Electric Israel Corporation Limited

ISRAEL ELECTRIC

CORPORATION LIMITED

FILES INDEX – Part II

The financial reports, for the year ended December 31, 2009, are presented in a primary order.

Each chapter is numbered separately by its internal sequence.

Part II

Chapter C - Financial Statements.

Chapter D - Additional Particulars about the Corporation for 2009.

Annex 1 - Actuarial Valuation.

The Israel Electric Corporation Ltd.

Chapter C Consolidated Financial Statements

For the Year Ended December 31, 2009

Accounting and Financial Statements Accounting and Economic Division Haifa, March 31, 2010

INDEX

Page Auditors' Report 3 Letters of Representation 5 Statements of Financial Position as of December 31, 2009, 2008 and 2007 9 Statements of Operations and Comprehensive Income for the Year Ended December 31, 2009, 2008 and 2007 11 Statements of Changes in Shareholders' Equity for the Year Ended December 31, 2009, 2008 and 2007 12 Statements of Cash Flows for the Year Ended December 31, 2009, 2008 and 2007 14 Notes to the Financial Statements 16

Prominent Disclaimer

This English translation of the “Consolidated Interim Financial Statements” for the year ended December 31, 2009 ("English Translation") is provided for information purposes only.

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 information relating to the Company.

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 general sense intended in the Hebrew version.

The Company reserves the right to effect such amendments to this English Translation as may be necessary to remove such conflict or inconsistency .

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: ADDENDUM (REGULATION 2) ADDITIONAL REPORT

IN ACCORDANCE WITH GOVERNMENT COMPANIES REGULATIONS (ADDITIONAL REPORT REGARDING ACTIONS TAKEN AND REPRESENTATIONS MADE TO SECURE THE ACCURACY OF THE FINANCIAL STATEMENTS AND DIRECTORS' REPORT), 2005

I, Harel Zeev Blinde, certify that:

1. I have reviewed the Financial Statements and Directors’ Report of The Israel Electric Corporation Limited ("the Company" or the "Electric Corporation") for the year ended December 31, 2009 (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 the reports.

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, results of operations, changes in equity and cash flows of the Company as of, and for, the periods presented in the reports.

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 during the period in which the reports were prepared.

5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's Board of Directors, based on our most recent evaluation:

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, summarize and report financial information.

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting.

There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to any law.

Harel Zeev Blinde March 31, 2010 Senior Vice-President of Finances and Economics

5 ADDENDUM (REGULATION 2) ADDITIONAL REPORT

IN ACCORDANCE WITH GOVERNMENT COMPANIES REGULATIONS (ADDITIONAL REPORT REGARDING ACTIONS TAKEN AND REPRESENTATIONS MADE TO SECURE THE ACCURACY OF THE FINANCIAL STATEMENTS AND DIRECTORS' REPORT), 2005

I, Amos Lasker, certify that:

5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's Board of Directors, based on our most recent evaluation:

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting.

There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to any law.

Amos Lasker March 31, 2010 Chief Executive Officer

6 ADDENDUM (REGULATION 2) ADDITIONAL REPORT

IN ACCORDANCE WITH GOVERNMENT COMPANIES REGULATIONS (ADDITIONAL REPORT REGARDING ACTIONS TAKEN AND REPRESENTATIONS MADE TO SECURE THE ACCURACY OF THE FINANCIAL STATEMENTS AND DIRECTORS' REPORT), 2005

I, Michael Lazer, certify that:

5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's Board of Directors, based on our most recent evaluation:

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting.

There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to any law.

Michael Lazer March 31, 2010 Chairman, Finance Committee

7 ADDENDUM (REGULATION 2) ADDITIONAL REPORT

IN ACCORDANCE WITH GOVERNMENT COMPANIES REGULATIONS (ADDITIONAL REPORT REGARDING ACTIONS TAKEN AND REPRESENTATIONS MADE TO SECURE THE ACCURACY OF THE FINANCIAL STATEMENTS AND DIRECTORS' REPORT), 2005

I, Dr. Ziv Reich, certify that:

5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's Board of Directors, based on our most recent evaluation:

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting.

There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to any law.

Dr. Ziv Reich March 31, 2010 External Director

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (NEW ISRAELI SHEKELS, IN MILLIONS) (Adjusted to NIS purchasing power of December 2009)

December 31, Note 2009 *2008 *2007

CURRENT ASSETS Cash and cash equivalents 4 3,885 3,670 492 Trade receivables for sales of electricity 5 3,219 3,487 3,302 Other current assets 6 875 950 968 Inventory- fuel 7 1,659 2,898 2,426 Inventory- stores 223 234 233

9,861 11,239 7,421

NON-CURRENT ASSETS

Long-term receivables 8 1,237 1,563 1,285 Advance payments on leasing real estate 9 398 404 401 Assets with respect to benefits after employment termination: Excess pension plan assets over pension liability 19 4,968 4,897 4,622 Funds in trust 10 1,736 1,591 1,202 6,704 6,488 5,824 Fixed assets, net Fixed assets in use, net 55,223 56,633 56,405 Fixed assets under construction 5,314 4,119 5,470

11 60,537 60,752 61,875

Intangible assets, net 12 782 789 800

79,519 81,235 77,606

The accompanying notes are an integral part of the Financial Statements. * Restated (see Note 35 below)

Mr. Harel Zeev Blinde Mr. Amos Lasker Mr. Michael Lazer Dr. Ziv Reich Senior Vice-President of Chief Executive Officer Chairman, Finance External Director Finances and Economics Committee

March 31, 2010 Date of approval of the Financial Statements

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (NEW ISRAELI SHEKELS, IN MILLIONS) (Adjusted to NIS purchasing power of December 2009)

December 31, Note 2009 *2008 *2007

CURRENT LIABILITIES

Credit from banks and other credit providers 14 1,727 6,705 2,397 Trade payables 1,457 1,376 2,104 Other current liabilities 15 1,372 1,813 1,587 Regulatory liabilities, net 20 2,258 128 687 Customer advances, net of work in progress 16 441 307 254 Provisions 17 803 817 755 8,058 11,146 7,784

NON CURRENT LIABILITIES

Debentures 18 30,375 29,160 28,446 Liabilities to banks 18 10,195 10,229 12,005 Liabilities with respect to other benefits after employment termination 19 2,456 2,385 2,270 Regulatory liabilities, net 20 1,529 1,447 1,225 Provision for refunding amounts arising from restatement of the financial statements 21 1,950 1,863 1,780 Deferred taxes, net 22 3,894 4,968 4,751 Debentures to the State of Israel 23 2,338 2,341 2,326 Others 18 1,895 2,105 2,198 54,632 54,498 55,001

SHAREHOLDERS’ EQUITY

Share capital 33 1,048 1,048 1,048 Capital reserves 26 950 950 950 Retained earnings 14,831 13,593 12,823 16,829 15,591 14,821

79,519 81,235 77,606

* Restated (see Note 35 below)

The accompanying notes are an integral part of the Financial Statements.

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (NEW ISRAELI SHEKEL, IN MILLIONS) (Adjusted to NIS purchasing power of December 2009)

Year Ended December 31, 2009 *2008 *200 7 Note

REVENUES ...... 28 18,704 24,142 20,870

Cost of operating the electricity system: Wages ...... 1,365 1,442 1,508 Fuel ...... 8,674 12,825 10,618 Purchases of electricity ...... 135 155 122 Operation of the generation system ...... 646 596 547 Operation of the transmission and distribution system ...... 333 318 329 Depreciation...... 3,635 3,515 3,383 14,788 18,851 16,507 Profit from operating the electricity system ...... 3,916 5,291 4,363

Sales and marketing expenses...... 29 749 779 773 Administrative and general expenses...... 30 816 674 711 Expenses (income) from liabilities to pensioners, 19 net ...... (215) 292 (102) 1,350 1,745 1,382

Income from current operations...... 2,566 3,546 2,981

Financial expenses, net: Financial expenses ...... 2,141 1,842 838 Capitalization of financial expenses ...... (240) (259) (255) Transfer of financial income to a regulatory liability 489 965 1,297 Financial expenses, net 32 2,390 2,548 1,880

Income before income taxes ...... 176 998 1,101

Income taxes: Income from adjustments of deferred tax balances arising from changes in future tax rates ...... (1,108) - - Other deferred taxes...... 22 46 228 278 (1,062) 228 278

Net income (loss) ...... 1,238 770 823

Total comprehensive income ...... 1,238 770 823

* Restated (see Note 35 below).

The accompanying notes are an integral part of the Financial Statements.

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (NEW ISRAELI SHEKELS, IN MILLIONS) (Adjusted to NIS purchasing power of December 2009)

Paid-up Capital *Retained share capital reserves earnings Total

Balance as of January 1, 2007 ...... 1,048 950 12,000 13,998

Changes during 2007 Net income...... 823 823

Balance as of December 31, 2008...... 1,048 950 12,823 14,821

Changes during 2008 Net income...... 770 770

Balance as of December 31, 2008...... 1048 950 13,593 15,591

Changes during 2009 Net income...... 1,238 1,238

Balance as of December 31, 2009...... 1,048 950 14,831 16,829

* Restated (see Note 35 below). a. The Government Companies Law, 1975, ("Government Companies Law") states, inter alia, that the decision of the Board of Directors on the appropriation of profits of a Government company, including, a distribution, as defined by the Companies Law, 1999, ("The Companies Law"), is subject to the approval of the Government Companies Authority. If the Government Companies Authority disputes the decision of the Board of Directors, then a company that is classified like the Company (provided that it is not a company in privatization process) will act according to the decision of the Government Companies Authority, as approved by the Government. The current policy of the Government Companies Authority (which may change from time to time) on appropriating profits for dividends distribution, as of 1995, states: 1) Dividends from current income of public utility companies will be distributed at a rate of 60% of the current net annual income, before profit-based bonus payments to employees. 2) Dividends from accumulated profits will be determined specifically for each company, with due consideration of several relevant data and factors. The provision for dividends is recorded in accordance with the stipulations of section 3 of the Government Companies Authority in Circular c 1-2/97, dated February 9, 1997 and the clarification of the Government Companies Authority according to which, when recording dividends, reference should be made to net income including all its components, before profit-based bonus payments to employees. According to the opinion of the legal advisors of the Company, such recording does not derogate or damage the position of the Board of Directors regarding the actual distribution every year. The Company's Board of Directors believes, that according to the tests specified in section 302 of the Government Companies Law, which according to the legal advisors of the Company overrides the stipulations of the Government Companies Law and the circular of the Public Utilities Authority - Electricity ("The Electricity Authority"), the amount of the dividends available for distribution should properly be determined solely in accordance with the tests specified in the Government Companies Law. b. The amount of the dividends according to this policy and before the restatement for 2004 was about NIS 1,546 million, for 2005 - about NIS 762 million and for 2006 - about NIS 166 million. No dividends were calculated for 2007, since according to the former reporting standards, the Company recorded a loss in that year. According to this policy, the dividends for 2008 amount to about NIS 342 million (before the restatement). The dividend amount for 2009, is NIS 743 million.

The accompanying notes are an integral part of the Financial Statements.

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (NEW ISRAELI SHEKELS, IN MILLIONS) (Adjusted to NIS purchasing power of December 2009) c. The Company's Board of Directors decided in 2005 to recommend to the General Meeting the distribution of dividends in the amount of NIS 118 million with respect to earnings for 2004, because in its opinion, dividends should not be distributed out of the earnings deriving from an accounting change and from an amount deriving from a decrease in the tax rate. d. The Company applied to the Director of the Companies Authority to receive his approval of the above recommendation for 2004 and as of the date of signing these Financial Statements, has not yet received his reply. e. For the time being, the Board of Directors does not recommend the distribution of dividends for 2005, 2006, 2008 and 2009. f. The Company requested the approval of the Director of the Companies Authority for not recommending payment of a dividend with respect to 2008 and did not receive a reply up to the signing date on these Financial Statements. g. On March 26, 2008, the response of the Director of the Companies Authority was received regarding the examination of the appropriation of earnings for 2006-2005 stating that “in 2008, the Companies Authority does not intend to require dividend distributions with respect to 2006-2005". h. No reaction was received as yet from the Government Companies Authority regarding the effect of the restatement of the Financial Statements on dividends. i. Bonus payments to employees: under the bonus policy in Government Business Companies, as stipulated in the Government Companies Authority circular, dated July 15, 2008, is not allowed when no dividends were paid for the year for which the bonus is requested, unless by an exceptional approval of the Director of the Government Companies Authority and subject to advance approval of the Management and the Board of Directors.. At this stage, the Company did not submit any request to the Director of the Government Companies Authority.

The accompanying notes are an integral part of the Financial Statements.

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (NEW ISRAELI SHEKEL, IN MILLIONS) (Adjusted to NIS purchasing power of December 2009)

Year Ended December 31, 2009 *2008 *200 7

Cash flows from operating activities: Net income according to the statements of operations and comprehensive income 1,238 770 823 Adjustments required to present cash flows from operating activities (Annex A) 5,453 1,575 3,272

Net cash provided by (used for) operating activities 6,691 2,345 4,095

Cash flows from investing activities: Purchase of fixed assets less consumers’ participation in assets (3,702) (2,374) (3,525) Purchase of intangible assets (170) (178) (257) Investments in funds in trust (40) (286) (282) Proceeds from sale of fixed assets 42 48 67 Collection of long-term debts, net 61 2 61 Deposit of redeemed deposits in banks - - 235 Net cash used in investing activities (3,809) (2,788) (3,701)

Cash flows from financing activities: Issuance of long-term debentures, net 2,595 4,808 2,157 Other long-term loans received, net 901 320 164 Long-term debentures repayment (4,470) (43) (1,125) Repayment of long-term loans from provident funds (187) (187) (187) Repayment of other long-term loans (1,077) (1,176) (1,367) Deposit (repayment) of hedging transactions, net 92 (231) (550) Short-term credit from banks, net (521) 130 197 Net cash provided by (used in) financing investing activities (2,667) 3,621 (711) Increase (decrease) in cash and cash equivalents 215 3,178 (317) Balance of cash and cash equivalents at beginning of the period 3,670 492 809 Balance of cash and cash equivalents at end of period 3,885 3,670 492 Additional information about cash flows- Actual interest payments, net 2,860 2,670 2,787 Actual tax payments, net 12 6 4

* Restated (see Note 35 below)

The accompanying notes are an integral part of the Financial Statements.

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (NEW ISRAELI SHEKELS, IN MILLIONS) (Adjusted to NIS purchasing power of December 2009)

ANNEX A - ADJUSTMENTS REQUIRED TO PRESENT CASH FLOWS FROM OPERATING ACTIVITIES

Year Ended December 31, 2009 *2008 *200 7

Income and expenses not affecting cash flows: Depreciation and amortization 3,927 3,638 3,719 Deferred taxes, net (1,069) 222 287 Decrease in liabilities with respect to employees benefits, net - (99) (310) Erosion of loans and debentures, net, including hedging transactions (894) (857) (1,878) Increase in differences with respect to increased provisions for refunding amounts arising from restatement of the Financial Statements 87 83 81 Increase of Company exposure to changes in foreign currency transferred to consumers 102 277 1,098 Decrease (increase) in other regulatory liabilities 2,109 (614) (5) Revaluation (erosion) of collectible debts 14 (1) 20 Capital loss (gain) on sale of fixed assets (24) 8 94 Decrease (increase) in value of funds in trust, net (105) (103) 2 4,147 2,554 3,108 Changes in assets and liabilities: Decrease (increase) in trade receivables for sales of electricity 268 (185) 29 Decrease (increase) in other receivables 47 (28) (54) Decrease (increase) in inventory- stores 11 (1) (3) Decrease (increase) in inventory- fuel 1,239 (472) (619) Increase (decrease) in customer advances, net of work in progress 134 53 (42) Increase (decrease) in liabilities to suppliers 81 (729) 854 Increase (decrease) in other current liabilities (474) 383 (1) 1,306 (979) 164 5,453 1,575 3,272

* Restated (see Note 35 below)

The accompanying notes are an integral part of the Financial Statements.

15 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL a. Operation of the Company 1. The Israel Electric Corporation Limited ("The Company") is engaged in the generation, transmission, distribution and supply of and commerce in electricity by force of licenses granted to the Company by the State of Israel. The Company was declared a monopoly by the Restrictive Trade Practices Commissioner. The Company also deals in the construction of the infrastructures required for these activities. Additional information on the operation segments of the Company is presented in Note 34 below. 2. The Company is a Government Company (the State of Israel holds approximately 99.85% of its share capital) and it is subject to the provisions of the Government Companies Law (see paragraph (d) below). The Company is also a public company as defined by the Companies Law and also a reporting corporation, as defined by the Securities Law – 1969.

b. The Electricity Sector Law The Company is subject to provisions of the Electricity Sector Law - 1996 ("the Electricity Sector Law") and its regulations. The purposes of the Electricity Sector Law are to regulate the activities in the electricity sector for the benefit of the public, while ensuring reliability, availability, quality and efficiency, all while creating conditions for competition and reducing costs and also to arrange structural changes of the electricity sector, including the future structure of the Company. The Electricity Authority was established by force of this law and its duties include regulation of the rates and methods of updating them and also granting licenses and supervising fulfillment of provisions stipulated in these licenses. Amendments to and Updates of the Electricity Sector Law are as follows: • Section 17a, added to the Electricity Sector Law on July 23, 2009 under Amendment 9, grants the Electricity Authority the authority to cancel the validity of an essential service supplier's license (after warning that license owner), upon discovery that the holder of an essential service supplier license failed to pay all payments due from him (in accordance with the Electricity Sector Law or the conditions of the license) to another holder of an essential service supplier license. The Company was conscientious in making payments due in accordance with the law to other license holders regularly, on time and as required, except in exceptional cases or in circumstances outside the Company's control (e.g. a strike). In addition, the Company believes that even in the event of violating the obligation to make a payment due to another license holder according to the law, the likelihood of applying such a severe sanction with such far- reaching implications for the electricity sector is very low. Amendment 9 to the Electricity Sector Law also expands the term "Rates" from payments paid by a transmission license holder to another license holder to include payments paid by any license holder to another and also payments paid by an essential service supplier to the consumer for electricity generation by the consumer and payments to the consumer under the demands management arrangements pursuant to the Electricity Sector Law. Section 17 (c1) of the Electricity Sector Law was also amended accordingly, to regulate payments by every essential service supplier license holder (not limited to transmission license holders as prior to the amendment) to a license holder or a consumer (not limited to license holders as prior to this amendment), to adapt it to the aforementioned definition of "Rates". • The Electricity Sector Law was amended on July 14, 2008, Amendment No. 8, according to which the Company's has operating licenses through July 1, 2009. The amendment cancelled the mechanism of application and extension, milestones and timetables provided by the law and the orders for establishing generation, distribution and transmission companies. It is also stated that future extension of the licenses does not require amending legislation by the Knesset, but instead the Ministers have the possibility to extend the said dates for additional periods that shall not exceed one year, each time, under conditions stipulated by the law.

16 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) b. The Electricity Sector Law (continued)

• On June 25, 2009, the Finance Minister and the National Structures Minister ("The Ministers") extended the licenses of the Company up to January 1, 2010, by the Electricity Sector Order - 2009 (Dates Postponement). The Company applied to the Ministers on November 29, 2009, requesting to extend the licenses according to the Electricity Sector Law beyond January 1, 2010, for another year to prevent a situation in which it will act contrary to the letter of the Electricity Sector Law. On December 29, 2009, after consulting with the Electricity Authority and with the Government Companies Authority and upon approval of the Economics Committee of the Knesset, the Ministers extended the licenses of the Company up to January 1, 2011, by the Electricity Sector Order - 2009 (Dates Postponement), since they realized that it is vital to promote the objectives of the law. The Company does not file audited Financial Statements for the profit centers, as required in the licenses. In the opinion of the Company's Management and the Board of Directors, the Company is exposed to proceedings that may be initiated against it due to its failure to conform to these requirements. In addition, the Electricity Sector Law determines sanctions against any entity acting without a legal license. • The opinion of the Management and the Board of Directors of the Company regarding the prescribed provisions of the law on the transition to the structure of a concern and to mutual holding of the different operations is that implementation of the amendment of the law enables transition to a concern structure over a gradual timetable, whereby the Company, as the parent company will hold the following subsidiaries: At least four companies that hold generation licenses, operating on the basis of a similar fuel mixture, whereby each will hold licenses for 30% to the total electricity generation volume at most; at least four companies holding distribution licenses, for 25% of the total distribution volume in the economy each, at most, with costs of the electricity facilities used by each of the companies as similar as possible; a company that holds a transmission license awaiting the decision of the Ministers by January 1, 2011 on its status as either remaining a part of the concern or a subsidiary or subsidiaries for providing services, in accordance with the instructions of the law, starting on January 1, 2009, and, with respect to the Company, under certain conditions, starting on January 1, 2010, the Company or the aforementioned subsidiaries that will obtain a license pursuant to the law, will only be able to provide services to themselves and not to others and will grant priority for receiving services from a service company (or companies), despite the stipulations of the Mandatory Tenders Law. The Company, as the parent company will be allowed to hold up to 51% of the controlling share in the generation or distribution companies until July 2013. The system management activity is an activity which requires a license pursuant to the Electricity Sector Law and will be performed by a separate corporation outside the concern structure of the Company. In view of employee sanctions taken to date (see Note 24 c), and since the negotiations with the different government authorities on the restructuring did not yield any agreements as yet, there has been no substantial progress in effecting the structural change (see also section e (7) below).

c. The Electricity Rate Mechanism On July 5, 2002, the bases of the electricity rates and criteria for 2002-2005 and the manner for their updating came into force ("the rate document"). The Electricity Authority's decisions with respect to the structure and level of the rates are detailed in the rate document for the Company's activities segments - generation, transmission, the high-voltage distribution and the low-voltage distribution. In that decision, it was also determined that in the event that as of December 31, 2005, new electricity rate bases shall not be determined with regard to January 1, 2006 and thereafter, then the Electricity Authority's decisions will remain in force until the date on which new electricity rate bases are determined.

17 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) c. The Electricity Rate Mechanism (continued)

The current rate document determines, among others, the following principles: The recognized active assets base, which is adjusted pursuant to Accounting Opinion 36 of the Institute of Certified Public Accountants in Israel, serves in determining the coverage of depreciation and financial expenses and the return on capital. This base was calculated for each of the four segments as follows: a) The generation segment b) The transmission segment c) The high-voltage and low-voltage distribution segments d) The consumer cost segment About half of the consumers pay one weighted rate for electricity, including all the operation segments, each consumer according to the connection voltage that reflects the parts of the system required to supply electricity to that supplier. The generation rate by itself is also used for transactions with private producers. The transmission rate is also used for transactions with producers for their own use. Private producers who sell electricity to the clients pay transmission and distribution rates according to the supply voltage to the consumer.

The rate document set the cost recognized to the Company for each of the aforementioned segments. The recognized cost is comprised of the following main components: 1. Fuel costs. 2. Capital costs. 3. Operational costs.

Recognized fuel costs consist about 52.7% of the current rate, capital costs about 27% and operation costs about 20.3%. Details of each of the above components and additional issues related to the current rate base are presented below.

1) Fuel Costs The fuel costs component in the rate is determined according to approved normative fuel quantities and approved fuel prices, based on actual fuels costs. The electricity rate includes a component to cover the Company's fuel expenses in its power stations. This component was determined by an estimated mixture of the use of the various power stations (that consume various types of fuel and that each have different utilization). The estimated fuel mixture is determined annually in advance based on various data, for example, the volume of demand for electricity forecast for that year, and the expected availability of each of the power stations. The fuel mixture for 2008 was determined according to the actual demand curve, since the annual update for that year was implemented when these data were known already. For details on the fuel mixture for 2009 see Note 20 below and also section 4e below. In addition, the Electricity Authority determined in the past, that up to 2007, part of the fuel cost savings that will be derived as a result of the transition to the use of natural gas will remain with the Company as an incentive for the years 2003 - 2006.

2) Capital Costs The recognized capital costs component is comprised of the following main elements: - Assets base - Depreciation - Return on Equity: The rate of return on equity and yield on foreign capital. a) The Assets Base:

18 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) c. The Electricity Rate Mechanism (continued)

The capital costs are calculated on the basis of the recognized active assets of the Company. Assets under construction are excluded from the capital costs calculations. The assets basis for the generation segment was calculated based on data of the net active assets during 1995-1999 and for the other segments based on average assets in 2000. b) Depreciation: Recognized depreciation costs are based on depreciation costs recorded in the records of the Company. Recognized depreciation costs for the generation segment were determined on the basis of the years 1996 – 1999 and for the other segments on the basis of 2000.

c) Return on Equity: A ratio between equity and foreign capital of one-third and two-thirds, respectively was determined for the purpose of calculating the recognized return on equity.

(1) Return on equity: The annual rate of return on equity was determined at 7% for the generation segment, 5.5% for the transmission segment and 6.2% for the low and high voltage distribution segment.

(2) Yield on Foreign Capital : A recognized division of the foreign capital between foreign capital linked to a basket of currencies (representing loans raised abroad) and foreign capital linked to the CPI (representing CPI linked loans raised in Israel) was determined for calculating the recognized yield on foreign capital. According to the course determined for this division over the years, the percentage of the foreign capital linked to the basket of currencies was reduced progressively on an annual basis, from 70% in 2002 to 54% in 2006. The percentage of the foreign capital linked to the basket of currencies continued to drop in 2007 and 2008 to 50.61% and 47.43% respectively. The interest rates on foreign capital are determined on the basis of the prevailing market interest rates, on a weighted basis. The annual update for 2008, determined that the interest rate on foreign capital linked to the basket of currencies will be 6.76% and the interest rate on foreign capital linked to the CPI will be 4.70%. In the 2009 annual update the interest rates on foreign capital have not yet been set. The Electricity Authority decided that interest rates will be updated when the new rates base for the generation segment will become effective, according to models determined in the new rates base. See Note 3a1 3 below and also section 4e below.

3) Operational Costs The generation segment is based on the analysis of operational expenses of the Company in 1996 - 1999 with the addition of certain adjustments. The other segments are based on the Financial Statements for 2000 with the addition of certain adjustments.

4) Other Subjects a) Amortization factors Amortization factors for a kWh sold, representing the expected efficiency and intended to reflect economies of scale at cumulative annual rates. The annual rates are 2.1% on inputs of the generation segment, excluding fuel; 1.3%, on inputs of the transmission and transformer segment; 2.5%, on inputs of the high-voltage

19 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) c. The Electricity Rate Mechanism (continued)

distribution segment; 3.7% on inputs of the low-voltage distribution segment and 2% on inputs of consumer costs segment. b) Current Rate Update . Recognized fuel rates are linked to changes in fuel prices. Foreign capital costs are linked to their weights in the basket of currencies (as determined by the Bank of Israel on May 1, 2006) and other rate components are linked to the CPI. The foreign capital component, linked to the basket of currencies, is updated upon the publication of the CPI and on the annual update date. The input basket of each of the segments is recalculated at each of these dates. Electricity rates are calculated biweekly (upon the publication of the CPI and upon the publication of fuel prices). ("Theoretical Consumer") Electricity rates are actually updated when the earliest of the following events occur: (1) A change to the cost of the basket of total system inputs, minus a reduction factor, of 5.5% in relation to the updated rate. (2) A change to the cost of the basket of total system inputs, minus a reduction factor, of 3.5% providing that three months have elapsed from the last update date. (3) When six months have elapsed from the last update date. Differences created between the actual update and the theoretical update are recorded as a regulatory asset (liability) and included in the rate as of the annual update date.

c) Annual Update Each year, in April, the Electricity Authority is supposed to carry out an annual update of the various components of the recognized costs. The updated components are: yield on foreign capital, the fuel mixture, the network and cable laying component, compensation for delay in updates, costs of purchasing electricity from independent producers, gas incentive, conversion of power stations to CCGT, etc.. On March 3, 2009, the update was carried out retroactively for 2008. The differences with respect to the delayed update were recorded as a regulatory liability of approximately NIS 192 million. On May 3, 2009, the Electricity Authority published the annual update for 2009. The update included only a small part of the rate components list, which should have been updated in the annual update. Update of the majority of the components, e.g., fuel basket components, foreign capital cost and additions to capital with respect to CCGTs were carried out once the new rate base of the generation segment was published in February 2010, in accordance with the updated models of the new base (see also Note 3 below).

d) Addition with respect to the emergency plan See Note 3(e) below.

e) On February 15, 2010, the Electricity Authority set new rate bases for the recognized costs of the generation segment for the years 2010-2014 (see Note 3 d2 below).

d. The Government Companies Law The Government Companies Law affects the Company in the following aspects: 1) The basis of the financial reporting and additional information (see Notes 2 a, 37 and 38). 2) Dividend distribution policy (see note to the statement on changes in shareholders’ equity). 3) Corporate government administration according to mandatory circulars applying to the Company. 4) Establishing and maintaining controls over disclosure and reporting (see Note 37).

20 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) d. The Government Companies Law (continued)

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 Committee of the Knesset, has set other operational considerations. e. Decisions of the Government and Parties Acting on its Behalf, Regarding the Electricity Sector Over the years, the Governments of Israel and its ministries have made decisions that concern the electricity sector (of which part, which include dates for performance, the decision has not been implemented due to various considerations, depending, inter alia, on progress of the discussions between the State and the Company and labor disputes in the Company), having the following significance: 1) Promotion and integration of independent power producers in electricity generation while using the Company's transmission system (as at the balance sheet date, the scope of the installed electricity generation capability for independent power producers comprises about 1.95% of the Company's total installed electricity generation capability. At the same time, additional conditional approvals in principle were granted to independent producers with an aggregate volume of approximately 1,742 megawatts that, as of the statement of financial position date, comprise approximately 14.9% of the installed electricity generation capability of the Company). 2) Reduce demand in the electricity sector. 3) Incorporating two Government Companies held by the State of Israel, to operate in the electricity sector: System Management Company Ltd. and New Electricity Generation Stations in Israel Ltd. To the best knowledge of the Company, on October 26, 2008, two Government Companies as aforementioned, were registered with the Registrar of Companies: System Management Company Ltd. and New Electricity Generation Stations in Israel Ltd. It was also decided that additional generation licenses can only be granted to the Company only for power stations included in the development plan approved within the development plan up to January 1, 2009. Up to that date, construction of power stations by the Company at a volume that shall not exceed 1,750 MW will be approved. Construction of additional power station by the Company in excess of the aforementioned will not be approved, unless special circumstances causes the Ministers, upon consultation with the Electricity Authority and Government Companies Authority to consider that there is no other reasonable alternative to constructing a power station, with due attention to the immediate needs of the energy sector. It was also decided (on May 12, 2009) to charge the Ministers to promote the actions of the Government Companies that were established by force of the Government decision on June 30, 2008, relating to the management of the electricity system, construction and operation of power stations in accordance with the objectives of the said companies, including recruitment of the required manpower, allocation of the capital these companies require to implement its goals, preparation of the companies to obtain the required licenses and promotion of their actions. To the best knowledge of the Company, directors were appointed to these companies, however the Company does not have information on any other activity in these companies (see section 8 below). 4) A change to the structure of the electricity sector and the structure of the Company, and to the extent required, a change was also made to the Electricity Sector Law. Additional principles of the decision, which are not specified by the Law and its amendments, are detailed below:

21 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) e. Decisions of the Government and Parties Acting on its Behalf, Regarding the Electricity Sector (continued )

a) The Company will be a Government owned holding company ("the holding company"). Companies will be spun-off from the holding company in the generation, distribution and transmission of electricity sectors and system management, as will companies in the sectors for additional services as detailed below. b) The Company's Management, and the Company's entire operational sector that will not be incorporated separately, as detailed below, will remain a part of the holding company. c) By January 1, 2012, the holding percentage of the holding company in each of the generation companies, transmission companies and service companies will have declined to 51%, including through offerings to the public. d) In the framework of the reduction in the holding company's holding percentage (as stated in section c above), the employees will be entitled to compensation from the holding company or from the generation companies, transmission companies and service companies as applicable, in accordance with employee compensation procedures in the course of privatization by the Government Companies Authority. In addition, the employees will be eligible to compete for the purchase of additional holdings in these companies under equivalent terms. e) Once competition has been established, the generation and supply segment will progressively be released from rate regulation by the Electricity Authority. f) The Ministers will be entitled to approve the sale of holdings in the generation companies (exceeding what is stated in section c above). In the absence of agreement between the Ministers, the Prime Minister will resolve the matter, without derogating from the provisions of the Government Companies Law. g) Upon the sale of 49% of the holding company's holdings in the generation company, that company will be authorized to engage in water desalination. This activity will be carried out pursuant to the principles of regularization customary in those segments. h) The transmission and distribution rates will be obligated to a fair rate of return on capital for the purpose of financial stability of the transmission company and system management and the distribution companies, respectively. i) The distribution companies will act to operate and develop the existing regional electricity grid, and it will be operated under regulation, including the rate for transmission service. j) The distribution companies will be obligated to provide services at equivalent terms to all parties in the electricity sector. k) By March 1, 2007, the Company's planning, construction and performance, information technologies and logistics divisions will operate as separate divisions in the framework of the holding companies. l) By January 1, 2009, each of the divisions will be incorporated as a separate subsidiary under the "holding company". m) Subsequent to January 2012, the holding company's remaining holdings in each of the service companies will be sold. n) The Ministers will be empowered to prescribe in the regulations, despite the provisions of the Mandatory Tenders Law that the generation, distribution and transmission companies that were spun-off from the Company will give preference to commitments with the service companies, for periods and at terms that will be determined by the Ministers. Further, these companies will also be entitled to compete on other tenders outside of the electricity sector.

22 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) e. Decisions of the Government and Parties Acting on its Behalf, Regarding the Electricity Sector (continued)

o) Upon the sale of 49% of the holding company's holdings in the distribution and generation companies, the holding company will be allowed to establish subsidiaries that will be involved in other areas of activity. These activities will be carried out pursuant to the regularization procedures customary in these areas. p) It was decided to empower the representatives of the Government Companies Authority, the budget division of the Ministry of Finance, the Wage Director in the Ministry of Finance and the Ministry of National Infrastructure to negotiate with the Company's Management and the representative employees’ organization concerning the structural change in the configuration of the electricity sector and in the organization of the Company. The understandings to be reached by the parties in the context of these negotiations will be presented for approval to the Ministerial Committee for Social and Economic Affairs, as will be required in order to amend the Electricity Sector Law. q) It was decided to establish a team that will include representatives from the Government Companies Authority, the budget division at the Ministry of Finance, the supervisor of the payroll division at the Ministry of Finance, the Ministry of National Infrastructures and the Company's Management to negotiate with the Company's representative employees' organization regarding employees' rights in the context of the structural change. The recognized costs of the restructuring will be expressed in future electricity rates. 5) The policy document outlining the restructuring On February 15, 2007, the Managing Director of the Ministry of National Infrastructures, the Supervisor of Budgets in the Ministry of Finance and the Director of the Government Companies Authority signed a document ("the policy document") that contains their primary recommendations for implementation of the outline for the change in the Company’s structure. Based on the Government's decision (as above in paragraph 4) and the policy document, the Electricity Sector Law was amended on March 1, 2007 (Amendment No. 5). Additional amendments were made to the Electricity Sector Law that affect the structural change since Amendment No. 5. The last amendment was Amendment No. 8. The principal points of the policy document that expand the Government decision and the Electricity Sector Law are as follows:

a) Company structure The Company will be a holding company owned by the Government, from which, subsidiaries will be split off in stages to engage in generation, transmission and distribution, as well as companies to provide services to implement and construct power stations, plan power stations, services and logistics, information technology and fuels. In addition, based on the Company's existing activities, a separate Government company will be formed, wholly owned by the Government, to manage the system, administer the commerce and plan for the long-term, and to which the current operations in these areas will be transferred, according to a pre-determined schedule. In the intermediate stage, the Company's Management and any area of activity that will not be separately incorporated will remain a part of the holding company. One of the objectives of this structural change is to obtain the efficient functioning of the Company and to add generation power to the economy while imposing minimum costs on the consumers of electricity.

23 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) e. Decisions of the Government and Parties Acting on its Behalf, Regarding to the Electricity Sector (continued) 5) The policy document outlining the restructuring (continued)

1) System management A wholly owned Government company will be established and activated to manage the system, the commerce and the long-term planning. Each of these entities will operate as a controlled profit center. The system management entity will operate under supervision. Rates for financing its operation and criteria for its actions will be determined by the Electricity Authority. The system management company will be obliged to provide services, without discrimination, to all parties in the electricity sector,. 2) The transmission system A subsidiary of the Company will be established to engage with the transmission system and be in charge of electricity transmission, transformation and switching. Clear rules establishing a structural distinction and independence between the Company and the transmission system company will be prescribed in order to assure its business independence and to ensure the development of competition. The control rights over the transmission system company will be held by the State, all in order to secure independence and to prevent conflicts of interests between members of the Company's Group. The transmission system company will operate under control. The rates and criteria for services provided by the Company will be determined by the Electricity Authority. 3) The distribution system The distribution segment will be split into four or five regional distribution companies with territorial continuity that will be structurally similar in terms of costs and scope of activities, as far as possible. These companies will be established and act as subsidiaries of the Company, in fields of responsibility as detailed in the policy document and clear rules of structural segregation and independence between the Company and the distribution companies and between the various distribution companies will be established to ensure business independence. The distribution companies will operate under supervision, where criteria and rates charged by the distribution companies will be determined by the Electricity Authority, the distribution companies will be obliged to service suppliers, without discrimination, to all parties in the Electricity Sector. 4) The supply segment Upon incorporation of the Company's generation companies, an initial attribution of all consumers to these companies, in accordance with principles defined by the restructuring administration with approval of the Ministers. The generation companies and other independent parties which are not distribution, transmission or system management companies will supply electricity to consumers, according to supply licenses. Supervision of prices in the generation and supply segments as well as the ability to choose consumers will be removed gradually, according to consumer groups, where supervision will be removed for the largest consumers first and last for household consumers. Rules to ensure freedom of choice to consumers will be set up to January 1, 2008. 5) Additional services The divisions for planning, construction and execution of power stations, information technology, logistics and fuels field will be established and operate as subsidiary/ies of the Company and clear rules of structural segregation and independence between the Company and the subsidiaries will be established and also among the subsidiaries themselves, to ensure business independence of these companies and development of competition in this sector. Once 49% of the Company's holding in the distribution and generation companies will be sold, the

24 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) e. Decisions of the Government and Parties Acting on its Behalf, Regarding to the Electricity Sector (continued) 5) The policy document outlining the restructuring (continued)

Company will be permitted to establish subsidiaries that will act in other fields of operation. This activity will be conducted subject to the stipulations of section 6 (d) of the Electricity Sector Law.

b) Electricity generation 1) The policy document presents two alternative structures of the generation companies: Alternative 1: The generation operations of the current generation units of the Company will be transferred to four up to six subsidiaries ("Generation Companies") which will be, as far as possible, of a similar composition of generation technologies and mixture of fuels consumption used to operate the generation units and similar generation costs, except the coal units. Each of the current coal sites will be held by two generation companies through a joint holding and will not sell electricity directly to the consumers. Alternative 2: The generation operations of the current generation units of the Company will be transferred to four subsidiaries which will be, as far as possible, of a similar composition of generation technologies and mixture of fuels consumption used to operate the generation units, except the coal units. Each of the two current coal sites will be held by one of the generation units, thereby creating a situation where two of the generation companies will have a coal power station in addition to the other units. The third and fourth generation companies will have agreements to purchase capacity and/or energy from the two companies that will hold the coal units. All for the purpose of creating a similar mix for electricity supply. 2) Both aforementioned alternatives will include future coal operated power stations ("D" and "E") which will be constructed and incorporated by subsidiaries of the Company, subject to the principles specified in the policy document and the implementation of the structural change of the Company according to the development plans approved by the Minister of National Infrastructures and subject to all laws.

3) Determination of the structure and establishment of the generation companies will be in such a manner so as to prevent market failures or unjust exploitation of the market power in the electricity market.

4) Clear rules of structural segregation and independence between the holding company and the generation companies, and among all of the generation companies themselves, will be established in order to assure the business independence of the generation companies and to assure the development of competition in the electricity sector. 5) The supply segment will be attributed to the generation companies so that with the incorporation of the generation companies of the Company, all the electricity sector consumers will be initially attributed to these companies and by January 1, 2008, rules to guarantee freedom of choice for the consumers will be instituted. The removal of price control in the generation and supply segments, as well as the consumer's ability to choose, will be gradually instituted according to consumer groups, with the largest consumers being removed from control at the beginning of the process and the household consumers at the end of the process.

25 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) e. Decisions of the Government and Parties Acting on its Behalf, Regarding to the Electricity Sector (continued) 5) The policy document outlining the restructuring (continued)

c) Regulation and cost recognition 1) The supervision in effect over all the sector's segments prior to commencing execution of the structural change will continue to apply and will be removed gradually from the generation and supply segments to the extent permitted by the competitive conditions in the sector. The criteria for the gradual removal of said control will be determined by September 1, 2007 by the Administration. 2) The recognized costs of the structuring change will be manifested in the future electricity rates. 3) The Electricity Authority's supervision over the rates of the subsidiaries and sister companies will take into consideration a fair return on the capital until it is removed (for generation and supply). 4) At the time of the split off, the Government will act to create the conditions required for the financial strength and stability of the companies in the Company's holding group and the system management company, given the reasonable business conduct of the supervised companies.

d) Transfer of assets and debts - The Company will sell, to the companies to be established, the assets pertaining to the operating segments that will be assigned to these companies. - Loans taken out by the Company will remain its responsibility and will not be assigned to the companies established. - Assets used by more than one company will be assigned to a company determined by the Ministers and proper contracts arranging the use of the assets by the other companies will be prepared under terms that will allow achievement of the goal of competition as soon as possible. - The sale consideration will be determined according to the book value of the assets in the Company's books. - A portion of the consideration, in an amount equal to the Company's outstanding loans near the date of the transfer, will be gradually repaid by the companies to which the assets were transferred on dates that will allow the Company to pay the secured amounts of the loans to its creditors. - The remaining consideration will be immediately paid to the Company by the transferee companies. Funds received by the Company from the subsidiaries, the source of which is the remaining consideration, will serve the Company to immediately invest in the share capital of the subsidiaries. - The portion of the consideration that is not immediately disbursed will bear interest to allow the repayment of the interest on the loans taken out by the Company according to their terms. - The sale of the assets to the new companies will be executed in a manner in which the Company's assets and revenues subsequent to the structural change, directly and indirectly, through its holdings in the subsidiaries to be established, will allow the repayment of the Company's outstanding debts to the creditors. - The Administration established to implement the structural change will be in charge of handling the contact with the Company's creditors in the aspects relating to the structural change.

26 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) e. Decisions of the Government and Parties acting on its Behalf, Regarding to the Electricity Sector (continued)

6) The letter of the Director of the Government Companies Authority On February 28, 2007, the Director of the Government Companies Authority addressed the Company in a letter which reiterated and clarified that the implementation of the reform of the Company pursuant to the Electricity Sector Law, as amended (the letter referred to Amendment No. 5) will be carried out, among other things, while examining the implications of the structural change on the Company's liabilities and this, inter alia, so as to not obstruct the Company from repaying the loans taken by the Company ("the letter of the Director of the Government Companies Authority"). 7) The position of the Company's Management regarding the structural change The Company's Management and Board of Directors is of the opinion that the Electricity Sector Law and all its amendments do not deal with the variety of issues raised by the structural change and do not arrange in detail the manner of executing the structural change. In the opinion of the Company's Management and Board of Directors, a real structural change in the Company is essential to be able to fulfill the duties prescribed by the Electricity Sector Law and they intend to act to the best of their abilities to promote a structural change under a realistic outline and in agreement with the employees. It should be emphasized that a substantial part of the structural change is not under the Company's control but in the hands of the State. Attention is hereby directed towards the matters stated in the various government decisions regarding the structural change, in the policy document and in the letter of the Director of the Government Companies Authority. For that purpose, the Company is acting and having contacts to the extent possible with the relevant entities in the State, the workers' association and the Histadrut in order to reach an agreement, inter alia, with the Company's employees. Up to the signing date on the Financial Statements, the Company has not achieved any real progress in implementing the structural change, due, among other things, to employees' sanctions on the subject of the structural change (the Company's petitions to the labor courts with respect to the structural changes were unsuccessful) and since negotiations with various Government ministries on issues of the structural change did not yet reach the agreement stage. Therefore, the Company is of the opinion that all the aforesaid did not enable the Company to proceed with preparations required at this stage for the structural change. Furthermore, in the opinion of the Company's Management and Board of Directors, the execution and implementation of the structural change will involve issues regarding the Company's creditors, in view of agreements signed with them, to the extent that they are affected by the structural change, all subject to provisions of the law. Until the date of the approval of the Financial Statements, the State and the Company have not yet settled the treatment of the said issues. It should be noted that a material part of the restructuring components is controlled by the State and not by the Company. 8) On May 12, 2009, the Government reached a decision on the subject of increasing competition in the Electricity Sector and promoting private electricity producers. The primary principles of this decision are: - Amend the Electricity Sector Law as follows: (1) To state in the law, that a condition to the validity of a critical service supplier's license, that collects payments from electricity consumers ("Collecting Critical Service Supplier"), is the paying of all payments required from the supplier to the system management license holder, with respect to system management services, or to any generation license holder, with respect to making available or generating electricity according to the stipulations of the purchase agreement between that Collecting Critical Service Supplier and the generation license holder.

27 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) e. Decisions of the Government and Parties acting on its Behalf, Regarding to the Electricity Sector (continued)

(2) Amend the rates definition in the law to include all types of payments made by a Collecting Critical Services Supplier to the generation license holder or to the consumer. (3) Perform the acts required to complete the regulation of independent electricity producers through the licenses method up to August 1, 2009. (4) Establish a team to increase coordination and efficiency of the supervision over the Company. The Ministers will report the initial conclusions of the team up to August 1, 2009. - To impose on the Ministers to promote the actions of the Government Companies that were established by force of the Government decision on June 30, 2008, relating to the management of the electricity system, construction and operation of power stations in accordance with the objectives of the said companies, including recruitment of the required manpower, allocation of the capital these companies require to implement its goals, preparation of the companies to obtain the required licenses and promotion of their actions (see also Note 1(e)(3) above). - To impose on the Accountant General in the Ministry of Finance, through the Government Procurement Administration to publish a tender for purchasing electricity for all Government Ministries from private electricity producers. The Accountant General will report to the Ministerial Committee for Social and Economic Affairs on the progress in implementing this item up to June 1, 2009. - Determine actions to locate and promote sites for establishing power stations.

Pursuant to this decision, paragraphs (1) and (2) above (with appropriate changes) were included in amendment No. 9 to the Electricity Sector Law and the Electricity Authority also made several decisions that regulate the operation of private electricity producers, including the update of chapters E and F of the Criteria Book on July 31, 2009, aiming to regulate the operation of the supplier as a mediator between private electricity producers and consumers under private transactions and to define the sphere of responsibility of the system manager (see also Note 3 d 3 below). In addition, the government approved on July 27, 2009, a new arrangement for private electricity producers that is another step in their integration.

9) In March 2003 the Government decided, in the framework of its plan to privatize Government companies, to charge the Companies Authority with drawing up proposals regarding privatization of Government companies, including the Company, after ensuring implementation of the structural changes and the decision of the Socio-Economic Cabinet on this matter, but no more than 49% of the Company’s shares. 10) Government Decision of September 18, 2008 The Government decided on September 18, 2008, to take steps to achieve more efficient energy consumption and set a Government guideline target for reducing the expected electricity consumption by 20% of the forecast electricity consumption in 2020, based on actual electricity consumption in 2006. In addition, On January 29, 2009, the Government plenum approved the decision of the Socio-Economic Committee on setting a guiding objective and defining tools to promote renewable energies, especially in the Negev and Arava regions.

28 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued)

f. The Restrictive Trade Practices Commissioner Pursuant to the declaration of the Restrictive Trade Practices Commissioner and the appeal of this decision filed by the Company with the Restrictive Trade Tribunal , the Company arrived at an agreement with the Commissioner, which received validity as a ruling, stating that the Company is a monopoly in the electricity supply sector (the generation of electricity and its sale), the transmission of electricity and its distribution, providing backup services to consumers and producers of electricity and also the provisions of chapter d of the Law for Restrictive Trade Practices – 1988, apply to the Company as the owner of a monopoly, both as to the electricity sector in general, and as to each of its components. As of the date on which the Financial Statements were approved, the declaration of the Company being a monopoly did not have a material effect on its operations, profitability or financial position. In light of the existing degree of supervision by the Electricity Authority and other authorities to which the Company is subject and in view of the structural changes required pursuant to the provisions of the Electricity Sector Law, including the incorporation of the generation units in the framework of separate subsidiaries, the Company is unable to assess what would be the future implications of the aforesaid declaration. In addition to the above, the Company is subject to a composite of provisions of the Law for Restrictive Trade Practices, including with respect to restrictive arrangements and mergers. It should be pointed out that, by force of the Company being a monopoly, its merger with any company whatsoever, is subject to the provisions of the Law for Restrictive Trade Practices regarding the merger of companies. The Company is implementing an internal enforcement program with regard to business restrictions.

g. The assets arrangement- 1) Electricity Sector Law Stipulations 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 determined in the Electricity Sector Law (section 62): a) Despite the provisions of section 46 to the amendment to the Electricity Concession Ordinance ("section 46 to the concession"), the liabilities of the Company, as well as the rights and assets which it held at the time that the concession expired, and for which it is entitled to compensation from the State pursuant to the aforesaid section, will remain with the Company and no compensation will be paid for them ("Compensable Assets"). b) The rights and assets for which the Company is not entitled to compensation, as stated above in section (a), and which are used or were designated to be used, whether directly or indirectly, for its operations pursuant to this law will be purchased by the Company according to their value on the date the rights and assets were acquired, in accordance with an arrangement to be signed by the State and the Company; in this section "are used" or "were designated to be used", as will be determined by the Ministers ("Non- Compensable Assets in Use").

c) Another non-compensable assets group, which are not used and were not intended to serve the Company in its operations on which section 46 of the concession states that the Company is not entitled to compensation upon transferring them to the State, where section 62 does not regulate the treatment of these assets, yet in the absence of use or designated use by the Company, these assets are not part of the "plant" in its meaning in the aforementioned section 46 ("Unused Non-Compensable Assets"). The law does not detail which assets will be included under section (a) above, which according to the provisions of the Electricity Sector Law, remain with the 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 Sector Law does not define the method pursuant to which the value of these assets will be determined.

29 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) g. The assets arrangement (continued)

Section 62 of the Electricity Sector Law obliges the Company to indemnify the State with respect to any payment paid by the State for any of the Company's liabilities in force at the concession expiration date, arising from its expiration or from implementing the provisions of the Electricity Sector Law regarding the assets arrangement. In the first year following the date on which the concession expired no negotiations were held therefore the parties did not reach an arrangement and, as of the date on which the Financial Statements were signed, the Ministers had not determined which assets in use are non-compensable (assets used or intended to be used by the Company) and/or any provisions with respect to the acquisition of the aforesaid rights and assets ("the assets arrangement"). 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 concession expired. If the parties do not arrive at the aforesaid arrangement within one year from the date that the concession expires, the Ministers will determine provisions as to the acquisition of the aforesaid rights and assets. 2) The Position of the Company Regarding the Assets Arrangement The Company believes, based on the opinion of its legal advisors regarding the matter of the appropriate interpretation of the assets arrangement, and taking into consideration the 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 was not supposed to be, there is not and will not be 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 arrangement will not have such an effect. 3) The Opinion of the State On February 15, 2000, the Company received a letter from the Deputy Commissioner of Budgets at the Ministry of Finance wherein 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), (hereafter: "the State's Opinion") the implementation of which might have a material effect on the Company. According to the State's Opinion and in reference to the provisions of sections 44 and 46 to the concession, the Company is not entitled to compensation for investments already refunded through provisions for amortization. Therefore, the State's Opinion included in its definition of the non-compensable assets to which the assets arrangement is supposed to apply, the following assets: a) All of the Company's assets which at the time the Concession expired were fully depreciated, and this 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 and various assets such as equipment, machinery and various buildings).

30 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) g. The assets arrangement (continued)

b) Assets which were not fully depreciated, in the amount of what was depreciated net of liabilities, according to a certain percentage which depends on their financing sources - primarily the power plants, transmission and distribution facilities, certain real estate and additional equipment. c) The Company's non-depreciable assets - primarily intangible assets and shares of investee companies, but not cash and inventory.

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 of the assets or liabilities, or the method for determining it.

The cost, as of March 31, 1996, of the assets which were fully depreciated, as detailed in section a) above, as it appears in the Company's Financial Statements as of that date, is approximately NIS 4.46 billion (approximately NIS 7 billion in NIS of December 2009). The net depreciated cost, as of March 31, 1996, in the Company's books, of the assets detailed in sections b) and c) above, is approximately NIS 4.5 billion (approximately NIS 7 billion in NIS of December 2009). It should be clarified that the aforementioned data are data as of March 31, 1996, yet the determining date is the end of the concession date, namely, March 5, 1996. In the Company's opinion, one should not infer the economic value of the assets from the amounts indicated above where pursuant to this economic value, the amount which the Company is liable to be requested to pay will be determined, even if the position presented in the State's Opinion is accepted.

4) Letter from the Director of the Electricity Authority Just after the State's Opinion was received, the Director of the Electricity Authority in the Ministry of National Infrastructures ("the Director") wrote a letter to the Company, as instructed by the Minister of National Infrastructures ("The Minister"). In the letter, he instructed the Company not to respond to the Ministry of Finance'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 offices of the Ministers and between the Company and the Ministry of National Infrastructures.

5) The Opinion of the Company The Company is of the opinion, based on the opinion of its legal advisors, that the interpretation of section 62 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, while the explicit intention of the legislator was that the Company will exist and fulfill the functions it was assigned and the tasks imposed upon it in the Electricity Sector Law and the licenses granted to it by virtue thereof.

31 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) g. The assets arrangement (continued)

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 over the years several floating liens on all its assets and its rights to the assets arrangement may affect the incidence of the said floating liens on assets that will be subjected to the assets arrangement.

7) The Company is of the opinion, based on the opinion of its legal advisors, that the cost for the Company, if and to the extent that there will be any with respect to the assets arrangement or in connection with the acquisition directives of the Ministers, needs to be recognized in the electricity rate base, although there is no certainty of this.

8) Certain assets, which, prior to the replacement of the Electricity Concession Ordinance by the Electricity Sector 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 (non-compensable assets not in use), which consequently are not intended to be transferred to the State, probably will not continue to remain in the Company's possession. The position presented in the Ministry of Finance's Opinion, assumed that these assets were transferred to the State. The Company's policy was and is to purchase assets, which are designated to be used in the Company's operations to generate and transmit electricity. 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 notice was given on behalf of the Ministers regarding this matter. 9) On the basis of all of the above, the Company, based on the opinion it obtained, believes that the implementation of the assets arrangement was 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 is no certainty that the implementation of the assets arrangement will not have this effect.

32 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) h. Environmental Protection Laws The Company's activities are subject to environmental laws and regulations regarding various matters such as non-ionizing radiation, emissions and their effect on air quality, water resources and considerate use thereof, noise, storage, freight and disposal of hazardous materials and others. The Company believes that it is complying with almost all the directives of the current environmental laws and regulations and is preparing its capital investments plan and operational budget to comply with current and anticipated regulation. Recently, several proposed environmental bills and regulations were brought before the Knesset and are in various stages of approval hearings. The Company is studying the possible economic, legal, operating and technical implications of the above. These proposed bills and regulations might have a material economic impact on the Company yet the Company estimates that the costs incurred for adjustments required in order to comply with any directives of the laws and/or the regulations will be covered by the electricity rates.

i. Investee and Included Companies – 1) Details of the consolidated companies of the Company

Holding Rate of Subsidiary Name Residence Status rate voting rights % %

National Coal Supply Israel The company purchases coal for the 100 100 Corporation Ltd. power stations of the Electric Company

a) On July 15, 2004, the Company signed an agreement with the National Coal Supply Corporation for the purchase and supply of coal for the Company's power stations that consume coal - Orot Rabin in Hadera and Rutenberg in Ashkelon. The agreement is in force from December 31, 2003 and will remain in force for as long as the Company shall have generation licenses for the aforesaid power stations. The Company reserves the right to cancel the agreement with one year's advance notice. The consideration that is paid is calculated based on cost in addition to an agreed upon profit and is subject to the coal price approved for the Company by the Electricity Authority. In accordance with the aforesaid agreement, the ownership of the coal inventory is transferred directly to the Company from the supplier, where the National Coal Supply Corporation continues to handle the shipment of the coal to the Company's power stations and sees to appropriate insurance (in favor of the Company), in the case of any loss or damage to the coal. b) In the years 2009, 2008 and 2007, the Company acquired coal from the National Coal Supply Corporation at a cost of approximately NIS 4,984 million, NIS 6,444 million and NIS 4,564 million respectively, included in fuel expenses.

33 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) i. Investee and Included Companies (continued)

2) Details of Investee Companies

Investee Company Name Residence Status Holding rate of Ordinary Shares December 31 2009 2008 % % PAMA Ltd. Israel Inactive since 2000 49.99 49.99

Migrashei Kablanim Ltd. Israel Inactive 76 .00 76 .00

Jordan Properties Company Israel Active 99.98 99.98

a) The Company holds 99.98% of Jordan Property Ltd., which is wholly owned by the Company. Jordan Properties Company Ltd., holds real estate, registered in its name in the lands register and are used by the Company. The Company also holds rights of use of radio frequencies, the purchase of the said frequencies was financed by the Company. These frequencies were leased to the Company. Jordan Properties Ltd. has two wholly-owned inactive affiliated companies - Ma'abarot Hayarden Ltd. and the Palestine Construction Company Ltd. b) The Company holds 50% of the Management shares and of the rights to appoint Directors (except the right to share the profits) of the Advanced Studies Fund of Company employees.

3) Regarding the resolution of the Board of Directors on establishing four subsidiaries for expanding the Company's business and entrepreneurial activities, these subsidiaries were not established as yet, due to the opposition of the worker's association, see Note 24 c below.

j. Efficiency Program and Organizational Change On May 14, 2008, the Board of Directors of the Company approved in principle the outline of the plan for structural change, presented to the Board of Directors by the CEO of the Company. The plan is based, inter alia, on the retirement of about 2,000 - 2,500 employees (including the number of employees indicated in Note 19 a (2) (d) below) and a process of reducing the number of Company employees to be spread over a period of three years, reorganizing Company units, including a reduction in the control of the Management, consolidation of functions benefiting from economics of scale, elimination of duplications and creation of supportive management mechanisms aimed at improving processes, management flexibility and optimal utilization of resources and manpower. Initial estimates made by the Management of the Company indicate that the total cost of the plan is an estimated NIS 2.3 - 4.0 billion. Conditions for recognition of the amounts expected with respect to the plan (except employee retirement, as specified in Note 19 a 2) (d) below) in accordance with the instructions of IAS No. 19 have not reached fruition, as yet. The Board of Directors instructed the CEO of the Company to commence an intensive consultation and negotiation process, on the subject of workers’ rights with the workers’ representatives, as required by law, as soon as possible. The workers’ organization announced that it objects to the implementation of the plan and prohibited the workers from cooperating on this subject. (see Note 24 c below). At the same time, the Management and the workers' organization, agreed at the beginning of May 2009, to open discussions on the restructuring of the electricity sector and structural change and efficiency process in the Company and open negotiations on resulting workers rights, scheduled to be completed up to August 1, 2009, aiming to reach an agreement on the aforementioned changes. On September 16, 2009, the Board of Directors unanimously

34 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 1:- GENERAL (continued) j. Efficiency Program and Organizational Change (continued)

agreed to enable effective negotiations between the Company, the State, the Histadrut and the employees organization, without time limits, to establish an agreed upon outline of an organizational change in the Company and restructuring of the Electricity Sector. Representatives of the State, the Histadrut, the employees organization and the Company Management agreed on March 18, 2010 to start an intensive and continued process of discussions on the subject of the structural change and employees rights thereto. These discussions, attended by all parties, are scheduled to take place on several days each week, aiming to reach an agreement on the aforementioned subjects.. k. Effect of Employees Sanctions on Company Costs Included in the Financial Statements Due to employee sanctions that commenced on March 12, 2009 and ended on May 3, 2009 (see Note 24 c below), the Company incurred financial loss, arising from the need to incur additional costs (in excess of costs incurred by the Company if not for the sanctions), amounting to approximately NIS 192.3 million. The Company applied to the Electricity Authority, with a request to receive appropriate rate coverage for these damages. These additional costs are mainly derived from increased fuel costs arising from the delay in completing the maintenance schedule of the power stations and generation plants (approximately $13.4 million), from delay in operation of a power station with gas (approximately $27.5 million), from delays in sending invoices to customers and their prompt collection as a result, from wages and benefits expenses with respect to the sanctions period and for the period of resuming routine work schedules. The Company was obliged to implement cost cutting steps and requested rate coverage of resulting damages. The response of the Electricity Authority on February 24, 2010 rejects the claims of the Company for rate coverage to the costs of these damages.. l. Definitions The Company – Israel Electric Corporation Limited The Group – The Company and its held companies Related Parties – As defined under International Accounting Standard 24 Interested Parties – As defined under the Securities Law (Preparation of Annual Financial Statements) - 1993 and its regulations Controlling Shareholders – As defined under the Securities Regulations (Annual Financial Statements) – 2010 Index – Consumer Price Index (CPI) as published by the Central Statistics Office Dollar – US dollar Subsidiary Companies – Companies either directly or indirectly controlled (as defined under IAS27) by the Company and whose financial reports are fully consolidated with those of the Company Held Companies – Subsidiary companies and investee companies Investee Companies – Companies in which the Company has material influence

35 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES a. The Basis of Financial Reporting The consolidated 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 amendments thereto (hereafter: “Government Companies Regulations”), (as specified in paragraph (1) below) and the directives of the Securities Regulations (Preparation of Annual Financial Statements) – 2010.

1. Government Companies Regulations The consolidated Financial Statements of the Company (hereafter: “Financial Statements”) fulfill the directives of the Government Companies Regulations. These regulations were published in the Official Gazette on June 30, 2008, and will apply to the Financial Statements of 2008 and interim periods of that year, including comparative data included in these Financial Statements. On January 14, 2009, the Minister of Finance extended the said regulations to Financial Statements for the period ending on December 31, 2009. On June 16, 2009, the Company requested that the Government Companies Authority grant an extension. The response of the Government Companies Authority, received on March 23, 2010, stating that pursuant to the application of the Deputy Director of the Government Companies Authority (at that time), Mr. Eran Heimer, on July 22, 2009 to the Minister of Finance, recommending the extension of the regulations and the application of the Minister of Finance to the Minister of Justice and to the Chairman of the Securities Authority on August 9, 2009, the Government Companies Authority is consulting the Ministry of Justice, the Securities Authority and the Electricity Authority on the subject. Several responses were received, to date from each of the aforementioned parties, and the Government Companies Authority intends to act to continue the consulting process. Under these Regulations: a) The Financial Statements will be prepared in accordance with the International Financial Reporting Standards (IFRS), and their clarifications as published by the International Accounting Standards Board (IASB), including IFRS 1 which, for our purposes, the date of transition to International Financial Reporting Standards is January 1, 2007. b) Notwithstanding any of the instructions of Section a) 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 Accountants in Israel). (2) The Company will prepare its Financial Statements under the principles of the US Financial Accounting Standards Board (FASB) as listed in Chapter Re6 with respect to regulated activities, 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 (hereunder “Standard for Regulated Companies”). However, in the Financial Statements prepared as of March 31, 2008, and also in the Financial Statements as of September 30, 2008, the Company will not implement the instructions of the Standard for Regulated Companies which it had not implemented in its Financial Statements prepared as of December 31, 2007. c) In the Financial Statements of the Company, (as of March 31, 2008), the attribution of pension liabilities to the service periods of employees will be done in the same manner as followed in the Financial Statements prepared as of December 31, 2007.

36 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) a. The Basis of Financial Reporting (continued)

d) The manner of applying International Financial Reporting Standards will be modified or adjusted as required for purposes of the said implementation.

The notes to the Company’s Financial Statements will include qualitative (rather than quantitative) disclosure to explain how the reporting principles applied in the Financial Statements of the Company differ from International Financial Reporting Standards (IFRS). Also, the Report of the Board of Directors will provide an estimate of the financial effect of such difference regarding the effect of the Standard for Regulated Companies and the effect of the Accounting Opinion on items of equity and net income. Should the Company fail to meet the conditions listed in the latter part of Note 37 below, then the Company will not prepare its financial reports with adjustment to the general purchasing power of the NIS. On December 24, 2009, the Minister of Finance amended the said regulations in the context of the Government Companies Regulations (Principles for the Preparation of Financial Statements of the Israel Electric Corporation Ltd, (Temporary Order) (Amendment) – 2009) that define the presentation mode of the pension plan assets, held by the Central Provident Fund for Pension of Company employees (The Plan"). The Minister of Finance stated in these regulations, that "in the Financial Statements of the Company as of June 30, 2009 and September 30, 2009 and also regarding comparative figures and any other information included in these Financial Statements, the Company is entitled to present the assets of the plan in sums calculated in accordance with the generally accepted accounting principles in Israel, according to the guidelines of the Capital Market, Insurance and Savings Commissioner in the Finance Ministry and according to Income Tax Regulations (Rules for Approving and Managing a Provident Fund) – 1964". In these financial statements, prepared as of December 31, 2009 and also in the comparison number included in these statements, the Company must present the plan assets at their fair value, according to IFRS standards.

2) Qualitative Disclosure As stated in Note 2.a. 1 above with regard to furnishing qualitative disclosure, the main differences between the financial reporting rules applied in the Financial Statements and the IFRS are listed below: a) 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 (FASB) (particularly FAS71), which deal with the effects of certain types of regulation on the accounting policies (hereafter: ”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 electricity rates. The Standard also establishes principles related to impairment in value of assets as measured by future cash flows, based on the electricity rates established by the Electricity Authority. These principles differ from those applicable to unregulated companies. The Standard applies when all three conditions listed below are met: (1) Regulation of rates - rates of regulated products or services are either established by an independent third party regulator or by a committee so .

37 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) a. The Basis of Financial Reporting (continued) 2. Qualitative Disclosure (continued)

empowered, or are subject to authorization by such regulator or committee, all under legal or contractual provisions governing consumer rates (2) Specific coverage of costs - regulated rates are so constructed as to cover the specific costs (including required return on capital) associated with the provision of the regulated product or service. (3) Competition and collectability from customers – in view of the demand for the regulated product or service and also of the level of direct and indirect competition, it would be reasonable to assume that the rates established so as to cover the costs are chargeable and collectible. These conditions may also be applied to separate portions of activities, such as generation or transmission of electricity, or to a specific sector of consumers. A company meeting the conditions above will capitalize the expenses which would have otherwise been attributed to the statement of operations, while the regulatory agency establishes rates which would cover these expenses in the future. Expenses capitalized as above are a regulatory asset. Such companies must also record regulatory liabilities as applicable (see Note 20 below). The Standard requires that the regulated entity reevaluate the probability of coverage of regulatory assets as of any date that it publishes Financial Statements. In the event that the conclusion is reached that the company no longer meets the conditions listed above for the application of the Standard, or that the coverage of all or some of the assets is no longer probable, then all or some such regulatory assets must be deleted, in whole or in part, from the balance sheet, and a provision for impairment of value under the International Accounting Standard No. 36 ("IAS 36") must be considered. Since the Company is a regulated company that applies SFAS 71 to the fixed assets used in the regulated activities, there are different rules with respect to the evaluation of impairment of the assets that were determined by SFAS 71 and by SFAS 90. For as long as the Company is complying with the rules for the application of SFAS 71, the standard covering the impairment in value of assets (IAS 36) does not apply to it. The Electricity Authority, pursuant to the Electricity Sector Law, determines the electricity rates based on the Company's costs. In addition, the Electricity Authority determined the required return on capital based on its evaluation of the Company's cost of capital. In light of the aforesaid, when there is a rate mechanism that provides the Company with full coverage of its costs and, in addition, leads the Company to profitability at a level that, according to an economic analysis of the Electricity Authority, constitutes a suitable return on capital (both equity and outside capital), and should the discount rate that is to be used according to IAS 36 be similar to the cost of the capital that the Electricity Authority determines in the rate, then it is reasonable to assume that it is not necessary to record a provision in accordance with IAS 36 if it were applicable (see Note 1 c above). Should the Company reach the conclusion that it is no longer complying with the principles for applying SFAS 71, it is also likely that there will be a need to record a provision for an impairment of value of the assets pursuant to IAS 36. The IFRS include no other standard which compares to SFAS 71 with respect to recording regulatory assets or liabilities.

38 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) a. The Basis of Financial Reporting (continued) 2. Qualitative Disclosure (continued)

b) Under the Company’s 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 provisions as are covered under Opinions Nos. 40, 50 and 56 of the Institute of Certified Public Accountants 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) (in Israel up to December 31, 2003). (1) General (a) As stated above, the Company prepares its Financial Statements on the basis of historical cost, adjusted for changes in the general purchasing power of the NIS. (b) The adjusted values of non-monetary assets do not necessarily represent the market value of these assets or their value to the Company, but only their cost adjusted for changes in the general purchasing power of the NIS. (c) In the adjusted statements, the term "cost" shall mean "adjusted cost". (d) The comparative figures in these Financial Statements were adjusted to NIS of the balance sheet month. (2) Adjustment principles a) Statement of Financial Position 1) The amounts for the non-monetary items (items for which the amounts appearing in the statement of financial position reflect their historical values when purchased or incurred-see below) are adjusted according to the changes in the CPI from the month in which each transaction was carried out to the CPI for the month ending the reporting period. The following items were treated as non-monetary items: fixed assets, advance land leasing payments, intangible assets and accumulated depreciation, expenses to raise capital, inventory, prepaid expenses, unrecognized actuarial gains and losses, receipts and disbursements for unfinished contracts, perpetual debentures, capital reserves and share capital. 2) Monetary items (those items for which the amounts appearing in the statement of financial position reflect updated values or realizable values as of the statement of financial position date) are presented in the adjusted statement of financial position as of the date of the balance sheet, in amounts identical to their nominal amounts as of that date (the comparative numbers were adjusted to NIS of the statement of financial position month). b) Statement of Operations and Comprehensive Income 1) The statement of operations items (except financing) which express transactions carried out during the reported year - income, expenses, etc. - were adjusted according to the changes in the CPI from the month in which they were recorded and through the month of the end of the reporting period. The erosion of monetary balances relating to those transactions, are included in financial expenses, net. 2) The statement of operations items related to non-monetary items in the statement of financial position (such as depreciation and amortization, changes in inventory, prepaid expenses and accrued income) have been adjusted on the same basis as the related balance sheet items.

39 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) a. The Basis of Financial Reporting (continued) 2. Qualitative Disclosure (continued)

3) The statement of operations items related to provisions included in the statement of financial position (such as provisions for pension and severance pay, vacation pay, etc.) are determined on the basis of the changes in the balances of the relevant balance sheet items after taking into account the relevant cash flows. 4) The net financial item reflects real financial income and expense, as well as the erosion of monetary items during the year. c) Statements of changes in shareholders’ equity Dividends declared and actually paid during the reporting year according to the CPI in effect on the actual date of payment. Dividends proposed as of the date of approval of the Financial Statements and which are to be distributed from the earnings for the reporting year and, as of the balance sheet date, have not been paid, are included without adjustment. The amount presented as erosion of proposed dividends in the past year represents the erosion in the real value of the dividends proposed in prior years that were actually paid in the following year (the erosion relates to the adjustment from the beginning of the year and until the actual date of payment).

3) The Electricity Sector Law prescribes that licensed vital service providers will prepare their Financial Statements as required by the Ministers in consultation with the Minister of Justice with regard to their level of detail, the accounting principles under which they are prepared, and any attached declarations and notes. Such instructions and obligations with regard to the Company’s Financial Statements have not yet been established by the Ministers.

4) Under Section 33(b) of the Government Companies Law, should the Government Companies Authority find that the public interest so requires, it may instruct a government company to present details in its Financial Statements or in any other statement which the Company is required to submit under any law in a certain manner, as long as the instructions covering this matter are not included under the rules, laws or generally accepted accounting principles or accepted reporting rules. Regarding Government Companies Authority instructions as derived from the above, see Note 37 below.

b. Functional Currency and Foreign Currency 1) Functional Currency and Presentation Currency The separate financial statements of the Company and the subsidiary are prepared in the currency of the primary economic environment in which they operate ("the functional currency"). For purpose of consolidating the financial statements, the results and financial position of the Company and the subsidiary are expressed in NIS, which is the functional currency of the Company. The consolidated financial statements of the Company and the subsidiary are presented in NIS.

2) Translation of Transactions in Currencies other than the Functional Currency In preparing the financial statements of the Company, transactions in currencies other than the Company’s functional currency ("foreign currency") are recorded at the rates of exchange prevailing at the dates of the transactions. At each statement of financial position date, monetary items denominated in a foreign currency are translated at the rates published by the Bank of Israel and were valid at that date. Non-monetary items carried at fair

40 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) b. Functional Currency and Foreign Currency (continued)

value that are denominated in a foreign currency are translated at rates prevailing at the date that the fair value was determined. Non-monetary items that are measured in terms of historical cost are translated at exchange rates in effect on the transaction date, as they relate to the non-monetary item.

3) Method of Recording Exchange Rate Differences Exchange rate differences are recognized in operations in the period in which these arise, except for: • Exchange differences which relate to assets under construction for future use in production are included in costs of those assets, when they are regarded as an adjustment to interest costs on foreign currency borrowings (regarding the accounting policy of the Company on capitalization of borrowing costs, see section (g) below). • Exchange differences recognized in the electricity rates for periods following the balance sheet date (see Note 3e below).

c. Cash and Cash Equivalents Cash and cash equivalents include deposits for immediate withdrawal and fixed term deposits with no usage limitation, and maturity dates at the deposit date that do not exceed three months. Deposits which are restricted as to use and whose maturity date on the investment date exceeds three months and do not exceed one year are classified under the short term investments item.

d. Consolidated Financial Statements The consolidated financial statements of the Company incorporate the financial statements of the Company and the entity controlled by the Company (the Coal Company). Control is achieved where the Company has the power to govern the financial and operating policy of an entity, so as to obtain benefits from its activities. Financial statements of a subsidiary which are not prepared in accordance with the accounting policies of the Company are adjusted, prior to consolidation, to the accounting policies implemented by the Company. All intercompany transactions, balances, income and expenses are eliminated in full on consolidation.

e. Non-Inclusion of a Separate Financial Statement in the Periodic Financial Statement The Company did not include separate financial information according to Regulation 9(c) of the Securities Regulations, since it does not contain any material information required by the reasonable investor to comprehend the financial position, operation results and cash flows of the corporation or which may affect economical decisions related to the corporation, that are not included already in the consolidated financial statements of the Company. The criteria implemented by the Company to determine the negligibility of the additional information were: the quantity aspect and the quality aspect. 1. Quantity Tests The Company conducted tests measuring the primary data of the Company as a percent of the corresponding data in the consolidated financial statements of the Company in the years 2007, 2008 and 2009: (Total assets, liabilities, equity, revenues, operation costs, balance of income from current operations, cash flows from current operation, cash flow from investments and cash flow from financing operation). Test results show that the additional information is negligible.

41 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) e. Non-Inclusion of a Separate Financial Statement in the Periodic Financial Statement (continued)

2. Quality Tests: The Company fully holds the Coal Company. The Coal Company purchases the coal for the power stations of the Company and acts in practice as the "long arm" of the Company for purchasing coal for its power stations. Except for a minor quantity, the Coal Company sells all the coal to the Company. According to this agreement between the companies, ownership of coal stocks passes directly from the supplier to the Company. The price paid to the Coal Company is calculated on the basis of cost plus agreed profit, calculates as a fixed rate of return on equity plus pat of the economical savings arising from other activities. This mechanism ensures a fixed profitability for the Coal Company. 3. Regarding the relations, agreements, loans, investments and material transaction between the Company and the Coal Company, see Note 1i 1 above. 4. The Coal Company does not have any material information in addition to the notes to the Consolidated Financial Statements of the Company.

f. Inventory in Warehouses Inventory in warehouses is evaluated at cost determined in accordance with the weighted average method.

g. Fixed Assets A fixed asset is a tangible asset, held for use in production or supply of goods or services or for renting to others, expected to be used during more than one period. The Company presents its fixed asset items in accordance with the cost model. Fixed asset items are presented in the statement of financial position at cost, net of accumulated depreciation and net of any accumulated impairment losses. The cost of the fixed assets includes asset acquisition costs, costs that can be attributed directly to bringing the asset to the location and condition required to operate it as intended by the management and also direct salary and related expenses, materials, contractors and overhead. Cost of qualified assets also includes borrowing costs, which must be capitalized, as indicated in section g below. Each component of depreciable fixed assets with significant cost in relation to the total cost of the fixed asset is depreciated separately. The depreciation is calculated systematically using the straight line method over the expected useful life of the components of the asset from the date on which the asset is ready for its intended use, while considering the expected residual value at the end of the useful life. Additions to the existing generation systems are depreciated over the remaining depreciation period of their original cost. Assets leased under financing lease agreements are depreciated over their expected useful life on the same basis as owned assets, or over the leasing period if the leasing period is shorter than the useful life of the asset.

42 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 2:-REPORTING RULES AND ACCOUNTING POLICIES (continued) g. Fixed Assets (continued)

The useful lives and depreciation rates used in the calculation of depreciation are as follows : Useful life Depreciation (years) rates (%)

Power stations 30 - 50 (mainly 30 years) 2-3.33 Industrial gas turbines 25 4 Jet gas turbines 15 6.67 Transmission system 30 3.33 Distribution system 20 - 30 (mainly 30 years) 3.33-5 Meters 14 7.1 Inventories (including office equipment), mobile mechanical equipment and telecommunications 10 10 Computers and auxiliary equipment 3-5 20-33.33 Motor vehicles 5-7 14.3-20 Buildings 30 3.33

The residual values, depreciation method and useful life of the asset are reviewed by the Management of the Company at the end of every fiscal year. Gains or loss incurred by sale or withdrawal from service of a fixed asset is determined in accordance with the difference between the proceeds from its sale and its carrying amount at the date of sale or withdrawal from service, and is recognized in the statement of operations.

h. Borrowing Costs Borrowing costs attributable directly to acquisition, construction or production of qualified assets, which are assets that take a substantial period of time to get ready for their intended use or sale, are capitalized to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. Currency rate differences on loans in currencies other than NIS (the functional currency of the Company) are capitalized to the cost of those assets to the extent that they are considered to be an adjustment to interest costs. Income earned from a temporary investment of specific borrowings, pending their investment in qualified assets, is deducted from the borrowing costs eligible for capitalization. All other borrowing costs are recognized in profit or loss in the period in which they are incurred, except credit costs covered by the electricity rate in periods following the balance sheet date (see Note 2. a. 2 below). Regarding the publication of additional clarifications and amendments in the period preceding implementation, see section b, e, and z below.

i. Intangible Assets An intangible asset is an identifiable non-monetary asset without physical substance. Intangible assets with a defined useful life are amortized using the straight-line basis over the estimated useful life thereof, subject to evaluation of impairment of value. A change in estimated useful life of an intangible asset with a defined useful life is accounted for on a prospective basis. The useful lives and depreciation rates used in the calculation of amortization of intangible assets with defined useful lives are as follows: Useful life Amortization (years) rates (%)

Software 5-12 8.33-20

43 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) i. Intangible Assets (continued)

Intangible assets of the Company are recognized and measured according to how they were created. Intangible assets purchased separately are presented at cost less amortization and accumulated impairment losses. Amortization of intangible assets with a defined useful life is calculated in accordance with the straight line method over the estimated useful life thereof. The estimation of useful life and amortization methods are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

j. Fuel Inventory Fuel inventory is an inventory of materials consumed in the electricity generation process. Inventory costs include all of the purchase costs, direct labor costs, fixed and variable overhead expenses and also other costs incurred to bring the inventory to the current location and condition. The cost of inventory is measured in accordance with the weighted average method. The inventory is stated at the lower of cost and net realizable value. The fuel inventory that is held for use in the electricity generation process is not written down if electricity sales amount to total cost or exceed cost. When inventories are purchased under borrowing terms whereby the arrangement involves a financing element, the inventories are stated at cost reflecting the purchase cost at usual borrowing terms. The difference between the actual purchase price and the purchase cost at usual borrowing terms is recognized as interest expense over the period of the financing.

k. Financial Assets 1) General Financial assets are recognized in the statement of financial position of the Company when the Company becomes a party to the contractual terms of the instrument. Investments in financial assets are first recognized at cost including transaction costs, except financial assets classified in the category of fair value through operations, where accompanying purchase costs are recorded to the statement of operations. The financial assets of the Company are classified into the following categories. Classification into these categories depends on the nature and purpose of holding the financial asset and is determined upon the initial recognition date of the financial asset. - Financial assets at fair value through operations; - Loans and receivables. 2) Financial Assets at Fair Value through Operations Financial assets are classified as “financial assets at fair value through operations" when held for a) Trading; or b) When designated as financial assets at fair value through operations.

(1) A financial asset is classified as held for trading, when: • It has been acquired principally for the purpose of sale in the near future; or • It is part of an identified portfolio of financial instruments that the Company manages together and has a proven actual pattern of transactions for short term profit taking; or • It is a derivative that is not designated and effective as a hedging instrument.

44 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued)

k. Financial Assets (continued) (2) A financial asset, other than a financial asset held for trading, may be designated as a financial asset at fair value through operations upon initial recognition, if: • Such designation eliminates or significantly reduces a measurement or recognition inconsistency, that would otherwise arise; or • The financial asset is part of a group of financial assets or liabilities or both, which is managed, and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management policy or investment strategy and information about the group of financial instruments is transferred on this basis in the context of internal reports to key managerial personnel of the Company. A financial asset at fair value through operations is stated at fair value. Any resultant gain or loss arising from changes in fair value, including those originating from changes in exchange rates, is recognized in operations in the period in which the change occurred. The net gain or loss recognized in operations incorporates any dividends or interest earned on the financial asset.

3) Loans and Receivables Customers, deposits, loans and other receivables that have fixed or determinable payments, and are not quoted in an active market, are classified as loans and receivables. Loans and receivables are measured at amortized cost, using the effective interest method, less impairment in value, if any. Interest income is recognized by applying the effective interest rate, except for short-term receivables, when the recognition of interest would be immaterial.

4) Impairment of Financial Assets Financial assets, other than those classified as financial assets at fair value through operations, are assessed for indications of impairment of value at each balance sheet date. Such impairment of value exists where there is objective evidence that, as the result of one or more events that occurred after the initial recognition of the financial asset, the anticipated future cash flows of the investment have been impacted. Indications of impairment of value of other financial assets, including receivables due to financing leases, may include: • Significant financial difficulties of the issuer or debtor; • Failure to meet current payments of interest or principal; • Probability that the debtor will enter bankruptcy or financial reorganization. The Company examines indications of impairment of value on a group basis for certain financial assets, e.g. customers for which no indications of impairment were identified, based on past experience with groups of receivables with similar characteristics and changes in the level of delinquent payments and also economic changes related to the sector and the economic environment in which they operate.

45 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued)

k. Financial Assets (continued) 4) Impairment of Financial Assets (continued) For financial assets carried at amortized cost, impairment of value that is recognized is the difference between the book value of the financial asset and the present value of anticipated future cash flows, discounted at its original effective interest rate. If the amount of loss due to impairment of value of a financial asset decreased in the following period and that decrease is objectively related to an event that occurred after the impairment in value was recognized, then in this case, the loss from impairment of value recognized in the past is fully or partially cancelled through operations. Such cancellation is limited in amount to the extent that the book value of the investment in the asset at the date that the loss from impairment of value is cancelled does not exceed what the amortized cost would have been at that date had impairment in value not been recognized in the past. The book value of a financial asset is directly reduced by the loss from impairment of value for all the financial assets, with the exception of trade receivables, where the book value is reduced through the use of an allowance account. When trade receivables are considered uncollectible, they are written off against the allowance account. Collections in subsequent periods of amounts previously written off are credited against the allowance account. Changes in the book value of the allowance account are recognized in operations.

l. Financial Liabilities and Financial Instruments Issued by the Company

Classification as a Financial Liability or an Equity Instrument Non-derivative financial instruments are classified as a financial liability or as an equity instrument, according to the essence of the underlying contractual arrangements. An equity instrument is any contract testifying to a residual right in the assets of the Company after deducting all liabilities. Equity instruments issued by the Company are recorded at the proceeds of the offering less expenses directly related to issuing such instruments. Financial liabilities are presented and measured according to the following classification: • Financial liabilities at fair value through operations. • Other financial liabilities.

a) Financial Liabilities at Fair Value through Operations A financial liability is classified at fair value through operations if it is held for trading purposes or designated as a financial liability at fair value through operations. Financial liabilities of the Company, included in this category, include swap transactions and forward transactions. A financial liability is classified as held for trading purposes, when: • It is mainly created for the purpose of repurchase in the near future; or • It is part of a portfolio of identified financial instruments, managed together by the Company with a proven operational record of generating profits in the short term, or: • It is a derivative that is not intended for and effective as a hedging instrument.

46 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued)

l. Financial Liabilities and Financial Instruments Issued by the Group (continued)

b) Other Financial Liabilities Other financial liabilities (mainly including debentures and liabilities to banks), are initially measured at fair value net of transaction costs. Subsequent to the date of initial recognition, other financial liabilities are measured at amortized cost, using the effective interest rate method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that accurately discounts the forecasted stream of the estimated future cash flows through the expected life of the financial liability to its book value or a shorter period, where appropriate.

m. Derivative Financial Instruments and Hedge Accounting

1) General The Company enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency rate risks, including foreign exchange forward contracts, interest rate swaps and cross currency swaps. Further details on the derivative financial instruments used by the Company are presented in Note 27 below. Derivative financial instruments are initially recognized at fair value on the date that a derivative contract is entered into and are subsequently at their fair value at each statement of financial position date. As a rule, changes in fair value of derivative financial instruments are recognized in operations. Derivative financial instruments that are not intended for hedging are presented as current assets, non-current assets, current liabilities or long term liabilities. 2) Embedded Derivatives Derivatives embedded in financial instruments or any other host contracts are separated from the host contract if the characteristics and economic risks are not closely related to the characteristics and economic risks of the host contracts and the host contracts are not measured at fair value, unless the mixed instrument, in its entirety, (including the embedded derivative) is presented as a financial asset or as a financial liability at fair value through operations. Changes in fair value of separable embedded derivatives are recorded to operations The Company has an embedded derivative, separated from the host contract, with respect to the US dollar denominated loan, convertible to a Yen denominated loan by the lender.

n. Revenue Recognition Revenue is measured at the fair value of the consideration received or the consideration which the Company is entitled to receive as revenue from sale of electricity and provision of services in the ordinary course of business. 1) Revenue from Sale of Electricity Revenues from sale of electricity are recognized upon consumption of electricity by customers, according to meter readings. Revenues for the quantity consumed during the period between the last meter reading and the statement of financial position date are included according to estimates. 2) Revenues from Interest Interest revenue is accrued on a time basis, by reference to the principal outstanding and at by use of the effective interest method. 3) Revenues from Dividends Dividend revenue from investments is recognized at the date of that entitlement to receive the dividends is created.

47 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued)

o. Works according to an Implementation Contract Where the outcome of work according to an implementation contract can be reliably estimated, principle revenues and costs are recognized by reference to the stage of completion of the work, as of the statement of financial position date. The rate of completion is generally measured by the proportion of costs incurred for the work performed as of the statement of financial position date relative to the estimated total costs to implement the contract, except for costs not representative of the stage of completion. When the outcome of work according to an implementation contract cannot be estimated reliably, the revenues are recognized up to the extent of costs incurred which are anticipated to be recoverable. Contract performance costs are recognized as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenues, the expected loss is immediately recognized to operations (see also Note 16 and 28 below).

p. Leasing 1). General Leases are classified as financing leases, whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. 2) Assets Leased With respect to finance lease transactions in which the Company leases assets to another entity, the Company recognizes an asset at the inception of the lease to the extent of the present value of the minimal lease payments. Financing income derived from a finance lease is allocated to accounting reporting periods so as to reflect a constant periodic rate of return on the Company’s net investment outstanding with respect to the lease transaction. Rental income from operating leases is recognized on a straight line basis over the lease term. With regard to operating lease arrangements in which at the inception of the lease period, no lease fees are received, or reduced lease fees are received, and also when additional benefits are granted to the lessee, the Company recognizes revenue on the straight line basis, over the lease term. 3) Asset Leasing Under financing lease transactions in which the Company leases assets from another entity, the Company, on the date of inception of the lease, recognizes the asset at fair value at the inception of the lease, or if lower, at the present value of the minimum lease payments. The liability for the transfer of the minimal lease payments to the lesser is included in the statement of financial position as a finance lease obligation. In subsequent periods, current payments with respect to the finance lease are apportioned between the financing component and the liability component so as to achieve a constant rate of interest that is allocated on the balance of the liability. The portion attributed to the financing element is charged to operations, other than instances in which the leased asset is a qualifying asset, where borrowing costs are capitalized. (Regarding capitalizing borrowing costs, see section g above). Lease expenses related to operating leases are recognized on a straight-line basis over the lease term. In lease arrangements, where no leasing fees are paid at the beginning of the lease period, or reduced fees are paid and also when the lesser grants additional benefits, the Company recognizes the expenses on the straight line basis, over the lease term. Land leases are classified as an operating lease. Deferred leasing payments paid at the inception date of the lease are presented in the statement of financial position in the advance land leasing payment section, amortized on a straight line basis over the balance of the leasing term, including the extension option.

48 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued)

q. Provisions Provisions are recognized when the Company has a legal obligation or constructive obligation as a result of a past event, as to which the utilization of economic resources is probable to liquidate the obligation and they can be reliably estimated. The amount recognized as a provision reflects the best estimate of the management of the consideration required to settle the present obligation as of the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where the provision is measured by using the cash flows estimated to settle the obligation, the book value of the provision is the present value of those anticipated cash flows. When all or part of the present amount to settle an obligation is expected to be recovered from a third party, the Company recognizes an asset with respect to the recovery, to the extent of the provision that was recognized, only if it is virtually certain that the indemnification will be received and it can be reliably estimated.

r. Taxes on Income 1) General Income tax expense (income) represents the sum of the tax currently payable and also the total change in balances of deferred taxes. 2) Current Taxes Current tax expenses are computed based on the taxable income of the Company and subsidiary during the reporting period. Taxable income differs from income before taxes on income, due to inclusion or exclusion of taxable income and expenses that are deductible in other reporting periods, and or are not taxable or deductible. Assets and liabilities of the Company for current taxes are calculated using tax rates and tax laws that have been enacted or substantially enacted by the statement of financial position date.

3) Deferred Taxes The Company creates deferred taxes for temporary differences between the value for tax purposes of assets and liabilities and their value in the financial statements. Balances of deferred taxes (asset or liability) are computed according to tax rates and tax laws enacted or substantially enacted by the statement of financial position date. Deferred tax liabilities are usually recognized for taxable temporary differences between the value for tax purposes of assets and liabilities and their value in the Financial Statements. Deferred tax assets are recognized for all temporary differences that may be deducted up to the amount of anticipated taxable income, against which the deductible temporary difference may be utilized. The taxes that would apply in the event that the investments in investees were realized were not taken into account in the calculation of the deferred taxes, since the Company intends to hold and develop these investments. In addition, the deferred taxes on distribution of earnings by investees as dividends were not taken into account, since the dividends are not taxable. Assets and liabilities for deferred taxes are presented on an offset basis, when an entity has a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to taxes on income levied by the same tax authority and the Company intends to settle its current tax assets and the liabilities on a net basis.

49 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued)

s. Benefits to Employees 1. Benefits after Termination of Employment Company benefits after termination of employment include: pension, grants and liability for severance pay. Benefits from the Company after termination of employment are in part defined contribution plans and in part for defined benefits plans. Expenses for the liability of the Company to deposit funds in a defined contribution plan are charged to operations, or capitalized to the cost of assets, at the time that the labor services, as to which the Company is obligated to make the deposit, are supplied. The difference between the deposit amount payable and the total deposits paid is presented in the statement of financial position of the Company as a liability in the payables item. Expenses for a defined benefit plan are charged to operations, or capitalized to the cost of the assets, utilizing actuarial valuations carried out at every statement of financial position date, under the projected unit credit method. The present value of the liability of the Company for the defined benefit plan is determined by capitalizing future cash flows anticipated for the plan at an interest rate determined according to market yields of CPI-linked government debentures, and having maturity periods closely identical to projected payoff dates under the plan. In cases in which there is no market with high tradability of debentures with a period to maturity of all benefit payments, the capitalization rate will be estimated by extrapolating current market rates along the yield curve. Current employment cost and total liability as at the statement of financial position date are determined for every period by attributing the benefit to employees to the employment periods, based on accumulated rights in the plan. In addition, income on plan assets and funds in trust are recorded and registered in the statement of operations or capitalized to the cost of assets, with respect to the anticipated yields from the assets of the plan as of the beginning to the reporting period. Actuarial gains and losses other than as recognized in the financial reporting period derive primarily from the difference between the actuarial assumptions, that are long-term assumptions, and the behavior of those variables during the reporting year (such as the expected rate of increase in salaries, the capitalization interest rate, the rates of early retirement and mortality and from the difference between the actual return on the funded amounts during the reporting year, and the expected return as of the beginning of the year) and from the changes in the actuarial assumptions themselves, are deducted over the balance of an average anticipated employment period of the employees participating in the plan, starting from the end of the reporting period. The liability of the Company for a defined benefit plan, recognized in the statement of financial position, represents the present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses, less fair value of the assets of the plan. A net asset, created by the said calculation, is limited to the amount of the unrecognized actuarial losses plus the present value of economic benefits available in the form of refunds from the plan or in the form of a reduction in future deposits in the plan (“cap amount”). Pension liability is assigned to service periods of the employees according to the rights accumulation rate in the pension plan. Regarding additional publications and clarifications implemented for the first time, see section u.1, below.

50 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) s. Benefits to Employees (continued)

2) Other Long Term Benefits to Employees Other long term benefits to employees are benefits anticipated to be utilized or will be paid after a period exceeding 12 months from the end of the period when the service entitling to the benefit was rendered. Other employee benefits of the Company include liabilities for a 20-year grant. These benefits (including actuarial gains and losses) are recorded to the statement of operations or capitalized to the cost of the assets, applying actuarial estimates calculated on every statement of financial position date, in accordance with the projected unit credit method. The present value of the Company’s liability for the grant is determined by capitalizing anticipated future cash flows for the plan at market yields of CPI-linked government debentures, linked to the CPI used to pay the benefits related to the grant, having maturity periods closely identical to the anticipated payoff dates of the grant. In a market without high tradability of debentures with a period to maturity of all benefit payments, the capitalization rate will be estimated by extrapolating current market rates along the yield curve.

3) Short Term Employee Benefits Short term benefits to employees are benefits expected to be utilized or paid within a period that does not exceed 12 months from the end of the period when service entitling to the benefit was rendered. Short term benefits to employees include the Company’s liabilities for short term absence, holiday, payments of grants and salaries. These benefits are recorded to the statement of operations or capitalized to the cost of the assets when incurred. The benefits are measured on a non-capitalized basis. The difference between the amount of short term benefits to which the employee is entitled and the relevant amount is recognized as an asset or a liability.

4) Benefits for Dismissal Benefits for dismissal are benefits due to be paid as a result of the Company’s decision to dismiss employees prior to the usual retirement age or as a result of the employee’s decision to agree to voluntary retirement in return for these benefits. The liability of the Company for an early retirement plan is charged to operations, where the Company is liable under a formal severance plan, that includes, at least, the location, position and estimated number of dismissed employees, the benefits to which the dismissed employees are entitled and the plan implementation date. Also the period of time for completing the implementation will be such that will not reasonably allow material changes in the plan. The benefits amount is determined in accordance with the capitalization rate of government debentures.

5) Interest Rate for Capitalizing the Future Cash Flow According to the provisions of the International Accounting Standard No. 19 ("IAS 19"), the discount rate for the calculation of pension actuarial liabilities is determined by using market returns at the end of the reported period on high quality corporate bonds. In countries where there is no deep market for such high quality bonds, the market returns on government bonds are used. Until the date of the approval of these Financial Statements the existence or absence of a deep market for high quality corporate bonds in Israel was not clearly determined. In the calculation of pension actuarial liabilities, at this stage, the Company used the appropriate discount rate for market returns on government bonds. 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 market returns on AA rated corporate bonds. In Israel, there are currently no special publications of data required for the specific calculation of pension actuarial liabilities according to market returns on corporate bonds.

51 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued)

s. Benefits to Employees (continued) 5. Interest Rate for Capitalizing the Future Cash Flow (continued)

According to data published by "Shaarey Ribit" (which was selected by the Capital Markets, Insurance and Savings Division of the Finance Ministry to quote interest and return data for the benefit of institutional entities), at every future time range, there is a different margin between the rate of return on AA rated corporate bonds and the rate of return on government bonds. The average effect of each 0.1% from the margin as above on the actuarial liability and the equity of the Company are as follows: December 31 2009 *2008 *2007 Weighted average of the margin (%) ...... 1.3-1.5 5.1-5.3 2.1-2.3 Average effect of each 0.1% of above margin (in NIS million): Decrease in actuarial liability...... 220 150 190 Increase in equity...... 420 65 125 * Restated.

6. Pension Plan Assets Pension plan assets are presented at fair value according to IFRS standards (see Note 2 a 1 above. 7. Funds in Trust The Company recognizes its right to indemnification as a separate asset, since it is virtually certain that another party will indemnify the Company with respect to all cash flows required to pay off a liability arising from a defined benefit. The Company presents the asset at fair value.

t. Earnings per Share The Company does not provide disclosure of earnings per share in its financial statements, since its ordinary shares are not listed for trading or in the process of being listed for trading on public markets.

u. Exchange Rates and Linkage Basis 1) Balances in foreign currency or linked thereto are included in the Financial Statements at the representative exchange rates published by the Bank of Israel and in effect as of the statement of financial position date. 2) CPI-linked balances are presented at the last known index on the statement of financial position date (index of the month preceding the Financial Statements month) according to the terms of the transaction. 3) The following are data of the CPI and exchange rates of the NIS/US dollar and the rates of change therein: Consumer Price Index Exchange Rate CPI for Known Representative Exchange month CPI rate of the US dollar As of the Financial Points Statements date As of December 31, 2009 ...... 206.19 206.19 3.775 December 31, 2008...... 19 8.42 19 8.61 3.802 December 31, 2007...... 191.15 190.03 3.846

Rates of change in the year ended on % % %

For the year ended on December 31, 2009 ...... 3.91 3.82 (0.71) For the year ended on December 31, 2008 ...... 3.80 4.51 (1.14) For the year ended on December 31, 2007 ...... 3.40 2.80 (9.44)

52 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued)

v. Segmental Reporting Operation segments are reported according to the same basis used for internal reporting purposes and submitted to the chief operating decision maker of the Company. The chief operating decision maker, responsible for allocating resources for the operational segments of the group and for assessing the performance of them is identified as the CEO of the Company, who makes the strategic decisions.

w. New Standards and Clarifications Affecting the Current and the Previous Reporting Periods 1) Standards Affecting the Presentation and the Disclosure • IFRS 8 Operating Segments This standard, that replaces Accounting Standard No. 14 "Segment Reporting", specifies how an entity should report information according to sectors in Annual Financial Statements. The standard requires, inter alia, to base segment reporting on information that serves Company Management to assess the performance of the segments and for the purpose of making decisions on allocation of resources to the different operating segments. The standard will apply to annual reporting periods starting on January 1, 2009, with retrospective adjustment of comparative figures of previous reporting periods. The first time implementation of the standard has no impact on the reported results of the operations and the financial condition of the Company. See note 34 below on Company's operation segments reporting according to the instructions of International Financial Reporting Standard No. 8 "Operating Segments" ("IFRS 8").

• IAS 1 (amended) “Financial Statements Presentation” The standard defines the presentation required in the Financial Statements and details the general framework of the structure and minimal contents of Financial Statements, required to be included in the report. The amendment to this standard introduces changes in the current presentation pattern of Financial Statements and expands the presentation and disclosure requirements in the Financial Statements, including presentation of an additional report within the framework of the Financial Statements, named “Statement of Comprehensive Income” and the addition of a statement of financial position as of the beginning of the earliest period presented in the Financial Statements, in the event of retrospectively implemented changes in accounting policy and in events of restatement and in events of reclassification. The standard applies by way of retrospective implementation to reporting periods starting on January 1, 2009. According to the stipulations of this standard, the Company presents a single statement of comprehensive income that includes both the components of the other comprehensive income and the income or loss components in one report, as well as a statement on changes in equity, presenting balances from transactions with shareholders in their role as shareholders. The Company also presents a statement of financial position for the earliest presented period, since the Company performed a restatement, as detailed in Note 35 below, in these financial statements. The first time implementation of the standard has no impact on the results of the operations and the financial condition of the Company. • Amendment IFRS 7 "Financial Instruments: Disclosures" The amendment expands the disclosures required on liquidity risks and measuring fair value, while defining a scale of three levels to present fair value measurements. The stipulations of the amendment apply to annual periods starting on January 1, 2009 or later. Implementation of the amendment does not affect the operation results and financial condition of the Company.

53 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) w. New Standards and Clarifications Affecting the Current and the Previous Reporting Periods (continued)

2) Standards and Clarifications Affecting the Reported Results and the Financial Position • Amendment IAS 19 "Employee Benefits " IAS 19 "Employee Benefits" was amended as part of the annual improvements project for 2008. Amended IAS 19 "Employee Benefits" states that accumulated right for compensation arising from absences will be classified as short term employee benefits, or as other long term employee benefits, based on the date on which the employee's right to the benefit was created. Consequently, the Company presents benefits with respect to vacation and other paid absences as short term employee benefits, measured at the non capitalized sum, which the Company expects to pay for exercising this right. The amendment applies retroactively to annual periods starting on January 1, 2008. Implementation of the amendment did not have a material effect on the Company.

x. New Standards and Clarifications which are in Force and do not have a Material Effect on the Current and Previous Reporting Periods : • IAS 23 (amended) “Borrowing Costs” The standard determines the accounting treatment of borrowing costs. The amendment to this standard cancels the possibility of immediate recognition of borrowing costs which relate to assets with substantial qualification or construction periods in the statement of comprehensive income. Such borrowing costs will be capitalized to the cost of the asset. The standard applies to borrowing costs arising from qualified assets that have a capitalization date as of January 1, 2009 or any earlier date. Implementation of the standard did not have any material impact on the reported operating results and financial condition of the Company. • Amendment IFRIC 9 "Reassessment of Embedded Derivatives" and IAS 39 "Financial Instruments: Recognition and Measuring " The amendment clarifies that reclassification of a financial asset outside of the "fair value through profit or loss" group requires that the Company consider the need for separating the derivatives embedded in the asset. The stipulations of the amendment apply to annual periods ending on or after June 30, 2009. Application of this amendment did not have a material impact the operating results and financial condition reported by the Company.

y. New Standards and Clarifications Published which are not in Force and were not Adopted by the Company in Early Adoption, Expected to, or may affect Future periods:

• IFRS 9 "Financial Instruments" The new standard specifies the instructions for classifying, measuring and identifying the expenses deficiency level of a future cash flow of financial assets. The standard requires that all the financial assets will be treated as follows: • Debt instruments will be classified and measured after initial recognition according to the depreciated cost or at fair value through the profit and loss. The setting of the measurement model will be in consideration of the business model of the entity in relation to financial asset management and in accordance with the characteristics of the contractual cash flow due from the relevant financial assets. • Debt instruments which upon examination are measured according to depreciated cost may be designated to fair value through profit and loss only when the designation cancels inconsistency in the recognition and measuring that would have occurred if the asset would have been measured at a depreciated cost. Equity instruments will be measured at fair value through the statement of operation.

54 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) y. New Standards and Clarifications Published which are not in Force and were not Adopted by the Company in Early Adoption, Not Expected to affect the Financial Statements of the Company (continued):

• Capital instruments may be designated at the initial recognition date to fair value, where the profit or loss is charged to other comprehensive income. Such designated instruments will cease to be subjected to impairment testing and the resulting profit or loss will not be transferred to the statement of operations, including on the exercise date. • Embedded derivatives, related to the financial asset will not be separated from a host contract included under the application of the standard. Mixed contracts will be measured instead, as a whole at depreciated cost of at fair value, according to the business model tests and contractual cash flows. • Debt instruments will be reclassified from depreciated cost to fair value and vice versa only when the entity changes its business model for managing financial assets. • Investments in capital instruments that have no quoted prices in an active market, including derivatives of these instruments will be always measured at fair value. The alternative of measuring at cost under certain circumstances was cancelled. Nevertheless, the standard states that under specific circumstances the cost may be an appropriate estimate of fair value.

The standard applies by way of retroactive application, other than exceptions specified by the standard regarding annual reporting periods starting on January 1, 2013 or later. Early adoption is allowed and in such cases, early adoption should be disclosed. Entities implementing the standard by early adoption before January 1, 2012, may choose not to apply it by way of retroactive application. At this stage, the Company's Management cannot estimate the effect of this standard on its financial position and results of its operations.

z. New Standards and Clarifications Published which are not in Force and were not Adopted by the Company in Early Adoption, Not Expected to affect the Financial Statements of the Company :

• Amendment IFRS 8 "Operational Segments" stating that measurement of reportable segment assets will be disclosed only if this information is regularly provided to the chief operational decisions maker. The amendment will be applied to annual reporting periods starting on January 1, 2010. Retroactive adoption is possible. The Company's Management estimates that this amendment will not affect the Financial Statements of the Company. • IAS 24 (amended) "Related Party Disclosures" The new standard narrows the disclosure requirements of an entity related to a government, a government authority or a similar organization with respect to transactions concluded with entities connected to the same government, a government authority or a similar organization. In addition, the standard changes the definition of a connected party. The standard was applied retroactively for annual reporting periods starting on January 1, 2011 or later. The Company's Management estimates that this standard will not affect its financial position and results of its operations. • Amendment IAS 7 "Statements of Cash Flows " Amendment IAS 7 "Statements of Cash Flows" clarifying that only outflows that lead to an asset recognized in the statement of financial position, qualify for classification as cash flows used for investment purposes. The amendment will be applied retroactively to annual reporting periods starting on January 1, 2010 or later. The Company's management estimates that this standard will not affect its financial position and results of its operations.

55 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) z. New Standards and Clarifications Published which are not in Force and were not Adopted by the Company in Early Adoption, Not Expected to affect the Financial Statements of the Company : (continued)

• Amendment IAS 17 "Leases" Amendment IAS "Leases" states that land leases will be classified as a financial lease or as an operational lease by using the general principles of the standard. The amendment will be applied retroactively to annual reporting periods starting on January 1, 2010 or later. The amendment will be applied retroactively to existing leases, where the required information is available at the leasing inception date. In the absence of the required information, land leases will be reviewed as of the amendment adoption date. The Company has land (other than investment property measured at fair value), held under a lease arrangement with the Israel Lands Administration, paid for in advance. In the event that the Company will decide that land leasing from the Israel Lands Administration is financial, it will classify the land accordingly. Since lease fess are paid in advance, this amendment does not affect the financial results and only affects the classification in the financial statements. At this stage, Company Management is unable to estimate these amounts. The Company's Management estimates that this standard will not affect its financial position and results of its operations.

aa. Critical Accounting Considerations and Principal Sources of Uncertainty Estimates 1) General Implementation of the aforementioned accounting policies of the Company requires the Management of the Company, to apply, in certain cases, expansive accounting judgment regarding estimates and assumptions on the book value of assets and liabilities which may not be found in other sources. The estimates and the related assumptions are based on past experience and other factors considered relevant. The actual results may differ from these estimates. The estimates and basic assumptions thereof are constantly reviewed by the Management. Changes in accounting estimates are recognized on for the period on which the estimate was changed, when the change affects only that period, or recognized in the said period and in future periods in cases where the change affects both the current period and the future periods.

2) Provisions for Legal Proceedings The Management of the Company relies on the opinions of legal and professional consultants for reviewing the legal aspects the claims and also for assessing the probability of decisions against the Company. After the advisors of the Company form their legal opinion and the chances that the Company will have to incur the results of the claim or will be able to reject the claim, the Management of the Company estimates the sum which should be recorded in the Financial Statements, if any. An interpretation of a certain legal status that differs from that of the legal advisors of the Company, a different understanding by the Management of the Company of agreements and changes originating from related court decision or new facts, may affect the value of the total provision for legal proceedings filed against the Company and consequently affect the Company's financial position and results of its operations.

56 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued) aa. Critical Accounting Considerations and Principal Sources of Uncertainty Estimates (continued)

3) Employees Benefits The present value of the Company’s liability for payment of grants for termination of employee-employer relations, pension plan and benefits for its employees is based on numerous data, determined on the basis of an actuarial estimate, which use many assumptions, including capitalization rate. Changes in actuarial assumptions may affect the book value of the Company's liability for payments of grants for termination of employee-employer relations, pension and benefits. The Company estimates the capitalization rate once every quarter, based on market yields of Government debentures. Other main assumptions are made in light of prevailing market conditions, and acquired experience of the Company. See Note 19 below for further details on assumptions made by the Company.

4) Fixed Assets Depreciation As mentioned in section f) above, the Management of the Company reviews the estimated useful life of fixed assets items, on every annual reporting period. The Management stated that there is no change in the useful life of the fixed assets during the period.

57 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY a. The Future Electricity Rate 1) A New Rate Base for the Generation Segment (for the years 2010-2014) a) On February 1, 2010, the Electricity Authority reached a decision on updating the new rate base for the generation segment for the years 2010-2014, and on updating the rate structure book relating to the demand classification groups and the consumption distribution and the compensation formula for the delay in rates update, to be applied to all electricity chain segments. This decision and rates deriving from it came into force on February 15, 2010. Under this decision, the Electricity Authority updated the rate base for the generation segment for the years 2010 – 2014, updating rate components, including capital costs operating costs, fuel mixture and more. The update does not include any reference to the pension costs of Company's employees. The recognized costs were determined after the Electricity Authority conducted a costs control of Company costs, as recorded in its records over the years The main issues principles of the new rate base for the generation segment are as follows: (1) Depreciation and Assets Base Assets recognized in the new rate base for the generation segment were determined according a future outline for 2010-2014 and will be updated every year. Recognized cost with respect to generation units was determined according to the development plan that includes the list of recognized units and their dates of first operation and not according to the increase in sales as implemented in the current rate. The generation units were divided into two main types: "Old" units - generation units that commenced operation before December 31, 2002. Recognition of the costs of the "old" units is mainly based on costs thereof in the Company’s books. Conversion to gas investments will be recognized from the annual update date only after commencing operation with gas. "New" units - generation units that were operated and that will be operated after December 31, 2002. Recognition of the costs of the "new" units is determined according to normative parameters, e.g., operation dates, building duration and normative interest. The "new" units were divided into two according to recognized rate aspects: − CCGTs outside of the emergency plan (except Tsafit stage B) (units 1-10). − CCGTs defined as "emergency" + Tsafit Stage B (units 11-21). Recognized equipment costs of the "new" units, where construction has already started (units 1-10) are based on costs of contracts entered into by the Company. Equipment costs of CCGTs defined as "emergency" projects and of Stage B (units 11-21) were determined in a normative manner, using data from the Gas Turbine Handbook (GTH) (average costs in the global market) adjusted to the Company. Development and installation costs (all costs except equipment, interest incurred during the construction and exceptional costs) of the new units will be recognized in a normative manner, based on an average of historical costs of building a gas turbine, a steam addition and CCGTs, in accordance with costs audit, performed by the Electricity Authority. In the event that units under construction incur costs, that are excessive in the opinion of the Company, the Company may request the Electricity Authority to recognize these costs for the subsequent annual update following the actual operation date of the unit. The normative development and installation costs were divided into two groups: a. Costs of Company employees are linked to changes in the average monthly salary of an Israeli employee do not include, at this stage, pension costs of generation A and generation B employees and pension costs with respect to free electricity, holiday gifts and bonuses for generation C employees, until the examination is completed and a final decision is reached on the pension issue.

58 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) a. The Future Electricity Rate (continued) 1) A New Rate Base for the Generation Segment (for the years 2010-2014) (continued)

b. Contractors costs, linked to the index of input in residential building. Financing cost during the construction period is based on normative construction duration and normative, recognized interest rates.

(2) Fines on Failure to Meet Timetables In accordance with the decision of the Electricity Authority, if the Company fails to meet predetermined normative timetables for commencing operation of generation units, the recognized income of the Company will be decreased under a fines mechanism, calculated on a daily basis. A formula for calculating fines with respect to failure to meet normative operation dates of the following "new" units which have not yet commenced operation: Haifa 3 and 4, Alon Tavor "emergency" and stage B of Eshkol "emergency", Hagit "emergency" and Ramat Hovav 8 "emergency", Tsafit second stage. The penalty for each unit will be calculated according to the number of delayed operation days from the normative operation date. The fine mechanism as specified in the decision of the Electricity Authority on June 29, 2009, still applies to the three "emergency" gas turbines (Eshkol, Hagit and Ramat Hovav – unit 8) (see also section 3 e below). The penalty rate for a delay in construction of a steam unit addition is 75% of the fine for a delay in construction of a gas turbine unit. Maximum fine may amount up to 25% of the unit cost.

(3) Financing Costs Financing costs will continue to be recognized in a normative manner, based on the recognized operating assets. The recognized leverage remains one third equity and two thirds foreign capital. The recognized return on foreign capital is derived from three components: The financing basket of the foreign capital will be divided into three components: The NIS financing basket component reflecting loans raised in the local market; a hedged financing basket component derived from a new hedging mechanism and NIS at higher interest rates financing basket component reflecting loans in foreign currency for which the Company is required to initiate hedging transactions. o The NIS financing basket - for which an average real NIS interest rate will be recognized. o The hedged financing basket - for which the following components will be recognized: an average, real NIS interest rate, the hedging obligation spreading rate for the Company or of the Company with respect to basket differences – index and interest differences between the average foreign currency interest rate and the average, real NIS interest rate. A decrease in the hedged financing basket was defined up to its cancellation within three years. The previous hedging mechanism was cancelled, the debt to consumers will be returned to the consumers over five years. o NIS financing basket at higher interest for which an average, higher, real NIS interest rate will be recognized. Recognized yield rates on foreign capital linked to the CPI and to exchange rates were determined according to the Financial Statements for 2007, while using the rolling formula for 2008 (and every subsequent annual update). Return on Equity The return on equity in the generation segment will be 7.35% (9.5% before tax) compared to 7% in the previous base. Total recognized financing costs will be the multiplication of the weighted recognized yield rate (equity and foreign capital) by the recognized assets basket, from which the reserve for deferred taxes will be deducted.

59 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) a. The Future Electricity Rate (continued) 1) A New Rate Base for the Generation Segment (for the years 2010-2014) (continued)

(4) The Hedging Mechanism The new rate base book for the generation segment for the years 2010-2014 states that the hedging mechanism was updated for all segments of the electricity chain. The main principles of the mechanism are as follows: • The initial estimate of a hedging fund is approximately NIS 12,065 million (according to the determining basket of February 2010). The sum of the hedging fund will be updated in the annual updating date, according to the recognized assets and to the decreasing plan published by the Electricity Authority, up to the complete cancellation of the mechanism. • The hedged sum will be linked to the US$ and to the Euro at 75% and 25% rates, respectively. • Amounts accumulated to the credit or debit of the Company will be spread up to the end of the hedging mechanism in April 2013. However, it should be noted that in light of the expected structural changes, the Electricity Authority freezes its increased outline of the NIS financing basket up to the earliest of March 31, 2011 or the initiation date of the structural change process. • The efficiency in the new rate base is based on operation components only, therefore, the efficiency is not applied to the hedging component.

(5) Operating Costs Recognition of operating costs in the new rate base were determined based on past costs, adjusted for an increase in sales. A 2% annual amortization factor is applied to these costs. The Electricity Authority did not complete the audit of the pension costs and upon reaching a final decision in this subject, this component will be updated accordingly in the recognized operating costs. The rates book includes an adjustment of pension costs to the amendment on the restatement of the financial statements. The following costs were reclassified in the rate as operating costs: − Investments in operational power stations. − Joint assets capital costs. − Spare parts capital costs. − Adjustment for costs of free electricity (exceeding average household consumption). − Fuels accompanying costs added to fuel prices. − Coal ash treatment, crude bottoms depreciation, electricity consumption in Company facilities. Operational salary costs are linked to the salary of an Israeli employee position. According to the Electricity Authority's decision, only half of the spare parts capital costs will recognized as calculated by the Electricity Authority for 2002-2006. This component is recognized under the recognized operation costs and will therefore increase each year according to the increase in sales, less a 2% amortization factor, determined by the Electricity Authority. (6) Fuels Costs The fuels basket will be calculated every year as an average of fuel baskets according to a forecast of load curves related to different climates. The fuels 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 interest and linkage. In addition, starting from the new rate base, the fuel mixture will be calculated and applied on a calendar basis for that year (January – December).

60 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) a. The Future Electricity Rate (continued) 1) A New Rate Base for the Generation Segment (for the years 2010-2014) (continued)

The Electricity Authority defined in advance the majority of the parameters to be used to calculate the fuel mixture throughout the trial period, including operation dates of generation units. The Gas Incentive provided by the new rate base is limited to the years 2009 - 2012 to new gas agreements only.

(b) Updates for the Transmission and Distribution Segments Pursuant to setting a new rate base for the generation segment, the Electricity Authority also updated some of the components for the transmission and distribution segments. Return rates on foreign capital were updated for the high voltage and low voltage transmission and distribution segments, similar to the updates in the generation segment. In addition, the new hedging mechanism is also applied to these segments.

(c) The Effect of the new rate base on the Financial Statements of the Company As of the publication date of the Financial Statements, the Company is still studying the full implications of the new rate base. The Company submitted its initial primary objections to the determined rate. Its main objections are detailed below: (1) Non-Recognition of the Construction costs of the Generation Units - The decision of the Electricity Authority reflects complete non-recognition of the Company's costs, since the normative recognition of construction costs of the majority of the generation units is significantly lower than the actual construction costs, even for units that already commenced operation, where construction costs have been recorded in the books. Consequently, there is a gap of approximately NIS 2.1 billion between costs recognized by the Electricity Authority and the cost as estimated by the Company, which includes both costs expended up to December 31, 2009 and costs expected for completing the generation units from this date onwards. The new rate base also states that in the event that, in the opinion of the Company, excessive costs are created by units under construction that are not included in the normative cost base determined by the Electricity Authority, the Company may request that the Electricity Authority recognize these costs in the subsequent annual update, after the actual operation of the unit. Estimated volume of the non-recognized assets* Sum (NIS billion) With respect to investments in assets operated up to December 31, 2009 ...... 0.5 With respect to investments in assets operated and will be operated in the first quarter of 2010 0.1 With respect to assets that will be operated after the first quarter of 2010 (including an estimated cost of assets under construction) ...... 1.5 Total...... 2.1 * This estimate does not include pension costs of approximately NIS 0.4 billion, that were not included in the rate recognition as yet, because the Electricity Authority did not completed its audit of pension costs of Company employees. Upon completion of this audit and in accordance with its results, the Electricity Company intends to amend the recognized costs. The Company estimates that these costs will be recognized, since these costs are an integral part from the assets construction costs.

61 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) a. The Future Electricity Rate (continued) 1) A New Rate Base for the Generation Segment (for the years 2010-2014) (continued) (c) The Effect of the new rate base on the financial statements of the Company (continued)

The Company estimates that it will deduct approximately NIS 0.6 billion in the first quarter of 2010, with respect to the investments in assets coverage shortage for assets that were operated and will be operated up to the end of the first quarter of 2010. As for the recognition shortage of the other assets of approximately NIS 1.5 billion, the Company did not yet complete review of the assets writing off mode and rate with due consideration of the investment progress rate in assets.

(2) Fines for failing to meet timetables - The Electricity Authority defined various fines with respect to failure to meet normative timetables for commencing operation of new generation units. Estimated fines with respect to assets that were operated up to the end of the first quarter of 2010, is approximately NIS 25 million. The Company estimates that it will deduct this sum in the first quarter of 2010. Estimated fines with respect to assets applied after the first quarter of 2010 is expected to amount to approximately NIS 1,3 billion. The Company did not yet complete the review of the recognition of the fines mode and rate, with due consideration to the investment progress rate in those projects. The Company estimates that is did not exhaust its full rights and claims. Therefore the aforementioned sums are the best available estimate as of the report date and may change.

(3) The Hedging Mechanism – The Electricity Authority decided to end the old hedging mechanism and return the debt to the consumers, spread over five years. The Company is still studying the implications of this decision (see also section a(4) above).

(4) Recognition of half the spare parts capital costs - For the purpose of supplying electricity at high reliability and availability, the Company holds a stock of spare parts for current maintenance, planned renovations and faults repair. The Electricity Authority decided to deduct only half the recognized annual capita of spare parts. The Company is still studying the effect of this decision on the Financial Statements.

(5) Conversion to Gas cost – Recognition of conversion to gas costs is applied only to gas operated units. Moreover, only investments made one year after the operation date will be recognized, provided that the investments will not exceed 10% of the total construction cost. Regarding units that already operate with gas, the Electricity Authority, requests the Company to explain the excessive costs for the purpose of receiving full recognition (Gezer Site).

(6) Operational salaries cost - The Electricity Authority chose to link the salaries of Company employees to the general salaries index. The Company has collective salaries agreements, which were approved by the Supervisor of Wages and Work Agreements in the Ministry of Finance and are not linked in one way or another to the general salaries index. . (7) Rate Coverage for past debts – The new rate base does not include any reference to the subject of past claims for rate coverage of the Company for which the Electricity Authority appointed a reviewing committee (see also Note 3 b below).

In light of the aforementioned, the Company intends to request the Electricity Authority discuss, again, the determined rate base, after the Company will be granted the opportunity to respond in detail to all the problems and faults in the published rates outline, to effect a thorough amendment of the decision.

62 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) a. The Future Electricity Rate (continued)

2) New Criteria for Relations of the Company with Private Electricity Producers An update was published in July 2009 of chapters E - F of the criteria book, relating to private producers, infrastructure services, definition of the future structure of the electricity sector and roles of its active participants. The Company's CEO addressed the Electricity Authority on November 24, 2009, claiming that the aforementioned decision specified in chapters E - F of the criteria book raises numerous subjects that require decisions and/or clarifications of the Electricity Authority, to enable the Company to act in accordance with these criteria and that until it receives such decisions and/or clarifications, the Company will not be able to implement the criteria in the present structure and will be obliged to implement only parts thereof.

3) Models for Recognizing Costs of Building the Distribution Networks The Company disagrees with the models developed by the Electricity Authority for reassessing the distribution assets. The Chairman of the Electricity Authority clarified to the Company that the Electricity Authority will evaluate models to be recommended by the Company, and that until a decision is reached regarding this matter, the extent of the Company's investments in the distribution segment will be studied (to be recognized in the framework of the determination of the next rate) based on the rate principles; that is, in accordance with the growth in the sales of electricity (in kWh). The Company submitted the aforesaid models during 2004. In November 2005, the Authority appointed a consultant who examined the physical models for the development of the distribution system that were suggested by the Company and those determined by the Electricity Authority. The legal consultant formulated models which he recommended to the plenum of the Electricity Authority. The model that was formulated by the legal consultant to examine the development of the high voltage distribution networks differs from the model suggested by the Company whereas the model suggested for examining the development of the low voltage distribution networks resembles the model suggested by the Company. At this stage, the Company cannot assess the extent of assets that will not be recognized in the context of the base of the next rate and has not recorded any provision for this matter.

b. Main costs incurred by the Company which are not covered by rates as granted by the Electricity Authority for Previous Years

The following are subjects on which the Electricity Authority made decisions that are disputed by the Company. All sums in sections 1-9 are calculated according to Financial Statements published before the restatement (see Note 35 below). The restatement does not have a material effect on these sums.

1) Values of the Equivalent Forced Outage Rates (EFOR) and maintenance days – the values, determined by the Electricity Authority are lower than those accepted worldwide, and in some cases even lower than the actual performance of the Company. The Company believes that the values must be based upon long term normative parameters, which will allow the Company to enjoy the fruits of efficiency in operating the system. The resulting loss to the Company during the period 2003 - 2007 amounted to approximately NIS 2,800 million. 2) Gas Incentive - In June 2002, the Electricity Authority determined an incentive scheme for 2003 - 2006 only. The Company believes that the gas incentive should be at a permanent rate of 20% of the total saving throughout the entire life span of the units. Total saving to the economy from gas introduction during the period 2004 - 2009 amounts to approximately NIS 23,500 million, of which the Company received only NIS 1,078 million as an incentive (as aforementioned, for the years 2003-2006).

63 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) b. Main costs incurred by the Company which are not covered by rates as granted by the Electricity Authority for Previous Years (continued)

3) Gezer CCGT - The recognized fuel mixture for 2007 and 2008 was calculated based on the assumption that the station will receive natural gas in October 2007. In practice, the station started using natural gas at a later date (July 2008), forcing the Company to use more expensive fuel than that recognized by the rate. The Company estimates that its loss amounted to approximately NIS 1,200 million (approximately NIS 200 million in 2007 and NIS 1,000 million in 2008)..

4) Electricity consumption at Company facilities - the Company believes that the current rate calculation method does not provide coverage for the electricity consumption of Company facilities, causing an annual rate coverage deficit of approximately NIS 30 million.

5) Recognition of financing costs - the Company did not receive recognition for the actual financing costs. Actual costs of raising finance during recent years (actually throughout the test period) in Israel and abroad was considerably higher than the cost recognized by the Electricity Authority, resulting in a rate coverage deficit to the Company. The marginal differences arising from fund raising costs reached up to 2%, leading to a cumulative loss of approximately NIS 282 million during the period 2002 - 2008.

6) Loss from collecting an average rate - the average rate is according to the division of consumption in 2000. Due to changes in division of consumption in recent years, the Company could not collect the full revenue determined by the Electricity Authority.

7) Recognized fuel basket for 2007 - the Company used a more expensive fuel mix than recognized in the rate, mainly due to a considerable increased demand for electricity that exceeded the forecasts of demand used to calculate the fuel basket in the electricity rate, and, as estimated by the Company’s Board of Directors, led to a loss of approximately NIS 690 million.

8) Alon Tavor CCGT - The Company used in 2008 a more expensive fuel mixture than the mixture recognized in the rate, since the Electricity Authority did not recognize the delay in operation of the CCGT (three months). The Company estimates the resulting loss at approximately NIS 50 million.

9) Reading Power Station - the station started using natural gas on a later date (July 2006) than the expected date (May 2005) used to update the rate, and thus fuel used was more expensive than that recognized in the rate, incurring an estimated loss of approximately NIS 275 million. In addition the Company incurred an estimated loss of approximately NIS 170 million, due to an order to close the station, issued by the Ministry of Environmental Protection that forced the Company to use more expensive fuel.

64 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) b. Main costs incurred by the Company which are not covered by rates as granted by the Electricity Authority for Previous Years (continued)

Open Issues on which the Electricity Authority did not reach a decision as yet: Liabilities for Pension - On March 25, 2004, the Company applied to the Electricity Authority requesting that it recognize the amount of about NIS 1,146 million as an expense that will be covered in the electricity rate, spread over no more than 10 years. This amount constituted an increase in the actuarial liability that was included in the Company's Financial Statements in 2003, and which originates from the adoption of the principles for calculating the actuarial liability that are prescribed by the Supervisor of the Capital Markets and Savings Division at the Finance Ministry, and other decisions the effect of which is exogenous on the amount of the actuarial liability. In reply to this request, the Electricity Authority notified the Company that, in view of the complexity and importance of the issue, it will appoint a team of outside consultants in the accounting and actuary sectors ("the consultants team"), in order to coordinate the required findings and calculations, including a rate approach to the implications of the setting up of a central pension fund. The issue in its entirety will be presented for discussion and a decision by the Electricity Authority plenum. The work of the consultants team was suspended at a certain stage. During 2005 through 2007, the Company applied several times to the Electricity Authority, with the objective of obtaining recognition in the rate for the as yet unamortized actuarial losses which have been recorded pursuant to the allotment provisions of International Accounting Standard No. 19 ("IAS 19"). As of December 31, 2007, the balance of the unamortized actuarial losses (according to the previous Israel Accounting Standard before the effect of the restatement) amounts to about NIS 2.93 billion, and in the Company's opinion, this amount is intended to be covered by the rate according to the rate of amortization in the Financial Statements, that is, over a period of 15 years. As of the date on which these Financial Statements were signed, the matter is under discussion and no final decision has as yet been reached. In its decision on the new rate base for the generation segment, the Electricity Authority indicated that it intends to publish for a public hearing principles for recognizing the pension costs of Company employees from June 10, 1996 and reach a final decision on the subject during 2010.

c. General Disputes between the Company and the Electricity Authority

1) The Company expressed its opinion to the Electricity Authority, among other things, on the need to reduce the amortization factors in the rate and to recognize exogenous expenses. The Company disputes the Electricity Authority's decisions described in paragraph (b) above regarding the update of the current rate, the positions of the Electricity Authority on the implications of the new rate base for the generation segment as described in paragraph (a) above. On April 29, 2007, the Chairman of the Company's Board of Directors approached the Ministers requesting to convene an urgent discussion in order to remove limitations and restrictions imposed on the Company with regard to raising capital, this so as to deliberate the Company's demands regarding the decisions of the Electricity Authority. Following this appeal, several discussions were held, attended by all the relevant Government organizations, including the Government Companies Authority and the Electricity Authority with the intention of evaluating various ways of resolving the gamut of problems described above.

65 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) c. General Disputes between the Company and the Electricity Authority (continued)

On August 8, 2007, the Electricity Authority decided that the recognized cost will increase, as of September 8, 2007, at a rate of 5% (in relation to the recognized cost as of July 16, 2007). The consumer rate update will be determined after examination of the overall changes in recognized cost as of that date including this increment and the changes resulting from the current update. The increment to recognized cost will represent advance recognition of investment cost at the following terms: a) On the date of establishing a new rate base for the generation segment or at the end of one year from the date of effecting the increment to recognized cost (September 8, 2007), whichever is sooner, the special increment will cease. The accrued increment will be deducted from the rate bases of the recognized assets as determined by the Electricity Authority. b) Until September 8, 2007, the Electricity Authority will determine a supervision mechanism ensuring that said increment as discussed in a) above will be designated solely for financing development needs. On November 4, 2008, the Electricity Authority announced that collection for advance recognition of investment cost is terminated up to September 8, 2008. Surplus amounts accumulated through this collection were returned to consumers under the compensation mechanism for delay in updates. The Company recorded this increment as an offset to the investments in fixed assets under construction. The total cost of fixed assets under construction deducted with respect to this increment as of the statement of financial position date amounts to approximately NIS 1,042 million (of which approximately NIS 19 million is not yet attributed to projects). On September 8, 2008, the collection of this increment ended and reduced the recognized costs at a rate of 4.76%, pursuant to collection termination. The Company's Management and Board of Directors are conducting an ongoing dialogue with the relevant Government bodies in an attempt to advance the discussions regarding issues in dispute as to the electricity rate. In the event that no progress is made on this subject, the Company's management will be required to take material cost saving steps, reduce vital operation costs and development costs and introduce organizational and structural changes, with the purpose of preventing adverse effect on its ability to supply electricity, as it is obliged by the law.

2) On March 2, 2009, the Electricity Authority published its decision on the annual update for 2008. Its decision updates the recognized fuel mix for 2008 and its basic assumptions and also fuel prices. The recognized fuels basket was accordingly updated retroactively as of April 2008. The determination of the recognized fuels basket during the annual update for 2008 recognized some demands of the Company, e.g., the request to recognize generation inception dates with natural gas in Gezer (except CCGT Gezer A) and Hagit and use of the actual load curve in 2008. However, the Company opposes some of the assumptions used by the Electricity Authority to define the fuels basket, as follows: • Forced unavailability of generation units and scheduled maintenance - normative values remained at the level set by the Electricity Authority in the previous year, contrary to the Company's position. • Operation date of Alon Tavor CCTG - The Electricity Authority set the operation date of the steam addition to September 2008. In practice, the steam addition operated with diesel up to December 2008. Namely, there is a three months gap in operating the steam addition with diesel.

66 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) c. General Disputes between the Company and the Electricity Authority (continued)

• Gezer A CCTG - the Electricity Authority related to the operation date of Gezer A CCTG with natural gas from October 2007 and did not update the operation date with gas according to the dates committed by the Company, namely September 2008, although it recognized the operation dates of all other units in Gezer with gas, as committed to by the Company. • Gas incentive - according to the decision of the Electricity Authority, no incentive was recognized for the Company with respect to the current gas agreement. The Company is of the opinion that a gas incentive set for 2008 should also apply to current gas agreements.

d. Implications of the Adoption of International Financial Reporting Standards (IFRS) 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 2003). In light of the aforementioned, adoption of the financial reporting according to IFRS will require the Company to recognize index and exchange rate linkage differences (in relation to nominal NIS and not adjusted NIS) in the Financial Statements on net financial liabilities not in nominal NIS. Therefore, on March 9, 2008, the Company applied to the Electricity Authority with an additional request to adjust the electricity rate with respect to IFRS and also announced that the transition to IFRS will lead to a reduction in equity of approximately NIS 2.5 billion as of December 31, 2007 and beyond, that will lead to a significant decline in the Company's profits every year. Compared to the Financial Statements adjusted to the CPI through December 2007, the Company's financial expenses will increase with respect to every percent of inflation by approximately NIS 390 million (before the tax effect), also causing an erosion of approximately NIS 150 million in equity. These calculations are according to Financial Statements published before the restatement (see Note 35 below). The restatement did not have a material effect on these sums. In addition to the above, the Company will be exposed in its Financial Statements to a real devaluation/revaluation in the basket of currencies for the amount hedged in the electricity rate, so that each real percent of change in the basket of currencies will be expressed in the comprehensive income statement (and not neutralized by a mechanism for creating regulatory assets/liabilities) thereby leading to an increase/ decrease in financial expenses of approximately NIS 140 million (based on the current hedging mechanism). These calculations are according to Financial Statements published before the restatement (see Note 35 below). The restatement did not have a material effect on these sums. This erosion in profits arising from the transition to international standards might harm the Company's rating, lead to an increase in capital raising costs and make it difficult to continue raising capital for executing the development plan. On March 26, 2008, the Electricity Authority announced that the adoption of IFRS is expected to be a complex procedure that will be executed and studied over several years. In view of the Company's demand for a massive electricity consumption rate increase due to the changes involving IFRS in its accounting reporting, the Electricity Authority's professional team argues that the time is not yet right for determining the rate-regulatory position regarding these changes and that the team does not yet possess all the data to enable the forming of a rate policy, if required. In light of the above, the Electricity Authority will form a team of expert advisors to study this issue and all of its aspects and particularly with respect to the implications on the electricity rates. Until this subject is studied in full, the Electricity Authority will continue preparing the rate bases as practiced to date.

67 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) d. Implications of the Adoption of International Financial Reporting Standards (IFRS) (continued)

The Electricity Authority further clarified that "a basic principle in the regulator's work consists of the latter not being limited in his judgment to automatically recognize the Company's costs as they appear in the books on its behalf or in its accounting records. In attempting to decide in this issue, as in any other issue, the Electricity Authority will weigh all the relevant considerations in this respect (see the High Court of Justice's ruling regarding the Electricity Authority's decision in the matter of applying Accounting Standard No. 12 on the Company, No. 7976/04) and will reach an educated decision in this case at the appropriate time". On March 9, 2008, the Company applied to the Minister of Finance requesting an injection of equity of approximately NIS 2.5 billion into the Company, equaling the erosion of capital arising from the transition to IFRS, in order to prevent damage to the Company's capital raising ability so as to prevent any impairment to the Company's financial stability and allow the continued development of the electricity sector.

The Company received the response of the Government Companies Authority on March 31, 2008, which rejected the request of the Company to inject equity. The Government Companies Authority believes that there are several suitable accounting solutions for this issue, similar to the deviation granted to the Company with respect to implementing IAS 12 between the years 2004-2007, that may be reached through a joint discussion between the Company and the Government Companies Authority. On June 29, 2008, the Finance Minister enacted the Government Companies Regulations. See Note 2 a 1 above. It is the intention of the Company to continue its negotiations with all of the relevant agencies so as to prevent impairment of its financial strength, and requests that the electricity rates be adapted to the new financial measurement method as provided under the IFRS and in accordance with the regulations of the Finance Minister applying to the Company (see Note 2 a.1 above).

e. Emergency plan for the Electricity sector . On August 27, 2008, the Minister of National Infrastructures approved an addition to development plan that includes construction of three combined cycle gas turbines: at Ramat Hovav, Eshkol and Hagit (Gas turbine synchronization in July 2010 and the steam addition up to July 2012). These three turbines are in addition to two gas turbines at Ramat Hovav, of which one was synchronized in November 2009 and the other was synchronized in January 2010, all in addition to the approved multi-annual development plan. On October 30, 2008, the Electricity Authority reached a decision on financing stage A of the emergency plan as approved by the Minister for National Infrastructures. In addition, on December 28, 2008, the Minister of National Infrastructures approved the building of a fourth combined cycle unit in Alon Tavor (stage A up to the summer of 2011, stage B, steam addition, up to summer 2013). The main principles of the decision, as made by the Electricity Authority are:

1) Pursuant to the accelerated development needs required by the Company and mainly the emergency plan for building generation units, as decided by the Minister for National Infrastructures, and in view of the financial condition of the Company and the uncertainty in the capital markets, the Electricity Authority sets a dedicated amount for development for the years 2009 - 2010, as follows: a) The Electricity Authority will recognize the costs for financing the development plant in the electricity rates at an accumulated amount of NIS 2 billion. This recognition will be spread over a period of two years, starting from January 2009 and ending on January 1, 2011, or up to the end of the collection.

68 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3:- IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) e. Emergency plan for the Electricity sector (continued)

b) The aforementioned amount in sub-section 1.a will be managed through a dedicated account, supervised by the Electricity Authority. Allocation of resources to the Company, for the emergency plan only, will be based on achievement of plan implementation milestones, upon approval of the Electricity Authority. c) The Electricity Authority will include its decision in calculations for defining the rates base for the generation segment and will verify that no surplus payment is created when defining the rates for the Company.

2) Recognition of this amount is subject to fulfilling the detailed conditions, including attainment of the timetables for operation of the project, as follows: a) The Company will meet the timetables for the development plan of the generation segment, including the emergency plan, as approved by the Minister for National Infrastructures and pursuant to the stipulations of the document for a hearing, published by the Electricity Authority. b) The CEO of the Company will report to the plenum of the Electricity Authority once every quarter on the implementation of the general development plan, including the development plan referred to in this decision, relating to meeting timetables, costs and a budget versus execution report, in a format approved by the Electricity Authority. c) The Company will not transfer funds to the CPY Pension Fund, exceeding the monthly current provision, until examinations are completed and decisions are made by committees appointed to this purpose in the Company, in the Government Companies Authority and the review conducted by the Electricity Authority, all subject to the law. d) The Company will act as soon as possible to execute efficiency steps which it announced to improve the financial condition of the Company.

On October 31, 2008, the Board of Directors of the Company approved Phase A of the emergency plan for the Electricity Sector. This approval is issued pursuant to the decision of the Electricity Authority on the aforementioned principles for financing the emergency plan. The Board of Directors of the Company approved that the Management of the Company will enter an agreement with Siemens to purchase three gas turbines and peripheral equipment. This approval comes in addition to the purchase of two gas turbines from General Electric, purchased for the Ramat Hovav site. Total expected investment for this stage of the emergency plan will amount to approximately NIS 3.6 billion and it will be financed as follows: Approximately NIS 0.9 billion was received as customer credit through Siemens and approximately NIS 2 billion will be collected through the electricity rate, in accordance with the decision of the Electricity Authority and the balance from internal sources of the Company. The Company records this rate addition, setting off from assets under construction items. As of the statement of financial position date, the Company deducted the amount of NIS 951 million from the assets under construction item.

3) Pursuant to the decision of the Electricity Authority of October 30, 2008, the CEO of the Company is required to submit a quarterly report to the Electricity Authority. Accordingly, the Company also submits current reports of projects progress. The report submitted on June 15, 2009, noted delays in operation dates. The decision of the Electricity Authority of June 29, 2009 states that in the event that the Company fails to attain the timetables stipulated in the emergency plan for commercial operation of the aforementioned power stations included in it, the Company will be penalized, as follows:

69 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 3: IMPLICATIONS OF THE CURRENT AND FUTURE ELECTRICITY RATE ON THE COMPANY (continued) e. Emergency plan for the Electricity sector (continued)

a) Regarding each of the two power stations at Ramat Hovav, included in the emergency plan for the summer of 2009, which the Company undertook to operate up to and no later than July and August 2009: (1) For each month of delay in the commercial operation compared to the scheduled date in the emergency plan for the summer of 2009, the recognized cost will be decreased by an amount of NIS 5 million for each month of delay for the months July through December 2009 and by an amount of NIS 10 million for each month of delay for the months January through June 2010. (2) Moreover, and without derogating from the aforementioned in paragraph (a), a sum amounting to one fifth of the total dedicated amount will be deducted in the event of an additional delay in the commercial operation of each of the two aforementioned power stations beyond June 30, 2010. In the event that such a deduction will result in a debt to the consumers, the Electricity Authority will determine the mechanism and period for repaying this debt. b) Regarding each of the three power stations (gas turbines in Eshkol, Ramat Hovav and Hagit sites) included in the emergency plan for the summer of 2010, which the Company undertook to operate up to and no later than July 2010: (1) For each month of delay in the commercial operation compared to the scheduled date in the emergency plan for the summer of 2010, the recognized cost will be decreased by an amount of NIS 10 million for each month of delay for the months July through December 2010 and by an amount of NIS 15 million for each month of delay for the months January through June 2011.

(2) Moreover, and without derogating the aforementioned in paragraph (1), a sum amounting to one fifth of the total dedicated amount will be deducted in the event of an additional delay in the commercial operation of each of the three aforementioned power stations beyond June 30, 2011. In the event that such a deduction will result in a debt to the consumers, the Electricity Authority will determine the mechanism and period for repaying this debt.

c) The aforementioned cost reductions deducted by the Electricity Authority will be presented as an expense in the statement of operations of the Company, with proper disclosure. In its letter of March 9, 2010, the Electricity Authority stated that the determining date for meeting timetables is the synchronization date. As of the statement of financial position date, the Company made a provision of approximately NIS 75 million with respect to aforementioned deduction of recognized costs. The Company disagrees with the Electricity Authority on this deduction.

NOTE 4:- CASH AND CASH EQUIVALENTS

December 31, 2009 2008 2007 NIS in millions Cash and balances in banks 17 25 297 Short-term deposits 3,868 3,645 195 3,885 3,670 492

70 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 5:- TRADE RECEIVABLES FOR SALES OF ELECTRICITY

December 31, 2009 2008 2007 NIS in millions

Customer debts for electricity bills that were issued 2,189 2,330 2,200 Allowance for doubtful accounts (see Note 30 below) (176) (155) (205) 2,013 2,175 1,995 Income receivable (1) 1,206 1,312 1,307 3,219 3,487 3,302

(1) Income with respect to the relative portion of the electricity bills issued after the statement of financial position date that, according to an estimate, are attributable to the related reported period.

The mean credit period of electricity sales is 13 days. Customers are not charged with interest for this period. After this period, customers are charged with monthly interest, at the rate of 0.75% on the balance of their debt. Regarding aging of customer receivables in excess of credit days see note 27 c. below.

NOTE 6:- OTHER CURRENT ASSETS

December 31, 2009 2008 2007 NIS in millions Current maturities of: Loans to employees 17 20 23 Chartering of tugboats 6 6 6 Deposits securing swap transactions 623 665 600 Total current maturities 646 691 629

Institutions 22 6 17 Prepaid expenses 68 49 51 Other receivables (1) 139 204 271 875 950 968

(1) Including indemnification receivable from the insurance companies with respect to legal charges for the years 2009, 2008 and 2007 which total approximately NIS 17 million, NIS 21 million and NIS 22 million, respectively.

71 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 7:- INVENTORY - FUEL

December 31, 2009 2008 2007 NIS in millions

Fuel oil 257 298 309 Diesel oil 651 1,101 928 Coal 312 653 608 Coal in transit 439 846 581 1,659 2,898 2,426

NOTE 8:- LONG-TERM RECEIVABLES

a. Composition of long-term receivables :

December 31, 2009 2008 2007 NIS in millions

Loans to employees (see section b below) 68 79 88 Chartering of tugboats (see section (b) and Note 13(b)) 91 101 112 159 180 200 Natural Gas Lines - gas transmission project (se e Note 13(g) below) 1,049 1,098 1,088 Deposits to secure swap transactions 623 665 600 Receivables for currency swap transactions (see Note 18 below) 23 271 8 Embedded derivatives in financing transactions 23 36 14 Other 6 4 4 Total long-term receivables 1,883 2,254 1,914 Less – current maturities (see Note 6 above) 646 691 629 1,237 1,563 1,285

72 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 8:- LONG-TERM RECEIVABLES (continued)

b. Loans to employees and chartering of tugboats

1) Linkage basis:

December 31, 2009 December 31, 2008 December 31, 2007 Unlinked Linked Linked Total Unlinked Linked Linked Total Unlinked Linked Linked to the to the to the to the to the to the Total CPI Dollar CPI Dollar CPI Dollar NIS in millions NIS in millions NIS in millions

Interest rates (in 1-6 4.5 7.9 -8.4 2-6 4.5 7.9 -8.4 2.6 -1.2 4.5 7.89 -8.37 percentages) :

Loans to employees. ... 68 1 - 69 78 1 - 79 86 2 88

Chartering of tugboats ...... 90 90 101 101 112 112

68 1 90 159 78 1 101 180 86 2 112 200

73 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 8:- LONG-TERM RECEIVABLES (continued)

b. Loans to employees and chartering of tugboats (continued)

2. Maturity dates :

December 31, 2009 Chartering of tugboats Loans to Land under Employees lease Total NIS in millions

First year – current maturities 17 6 23 Second year up to fifth year 52 31 83

Sixth year and thereafter - 53 53

Total 69 90 159

Amounts of employees' loans and chartering tugboats in the accounts is equivalent or close to their fair value.

NOTE 9:- ADVANCE PAYMENTS ON LEASING REAL ESTATE

The Company entered into arrangements for the operating lease of lands. Pursuant to the guideline of the Ministry of National Infrastructures, new lease agreements will include a condition, stipulating that in the event that the designation of the land will cease to serve its original purpose (namely electricity utilities), the agreement will be terminated and the land will be returned to the Israel Lands Administration, while the paid up lease fees will be refunded.

December 31, 2009 *2008 *2007 NIS in millions

Prepaid expenses with respect to land under operating lease, net 398 404 401

* Restated

NOTE 10:- FUNDS IN TRUST

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 Note 19 below).

74 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 11:- FIXED ASSETS

NET BOOK COST ACCUMULATED DEPRECIATION VALUE a. 1) Composition and changes in 2009 Balance as of Balance as of Balance as of Change in Balance as of As of December 31, Additions December 31, December 31, depreciation December 31, December 31, 2008* net 2009 2008 net 2009 2009 NIS in millions

FIXED ASSETS IN USE Power plants (including land, buildings and machinery) 56,954 652 57,606 31,269 1,872 33,141 24,465 Switching and transformer stations 11,445 403 11,848 5,731 369 6,100 5,748 Overloading control center 839 12 851 759 17 776 75 Telecommunications 1,258 43 1,301 916 66 982 319 Switching stations and 400 KV voltage lines 7,322 48 7,370 2,853 262 3,115 4,255 High voltage transmission lines 5,296 73 5,369 2,722 143 2,865 2,504 Distribution networks 35,104 894 35,998 18,079 932 19,011 16,987 Installations, etc. - East Jerusalem district 127 - 127 127 - 127 - Meters 2,005 63 2,068 1,495 70 1,565 503 Land, office buildings 2,502 22 2,524 1,146 71 1,217 1,307 Office equipment and tools 1,324 27 1,351 1,138 40 1,178 173 Computers 1,439 9 1,448 1,361 23 1,384 64 Motor vehicles 664 (4) 660 446 (40) 406 254 Mobile mechanical equipment 514 17 531 449 14 463 68 Emergency equipment 54 2 56 41 2 43 13 Various projects 76 7 83 20 3 23 60 126,923 2,268 129,191 68,552 3,844 72,396 56,795 Less: receipts for extension of the electricity network (8,593) 2 (8,591) (5,914) (204) (6,118) (2,473) 118,330 2,270 120,600 62,638 3,640 66,278 54,322 Spare parts for power plants and substations 1,244 (49) 1,195 303 (9) 294 901 Total fixed assets in use 119,574 2,221 121,795 62,941 3,631 66,572 55,223

* Restated (see Note 35 below)

75 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 11:- FIXED ASSETS (continued)

NIS in millions NET BOOK COST ACCUMULATED DEPRECIATION VALUE Balance as of Balance as of Balance as of Change in Balance as of As of a. 1) Composition and changes in 2009 December 31, Additions December 31, December 31, depreciation December 31, December 31, (continued) 2008* net 2009 2008 net 2009 2009

FIXED ASSETS UNDER CONSTRUCTION Power plants, buildings and other installations 2,463 1,503 3,966 6 - 6 3,960 Switching and transformer stations and high voltage lines 705 106 811 32 - 32 779 Switching stations and 400 KV voltage lines 116 20 136 - - - 136 Payments on account of equipment 281 (182) 99 - - - 99 Materials and payments on account of materials designated for investments in fixed assets 612 (39) 573 - - - 573 Consumers' participation in construction of fixed assets not yet attributed to projects (20) (213) (233) - - - (233)

Total fixed assets under construction 4,157 1,195 5,352 38 - 38 5,314

Total fixed assets 123,731 3,416 127,147 62,979 3,631 66,610 60,537

* Restated (see Note 35 below)

76 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 11:- FIXED ASSETS (continued)

NET BOOK a. 2) Composition and changes in 2008 COST ACCUMULATED DEPRECIATION VALUE Balance as of Balance as of Balance as of Change in Balance as of As of December 31, Additions December 31, December 31, depreciation December 31, December 31, 2007* Net 2008 2007 net 2008 2008 NIS in millions

FIXED ASSETS IN USE Power plants (including land, buildings and machinery) 54,677 2,277 56,954 29,510 1,759 31,269 25,685 Switching and transformer stations 10,968 477 11,445 5,387 344 5,731 5,714 Overloading control center 825 14 839 741 18 759 80 Telecommunications 1,202 56 1,258 849 67 916 342 Switching stations and 400 KV voltage lines 7,308 14 7,322 2,592 261 2,853 4,469 High voltage transmission lines 5,200 96 5,296 2,579 143 2,722 2,574 Distribution networks 34,494 610 35,104 17,193 886 18,079 17,025 Installations, etc. - East Jerusalem district 128 (1) 127 128 (1) 127 - Meters 1,936 69 2,005 1,427 68 1,495 510 Land, office buildings 2,484 18 2,502 1,075 71 1,146 1,356 Office equipment and tools 1,294 30 1,324 1,096 42 1,138 186 Computers *1,427 12 1,439 1,316 45 1,361 78 Motor vehicles 585 79 664 372 74 446 218 Mobile mechanical equipment 520 (6) 514 452 (3) 449 65 Emergency equipment 54 - 54 38 3 41 13 Various projects 56 20 76 18 2 20 56 123,158 3,765 126,923 64,773 3,779 68,552 58,371 Less: receipts for extension of the electricity network (8,592) 1 (8,593) (5,697) (217) (5,914) (2,679) 114,566 3,764 118,330 59,076 3,562 62,638 55,692 Spare parts for power plants and substations 1,235 9 1,244 320 (17) 303 941 Total fixed assets in use 115,801 3,773 119,574 59,396 3,545 62,941 56,633

* Restated (see Note 35 below)

77 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 11:- FIXED ASSETS (continued)

a. 2) Composition and changes in 2008 NET BOOK (continued) COST ACCUMULATED DEPRECIATION VALUE Balance as of Balance as of Balance as of Change in Balance as of As of December 31, Additions December 31, December 31, depreciation December 31, December 31, 2007* net 2008 2007 net 2008 2008 NIS in millions

FIXED ASSETS UNDER CONSTRUCTION Power plants, buildings and other installations *3,958 (1,495) 2,463 6 - 6 2,457 Switching and transformer stations and high voltage lines 910 (205) 705 32 - 32 673 Switching stations and 400 KV voltage lines 108 8 116 - - - 116 Payments on account of equipment *100 181 281 - - - 281 Materials and payments on account of materials designated for investments in fixed assets 577 35 612 - - - 612 Consumers' participation in construction of fixed assets not yet attributed to projects (145) 125 (20) - - - (20)

Total fixed assets under construction 5,508 (1,351) 4,157 38 - 38 4,119

Total fixed assets 121,309 2,422 123,731 59,434 3,545 62,979 60,752

* Restated (see Note 35 below)

78 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 11:- FIXED ASSETS (continued)

NET BOOK a. 2) Composition and changes in 2007 COST ACCUMULATED DEPRECIATION VALUE Balance as of Balance as of Balance as of Change in Balance as of As of December 31, Additions December 31, December 31, depreciation December 31, December 31, 2006* Net 2007 2006 net 2007 2007 NIS in millions

FIXED ASSETS IN USE Power plants (including land, buildings and machinery) 52,134 2,543 54,677 27,825 1,685 29,510 25,167 Switching and transformer stations 10,536 432 10,968 5,040 347 5,387 5,581 Overloading control center 811 14 825 717 24 741 84 Telecommunications 1,138 64 1,202 784 65 849 353 Switching stations and 400 KV voltage lines 7,113 195 7,308 2,354 238 2,592 4,716 High voltage transmission lines 5,076 124 5,200 2,449 130 2,579 2,621 Distribution networks 33,416 1,078 34,494 16,251 942 17,193 17,301 Installations, etc. - East Jerusalem district 127 1 128 127 1 128 - Meters 1,867 69 1,936 1,358 69 1,427 509 Land, office buildings 2,492 (8) 2,484 1,040 35 1,075 1,409 Office equipment and tools 1,263 31 1,294 1,052 44 1,096 198 Computers 1,458 (31) *1,427 1,286 30 1,316 111 Motor vehicles 604 (19) 585 329 43 372 213 Mobile mechanical equipment 521 (1) 520 447 5 452 68 Emergency equipment 54 - 54 37 1 38 16 Various projects 41 15 56 15 3 18 38 118,651 4,507 123,158 61,111 3,662 64,773 58,385 Less: receipts for extension of the electricity network (8,605) 13 (8,592) (5,481) (216) (5,697) (2,895) 110,046 4,520 114,566 55,630 3,446 59,076 55,490 Spare parts for power plants and substations 1,205 30 1,235 316 4 320 915 Total fixed assets in use 111,251 4,550 115,801 55,946 3,450 59,396 56,405

* Restated (see Note 35 below)

79 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 11:- FIXED ASSETS (continued)

a. 2) Composition and changes in 2007 NET BOOK (continued) COST ACCUMULATED DEPRECIATION VALUE Balance as of Balance as of Balance as of Change in Balance as of As of December 31, Additions December 31, December 31, depreciation December 31, December 31, 2006* net 2007 2007 net 2007 2007 NIS in millions

FIXED ASSETS UNDER CONSTRUCTION Power plants, buildings and other installations *5,673 (1,715) *3,958 6 - 6 3,952 Switching and transformer stations and high voltage lines 972 (62) 910 31 - 32 878 Switching stations and 400 KV voltage lines 227 (119) 108 1 - - 108 Payments on account of equipment 99 1 100 - - - 100 Materials and payments on account of materials designated for investments in fixed assets *571 6 577 - - - 577 Consumers' participation in construction of fixed assets not yet attributed to projects - (145) (145) - - - (145)

Total fixed assets under construction 7,542 (2,034) 5,508 38 - 38 5,470

Total fixed assets 118,793 2,516 121,309 55,984 3,450 59,434 61,875

* Restated (see Note 35 below)

80 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 11:- FIXED ASSETS (continued)

b. Investments in land (before amortization), which are included under fixed assets amount to NIS 618 million for land owned by the Company.

A substantial portion of the landed property, in which the Company has rights, is not registered in the Land Registry and the status of such properties has not been settled for various technical reasons, such as the absence of parcelization in a portion of those areas, the requirements of planning authorities to assemble master plans, and disputes with the various authorities, including the tax authorities, regarding the receipt of confirmation of having made mandatory payments, and those disagreements prevent obtaining authorizations for registration in the Land Registry. Due to the great complexity of the matter, it is not possible to estimate the period of time which will be required to conclude registering the land, but, in the Company's opinion, this cost of registering the land, as aforesaid, is not liable to be substantial. There are capitalized contracts with respect to the majority of the land leased by the Company from the Israel Land Administration.

c. As of the date of the expiration of the Concession (March 5, 1996), the Company had fully written off the cost of acquiring land in the amount of NIS 533 million as to which the Company's right to receive compensation at the expiration of the Concession was unclear. Land purchased in late 1995 at a cost of NIS 327 million, as to which the Company received confirmation that it would receive adequate compensation, was not written off.

d. See Note 18 (e) for pledges related to fixed assets.

e. See Note 24.a.7 for fixed asset investment commitments.

f. Accumulated financial expenses, net, capitalized as part of the cost of fixed assets (before depreciation) were NIS 4,105 million and NIS 3,860 million as of December 31, 2009 and 2008, respectively and NIS 3,598 million as of December 31, 2007 (see Note 32 a).

g. The Company's Financial Statements include assets, primarily networks and lines located within Judea, Samaria and the Gaza Strip (including the Palestinian Authority territories) ("the territories") with a net book value of approximately NIS 842 million as of December 31, 2009. In the opinion of the Company's Management, the utilization of these assets for the purpose of electricity supply will continue and they will remain in the possession of the Company.

In the event that the possession of the balance of the assets, as a whole or partially, located in the territories is taken from the Company, the Company's management estimates, based on the terms of the interim agreement signed between Israel and the Palestinians on September 28, 1995, and based on the principles prescribed in the Disengagement Law, that the Company will be indemnified in an amount equal to at least the net book value of the assets as reflected in the Financial Statements, and that the Company will not suffer losses as a result.

81 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 11:- FIXED ASSETS (continued)

The Company has user's rights in the land and to what is connected to this land in the region of Gaza and northern Samaria and from which Israelis were evacuated in accordance with the Law for the Implementation of the Disengagement Plan, 2005, that was passed in the Knesset on February 16, 2005 ("the Disengagement Law"). In accordance with the provisions of this law, the rights for the use of the land were nullified as of the date of the evacuation, while providing rights to demand compensation for the infrastructure facilities that were installed by the Company. In 2008, the Company filed a claim with the Disengagement Authority for compensation for its assets that remained in the evacuated areas and deducted the amortized balance from the books. The compensation, amounting to approximately NIS 25 million was received in February 2009.

NOTE 12:- INTANGIBLE ASSETS, NET

Balance as of Balance as of December 31, Disposals Additions December 31, 2008 in 2009 in 2009 2009 NIS in millions

Cost of software 2,808 - 170 2,978

Accumulated amortization of software (2,019) - (177) (2,196)

Intangible assets, net 789 - (7) 782

Balance as of Balance as of December 31, Disposals Additions December 31, 2007 in 2008 in 2008 2008 NIS in millions

Cost of software 2,631 - 177 2,808

Accumulated amortization of software (1,831) - (188) (2,019)

Intangible assets, net 800 - (11) 789

Balance as of Balance as of December 31, Disposals Additions December 31, 2006 in 2007 in 2007 2007 NIS in millions

Cost of software 2,414 - 217 2,631

Accumulated amortization of software (1,619) - (212) (1,831)

Intangible assets, net 795 - 5 800

82 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 13:- RELATED AND INTERESTED PARTIES

a. The State of Israel and companies and other entities controlled by it (including Government companies, local authorities and Government ministries and other corporations in which the Government has a certain percentage of ownership in them), constitute related and interested parties of the Company. The Company's revenues from those transactions carried out with interested parties, during its ordinary course of business, are: sales of electricity, electricity connections and works according to execution contracts . In the framework of its purchases, the Company primarily buys natural gas, transmission, water and land leasehold services from the above interested parties. Payments to the State and its authorities as a sovereign entity, namely payments pursuant to law, such as taxes and fees, are transactions not deviating from the Company's ordinary course of business. The transactions with the interested parties during the reported period were as follows:

1) Revenues

a) Revenues from the State and its authorities (in accordance with invoices that were issued, and not including income receivable) – approximately NIS 586 million. b) Revenues from interested and other parties – approximately NIS 927 million (primarily revenues from Mekorot Ltd. – about NIS 513 million). c) Invoices issued to Natural Gas Lines Ltd., for building the natural gas pipeline, of approximately NIS 534 million (see details in section g below).

2) Expenses

a) Expenses for natural gas transmission to Natural Gas Lines Company Ltd. ("Natural Gas Lines") – about NIS 230.4 million (see details in section f below). b) The remaining expenses (primarily leasehold fees, pumping of fuels and water) - about NIS 80 million.

With regard to State guarantees, see Note 18.h. below.

b. State of Israel (Chartering of Tugboats) In 1997, the Company chartered two tugboats that it had purchased from the Israel Shipyards Ltd. according to a contract signed in the past between it and the Ministry of Communications, to the Hadera Port Authority for periods of twenty years each, pursuant to the charter agreement entered into between the Company and the Hadera Port Authority in 1995. The balance for the charter as of December 31, 2009 was approximately NIS 38 million as compared with NIS 44 million as of December 31, 2008 and NIS 50 million as of December 31, 2007. The amount is linked to the U.S. dollar with the addition of interest at customary rates (see Note 2 p) above).

c. The Eilat Ashkelon Pipeline Company Ltd. ("EAPC") Pursuant to an agreement between the Company and EAPC, EAPC allocated an area that it owns to the Company for the purpose of building a pier for the unloading of coal for the Rutenberg power plant. In the context of this agreement, the Company entered into an agreement for the building of two tugboats by the Israel Shipping Ltd. In 2000, the tugboats were chartered to the Ashkelon port for periods of 240 months each, from the date of their delivery, in accordance with the charter agreement reached between the Company and EAPC. The balance of the amount of the charter fees as of December 31, 2009 was approximately NIS 52 million as compared with NIS 57 as of December 31, 2008 and NIS 62 million as of December 31, 2007. The amount is linked to the U.S. dollar with the addition of interest at customary rates (see Note 2.p) above).

83 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 13:- RELATED AND INTERESTED PARTIES (continued)

d. Oil Infrastructures Ltd. ("Oil Infrastructures ")

Pursuant to an agreement signed in the past between the Company and Oil Infrastructures., Oil Infrastructures constructed an oil distillate line ("the oil distillate line") to the Gezer site and, through which oil distillates are pumped for 50 years. In exchange for Oil Infrastructures' commitment to pump oil distillates through the line during the aforesaid period, the Company bears 64% of the value of the investment in the oil distillate line by way of the payment of 25 annual installments linked to the CPI. The Company recorded this transaction as a financial lease. The balance of the lease as of December 31, 2009 amounts to approximately NIS 22 million as compared with NIS 23 million as of December 31, 2008 and NIS 24 million as of December 31, 2007. The amortized amount as of December 31, 2009 is approximately NIS 20 million, NIS 23 million as of December 31, 2008 and NIS 22 million as of December 31, 2007.

e. The Israel Lands Administration

The Company held and is holding discussions and clarifications with the Israel Lands Administration from time to time, as needed, with respect to the lease fees for certain real estate properties at different sites that it uses, including the Reading power plant site. On May 25, 2009, the Company received a demand from the Israel Lands Administration regarding usage fees for Reading power station for the past and up to December 2009, amounting to approximately NIS 8 million. The Company is currently clarifying and reviewing the demand for payment, this included a meeting and an exchange of documents. Nevertheless, the Company did not receive as yet the position of the Administration and response to documents and claims submitted by the Company, therefore, the sum of lease fees the Company will be required to pay cannot be estimated as yet. As of the statement of financial position date, no additional demands regarding past usage fees of other real estate assets in other sites were received. The Company is unable to estimate if it will be required to pay the said usage fees and if required, what amounts will be demanded. The Company did not record any provision with respect to these demands in its Financial Statements.

f. Commitment for the transmission of natural gas

In June 2006, the Company and Natural Gas Lines signed an agreement for the transmission of natural gas according to the version published by the Natural Gas Authority, which is applicable to all gas consumers who enter into a transmission agreement with Natural Gas Lines. The agreement is designed to regulate the commercial, technical and legal principles regarding natural gas transmission for a period of 15 years.

This agreement was signed with respect to the Eshkol and Reading sites and the Company had several reservations regarding the agreement. On May 31, 2007, the Natural Gas Authority published a general draft of the transmission agreement between Natural Gas Lines and the sector's transmission consumers. In February 2009, the Company's Board of Directors approved a permanent agreement for the transmission of natural gas between the Company and Natural Gas Lines, replacing the agreement of June 2006. The sites included in this agreement are Eshkol, Reading, Gezer and Hagit. The Company was granted certain flexibility with respect to capacity ordering by way of a right to divert capacity at a scope of up to 15% of the ordered capacity, and by way of a right to order short-term capacity (for at least a full month). This agreement is in effect for a period of 15 years, to apply to all the sites to be connected to the gas transmission system.

84 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 13:- RELATED AND INTERESTED PARTIES (continued)

g. Project for the establishment of a natural gas transmission system ("the project")

According to the agreement signed in November 2004 and the addition to that agreement of December 19, 2005, between the Gas Lines company, the Government of Israel (on behalf of the State of Israel) and the Company (“the tripartite agreement”), the Company was charged with funding, ordering and managing the work to set up part of the natural gas pipeline system in Israel as specified below ("the Project"). In addition, it was agreed that the Company would not act as or be deemed the chief contractor or the executing contractor for the Project, unless such responsibility was imposed on the party ordering the work by law. The Project includes setting up a marine system for piping natural gas, a marine segment from Ashdod to the Reading site, a receiving and measuring terminal in Reading, a marine segment from Reading to Dor beach, connection to the Hadera coast, including an overland segment from the Dor coast to the Hagit site, and a measuring terminal at Hagit.

The principal elements of the tripartite agreement are as follows:

- The role of the Company is to finance the project, to manage it and to order the works that are related to its construction (including, but without derogating from the totality of the aforesaid, the selection of contractors, the commitments with contractors, full coordination between the contractors regarding the execution of and the compliance with timetables, managing the execution and supervision over the works, taking those actions that are required in order to assure the existence and enforcement of the obligations of the contractors, carrying out all of the actions that are required for the purchase and arrangement of all the rights to land that are required in order to construct the system, obtaining building and additional permits, as well as handling and paying compensation to the owners of the land and doing everything that is required to assure the integrity of the system during the warranty period). - The Company will not be the owner of the system and it will not have any rights in it or in part of it, and the system shall be owned by the State. - In exchange for the execution of the project, the Company will be entitled to receive all of the expenses (including financial expenses - as detailed in the tripartite agreement) that it expended for the project and that were approved by the authorized party, as defined in the tripartite agreement (the Accountant General at the Ministry of Finance, the Director General of the Ministry of National Infrastructures and the CEO of Natural Gas Lines- "the authorized party"), as well as management fees in the amount of between $ 10 million and $ 14 million, so that the Company does not anticipate a material profit or loss from this project. The authorized party is entitled to offset from the expenses to be reimbursed to the Company any cost or damage that was sustained by the State and/or Natural Gas Lines as a result of negligence or violation of the agreement by the Company. This liability of the Company is limited to $ 20 million during the warranty period, and $ 20 million following this period (even if the limits of the warranty period were fully or partially utilized). Should the damages that were caused by the Company's negligence exceed $ 20 million, the aforesaid surplus damages shall be offset against the management fees that are to be paid to the Company. Insurance was taken out for the project that covers damages that are likely to be caused to the project and damages that are likely to be caused to third parties. In addition, there is coverage for the Company for professional liability in the framework of the Company's general third party liability policy.

• With regard to the reimbursement of the approved expenses, it was determined as follows:

85 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 13:- RELATED AND INTERESTED PARTIES (continued)

h. Project for the establishment of a natural gas transmission system ("the project") (continued)

1) Natural Gas Lines will pay all of the amounts to the Company that the Company must pay according to the payment schedule ("the repayment amounts") of the loans that the Company has received from Citibank for the financing of the project's costs (see below), this on the date on which each payment is made for each of the repayment amounts according to the payment schedule (back-to-back). 2) The repayment amounts will also include actual payments by the Company to the State for State guarantee commissions and other commissions and expenses that the Company paid for taking out the aforesaid loan.

The settling of accounts regarding the approved expenses and the reimbursement shall be denominated in U.S. dollars. The Company's responsibility for the project is derived from the obligations and the duties imposed on it in the tripartite agreement. In addition, these duties are liable to impose on it responsibility by law, including responsibility pursuant to the labor safety laws.

The Company's responsibility regarding the integrity of the system, as defined in the tripartite agreement, is limited to the warranty period, provided to the Company by the contractors with which it entered into agreements, and on condition that it will not be less than the minimal period detailed in the agreement - up to the end of 18 months from the date on which confirmation was granted for the completion, or by the end of 12 months from the date on which the system began to operate, whichever is earlier. (Nonetheless, it should be pointed out that the Company does not receive any general warranty for the system from the contractors; rather, each contractor is responsible only for the work he carried out).

In January 2005, the ocean section of the pipeline suffered damage. This damage was repaired by the contractor in light of its warranty, in accordance with the agreement between him and the Company. In the Company's opinion, the repair was successful, and the Company has confirmation to that effect from regulatory bodies. While the repair was being made, Natural Gas Lines directed the Company to repair it differently. However, consenting to these requests would have resulted in an additional expense of tens of millions of dollars, not to mention the fact that the Company was instructed by the Minister to make the repair as it was carried out. Should the Company be required in the future to make the repair by a different method, the anticipated expense will be about $ 30 million.

The parties entered a joint agreement as an addition to the tripartite agreement (the third addition to the tripartite agreement dated February 19, 2009). According to the agreement, the Company will incur 50% of the actual additional repair cost up to a cap of $ 15 million. The responsibility to finance the repair cost is subject to the decision of the arbitrator (see below). Thus, if the arbitrator rules that the Company is not required to incur the cost of the additional repair, or if no decision is made up to October 30, 2011, the amounts incurred by the Company in relation to the repair will be refunded. If the arbitrator rules that the Company is responsible for the additional repair, the obligation of the Company will remain in force (fully or relatively, according to the division of responsibility stipulated by the decision) for a period of 25 years from the date of signing the third addition. The responsibility cap of the Company in the tripartite agreement is $ 20 million. This agreement does not change the responsibility cap of the Company.

86 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 13:- RELATED AND INTERESTED PARTIES (continued) h. Project for the establishment of a natural gas transmission system ("the project") (continued)

In 2006, several disputed issues were raised between the Company and representatives of the State regarding the project as follows: a) On April 10, 2006, the authorized party rejected several requests made by the Company to increase the project's budget in connection with works already expended by it or that will be expended in the future, amounting to about $ 20 million. b) In addition, it is the authorized party's opinion that expenses relating to the project that had been or will be expended by others in a total of about $ 10 million should be borne by the Company. c) Furthermore, certain claims were raised against the Company by the Ministry of Defense arguing that the Company had violated its obligation to place the gas pipe at a certain depth as specified in the claims.

Based on the opinion of its legal counsel, the Company believes that as far as issues a) and b) above are concerned, it has solid arguments based on which it is highly likely that the Company will be awarded the amounts that it had expended or had committed to spend for additional jobs and tests of the gas pipeline. With respect to issue c) above, other than the fact of the making of the claim by the Ministry of Defense, no specific allegations have been made by the Ministry and certainly no claims have been made regarding damages or the necessary costs of repair. Therefore, despite tests conducted by the Company's technical staff, it is not possible to assess the Company's exposure in this matter, if there should be any. It should be clarified that the Company is continuing its preparation for the arbitration proceeding as above and, with the help of technical persons, is examining the statements made by the project's managers.

It should be pointed out that the Company had approached the Attorney General of the Government requesting that arbitrators (legal and technical) be appointed to deliberate the various disputes between the Company, the State and other bodies in connection with this project. The Attorney General responded to the Company's request stating that he does not intend to appoint an arbitrator and that an expert in engineering technical disputes should be appointed in coordination with the parties. The Company has rejected this proposal and has re-addressed the Attorney General announcing that it intends to initiate legal proceedings to appoint an arbitrator according to the terms of the tripartite agreement. At the end of the proceedings, the court decided to appoint an arbitrator - the retired judge of the high court, Mr. Theodore Or, while giving the legal advisor of the government an extension, up to June 1, 2008, to decide on the arbiter appointed on his behalf. On May 29, 2008, the Attorney General announced the appointment of Dr. Udi Nissan, Government Companies Authority Director (at that time), as the arbitrator. The arbitration process started at the end of July 2008. Claims of the State and the Gas Lines Company against the Company in this proceeding were received on January 28, 2009. A response letter, complementing the claims of the State and the Gas Lines Company was received in July 2009. The Company is studying the claims of the State and the Gas Lines Company. The parties are currently awaiting the appointment of a new arbitrator, since the Government Companies Authority Director resigned his position. A provision of approximately NIS 30 million was recorded in 2006. The Company completed the construction of the project for which it is responsible according to the tripartite agreement a few months ago. The State and the Gas Lines Company caused gas delivery through the last sector to be subject to the condition of receiving additional obligations from the Company, based on additions No. 3 and 4 to the tripartite agreement. These additions were signed on February 19 and February 22, 2009, respectively. Gas delivery through the last segment started on February 23, 2009.

87 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 13:- RELATED AND INTERESTED PARTIES (continued)

h. Letter of indemnification to the State of Israel

The Company furnished a letter of indemnification to the State of Israel (the Ministry of Defense) in connection with the damages likely to be caused to the State due to passage of the gas transmission line through security areas that belong to the State, and the Company's liability for indemnification to the Ministry of Defense for any damage,, expense, payment or loss that will be borne by the Ministry as a result of the positioning of an underwater pipe that is not in accordance with the provisions of the coordination agreement that was signed with the Ministry of Defense in this matter. The force of the letter of indemnification has expired and, as of the date on which these financial statements were signed, the Company is not aware of any event whatsoever that might create responsibility and/or liability in accordance with the letter of indemnification.

i. Establishment of a desalination facility at the Orot Rabin site

On September 7, 2004, an agreement was signed between the State and the Company, pursuant to which the Company will grant the State, or a developer on its behalf, the right to use land with an area of about 71 thousand sq. m. in the proximity of the Hadera power station, for the purpose of constructing a sea water desalination facility. The right of use of the land will commence on the date determined by the Government ("the record date") and will extend for 24 years and 11 months. On December 2007, the State announced that this date is the "Record Date". In consideration for granting the aforesaid use of the land, the Company is entitled to a non- recurring sum of NIS 7.5 million for covering the costs of evacuating the buildings on the designated plot designated to be assigned to the concessionaire and relocating them to another place at the power station. Furthermore, from the record date to the end of license, the Company will be entitled to an amount of NIS 1,140 thousand per year (linked to the CPI). As of the date of generating desalinated water in the facility, the Company will be entitled to a payment of 0.24 cents for each one cubic meter of desalinated water that the operator will sell to the State (the facility is intended to supply about 100 million cubic meters of desalinated water a year) in respect of additional services provided to the operator. The facility commenced operations at the end of 2009.

j. The Advanced Study Fund of the Israel Electric Corporation Employees Ltd. ("the Advanced Study Fund")

The Company holds 50% of the Advanced Study Fund's management shares and rights to nominate directors (excluding a right to share profits). The Company makes deposits to the Advanced Study Fund for employees entitled to such deposits pursuant to labor agreements. Following are the amounts funded during the periods:

NIS in millions

For the year ended December 31, 2009 63 For the year ended December 31, 2008 63 For the year ended December 31, 2007 65

The Advanced Study Fund does not invest in the Company's securities.

88 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 13:- RELATED AND INTERESTED PARTIES (continued) k. Benefits to Interested Parties

Group Year Ended December 31, 2009 2008 2007 2009 2008 2007 Number of Individuals NIS in millions

1. Interested parties employed by the Company (including directors employed during part of the year) 2 2 2 2.1 2.0 1.6

2. Directors not employed by the Company 6 11 14 0.7 0.6 0.6

l. Subsidiary and Associate Companies See Notes 1 i and 2 e above for details of the companies and transactions with them.

m. Indemnification letter to the Actuary of the Company At the request of the Company the actuary received on December 23, 2009 an indemnification letter, issued by Inbal, Insurance Company Ltd. See details in Note 19 a 2)(g) below.

n. Indemnification Letter to officers On December 24, 2009, the Company received an approval in principle from the State for issuing an indemnification letter to officers of the Company (member of the Company's Board of Directors who served in this capacity on the date of the formal submission of the Financial Statements of the Company as of June 30, 2009 ("the Determining Date"), the CEO of the Company, the CFO of the Company and the Legal Consultant of the Company, provided that they served in the said positions on the determining date). In the indemnification letter, the Company undertakes to indemnify any officer for any liability or expense for which no indemnification was received from others: a) With respect to any direct or indirect action related to the preparation, approval and publication of the Financial Statements of the Company as of June 30, 2009, unless the Company objects to the indemnification because the liability or expense is not related directly or indirectly to the correction of the error and the Director of the Government Companies Authority approves the position of the Company, after receiving the opinion of the Deputy Attorney General and the affirmation of the court. b) With respect to implications of the correction of the error on the preparation, approval and/or publication of the Financial Statements and/or implications of the error correction on transactions related to or based on the Financial Statements of the Company preceding the determining date, all according to the terms specified in the indemnification letter. The indemnification will not apply in the following cases: • Breach of obligation of trust, except breach of obligation of trust towards the Company, when the officer acted in good faith and had a reasonable basis to assume that the act will not affect the benefit of the Company. • Intentional or reckless breach of the obligation of caution, except when it is a result of negligence only. • An act taken with the intention of deriving unlawful personal gain. • Indemnification with respect to paying a penalty or a fine imposed on an officer.

89 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 13:- RELATED AND INTERESTED PARTIES (continued) n. Indemnification Letter to a position holder (continued)

The cumulative sum of indemnification that the Company may pay to all officers according to this indemnification letter and according to all other obligation and indemnification letters to position holders (as implied by the Companies Ordinance – 1999) and to Company employees, issued or as will be issued by the Company in the future, including, if and as far as the Company will grant indemnification regarding restructuring and/or privatization of the Company, will not exceed 25% of the Company's equity, as of June 30, 2009, linked to the CPI in Israel, starting from the July 2009 index ("Maximum Indemnification Sum"). The Company's indemnification obligation will not apply to any sum which the insurer of the officer’s insurance policy has recognized as its responsibility and placed at the disposal of the officer on a date that enables him to fulfill the obligation imposed on him. However, when the officer is charged with an indemnifiable event in an amount exceeding the sum paid by the insurer, the indemnification will apply to the difference between the financial liability imposed on the officer and/or legal expenses expended by the officer or that were imposed on him and the sum received from the insurer for the same event, provided that the indemnification sum that the Company will be charged with according to this obligation letter will not exceed the maximum indemnification sum. The Company will also indemnify the officer with respect to the deductible that he will be required to pay according to the insurance policy. The obligation of the Company according to this indemnification letter will be valid from the determining date, namely from the formal submission of the Financial Statements of the Company as of June 30, 2009. The obligation of the Company to indemnify a Director is a transaction with an interested party, by being an agreement between the Company and a Director in the Company regarding the terms of his position, therefore, approval of the Audit Committee, Board of Directors and the General Meeting is required according to the Companies Law. The obligation to provide indemnification, in the version approved in principle by the State, was approved by the Audit Committee of the Board of Directors and the Board of Directors of the Company and by the General Shareholders’ Meeting of the Company.

NOTE 14:- CREDIT FROM BANKS AND OTHERS

December 31, 2009 2008 2007 NIS in millions

Short term loans 147 668 538 Current maturities of loans and debentures (*) 1,568 5,729 1,847 For forward and swap transactions 12 308 12

Total 1,727 6,705 2,397

(*) With respect to interest rates for current maturities, see Note 18. (**) As for currency types, see Note 18.

90 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 15:- OTHER CURRENT LIABILITIES

December 31, 2009 2008 2007 NIS in millions Employees 175 413 414 Institutions 223 301 147 Interest and accrued expenses 874 953 819 Other current liabilities 100 146 207

1,372 1,813 1,587

91 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 16:- CUSTOMER ADVANCES, NET OF WORK IN PROGRESS

Represents receipts from customers, net of work in progress with respect to attachments to buildings and works for others (see also Note 2(n) above and Note 28 below).

Connections to buildings Work paid for by others Total December 31, December 31, December 31, 2009 2008 2007 2009 2008 2007 2009 2008 2007 NIS in millions Receipts from customers ...... 233 192 157 77 4 552 704 1,00 7 744 861

Less: expenses with respect to work in 121 86 78 604 6 569 725 526 647 progress...... 112 106 79 170 112 135 282 218 214

Provisions transferred to Statement of Operations...... 159 89 40 159 89 40

112 106 79 329 201 175 441 307 254

92 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 17:- PROVISIONS

Advance Provision payments from Provision for customers less for legal vacation Municipal works in claims (1) pay tax process Total NIS in millions Balance as of January 1, 2009 449 272 84 12 817 Additional recognized provisions 59 - 9 (11) 57 Updated current provisions (15) 164 2 (5) 146 Amounts used during the period - (167) (3) (1) (171) Amounts canceled during the period (44) - (2) - (46)

Balance as of December 31, 2009 449 269 90 (5) 803

(1) In 2009, the Company recorded revenues of approximately NIS 13 million resulting from the settlement of legal claims as existed on December 31, 2008.

Advance Provision payments from Provision for customers less for legal vacation Municipal works in claims (1) pay tax process Total NIS in millions Balance as of January 1, 2008 430 268 51 6 755 Additional recognized provisions 64 - 23 3 90 Updated current provisions 3 197 21 3 224 Amounts used during the period - (193) - - (193) Amounts canceled during the period (48) - (11) - (59)

Balance as of December 31, 2009 449 272 84 12 817

(1) In 2008, the Company recorded revenues of approximately NIS 12 million resulting from the settlement of legal claims as existed on December 31, 2007.

93 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 18:- DEBENTURES AND LIABILITIES, TO BANKING CORPORATIONS AND OTHERS

a. Composition of the long-term debentures and liabilities and hedging transactions, net

December 31, December 31 December 31, 2009 2008 2007 Denominated Denominated Denominated Denominated Unlinked Linked to un U.S. Denominated in Swiss in Japanese in Pounds Linkage Basis: NIS the CPI Dollars in Euro Francs Yen Sterling Total Total Total

NIS in millions

(1) Debentures Interest rates (%) 8.5 2.8-6.9 2.6-9.4 2.8-4.1 Effective interest rates (%) 6.6-7.5 5.0-7.1 2.2-9.8 3.3-4.3

Debentures traded on the Israel Stock Exchange (1) - 7,007 - - - - - 7,007 7,056 7,052 Debentures not traded in Israel 657 6,897 - - - - - 7,554 7,060 6,861 Debentures issued abroad. - - 11,589 - - 3,473 - 15,062 18,207 13,188 657 13,904 11,589 - - 3,473 - 29,623 32,323 27,101 Less: deferred charges - (18) (47) - - (23) - (88) (90) (83) (Discount)/premium 41 800 (38) - - (7) - 796 954 1,073 698 14,686 11,504 - - 3,443 - 30,331 33,187 28,091

Current maturities: Debentures - 43 - - - 245 - 288 4,389 44 Deferred charges - (4) (6) - - (3) - (13) (14) (14) (Discount)/premium 4 145 (4) - - - - 145 137 127 4 184 (10) - - 242 - 420 4,512 157 Long-term debentures, net. 694 14,502 11,514 - - 3,201 - 29,911 28,675 27,934 Long-term debentures issued in the United States - - 472 - - - - 472 493 520 Less: Deferred charges - - (7) - - - - (7) (7) (7) Discount - - (1) - - - - (1) (1) (1) Long-term debentures issued in the United States, net - - 464 - - - - 464 485 512 Total debentures, net 694 14,502 11,978 - - 3,201 - 30,375 29,160 28,446

94 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 18:- DEBENTURES AND LIABILITIES TO BANKING CORPORATIONS AND OTHERS (continued)

a. Composition of the long-term debentures and liabilities and hedging transactions, net (continued)

December 31, December 31 December 31, 2009 2008 2007 Denominated Denominated Denominated Denominated Unlinked Linked to in U.S. Denominated in Swiss in Japanese in Pounds Linkage Basis: NIS the CPI Dollars in Euro Francs Yen Sterling Total Total Total NIS in millions

(2) Liabilities to banks Interest rates (%) 2.4 1.3 0.6-7.4 1.3-5.5 0.9-4.2 1.3 Effective interest rates (%) 2.4-5.7 1.0– 8.2 1.4-6.3 5.2 1.9

Loans from banks 250 893 5,350 3,807 20 - 10 10,330 10,663 12,247 Less: Deferred charges - - (48) (187) - - - (235) (190) (232) 250 893 5,302 3,620 20 - 10 10,095 10,473 12,015

Current maturities: Loans from banks - 167 287 537 12 - 5 1,008 1,022 1,203 Deferred charges - - (7) (37) - - - (44) (37) (41) Total current maturities - 167 280 500 12 - 5 964 985 1,162

Total liabilities to banking corporations (including 250 726 5,022 3,120 8 - 5 9,131 9,488 10,853 hedge transactions)

95 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 18:- DEBENTURES AND LIABILITIES TO BANKING CORPORATIONS AND OTHERS (continued)

a. Composition of the long-term debentures and liabilities and hedging transactions, net (continued)

December 31, December 31, December 31, 2009 2008 2007 Denominated Denominated Denominated Unlinked Linked to Denominated Denominated in Swiss in Japanese in Pounds Linkage Basis: NIS the CPI in U.S. Dollars in Euro Francs Yen Sterling Total Total Total NIS in millions

Brought forward from previous page 250 726 5,022 3,120 8 - 5 9,131 9,488 10,853

Hedging transactions

Deposits - - (5,988) (730) - (2,189) (379) (9,286) (9,882) (8,787) Loans. 1,011 6,298 242 1,637 - - 1,046 10,234 10,461 10,188 Total swap transactions 1,011 6,298 (5,746) 907 - (2,189) 667 948 579 1,401 Forward transactions (632) - 309 271 - - (52) (165) 12 Total hedging transactions 379 6,298 (5,437) 1,178 - (2,189) 667 896 414 1,413 Current maturities of swap - transactions - 3,078 (2,275) (467) (305) (124) (93) 109 257 Current maturities of forward transactions (632) - 309 271 - - - (52) (165) 12 Total current maturities (632) 3,078 (1,966) (196) - (305) (124) (145) (56) 269 Total hedging transactions, - net 1,011 3,220 (3,471) 1,374 (1,884) 791 1,041 470 1,144 Transfer of swap transactions to long-term receivables, net - - (90) 263 - - (150) 23 271 8 Total liabilities to banking corporations (including hedge transactions) 1,261 3,946 1,461 4,757 8 (1,884) 646 10,195 10,229 12,005

96 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 18:- DEBENTURES AND LIABILITIES TO BANKING CORPORATIONS AND OTHERS (continued)

a. Composition of the long-term debentures and liabilities and hedging transactions, net (continued)

December 31, December 31 December 31, 2009 2008 2007 Denominated Denominated Denominated Unlinked Linked to Denominated Denominated in Swiss in Japanese in Pounds Linkage Basis: NIS the CPI in U.S. Dollars in Euro Francs Yen Sterling Total Total Total NIS in millions

Brought forward from previous page 1,261 3,946 1,461 4,757 8 (1,884) 646 10,195 10,229 12,005

Interest rates (%) 2.7 – 6.7 1.7 – 2.8 Effective interest rate (%) - 3.0 – 6.8 2.2 1.5-2.1

Loans from provident funds and insurance companies - 1,605 223 - - - - 1,828 2,028 2,213 Loans from suppliers - - - 62 - - - 62 107 178 Liabilities for finance leases - 22 - - - - - 22 23 24 Long term payables - 169 - - - - - 169 184 31 Total - 1,796 223 62 - - - 2,081 2,342 2,446 Less: deferred charges - (2) - - - - - (2) (3) (3) - 1,794 223 62 - - - 2,079 2,339 2,443

Current maturities: Other liabilities - 151 - 34 - - - 185 234 246 Deferred charges - (1) - - - - - (1) - (1) Total current maturities - 150 - 34 - - - 184 234 245

Other liabilities, net - 1,644 223 28 - - - 1,895 2,105 2,198 Total debentures, liabilities and hedging transactions, net 1,955 20,092 13,662 4,785 8 1,317 646 42,465 41,494 42,649

97 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 18:- DEBENTURES AND LIABILITIES TO BANKING CORPORATIONS AND OTHERS (continued)

b. Composition of the long-term debentures and liabilities and hedging transactions, net (continued) 1) Negotiable debentures Series 21 and 22 which were issued on the Tel-Aviv Stock Exchange, are linked (principal and interest) to the known CPI, and are due for redemption through the years until 2015. 2) Non negotiable debentures Series X, XI, XII, "2018 Linked Electric", "2018 NIS Electric", "2012 Linked Electric", “2015 Linked Electric” and "2014 Linked Electric", and "2020 Linked Electric" which were issued on the Tel-Aviv Stock Exchange, due for redemption in 2012 – 2020. 3) Non negotiable debentures series in the U.S.A., due for redemption up to 2096 . 4) Non negotiable debentures series in Japan and Europe, due for redemption up to 2032. 5) Negotiable debentures series in Singapore, due for redemption up to 2019 .

c. Material Funds Raised 2009 1) On January 28, 2009, the Company issued debentures through the investment banks Citi Group and J. P. Morgan to institutional buyers in and outside the U.S.A. in a total sum of U.S .$ 500 million, nominal value, out of a general plan (GMTN) to issue debentures of a total amount of up to U.S. $ 2 billion nominal value. The debentures were issued at a nominal interest rate of 9.375% (effective interest rate of about 9.5% per year with respect to annual payments and effective interest of about 9.7% per year with respect to semi-annual payments). The principal of the issued debentures will be paid off in one payment on January 28, 2020.This issue is in addition to a previous issue of May 2008, in the amount of U.S.$ 1 billion nominal value, thus adding up to a cumulative sum issued under the general plan of U.S.$ 1.5 billion nominal value. These debentures were registered for trade on the Singapore Stock Exchange. 2) On February 12, 2009, the Company issued through Leader Capital Markets Investment House, by way of a private placement, non-marketable, linked debentures, Series "Linked Electricity 2020" with a nominal value of NIS 505 million, at a nominal interest rate of 6.85% (effective interest rate of about 7.1% per year with respect to semi-annual payments). The principal of the issued debentures will be paid off in one payment in February 12, 2020. 3) On March 31, 2009, a NIS 250 million loan was received from Discount Bank. The loan will be paid off in one payment on March 31, 2020. 4) On December 30, 2009, the Company received a loan of approximately Euro 132 million, from DZ at variable, semi-annual EURIBOR interest rate with an added margin of 0.95. The loan will be paid off in 24 equal semi-annual payments from March 31, 2011 and up to September 30, 2022. 5) On February 15, 2010, the Company received a loan from DZ of approximately Euro 24 million, To be paid off in 24 equal semi-annual payments from March 31, 2011 to September 30, 2022. 6) After the Statement of Financial Position date , on March 18, 19, 2010, the Company effected, at its discretion, early repayment and purchase of foreign currency hedging transactions as part of the policy for treatment of its currency exposure, arising from the new rate base for the generation segment, applied in February 2010.

98 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 18:- DEBENTURES AND LIABILITIES TO BANKING CORPORATIONS AND OTHERS (continued) c. Material Funds Raised (continued)

2008 1) On January 17, 2008, the Company issued debentures through Goldman Sachs International, and Dexia Credit Local to foreign investors abroad amounting to a total of US$ 250 million, at an annual interest rate of Libor + 1.65%. The debentures were listed for trade on the Singapore stock exchange. The principal of the said issued debentures will be paid off in one lump sum after 10 years elapse from the issue date. 2) On March 19, 2008, the Company issued non-marketable debentures to institutional organizations, in a total amount of about NIS 170 million, at a fixed annual interest rate of 6.5%, to be paid off in March 19, 2014. 3) On May 7, 2008, the Company issued debentures through Citi Group Global Markets, Lehman Brothers and additional underwriters to authorized institutional buyers in the U.S.A., in a total amount of US$ 1 billion, at a fixed annual interest rate of 7.25%. The debentures were issued under a general plan to issue debentures in a total amount that shall not exceed US$ 2 billion. The debentures were listed for trade on the Singapore stock exchange. The principal of the said issued debentures will be paid off in one lump sum on January 15, 2019. 4) On July 7, 2008, the Company received a loan amounting to NIS 250 million from a banking corporation, at an annual interest rate of TELBOR + 1.15%, to be paid off in January 6, 2020.

2007 The Company issued non negotiable debentures series "2018 Linked Electric", "2008 NIS Electric", "2012 Linked Electric" and “2015 Linked Electric” Debentures at face value of NIS 1,790 million were issued under these series, at an annual interest rate of 6.5% (for the linked) and 8.5% (for the NIS). The proceeds from these series, with added premium, less float expenses of NIS 173 million, amounted to NIS 1,963 million.

d. Material Repayments: 2009 1) A debenture in the amount of U.S.$ 0.5 billion nominal value was paid off on March 2, 2009. 2) On October 15, 2009, debentures were paid off in the U.S.A., in an approximate sum of $ 600 million. 3) On November 1, 2009, debentures Series 21 were partially paid off, in the amount of approximately NIS 43 million.

e. To secure all complete and accurate payments of the aforementioned debentures and loans (principal, interest and linkage differences) and to secure proper compliance with the other terms of the debentures, the Company pledged all its assets (including fixed assets under construction) in a floating charge and all of its rights to those assets of any type and class whatsoever, which currently exist or will exist in the future, ranking equally with all other floating charges granted by the Company proportionately (pari passu) to the amounts of liabilities which will be secured, from time to time, by each of these charges. At the time the fixed assets under construction for which a generation license must be obtained are operated, the Minister is entitled to determine restrictions on the transfer, encumbrance or attachment of that property. The Company is of the opinion that these restrictions cannot apply to existing encumbrances.

99 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 18:- DEBENTURES AND LIABILITIES TO BANKING CORPORATIONS AND OTHERS (continued)

f. Fair Value of Negotiable Debentures The fair value of the debentures traded on the Israel Stock Exchange is approximately NIS 8,036 million. The fair value of debentures traded on the Stock Exchange abroad is NIS 1,706 million. These sums reflects the market values of these debentures, see also Note 27.f below. In addition to the charge stated above in paragraph (c), the lenders were granted the right to offset or place a lien regarding all of the cash, notes, securities and other negotiable instruments that the Company delivers to them for collection, security, safekeeping or other activities.

g. Terms of the Company's loan agreements that might result in immediate repayment The financing contracts of the Company include provisions that provide the lender with the right to demand immediate repayment of the unpaid balance of the loan and the accrued interest on the occurrence of the following main events:

1) As is customary in financing contracts, events such as a material violation of the Company's liabilities, the granting of a liquidation order or the appointment of a receiver for material assets of the Company, provide the lenders with the right to demand immediate repayment. When such events occur, a lender in whose favor the Company recorded a floating charge is entitled to realize this charge.

2) In all of the loan agreements, the failure to pay principal or interest on time (or after a period of deferral of repayment as defined in the agreement) constitutes a breach that provides the lender with the right to demand immediate repayment. In all of the financing contracts denominated in foreign currency, the Company is obligated to pay the principal and interest in the denominated currency. The Company's inability to purchase foreign currency at the required time and in the required amount constitutes a breach that provides the lender the right to demand immediate repayment.

3) In most financing contracts abroad, if the Company shall breach its liabilities toward a certain lender and that lender demands immediate repayment as a result of that breach, the matter will result in a "cross violation", whereby a lender with whom an agreement was not breached is also entitled to demand immediate repayment.

4) The majority of the financing contracts determine that nonpayment pursuant to a ruling against the Company in excess of a certain amount (in the majority of cases, $ 25 million or more) provides the lender with the right to demand immediate repayment.

5) In all financing contracts where the Company's liabilities are secured by a State guarantee, the cancellation of the State guarantee or the insertion of changes to it without the lender's consent constitutes a breach that provide the lender with the right to demand immediate repayment. 6) In part of the financing contracts, there is a blanket prohibition against the transfer of assets that are the subject of the specific financing. In other financing contracts, the Company has the right to transfer assets subject to conditions/restrictions included therein, including obtaining the lender's consent. Certain contracts allow the transfer of assets to subsidiaries of the Company, on condition that these assets constitute less than 5% of the Company's assets. Certain financing contracts prescribe that the Company is entitled to transfer assets on condition

100 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 18:- DEBENTURES AND LIABILITIES TO BANKING CORPORATIONS AND OTHERS (continued) g.Terms of the Company's loan agreements that might result in immediate repayment (continued)

(a) that the transfer is made at market value (according to the determination of an appraiser or the Company), (b) at least 75% of the proceeds was received in cash or cash equivalents, (c) that the Company shall invest the proceeds in active assets. In the framework of the global plan of capital offerings abroad ("the capital offerings plan"), the Company is entitled to use the proceeds in order to pay part of the amounts it owes to the holders of debentures that were issued in the framework of this plan.

7) In some of the financing contracts, the Company was provided the right to transfer its liabilities that are the subject of the contract, conditional upon the receipt of the lender's consent. It should be pointed out that pursuant to Israeli law, it is not possible to assign a charge without the creditor's consent. An action by the Company contrary to these provisions constitutes a breach that provides the lender with the right to demand immediate repayment.

8) In the majority of financing contracts, the Company is obliged to exhibit presentations of various matters, such as the accuracy of its financial statements, its right to use its assets and its ownership of them, the existence of the required licenses and their timely renewal, etc. In some of these contracts it is stipulated that in a case where it will be determined that the Company's representations were materially misleading (or incomplete), the lender has the right to demand immediate repayment. In addition, non-disclosure of material details that are liable to result in a materially adverse change in the Company's business activities or its ability to repay provide the lender with the right to demand immediate repayment.

9) In certain financing contracts, the Company is obligated to provide the lender with current updates regarding events (including a change in legislation and decisions by the Government, and including structural changes in general) that affect or are likely to adversely affect the Company's operations and/or financial strength. The lender is granted the right to decide, at his discretion, if there is anything to these changes that endanger the Company's ability to repay the balance of the unpaid principal and the accrued interest. Should the lender decide that that is the case, he is provided with the right to demand immediate repayment.

10) In the framework of the debentures (Series 21) that the Company issued to the public and institutional investors in Israel, it was determined in the trust deeds that the Company will be entitled to sell, lease, assign, deliver or transfer, in any way, its assets, or any part of them, during the ordinary course of business. Carrying out an action other than in the ordinary course of business could provide the lenders (through the trustees) the right to demand immediate repayment.

11) In the signed trust deeds in connection with the debentures (Series 21 and Series 22) that the Company issued to the public and institutional investors in Israel, it was determined that the trustee will be entitled to require immediate repayment of the entire unpaid balance of the debentures and will be obligated to do so if so requested by a special decision made in a general meeting of the holders of the debentures, or

by the written demand of holders of debentures owning at least 20% of the aggregate par value of the outstanding debentures, on the occurrence of one or more of the events listed below:

101 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 18:- DEBENTURES AND LIABILITIES TO BANKING CORPORATIONS AND OTHERS (continued) g. Terms of the Company's loan agreements that might result in immediate repayment (continued)

(a) if the holders of the charges on the Company's assets will realize the charges that they have on the Company's assets, in whole or in part (that is, a cross violation); (b) if a court shall grant a final order or if a valid decision will be made to liquidate the Company (excluding a liquidation for objectives of a merger with another company or a change in the Company's structure). It was determined in the trust deed, with respect to the debentures (Series 22) that the end of the validity of the generation and/or generation licenses held by the Company (at the time these financial statements were signed) does not constitute a cause for immediate repayment.

12) In some of the financing contracts, the lenders have the right to change the conditions of the loan or to demand immediate repayment, due to a decline in the State's holding percentage in the Company to below 51%.

13) In financing contracts secured by insurance companies that provide credit risks insurance, cancellation of the insurance is a cause for immediate payment.

14) Under the terms of debentures issued through Goldman Sachs and Dexia investment banks and the framework agreement for issuing debentures in an amount of $ 2 billion from April 2008, the Company undertook that once another company will be engaged in all or most of the electricity transmission operations, the Company will transfer the debt to that other company ("the Transmission Company"). In such circumstances, holders of the debentures have an option to demand immediate pay-off of the debt, pursuant to the terms detailed in the debentures. The main terms are: a) The State will cease to be a controlling shareholder in the Company, as defined by the law prior to transferring the debt to the Transmission Company. b) The Company will not complete its obligations for the purpose of transferring the debt to the Transmission Company. c) The State will cease to be a controlling shareholder as defined by the law, in the Transmission Company after the debt is transferred it. d) After the debt is transferred to the Transmission Company, the main activity of the Transmission Company will not be in the field of electricity transmission.

15) Negative charge – In some of the foreign financing contracts the lenders have the right to demand immediate repayment in the event that the Company grants a senior charge to other lenders which will affect their ability to realize the charge they received.

16) Any event, which in the opinion of the lender may materially affect the Company's ability to pay the loan.

The Company is of the opinion that it is complying with the aforementioned terms and, to the best of its knowledge, at the time these financial statements were signed, none of the grounds exist that provide the lenders with the right to demand immediate repayment.

h. Government guarantees (for which the balance as of the statement of financial position date amounts to approximately NIS. 5,908 million) have been given to various financial institutions with relation to certain loans given to the Company.

102 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION

1. Excess of amounts of pension plan assets over the obligation for pension

December 31, 2009 *2008 *2007 NIS in millions Value of plan assets,...... 19,027 17,410 18,016 Present value of pension obligations ...... (13,658) (13,437) (12,948) Unrecognized actuarial losses (gains) ...... (106) 1,298 (203) 5,263 5,271 4,865 Present value of pension obligations with respect to special agreements on early retirement ...... (295) (374) (243) Excess pension plan assets over pension obligations ...... 4,968 4,897 4,622

2. Funds in Trust

December 31, 2009 *2008 *2007 NIS in millions

Funds in trust designated for covering actuarial obligations (assets according to IAS 19 section 104A)...... 1,736 1,591 1,202

3. Liabilities with respect to other benefits after employment termination

December 31, 2009 *2008 *2007 NIS in millions

Present value of obligation with respect to other benefits after employment termination, including with respect to special agreements on early retirements (see section a(3)b below)** ...... 2,233 2,295 2,216 Unrecognized actuarial gain ...... 223 90 54 Liability with respect to other benefits after employment termination...... 2,456 2,385 2,270

* Restated (see Note 35 below).

103 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued)

** Composition according to types of the other benefits December 31, 2009 *2008 2007 NIS in millions

Discounted electricity ...... 903 971 902 V.A.T. and grossed up income tax with respect to discounted electricity ...... 347 391 387 Retirement benefits ...... 699 648 641 Holiday gifts including grossed up income tax ...... 284 285 286 Total obligation for other benefits after employment termination as at the end of the period...... 2,233 2,295 2,216

* Restated (see Note 35 below). a. The Pension Plan of the Company 1) Summary of the Pension Regulations of the Company The pension regulations since 1958 apply to all Company tenured employees and pensioners who were admitted to work in the Company up to June 10, 1996. The entitlement to pension is created upon fulfillment of one of the following conditions: (a) At the mandatory retirement age, stipulated by law at the age of 67 years and work at the Company for 10 years at least. In addition, a woman is entitled to retire for age reasons if she worked in the Company for 10 years at least and chose to retire between the retirement age and the mandatory retirement age. (b) After working in the Company for thirty years at least, provided that the employee turned 55 (women 50) and wishes to retire or that the Company wants him to retire and the employees organization consents to the retirement and provided that the total number of retirees per year pursuant to this paragraph shall not exceed 20% of the total number of retirees on that year. However, if an employee wishes to retire pursuant to this paragraph and the Company is interested in continuing his employment, the Company shall consider the recommendations of the employees’ organization. (c) An employee was employed by the Company for 10 years at least, reached the age of 40 years and was discharged. (d) Retirement due to disability. (e) Survivors of an employee/pensioner have a right to pension according to the pension rates detailed in the pension regulations.

Pension Rates : (a) After 10 years of employment in the Company – 25% of the last salary. (b) After each additional employment year, up to 30 years of employment in the Company - 2% of last salary for each year of such employment, in addition to rate specified in sections (a) above. (c) Starting from the 31 st year and up to 35 years of employment in the Company - 1% of last salary for each year of such employment in addition to rates specified in sections (a) and (b) above. (d) For tenure exceeding 35 years in the Company, the employee is entitled upon retiring to a grant in the amount of one last monthly salary for each year of tenure exceeding 35 years. (e) Pension rates for a permanent employee who retires due to disability are determined in accordance with the provisions of the pension regulations.

104 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 2) Salary Components for Calculation of Pension and Main Actuarial Assumptions Applied to Tenured Company Employees and Pensioners who became Company Employees Before June 10, 1996 ("Employees Included in the Pension Plan") .

The Company estimates its financial liability for pension and grants for termination of employee- employer relations on the basis of actuarial calculations calculated by an external actuary (see paragraph 3 a hereunder). The liability is calculated in accordance with the aforementioned pension regulations, according to personal data submitted to the actuary. Estimates of the actuarial liability are based on a forecast of expected future cash flows according to an actuarial assumptions system. The actual cash flows may differ from the expected, due to possible change between the future reality (the actual cash flow) and the forecasts. The system of assumptions on which the actuarial balance is based is also subject to changes which may occur in future. Thus, upon accumulation of updated information about factors affecting the continued validity of the assumptions. e.g. changes in development of life expectancy, regulatory changes, economic changes, etc. Such possible changes will affect (upon occurrence) the amount of the liability with respect to employee-employers' relations.

(a) The liability is calculated on salary components for pension, included in the last salary as of the Financial Statements date. The Financial Statements for the reported period reflect increments according to wage agreements. These wage agreements affect the scope of liabilities with respect to employee-employer relations of the Company, which were accrued in the past. On June 24, 2008, the wage agreement was signed for the period up to December 31, 2009. The agreement signed specifies a wage increment at a 5% rate, to be paid as follows: 1.5% in January 2008, 1.5% in December 2008, 2% in December, 2009 (see actual realization below). The liability as of the balance sheet date includes a provision at the rate of 0.28% with respect to the said wage agreement out of the 2%. (b) The actuarial liability includes the following entitling components, in addition to pension to be paid after resigning from work: - Holiday gifts including grossed up tax thereto and entitlement to reduced electricity rates and grossed up tax and VAT with respect to the benefit. - Early retirement to pension grant. - Severance pay for retirement without entitlement to pension. - Grant for over 35 work years. - Excess years grant (over 35 years grant). - Unused sick leave days grant. - Retirement grant to disability retirement. - Supplementing the liability of the Company for severance pay 2 1/3% (for 3 rd generation employees). - 20 years grant - paid during employment period and not at its end. - Increased severance pay (to employees under a special agreement).

105 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 2) Salary Components for Calculation of Pension and Main Actuarial Assumptions Applied to Tenured Company Employees who became Company Employees Before June 10, 1996 ("Employees Included in the Pension Plan") (continued)

(c) On August 21, 2006, the Company received a letter from the Supervisor of Wages and Work Agreements announcing the decision regarding the salary terms of the Company's employees and pensioners whereby, among other things, several salary components had been paid to the Company's employees and pensioners in contravention of the Budget Law, 1985 and accordingly, the Supervisor of Wages and Work Agreements has decided to cancel and/or change those components. The Supervisor of Wages has instructed the Company to claim refunds from its employees and pensioners for these salary components and has decided that the Company's pensioners will be promoted every three years instead of every two years. On October 3, 2006, the Supervisor of Wages and Work Agreements addressed the Company in another letter instructing it, among other things, to immediately stop/change the payments made to certain senior pensioners and employees ("the seniors' group") and expressed his consent to hold a supplementary hearing to allow the future implementation of other salary components. Following sanctions by the employees on this subject, the Company appealed to the District Labor Court and in the court hearing on November 12, 2006, the Histadrut, the workers' association, the Company and the Supervisor of Wages and Work Agreements agreed on the following, among other things: - The employees will remove the sanctions and the Company will adopt the Supervisor's decision regarding the group of senior employees. - For a period of one month, talks will be held regarding the Supervisor's decision as to salary excesses in the Company. - Until the talks have been exhausted, the Company will not act to implement the decisions of the Supervisor of Wages and Work Agreements in the matter of filing retroactive refund claims . The talks between the parties failed. On January 19, 2009, the Company received another letter from the Supervisor of Wages and Work Agreements, indicating his intention to exhaust the negotiations before issuing an order to implement the aforementioned decisions (regarding subjects not yet implemented). The Company was also requested to present its position on the results of the investigation recently conducted by the Supervisor, showing that promotion of pensioners every three years is an apparent deviation in wages. In conclusion, the letter stated that the Supervisor of Wages and Work Agreements intends to conduct a comprehensive audit of condition of wages paid to employees and pensioners of the Company. On January 26, 2009, the Company answered the letters of the Supervisor of Wages and Work Agreements in a detailed letter, expressing its opinion that the discussed wage components are paid in accordance with the law. Pursuant to this letter, the parties opened discussions on the subject. On June 10, 2009, the Supervisor of Wages and Work Agreements notified the Company of his decision, that requires the Company to implement the decision of August 21, 2006 and all its components (except the vehicle expenses refunding section, on which it was not yet decided to apply the decision), including a claim for repayment of additions to wages defined as contrary to the law and paid to employees and pensioners from January 1, 2004 and up to the decision implementation date. On June 11, 2009, the Company addressed the Supervisor of Wages and Work Agreements with a request to delay the implementation of his decision, at least for the period that will enable progress in the negotiations to implement the reform in the Company and in the Electricity Sector and the efficiency and restructuring processes required by the Company. On August 6, 2009 a special collective agreement was entered between the Company and the Histadrut and the Company's employees committee, approved by the Supervisor of Wages and Work Agreements in the Ministry of Finance. According to the new collective agreement, the parties will conduct discussions up to January 1, 2010, on the decision of the Supervisor of Wages of June 10, 2009.

106 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 2) Salary Components for Calculation of Pension and Main Actuarial Assumptions Applied to Tenured Company Employees who became Company Employees Before June 10, 1996 ("Employees Included in the Pension Plan") (continued)

The discussions will include, inter alia, the issue of transition of the budgetary pension arrangement to a mechanism of linking the pension to the CPI and/or offsetting from agreements/arrangements and/or any other arrangement. The balance of the addition to wages payable to Company employees on December 2009, according to a special collective agreement dated June 24, 2008, will include a complement of up to 4.7% only, instead of 5% and cancellation of the labor dispute, unless the Supervisor of Wages and Work Agreements orders in writing to implement any part of his decisions on a date that will not be earlier than January 1, 2010. In the mean time, the Supervisor of Wages and Work Agreements notified the Company and the Histadrut that the implementation of his decisions will be postponed up to January 1, 2010 at least. On January 12, 2010, a senior deputy of the Supervisor of Wages and Work Agreements notified the Company that since the differences between the parties, as expressed during the talks are material and cannot be resolved, the Company must make preparations to implement the decisions of the Supervisor of Wages and Work Agreements, as of the salary of January 2010, paid in February 2010 (if he chooses to order the implementation). On February 3, 2010, the Supervisor of Wages and Work Agreements in the Ministry of Finance instructed the Company to implement his decisions starting from the salary of February 2010. On February 2010, the Supervisor of Wages and Work Agreements announced that "in light of the understanding between the Company and the Histadrut on the transition to a linking mechanism of pensions to the index under the budgetary pension arrangement and on the offsetting from agreements, I hereby issue my approval to postponing the implementation of the following part of the decision of the Supervisor of Wages and Work Agreements on February 3, 2010, as detailed below, to the salary of March 2010 (paid on March 20, 2010) (see postponement below), thereby allowing the parties in the work relations to enter a collective agreement that will formalize the said agreements and will be acceptable to the Supervisor of Wages and Work Agreements, up to March 20, 2010, see postponement below, when the decision of the Supervisor of Wages and Work Agreements of February 3, 2010 will be fully implemented." On March 21, 2010, the Supervisor of Wages and Work Agreements in the Ministry of Finance approved postponement of implementing the instructions of his letter of February 21, 2010 for another month, up to the salary of April, paid on April 20, 2010, see also Note 24c(2) below. In light of the understanding with the Supervisor of Wages and Work Agreements, the Company estimates that in the event that the understandings will mature to a signed agreement, the Company will increase the actuarial liability, on the agreement signing date, by approximately NIS 2.8 billion (estimate correct as on March 21, 2010) and will also cancel the provision for refunding sums of approximately NIS 118 million, as detailed below. Pursuant to the announcement of the Supervisor of Wages and Work Agreements of June 2009, the Company recorded a provision to decrease salaries cost and pension expenses for the period of the report, amounting to NIS 118 million with respect to refund of amounts paid based upon employees rights prior to the decision of the Supervisor of Wages and also the effect of the aforementioned on the actuarial liability in the amount of NIS 143 million was recorded as a decrease of salaries cost and pension expenses for the reported year.

(d) 1. The early retirement agreement for about 300 regular employees, signed on February 4, 2008 constitutes a first step in the plan of a planned retirement agreement in the context of which, some 700 additional regular employees are expected to retire (see Note 1.j above). This retirement agreement is part of the Company's preparations for the planned restructuring pursuant to the Electricity Sector Law. Accordingly, a provision in the amount of approximately NIS 372 million was included in the Financial Statements for the year 2008.

107 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 2) Salary Components for Calculation of Pension and Main Actuarial Assumptions Applied to Tenured Company Employees who became Company Employees Before June 10, 1996 ("Employees Included in the Pension Plan") (continued)

2. On May 7, 2009, the Company received the approval of the Government Companies Authority to include 10 additional employees in the early retirement plan, subject to the approval of the Company's Board of Directors and the Supervisor of Wages and Work Agreements. A collective agreement to that effect was entered on May 12, 2009. The cost arising from this agreement in the reported period amounts to approximately NIS 12 million.

(e) The discount rates used to calculate the actuarial liability conform to the market yields of Government debentures at of December 31, 2009. (f) The Company assumed for the actuary, the purchase of a professional liability insurance policy for the actuary, to cover damages amounting up to $ 25 million. (g) Indemnification Letter to the actuary of the Company At the request of the Company, the actuary of the Company received on December 23, 2009, an indemnification letter from "Inbal" Insurance Company Ltd. ("Inbal"), in accordance with the decision of the court on December 10, 2009, stating that the Company will be entitled to replace the indemnification letter it gave the actuary on September 30, 2009 (following a previous decision of the court), if the indemnification letter issued by Inbal will be an identical version of the indemnification letter signed by the Company at that time. According to the indemnification letter, Inbal is obliged to indemnify the actuary with respect to any sum, liability or expense which the actuary pays or will be required to pay with respect to a claim, demand, complaint or other proceedings opened against him (including civil or criminal, in or outside the courts, arbitration and mediation processes) the cause of which arises from or related to, directly or indirectly, to providing the consulting services and/or exercising the engagement agreement and/or the cause of which arises from an act or a default, to the results of which the Electricity Company is responsible according to the engagement agreement and/or according to any law. The liability for indemnification will also apply to payments for which the actuary will be responsible with respect to any damage or loss incurred by the actuary or by Alan Dubin P.S.A Ltd., and/or any employee and/or sub-contractor and/or whoever acts on his behalf and/or any third party on his behalf related to performing the consulting services and/or violation of his obligations according to the agreement with the Company. However, the liability will not apply if the actuary acted in bad faith or criminal negligence while performing the consulting services. Total indemnification amount will not exceed U.S.$ 25 million. The obligations provided by the indemnification letter will be valid without any time limit. The indemnification obligation will apply during the entire period of the agreement between the actuary and the Company, starting on January 1, 2008 and will also apply to processes opened against him and/or payments he will be obliged or required to pay, even after the agreement with the Company expires, provided that these relate to the performance of consulting services and/or any service he was required to provide according to the agreements. The indemnification letter will be activated by an independent party. The indemnification letter also stipulates that if the actuary received payment from an insurance company according to a professional liability insurance policy, with respect to an event that entitled the actuary to indemnification from Inbal, then: if the sum actually paid to the actuary by the insurance company fully covered the indemnification liability amount, the actuary will not be entitled to additional payment from Inbal. Yet when the sum actually paid to the actuary by the insurance company did not cover the full indemnification liability amount, the actuary will be entitled to indemnification from Inbal with respect to the balance, which was not covered by the insurance company up to the maximum indemnification amount, namely up to U.S.$ 25 million.

108 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 2) Salary Components for Calculation of Pension and Main Actuarial Assumptions Applied to Tenured Company Employees who became Company Employees Before June 10, 1996 ("Employees Included in the Pension Plan") (continued)

As indicated, the actuary received the indemnification letter from Inbal on December 23, 2009 and accordingly, the Company notified the actuary that this indemnification letter replaces the previous indemnification letter he received from the Company and that the indemnification letter given previously by the Company is null and void and the actuary has no rights derived from it.

The Company gave Inbal an autonomous, irrevocable bank guarantee of U.S.$ 30 million, to be used for realizing all Inbal's liabilities according to the indemnification letter and in addition, undertook to indemnify Inbal for any cost or expense it incurs exceeding the amount of the guarantee. (h) On July 31, 2008, the Central Pension Fund ("The Pension Fund") required the Company to cover the actuarial deficit created in the fund, amounting to NIS 2.5 billion, by September 30, 2009, which includes the current deficit and an amount of approximately NIS 1 billion for increasing the early retirement rates in the actuarial assumption of early retirement by the fund. After receiving the demand of the fund, the Company appealed to the person in charge of the Capital Market Insurance and Savings Division and explained that it has no intention of changing the actuarial assumption of the number of actual retirees, including with respect to the decision of the Board of Directors of the Company on September 1, 2008 according to which the best estimate of the number of early retirees to pension from the Company in the future (not included in special retirement plans and unaffected by these plans) is an average of 25 retirees per year. In the same meeting, the Board of Directors of the Company also decided that once the organizational restructuring plan "Matzpen" is implemented by the Company, no special retirement plans are expected in the foreseeable future (except under a restructuring framework). The fund retracted this demand on April 27, 2009. See paragraph (r) below. (i) On October 2, 2008, the Company received another letter from the pension fund, that included a new demand, mentioned for the first time in the said letter, to pay an additional debt amounting to NIS 2 billion, derived from the decision of the pension fund to make a transition from using the linear method to calculate the actuarial liability of the fund to the accumulated pension percentages method, a transition made by the Company in its Interim Financial Statements for June 2008, in the context of full implementation of IAS 19 by the Company. (j) The Company also addressed the person in charge of the Capital Market, Insurance and Savings as to these issues, claiming that there is no reason to change the calculation method of the division of the pension liability between the past and the future, mainly because the pension fund has not as yet adopted the IFRS accounting reporting method, and it is not known if the pension fund is required to report according to the IFRS, and also claimed that by force of the loyalty duty of the pension fund towards the Company, the pension fund may change the calculation method only after receiving clear guidelines in writing from the Capital Market Division. (k) A discussion, held on November 25, 2008, between representatives of the Company and the person in charge of the Capital Market Insurance Division and Savings in the Ministry of Finance and its representatives on the aforementioned applications, decided on two parallel progress routes: 1. Appointment of an actuary on behalf of the Ministry of Finance to review the manner of implementing the international accounting standards by the management company in all aspects related to the actuarial liability.

109 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 2) Salary Components for Calculation of Pension and Main Actuarial Assumptions Applied to Tenured Company Employees who became Company Employees Before June 10, 1996 ("Employees Included in the Pension Plan") (continued)

2. Agreement that the Company will request the managing company of the fund to modify the articles of the fund in aspects related to scheduling the actuarial debt. If it is decided to modify the articles, it will be subject to the approval of the person in charge of the Capital Market Insurance and Savings Division in the Ministry of Finance, including modification of the Income Tax Regulations (Rules for Approving and Managing Provident Funds), resulting from the modification, if approved. (l) On December 22, 2008, the Company received a letter from the fund stating that since the Company chose to apply the accumulated pension percentage method in its Financial Statements instead of the straight line method, the pension fund sees no reason to act otherwise.

(m) On April 2, 2009, the Company received a letter from the Capital Market Insurance and Savings Division in the Ministry of Finance, stating that pursuant to tests conducted by the actuary appointed on its behalf, its position is: • Accounting rules should be separated from rules applied to the fund's actuarial liability estimate, since the purpose of the accounting inclusion in the Financial Statements of the Company differ from the purposes of rules required to determine the reserve in the fund from which deposits required from the Company are derived. • The fund's actuary should choose the calculation method of the actuarial liability at his discretion and subject to the following purposes of the estimate of the actuarial liability. 1. Methodically accumulate assets over time in order to ensure payment of the pension benefits accumulated to the credit of the employees, under separate management from employer's assets. 2. Create an ordered and rational rate of employer's deposits into the fund. The Capital Market Insurance and Savings Division also intends to examine the method chosen during the coming year, to verify the probability of the estimates and the appropriateness of the calculations. • The actuary should determine, at his discretion, the number of early retirees on the basis of the retirement plan, as discussed by the Board of Directors of the Company and the supervisory authorities. However, he is entitled to include observations made or information received which do not conform to the retirement plan in the assumptions basis of his calculations of the reserve, if he believes that the policy and plans are incompatible. • Risk free interest, based on published interest of negotiable, linked Government debentures should be used to calculate the actuarial liability, by quoting a quoting company, as defined by the commissioner ("Sha'arey Ribit"). • If the request to amend the articles, as mentioned in paragraph k (2) above is approved, nothing will prevent the approval, subject to the instruction or any law, of allowing the spreading out of the difference, which is not derived from current deposits, as determined by the actuary, with due attention to the actuarial assessment, provided that the difference will be covered within 10 years.

(n) In light of the aforesaid in section (k) (2) above, the Company addressed the managing company for the purpose of changing the articles on the subject of distributing the actuarial debt. Draft changes in the articles are under discussion between the Company, the managing company and the Ministry of Finance. (o) As for the matter of reviewing the actuarial liability and appointing an examiner for the matter, by the Government Companies Authority, see Note 37 (m) below. (p) In addition, the State Comptroller notified the Company on February 22, 2009, of his decision to include, inter alia, the financial condition of the Company and the provisions for employees' rights in his audit plans for 2009.

110 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 2) Salary Components for Calculation of Pension and Main Actuarial Assumptions Applied to Tenured Company Employees who became Company Employees Before June 10, 1996 ("Employees Included in the Pension Plan") (continued)

(q) Regarding the aforesaid in paragraphs (o) and (p) above, the Company has no knowledge of any findings of these audit processes. (r) On April 27, 2009, the Company received a letter from the CEO of CPY, detailing the demand of the fund for payment of the difference between the actuarial liabilities of the fund and the assets of the fund as of March 31, 2009. This letter states that CPY's actuary adopts the number of early retirees in accordance with the decision of the Board of Directors of the Company. This means that the aforesaid in paragraph (h) above as regards the sum of NIS 1 billion which the Company was required to transfer to CPY for increasing the early retirements rate is cancelled. (s) Following the restatement of the Financial Statements of the Company (see Note 35 below), CPY requested, even before the Financial Statements for June 2009, to postpone the publication of its Financial Statements as of September 30, 2009, up to the publication date of the Company's Financial Statements, for the purpose of studying the calculation assumptions and the differences in the actuarial liability. CPY, requested at that time an exemption from filing financial statements as of June 2009 and as of September 2009 and received the exemption. As of the publication date of these Financial Statements, CPY did not publish its financial statements as of December 31, 2009. (t) The Company believes that the amendments to the articles of the fund will be approved soon and its debt to the fund will be spread (see paragraph (n) above). (u) In accordance with the articles of the fund on the eve of its expected amendment and according to the request of the managing company, the Company was required to transfer to the fund, up to December 31, 2009, the sum of NIS 1,2 41 million. The Company notified the managing company on November 16, 2009, that upon approval of the articles of the fund, the debt will be spread and transfer of the full sum will not be required. The Company also noted that in light of the discussions on the actuarial liability, and subsequent changes in the liability, there is no need to respond at this stage to the request of the managing company. The managing company requested on November 16, 2009 the approval of the Capital Markets, Insurance and Savings Division to refrain from filing a claim against the Electricity Company with respect to its failure the pay its debt to the fund on the specified date (see also section 4 a 6 below).

3) Reserves a) Changes in the present value of the obligation for pension For the year ended December 31, 2009 *2008 *2007 NIS in millions Present value of the obligation for pension as at the beginning of the period ...... 13,437 12,948 13,206 Cost of interest ...... 476 479 472 Current service cost ...... 176 185 199 Previous service cost - changes in the plan terms following decisions of the Wages Officer in the Ministry of Finance ...... (123) - - Benefits paid ...... (497) (518) (592) Actuarial (gains) losses ...... 189 343 (337) Present value of the obligation for pension as at the end of the period...... 13,658 13,437 12,948

111 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 3. Reserves (continued)

b) Changes in the present value of the obligation for other benefits after employment termination

For the year ended December 31, 2009 *2008 *2007 NIS in millions Present value of the obligation for other benefits after employment termination as at the beginning of the period ...... 2,295 2,216 2,197 Cost of interest ...... 80 83 79 Current service cost ...... 18 45 46 Additional cost with respect to early retirement ... 2 13 - Previous service cost - changes in the plan terms following decisions of the Wages Officer in the Ministry of Finance ...... (11) - - Benefits paid ...... (62) (73) (52) Actuarial losses (gains) included in the statement of operations ...... - (1) - Actuarial losses (gains) included in the balance sheet...... (89) 12 (54) Present value of the obligation for other benefits after employment termination as at the end of the period ...... 2,233 2,295 2,216

* Restated (see Note 35 below)

c) Changes in present value of the obligation with respect to special agreements on early retirement

For the year ended December 31, 2009 *2008 *2007 NIS in millions Present value of the obligation at the beginning of the period ...... 374 243 306 Cost of interest ...... 12 8 10 Additional provision for employee retirement due to employment termination...... 27 194 - Previous service cost – changes in plan terms arising from decisions of the Supervisor of Wages ...... (9) - - Benefits paid...... (89) (76) (58) Actuarial losses (gains) with respect to the obligation included in the statement of operations (20) 5 (15) Present value of the obligation at the period end... 295 374 243 * Restated (see Note 35 below)

d) Reserve items as above total NIS 16,186 million and NIS 16,106 million and NIS 15,407 million as of December 31, 2009, 2008 and 2007 respectively.

112 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued)

4. Funds (a) Central Pension Fund (1) As of March 8, 2005, the Company deposits funds to cover pension liabilities for pension for employees included in the pension plan in the Central Pensions Fund ("Pension Fund"). (2) The Pension Fund acts by force of the Income Tax Regulations (Rules for Approving and Managing Pension Funds) - 1964 ("income tax regulations"). The fund is managed by the managing company ("CPY") in accordance with these regulations. (3) The fund calculates the actuarial liability of the Company for employees included in the pension plan, to determine the amount which the Company should deposit to cover this liability. These calculations of the fund are calculated by the actuary of the fund in accordance with the aforementioned stipulations of the income tax regulations, providing that the liability amount shall be calculated for entitling components of the salary, as instructed by the officer in charge of the Capital Market Department in the Ministry of Finance ("The Capital Market Officer"), according to the liabilities of the Company, with respect to applied work agreements and according to any law. The calculation method shall relate, inter alia, to the interest rate for capitalization, increase rate of entitling salary components, pension linkage method and life tables. The different deposits of the Company in the Fund should amount to its total actuarial liability, which may however be deposited within 90 days or 12 months, according to the changes that raised the need to deposit in the fund. (4) No funds were deposited in the fund during the report period (except for a sum of approximately NIS 2 million arising from indemnification received by the Company pursuant to claims of relatives, which was transferred to CPY). (5) As of the Financial Statements approval date, there are differences between the actuarial assumptions used by the fund to calculate the actuarial liability of the Company and the actuarial assumptions and models used by the Company to calculate its actuarial liability (according to IAS 19 principles) as follows: In the fund: A real annual increase rate for active employees of 2% in the pension, according to employee's age and gender model, based on forecast salary increase in future, compared to the assumptions of the Company: An individual pension development model of pensioners and an individual salaries development model of active employees and also inclusion of salary increments arising from current wage agreements and general future wage agreements (after deducting inflation effects) (See section 2 above) and also reference in section 6 b above. All other assumptions are similar in principle. (6 ) a) According to the letter from the CEO of the Central Pension Fund (differentiated from the financial statements of the fund, that were not published as yet see also section 2 s above), the actuarial liabilities of the fund, as of December 31, 2009, amount to NIS 22,418 million, the financial value of the investments of the Pension Fund amounts to a total of NIS 19,027 million and the balance to be deposited in a provident fund amounts to NIS 3,391 million. b) In addition, the letter from the CEO of the Central Pension Fund also states that they received from the actuary of the fund the updated study on increase of salary and pension which indicates that the according to the new study, the actuarial liability is expected to decrease by approximately NIS 2.7 billion. The updated study was forwarded to the Ministry of Finance for review and they did not receive their response as yet. Upon receiving the response of the Capital Market Division to the salary study, which was sent for their review, they will update the liability and the gap to be completed, accordingly.

113 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 4. Funds (b) Changes in the fair value of the assets of the plan

For the year ended December 31, 2009 *2008 *2007 NIS in millions Fair value of plan assets at the beginning of the period ...... 17,410 18,016 17,562 Anticipated yield on plan assets ...... 710 727 705 Deposits...... 2 406 478 Benefits paid...... (602) (594) (595) Actuarial gains (losses) on plan assets ...... 1,507 (1,145) (134) Fair value of plan assets at period end ...... 19,027 17,410 18,016

For the year ended December 31, 2009 *2008 *2007 NIS in millions

Employees participation in the plan ...... 23 24 23

For the year ended December 31, 2009 2008 * 2007 * NIS in millions

% % %

Marketable government debentures ...... 10,752 56.5 10 ,951 62.9 10,557 58.6 Marketable corporate debentures, deposits and loans ...... 6,019 31.6 3,778 21.7 3,855 21.4 Shares ...... 1,727 9.0 888 5.1 1,586 8.8 Other investments...... 219 1.3 1,549 8.9 1,892 10.5 Cash and cash equivalents...... 310 1.6 244 1.4 126 0.7 19,027 100 17,41 0 100 18,016 100 * Restated, see Note 35 below.

(d) Forecasted redemption proceeds of plan assets in marketable vehicles are determined according the fair value of the assets and the yield derived, while for non-marketable assets, they are determined pursuant to the guidelines of the Capital Market Department in the Ministry of Finance, according to which institutional entities are required to revalue non-negotiable assets which they hold at quoted interest rates provided by the Interest Rates Company Ltd.

5. 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. Based on the opinion of the legal advisors of the Company, the Company cannot withdraw these funds from the trust account for its current needs and it is practically certain that these funds will cover present actuarial liabilities.

114 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued)

5. a. Changes in fair value of funds in trust designated to cover actuarial liabilities (assets according to section 104 A) :

For the year ended December 31, 2009 2008 2007 NIS in millions Fair value of funds in trust at the beginning of the period ...... 1,591 1,202 924 Anticipated yield from funds in trust ...... 55 50 38 Deposits...... 40 286 240 Actuarial gains (losses) ...... 50 53 -

Fair value of funds in trust at period end ...... 1,736 1,591 1,202

b. Yield of funds in trust :

For the year ended December 31, 2009 2008 2007 NIS in millions Anticipated yield from funds in trust ...... 55 50 38 Actuarial gains from funds in trust ...... 50 53 -

Actual yield from funds in trust ...... 105 103 38 Anticipated yield rate of funds in trust at the beginning of the year ...... 3.35% 3.57% 3.55%

6. Actuarial Gains (Losses) (a) Change in actuarial gains (losses) not recognized with respect to pension obligation and plan assets For the year ended December 31, 2009 *2008 *2007 NIS in millions Actuarial gains (losses), not recognized as at the beginning of the period ...... (1,298) 203 - Actuarial gains (losses) created during the period: With respect to actuarial liability for pension...... (189) (343) 337 With respect to plan assets...... 1,507 (1,145) (134) Actuarial losses (gains) recognized as at the end of the period ...... 86 (13) - Actuarial gains (losses) not recognized as at the end of the period ...... 106 (1,298) 203

115 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued) 6. Actuarial Gains (Losses) (continued)

b) Change in actuarial gains (losses) not recognized with respect to other actuarial obligations and trust assets For the year ended December 31, 2009 *2008 *2007 NIS in millions Actuarial gains (losses), not recognized as at the beginning of the period ...... 90 54 - Actuarial gains (losses) created during the period: With respect to other benefits after employment termination ...... 89 (12) 54 Trust assets (assets according to section 104 A) 50 53 - Actuarial losses (gains) recognized for the period (6) (5) - Actuarial gains, not recognized as at the end of the period ...... 223 90 54

* Restated (see Note 35 below)

7. Amounts Presented in Cost of Salaries and in Expenses with respect to Liabilities to Pensioners

For the year ended December 31, 2009 *2008 *2007 NIS in millions Cost of Salaries and Expenses with respect to liabilities for pensioners Current service cost after deducting employees participation in the pension plan ...... 172 207 222 Cost of interest ...... 569 571 563 Anticipated gain on plan assets after deducting management fees...... (701) (719) (697) Previous service cost - changes in plan terms arising from decisions of the Supervisor of Wages (261) - - Actuarial loss (gain), net, recognized for the period ...... 15 310 (17) Total cost recognized in salaries cost and expenses with respect to liabilities to pensioners... (206) 369 71

For the year ended December 31, 2009 *2008 *2007 NIS in millions Anticipated yield from plan assets...... 710 727 705 Actuarial gains (losses) on plan assets...... 1,507 (1,145) (134) Actual yield (loss) on plan assets ...... 2,217 (418) 571

* Restated (see Note 35 below).

116 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 19:- EMPLOYEE BENEFITS AFTER EMPLOYMENT TERMINATION (continued) a. The Pension Plan of the Company (continued)

8. Main Actuarial Assumptions Applied to the Actuarial Liability and Plan Assets

December 31, 2009 *2008 *2007 Weighted real interest rate grossed in the present value of the obligation...... 3.3% 3.51% 3.72% Weighted real rate of return grossed in the fair value of plan assets...... 4.16% 4.1% 4% Real update of salaries during the work period - individual salary development model of the active employees and also inclusion of salary increments arising from current or future general agreements on salaries (after deducting inflation effects). Real update of pension amounts after employment - an individual pension development model of termination pensioners (after deducting inflation effects). Pensioners and next of kin mortality, i ncluding - According to the Ministry of Finance circular updated mortality data dated May 17, 2007.

9. The funds for pension cover all the liabilities of the Company to employees included in the pension plan, assuming that the employees will retire in accordance with the accepted actuarial estimates. 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. The Management of the Company estimates that such an event is not expected.

(*) See also Note 35 below on restatement. b. Pension for Employees Not Included in the Pension Plan Other employees of the Company, who are not included in the pension plan, are insured, by default, in an old or a new external cumulative pension fund, or in other pension insurance according to the employee's individual choice in a pension provident fund for the other relevant components. The Company deposits its full liabilities for these employees, amounting to NIS 37.5 million as of December 31, 2009, NIS 33 million as of December 31, 2008 and NIS 34.5 million as of December 31, 2007. Amounts deposited in pension insurance are recorded in the name of the employees and related liabilities are not presented in the balance sheet of the Company, since the fund is outside the control and management of the Company.

117 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 20:- REGULATORY LIABILITIES a. SFAS 71 The Company applies accounting principles for regulated rate companies (SFAS 71) which permit, under certain conditions, an accounting treatment other than by that acceptable with regard to the timing of expense/income attribution to operations. One of the conditions for the implementation of SFAS 71stipulates that regulated rates be so constructed as to cover the specific costs (including required return on capital) associated with the provision of the regulated product or service (see also Note 2. a. 2).

b. Details of the amounts of the regulatory liabilities, net

For the year ended December 31, 2009 2008 2007 NIS in millions With respect to the erosion of the Company's liabilities in foreign currency passed on to the electricity consumers (see Note 1 c, 2c 2) (1,911) (1,810) (1,531) With respect to the dates for updating rates (see Note 1 c 4) 296 347 (163) With respect to depreciation of fuel oil power stations (see paragraph c below) (257) (257) (256) With respect to r regulatory assets-social rate (see paragraph d below) 147 145 38 With respect to provision for fines - Electricity Authority (see Note 3 e above) (75) - - With respect to partial update only of the 2009 rate (see section (e) below and also Note 3 above) (1,987) - - Total (3,787) (1,575) (1,912) Presented in current liabilities (2,258) (128) (687) Presented in non-current liabilities (1,529) (1,447) (1,225) ...... (3,787) (1,575) (1,912)

c. Depreciation of fuel oil power stations Following the change in the estimated economic life of the fuel oil power stations effected by the Company in 2001, on March 14, 2004, the Electric Authority decided that the accumulated difference in the depreciated costs of the fuel oil power stations, during the period between July 2002 and the date for the next update in the rate basis, will not be recognized in the framework of the recognized costs in the electricity rates that the Electricity Authority will determine at that time. The remaining regulatory liabilities created by the Company as above as of December 31, 2009, amounts to approximately NIS 257 million

d. On March 27, 2007, the Electricity Sector Law (Amendment No. 6, Reduced Rates), 2007 was made public. According to the Law, a consumer who has reached legal retirement age and is entitled to income support from the State, will pay a reduced rate of 50% of the home consumption rate for the first 400 kWh consumed on a monthly basis for home consumption only. As of the balance sheet date, the Company created a NIS 147 million regulatory asset for providing reduced payments to needy populations which are reflected in the electricity rate from 2009. According to the decision of the Electricity Authority, this cost, consisting about 0.5% of the recognized costs of the Company will be charged to all electricity consumers.

118 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 20:- REGULATORY ASSETS (continued)

e. On April 30, 2009, the Electricity Authority published its decision on the annual update for 2009, stating that updates of the fuel basket and several other components will be postponed to the date of applying a new rate base for the generation segment. Consequently, the fuels component charged to electricity consumers by the Company is still based on the mix recognized for 2008. This component is higher than the forecast rate for 2009, due to the transition to extensive use of natural gas by the generation units of the Company. In the framework of the published decision of the Electricity Authority in February 2010 on the new electricity rate, the Electricity Authority updated the recognized fuels costs in the rate retroactively from April 2009. Price differences with respect to retroactively updated gas prices were also included. In addition to updating the fuel mixture, the Electricity Authority also updated retroactively the recognized gas price in the rate, from July 2009 applied to new gas contracts entered by the Company. The Company also estimates that the remaining rate components that were not updated in the aforementioned annual update will also be expressed retroactively from April 2009. In light of the above, the Company recorded in its books a regulatory liability with respect to the said partial rates update only for 2009. The balance of these liabilities as of the balance sheet date is NIS 1,987 million.

NOTE 21:- PROVISIONS FOR REFUNDING SUMS ARISING FROM RESTATEMENT OF THE FINANCIAL STATEMENTS

The Financial Statements include provisions amounting to NIS 195 million with respect to refunding sums arising from the restatement of the Financial Statements derived from the difference between calculations previously used to determine the rate and new calculations calculated in light of the restatement (see also Note 35 j below). At the same time, the Company has claims against the Electricity Authority, stating that the current rate coverage for pension liabilities is lower than that required to cover these liabilities and the Company has addressed the Electricity Authority with a demand to receive them. Therefore, it is too early to estimate whether these provisions will have an eventual effect on the cash flow of the Company.

NOTE 22:- INCOME TAXES

a. Benefits under the Law for the Encouragement of Industry The Company is an "Industrial Company" as defined by the Law for the Encouragement of Industry (Taxes), 1969 and, accordingly, is entitled to certain tax benefits, the most significant of which is depreciation at enlarged rates.

b. Taxation under inflationary conditions On February 26, 2008, the Knesset (Israeli Parliament) passed by third reading the Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Limitation of Effective Period), 2008, according to which the provisions of said law will no longer apply, except for the transition provisions for the purpose of preventing tax distortions. According to the amendment, starting 2008 and thereafter, the adjustment of income for tax purposes to a real measurement basis will no longer be calculated. Furthermore, the linkage to the CPI of the depreciation on fixed assets and of carry-forward losses for tax purposes will be discontinued so that these amounts will be adjusted up to the CPI of the end of 2007 and their linkage will stop from that date forward.

119 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 22:- INCOME TAXES (continued)

c. Tax loss carry-forward to future years The tax loss available for carry-forward to future years on the report date was NIS 17,019 million. The Company recorded a deferred tax asset with regard to the loss carry-forward in the aggregate amount of NIS 3,150 million as of December 31, 2009 and NIS 4,548 million as of December 31, 2008 and NIS 4,749 million as of December 31, 2007 (section j 1 below), based on management's estimation that it is there is a high level of certainty that the loss carry-forward will be utilized (including realization against deferred tax provisions, see section j 2 below).

d. Effect of the change in the tax rate The Economic Efficiency Law (Legislative Amendments for Implementing the Economic Program for the years 2009 and 2010) – 2009 ("The Arrangements Law"), published on July 23, 2009, prescribes, among others, an additional gradual decrease in the corporate tax rate to 18% in 2016 and thereafter. According to these amendments, corporate tax rates from 2009 onwards are as follows: in 2009 - 26% and in 2010 - 25% in 2011 – 24%, in 2012 – 23%, in 2013 – 22%, on 2014 – 21%, in 2015 – 20% and in 2016 and thereafter – 18%. The implications of the change in tax rates are presented in the Financial Statements, in the income tax item.

e. Reform in the Israeli tax system

In 2003, the provisions of the Law for Amendment of the Income Tax Ordinance (No. 132), 2003, became effective ("the reform law") which deal with a comprehensive reform in certain aspects of the Israeli tax system. It is expected that the application of the law will result in a gradual decrease in the companies' tax liabilities, since a certain portion of the companies' income derives from gains which are subject to capital gains tax. According to the provisions of the reform law, tax at a reduced rate of 25% will apply on capital gains accrued after January 1, 2003, instead of the regular tax rate. In case of the sale of assets purchased before the effectiveness of the reform law, the reduced tax rate will apply only to the portion of the gain which accrued after the adoption of the law, as computed according to the law's stipulations. Further, the reform law states that capital losses carried forward for tax purposes may be utilized against capital gains for an indefinite period. The reform law also provides for the possibility to offset capital losses from sales of properties outside Israel against capital gains in Israel.

f. The tax that will apply to the shareholders due to the payment of dividends by the Company is not expected to be material since almost all of the Company's shares are held by the State of Israel.

g. Tax assessments

The Company received final tax assessments through the 2003 tax year.

h. Theoretical tax

Below is a reconciliation between the theoretical tax on adjusted income before income taxes (computed as a result of the application of statutory tax rates) and the income taxes included in the statement of operations:

120 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 22:- INCOME TAXES (continued)

h. Theoretical tax (continued)

Year Ended December 31, 2009 *2008 *2007 NIS in millions

Income (loss) before income taxes 176 998 1,101 Statutory tax rate 26% 27% 29%

Computed tax per statutory rate 46 269 319 Expenses disallowed net (including depreciation) 5 7 4 Effect of tax law compared to adjusted statements 9 (17) (1) Income arising from change in the tax rate (1,108) - - Additional deduction benefit to asset holders - (11) - Effect of the difference between the statutory tax rate and the tax rate according to which the deferred taxes were calculated (14) (20) (44) (1,062) 228 278 * Restated (see Note 35 below).

i. Composition of deferred taxes in the statement of operations

Year Ended December 31, 2009 *2008 *2007 NIS in millions

Decrease (increase) in deferred tax assets 1,670 378 613 Increase (decrease) in deferred tax liabilities ...... (2,741) (159) (340) Current taxes of subsidiary 9 9 5 (1,062) 228 278 * Restated (see Note 35 below).

j. Deferred taxes

1) Deferred tax assets consist of the following

Allowance for Accrued Loss Accrued doubtful Debt to pension carry- vacation accounts Consume pay, forward pay and legal rs net Total NIS in millions Balance as of December 31, 2007 4,749 35 53 445 1,730 7,012 Changes during 2008 (201) 7 15 21 (234) (392)

Balance as of December 31, 2008 4,548 42 68 466 1,496 6,620 Changes during 2009 (1,398) - (8) (76) (188) (1,670)

Balance as of December 31, 2009, long term 3,150 42 60 390 1,308 4,950

The deferred taxes are calculated according to tax rates that are expected to apply at the time they are realized.

121 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 22:- INCOME TAXES (continued) j. Deferred taxes (continued)

2) Deferred tax liabilities consist of the following Adjustment of depreciable fixed assets, depreciation Fuel and and other other assets inventories Total NIS in millions

Balance as of December 31, 2007 11,783 68 11,851 Changes during 2008 (150) (14) (164)

Balance as of December 31, 2008 11,633 54 11,687 Changes during 2009 (2,734) (7) (2,741)

Balance as of December 31, 2009, long term 8,899 47 8,946

3) Composition of deferred taxes Year Ended December 31, 2009 2008 2007 NIS in millions

Long-term Deferred tax liabilities 8,946 11,687 11,851 Less: deferred tax assets ...... (4,950) (6,620) (7,012) Advances for non deductible expenses (102) (99) (88) 3,894 4,968 4,751

NOTE 23:- PERPETUAL DEBENTURES TO THE STATE OF ISRAEL

Pursuant to the Company's arrangement with the Ministry of Finance, perpetual debentures in a nominal amount of about NIS 15 million (the adjusted amount as of the balance sheet date is approximately NIS 2.34 billion) were issued in previous years. The principal in respect of these debentures is unlinked and they bear annual interest at a rate of 5% and 5.75%, fully linked to the known CPI as of balance sheet date. Other than a pledge in a nominal amount, the perpetual debentures have no preference over any other loans extended to the Company.

122 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES a. Agreements

1) Agreement Of Intention to Supply Gas from Tamar Field, Natural Gas Storage Services in Mari B Field Under the gas procurement process, which started in 2007, the Company reached an understanding with the stakeholding companies in Tamar Field, located about 90 km west of Haifa, on the principles of gas supply from this field, for a period of 15 years, starting on July 2013. The parties signed a letter of intentions (non-obligatory) on December 13, 2009, in which the parties agreed to quantities and price formula. On December 24, 2009, the Company's Board of Directors approved the letter of intentions as the basis for negotiations for a binding contract and the Company reported to the Securities Authority on December 17, 2009. In addition, the Company concluded a letter of intentions (non-obligatory) with Thetis Sea Group, that produces gas from Mari B field, opposite Ashkelon shores, whereby the Group will provide natural gas storage services to the Company in this field. The starting date for providing the storage services will be concluded in a detailed contract that will allow the Company to store gas reserves in Mari B field from the beginning of the regular gas supply from Tamar Field, to be used by the Company during disruptions in gas supply from current gas sources or during peak demands. Based on these two letters of intentions, the parties intend to conclude detailed agreements within six months. The agreements will be submitted for the approval of the authorized committees.

2) Thetis Sea Group The Tenders Committee of the Board of Directors of the Company approved on July 23, 2009, an agreement in principle with the Thetis Sea Group for purchasing additional quantities of natural gas, in an annual quantity of 1 billion cubic meters (BCM) for the next five years. Estimated cost of the agreement is about $ 1 billion.

3) E.M.G. On July 21, 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. According to the agreement, the amount of gas to be purchased (about 25 billion cubic meters), will be at an average annual pace of 1.7 billion cubic meters over 15 years, with an option for the Company to extend it by five additional years at the same terms and annual amounts. The exercise of the option is conditioned on the advance notice of the Company 36 months prior to the end of the base period. On July 31, 2005, the Government approved the above decision of the Board of Directors, in accordance with sections 11(a) and 9a to the Government Companies Law. Gas delivery started on May 1, 2008 and the contract period started on July 1, 2008, after a running-in period of two months. Since the beginning of the gas delivery from E.M.G. in May 2008 and the beginning of the contractual delivery in July 2008, E.M.G. have not fulfilled their contractual commitments. In their notifications, E.M.G. claim that there is a general gas shortage in Egypt, due to delays in operating new gas production sites that limit the delivery volume; increased demands for gas that exceed forecasts and failures in the delivery system, caused by on overload on the gas delivery and handling systems. Starting on the second half of June, the supplier fulfills the delivery obligations. Following the amendment of the gas sales agreement between the Egyptian Government and E.M.G., the parties concluded the terms for updating the original agreement signed in 2005, adapting it to the developments since then. The main updates to the agreement are: a) Change in the price of natural gas and defining a periodic price update mechanism. b) Reduction in quantities that the Company is committed to purchase under the agreement. c) Defining means to ensure reliable gas supply. The update was approved by the related parties in the Company in August 2009.

123 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) a. Agreements (continued)

4) Agreements of the subsidiary The subsidiary, The National Coal Supply Company Ltd. ("the Coal Company") entered into long term agreements with suppliers and international shipping companies for the purchase and transportation of coal consignments. The commitment to purchase coal is made according to long term agreements with coal suppliers, where the price of the major quantity of coal is negotiated every six months while the price of the remaining quantity is linked to international indices of coal prices .

Some of the coal purchasing and marine shipping agreements are at fixed prices, in accordance with the Coal Company's policy. In coal purchasing agreements, fixed prices are determined for a maximum period of 12 months in advance while marine shipping agreements are for various periods, and as to periodic leasing agreements, even for several years in advance. In recent years part of the coal purchasing agreements and the majority of marine shipping agreements were at fixed prices, considerably lower than market prices. The current global crisis caused a decrease in coal and marine shipping prices and some of the agreements at fixed prices are now at higher prices than market prices as of the publication date of the financial statements.

The Coal Company has agreements with shipping companies to ship coal consignments up to the end of 2010 and agreements for leasing ships up to 2017. Some of the agreements are at prices fixed as of the shipping date and some are linked to international indices of shipping prices.

5) As of December 31, 2009, the Company has entered into commitments to purchase and ship raw materials, purchase equipment and services and construct facilities, which are not expressed in the Financial Statements, as follows: a) Ordering, planning, consulting and equipment from suppliers in various currencies which, at their exchange rates as of the statement of financial position date amount to approximately $ 102 million and € 184 million and ₤2 million. These orders will be financed, among others, by existing long-term credit lines from banks and foreign suppliers. b) Contracts regarding construction, equipment supply, purchase of fuels and current activities with local suppliers amounting to approximately NIS 2,505 million. c) The Coal Company has agreements with shipping companies to ship coal consignments and for the long term charter of ships up to 2015 amounting to approximately $ 300.5 million. In addition, the Coal Company has long term agreements to purchase coal and for the long term charter of ships up to 2015 at a total quantity of 12,565 thousand tons . As of December 31, 2009, the Coal Company is bound by agreements to purchase coal at a "fixed price", relating to deliveries in 2010 amounting to $ 41.4 million. Coal purchasing agreements at fixed prices relating to deliveries in 2010 refer to a quantity of about 585 thousand tons out of 12,395 thousand tons planned for the entire 2010 (4.7%)

b. Contingent Claims and Commitments

The Company is involved in pending claims in the ordinary course of its business. The Company is of the opinion, based on the opinion of its legal and professional advisors with respect to these claims, that ultimately, nothing will result from these claims that will materially affect the financial position as of December 31, 2009 or the results of operations for the year then ended.

124 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued)

Based on the aforesaid opinions, a provision was recorded in the financial statements in the amount of NIS 432.1 million (as of December 31, 2008 – NIS 427.8 million and NIS 407.3 million as of December 31, 2007) which is adequate to cover the losses that may possibly result from:

1) Insured claims as to which a provision was recorded up to the amount of the deductible component (a total provision of NIS 61.8 million). 2) Uninsured claims (that do not include claims for bodily injury) and as to which no provision was recorded at all, or for which only a partial provision was recorded (total provision of NIS 344.1 million). 3) Uninsured claims for bodily injury as to which a full provision was recorded (total provision of NIS 13.6 million). 4) Uninsured claims for bodily injury that, as is customary, are not specified by amount (total provision of NIS 12.6 million).

The total claims pending against the Company in items 1-4 above amount to nearly NIS 23,191 million, of which about NIS 20,162 million is for claims that were requested to be recognized as class actions.

1) Claims requested to be recognized as class actions

a) On August 30, 2000, a request was filed with the Tel Aviv District Court against the Company and the State, to approve a claim as a class action, later amended after the Class Actions Law – 2006 ("Class Actions Law") came into force. The request for approval dealt with the collection of the special surcharge to the electricity rate. This special addition is an addition to the electricity rate fully collected from consumers, from 1997 to 2005 inclusive (by force of the pension agreement in June 1996 between the Government and the Company and by force of section 62(e) to the Electricity Sector Law). The special addition 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. The claimant claims, inter alia, as detailed in the claim, that the 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 2,847 million in values of the date on which the claim was filed. The Company had collected a total of NIS 8,831 million on account of the special surcharge. Following several proceedings of submitting amended claims arising from corrections made by the claimant, a preliminary hearing, held on December 29, 2009, on the claims against the Company and the State, presided by a new judge that was appointed to hear the case. At the end of the hearing, it was decided that the parties waiver conducting cross examinations of the declarers in the case and may file complementary pleas. Upon receiving the pleas, the court will decide if it should hear the different threshold claims and issue its decision on the request to approve (whether it will refer to the threshold claims only or to the request for approval). The parties completing filing their complementary pleas on February 9, 2010 and are waiting for the decision of the court. The Company's legal advisors believe that the Company has good defense arguments against the class action motion and believe that it is most probable that it will be rejected

125 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 1) Claims requested to be recognized as class actions (continued)

b) On July 8, 2009, a request was filed with the Tel Aviv District Court against the Company, in accordance with the Class Action Law ("Request for Approval"), to approve a claim as a class action. The Claimant asked the court to approve and allow him to file a class action against the Company on behalf of “any person or corporation or any other party that paid or received a demand to pay for electricity consumption utilities during the seven years preceding the filing of this claim and also during the hearing of this claim and up to the date on which over collection for electricity services will end.” The claimant claims that the Company collects illegal amounts from electricity consumers, as part of the price of the electricity it supplies, since the Company allegedly collects through electricity bills the excessive, illegal and invalid salary (all allegedly according to the claimant's claim) of Company employees. The claimant claims that the accrued amount of the allegedly illegal salary payments amounts to NIS 5 billion over the last seven years. (Alternately, upon adopting the lenient approach of the Salaries Commissioner towards the Company, the amount according to the claimant's claim will range from at least NIS 1.225 billion to NIS 3.5 billion.) The claimant claimed, inter alia, that the Company allegedly submits misleading data to the Electricity Authority and there are alleged significant salary deviations by the Company, contrary to the Government Companies Law and contrary to the Foundations of Budget Law – 1985. The claimant claims that it has grounds for a claim against the Company due to the aforementioned practices of the Company, also by force of misleading cause and exploiting the consumer's plight stipulated in the Consumer Protection Law – 1981 and by force of abusing the status of a monopoly, stipulated in the Trade Restriction Law , also by force of enrichment as stipulated in the Unjust Enrichment Law – 1979 cause and also by force of fraud and negligence wrongs cause in the Torts Directive (new version) – 1968. On August 17, 2009, the claimant filed a request to amend the claim and the request for approval ("The Request to Amend"). In this request to amend the court is requested to allow the claimant to amend the claim and the request to approve by way of adding another cause for claim, similar to the cause of the first claim. The claimant claims that due to an accounting error of the Company related to provisions for pension of Company employees, the Company allegedly collected a higher rate than the rate it should have collected. Therefore, the Company must return the said amounts to the electricity consuming public.

On September 15, 2009, the Company filed an objection to the request to amend, in light of, inter alia inefficiency of granting approval to amend the request for approval when another request for approval, filed against the Company is pending on the same subject. On November 8, 2009, the court dismissed the request for correction. According to the decision of the Court, the Company must respond at this stage to the request for approval up March 28, 2010. The preliminary hearing on the request for approval was held on December 10, 2009. and an additional preliminary hearing is scheduled for May 25, 2010 together with the preliminary hearing on the request for approval on the second case (see section c. below). The claim and the request for approval were forwarded to the legal advisers of the Company, who have not yet expressed their opinion on the estimated risk to the Company, due inter alia to the preliminary stage of the proceedings of the aforementioned request for approval, as described above.

126 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 1) Claims requested to be recognized as class actions (continued)

c) On August 30, 2009, a request to approve a class action against the Company was filed with the Petach Tikva District Court, in accordance with the Class Action Law ("The Request for Approval"). The request for approval was filed by three claimants, requesting the court to permit them to file a class action against the Company on behalf of "any person and/or corporation and/or any other party who paid and/or was required to pay for electricity consumption utilities during the seven years preceding the filing of this claim as well as during the proceedings of this claim and up to the date when over collection of payments for electricity consumption will end." The claimants claim that the Company collects alleged excessive payments for electricity consumption due to setting higher than required electricity rates, which are allegedly illegal, since 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 claim that the cost of the increased pension liability was allegedly passed on to the consumers. The claimants claim that although the Company was allegedly aware of the error in pension liability calculations, it refrained from correcting it and even presented allegedly erroneous data to the Electricity Authority. Thus, the Company allegedly caused the electricity rate to be higher than required and illegal. The claimants estimate the over collection at an amount of NIS 6 billion during the seven years preceding the claim and during the proceedings of the claim. On September 13, 2009, the Company filed a request to transfer the hearing on the request for the said approval to the Tel Aviv District Court, together with a similar request for approval that was filed earlier there (see section b) above). On October 20, 2009, the claimants notified, inter alia, that they consent to the request to transfer the hearing. On October 22, 2009 the court accepted the request of the Company and transferred the request for approval to the Tel Aviv district court. On January 19, 2010, the Company filed a request to strike the request for approval in limine, in light of the announcement of the Electricity Authority, which states inter alia, that electricity rates collected over the years were correct and do not include higher than required pension costs and that in any case, insofar as surplus sums will be found, the Electricity Authority will instruct that they be refunded to the consumers. The Company claims that as things stand, there is no case to direct the claim specifically towards the Company and obviously there is no point or need for class action on the subject. At the same time, the Company filed a request to extend the date for filing the response to the request for approval in the event that the request to strike in limine will be dismissed. The court granted the requested extension. Therefore, the date for filing the Company's response to the request for approval was postponed until the court will issue the decision on the request to strike in limine. In addition, filing of claims on the request to strike in limine was completed and the parties are waiting for the decision on the court on this request. A preliminary hearing of the request for approval is scheduled for May 25, 2010 together with a preliminary hearing of a similar request for approval (see section b above). The legal advisers of the Company are of the opinion that in light of the announcement of the Electricity Authority, it is more reasonable than not that the request for approval will be dismissed in limine. Regarding the actual claims of the claimants in the request for approval, the legal advisers of the Company did not yet form their opinion on estimated risk to the Company, due to the preliminary stage of the legal proceedings.

127 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 1) Claims requested to be recognized as class actions (continued)

d) On June 2, 2009, a claim and a request was filed with the Tel Aviv District Court, in accordance with the Class Action Law , to approve a claim as a class action against the Company ("The Request for Approval"), amounting to NIS 100 million. The claim stated that the Company does not fulfill its duty to disclose and inform the public on radiation levels emitted from its facilities. This claim requests to instruct the Company to enact a process of initiated and proper disclosure to the public of information related to radiation from the electricity grid and its facilities. The Company is requested specifically to disclose the following: 1) To publish the conclusions of studies and recommendations of international institutes and the Ministry for the Environment on avoiding prolonged exposure to radiation. 2) Proper, targeted and effective disclosure addressing the population residing near electricity facilities on the existence of exposure to radiation, information on radiation levels and information on possible medical implications. 3) Targeted and effective exposure to populations residing in "sensitive sites" on the risk involved in the exposure. On March 1, 2010, the claimants filed their response to the Company's response. A preliminary hearing of the request for approval is scheduled for June 2, 2010. The Company's legal advisors believe that the Company has good defense arguments against the request for approval as a class action and believe that it is more probable that it will be rejected. e) On July 6, 2009, a claim and a request was filed with the Tel Aviv District Court against the Company, in accordance with the Class Action Law, ("The Request for Approval") to approve a claim as a class action. 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 non- pecuniary damages caused by repeated disruptions and faulty electricity supply to villages in the Gush Etzion district. The claim notes that the average electricity disconnections in the Gush Etzion area in 10 to 15 times higher than the national average of high voltage lines failures. The claim requests an enforcement relief, namely to oblige the Company to execute within a reasonable time, all maintenance works required to prevent exceptional failures in electricity supply and also compensation relief, for pecuniary damage amounting to approximately NIS 5 million and for non-pecuniary damage (suffering and mental anguish) approximately NIS 34 million. Consequently, the amount of the claim which the court is requested to approve as a class action is approximately NIS 39 million. A preliminary hearing on the request for approval was held on December 9, 2009. During the preliminary hearing, an additional preliminary hearing was arranged for May 23, 2010. In the opinion of the legal advisers of the Company, the Company has good defense arguments for both the dismissal of the request for approval and the claim itself

128 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 1) Claims requested to be recognized as class actions (continued)

f) 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, in accordance with the Class Action Law ("The Request for Approval"). 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, according to section 18 b of the Consumer Protection Law – 1981. The claim against the Company refers to charges for calling the 103 call center from a mobile phone and also charges for calls to direct telephone numbers of the Company from both mobile and land-line phones. The claimants claim that the Company's conduct gives grounds to their claim against the Company by force of the basic principles of the Civil Wrongs Law and by force of the Consumers Contracts Law. The claimants claim that the accumulated amount of the aggregate damage allegedly incurred by the members of the group, arising from the said conduct of the Company amounts to NIS 24 million over the last three and a half years. The Company responded to the request for approval up to March 17, 2010. A preliminary hearing of the request for approval is appointed to April 18, 2010. In the opinion of the legal advisers of the Company, the Company has good defense arguments for both the dismissal of the request for approval and the claim itself and it is quite probable that the claim will be dismissed.

g) On January 4, 2010, a request to approve a class action against the Company was filed with the Tel Aviv District Court, in accordance with the Class Action Law ("The Request for Approval"). The subject of the request for approval is a claim of a resident in a settlement in Judea and Samaria area ("The Area"), claiming that the Company allegedly collects excessive rates for electricity consumption in the Area. According to the claim, electricity rates in the Area were raised over the last seven years by about 20% at least, without allegedly obtaining the approval of the Area Commander, who has the authority to approve electricity rates in the Area and changes thereof. The claimant claims that the excessive rated collected by the Company from all members of the group he requests to represent are estimated at NIS 168 million. The Company must respond to the request for approval up to April 14, 2010. A preliminary hearing of the request for approval is scheduled to June 23, 2010. The claim and the request for approval were forwarded to the legal advisers of the Company did not yet form their opinion on estimated risk to the Company, due, inter alia, to the preliminary stage of the legal proceedings.

2) Claims for the pollution of the Kishon River In the framework of claims filed against Haifa Chemicals Ltd., Oil Refineries Ltd., the Association of Municipalities (Haifa region - Sewage) and the municipality of Haifa that were filed by 95 soldiers of the IDF or their estates claiming that the soldiers allegedly became ill with various types of cancer as a result of their exposure to the water of the Kishon river, Haifa port, Shemen coast and surrounding waters during their military service, in 2005, a joint notice was filed on behalf of the defendants against multiple third parties, among whom the Company. This notice is aimed at consolidating individual notices filed by certain of the defendants ("The Claim of Michael Atzmon et al").

129 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 2) Claims for the pollution of the Kishon River (continued)

As in the claim discussed in a) above, the Company was added as one of the third parties since it is alleged that its power station in Haifa contributed to the pollution of the Kishon's waters. As of the date of signing these Financial Statements, the aggregate number of plaintiffs in these claims amounts to 74 after several claims have been rejected/struck off both at the request of the defendants and third parties due to the failure to comply with the court's decisions and at the request of the plaintiffs and after one claim was dismissed upon finding that the claimants on behalf of one of the estates are not the heirs according to the will of the deceased. These claims relate, initially to the causal connection, in its narrow meaning, namely, the issue of the causal connection between the alleged exposure to the plaintiffs to substances allegedly found in the Kishon river water and surrounding and their diseases, with due consideration of the relevant circumstances of each of the plaintiffs (age, other risk factors, etc.).

In 2007, another claim was filed, consolidating 17 claims by soldiers or estates against the same defendants in the existing claims and against their insurers. In these claims also, a joint notice was filed by the defendants, Haifa Chemicals Ltd., Oil Refineries Ltd., the Association of Municipalities (Haifa region - Sewage) and the municipality of Haifa against multiple third parties, among them the Company. This claim will be heard separately from the remaining soldiers' claims, and will focus on the origination of the damage issue ("The Claim of Avraham Zohar et al"). As at the signature date on the Financial Statements, the number of claimants in these claims is 16, after one of the claims was denied at the request of the claimants. Two additional plaintiffs passed away in 2009. The Company was added as one of the third parties, claiming that the Haifa power station contributed to the pollution of the Kishon river.

As of the signing date of the Financial Statements, experts acting on behalf of the defendants and third parties are presenting their opinions in the claim of Michael Atzmon et al., after the cross examination of the claimants and the experts acting on their behalf ended, while in the claim of Avraham Zohar et al., damages calculations had not been filed for receiving the decision of the court. Regarding the risk estimate of these two claims, it should be noted that about one third of the plaintiffs in these claims are estates and dependents of soldiers who passed away over the years at different ages (part of them passed away 20-30 years ago). It should be noted that in light of the recent ruling of the Supreme Court in the Ettinger case, an estate is eligible for compensation for the loss of earnings for the missing years. In view of this practice, it appears that it is already possible to estimate that the amounts of the compensation for each estate are liable to increase by tens of millions and perhaps hundreds of millions of shekels, each case specifically and according to its circumstances. Since the case involves bodily injury claims, in the framework of which no defined aggregate cash amount was 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, 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 defendant and third party being sued in this claim is.

130 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 2) Claims for the pollution of the Kishon River (continued)

In order to assess the amounts asserted in this claim (as distinguished from the real damage caused to the plaintiffs as stated above, that can not be estimated at this stage), it is necessary to distinguish between the claims by the estates and the claims of the living plaintiffs. With respect to estates, defined amounts are being claimed in the letter of claim in a total of about NIS 110 million. As for living plaintiffs, the letter of claim includes defined amounts for special damage components (loss of earnings in the past, third party assistance in the past and past expenses) that were caused to the plaintiffs and that, together, amount to about NIS 36 million. On the other hand, the general damages components, which are the principal damages when referring to the living victims (future loss of earnings, future third party assistance, and future expenses), are unknown at this stage, and in the evaluation of the Company's attorneys, the amounts being claimed amount to between an additional NIS 250 million and NIS 400 million. The amount of non-monetary damage (pain, suffering, and shortened lifespan) asserted in the letter of claim, in spite of it being general damage, is about NIS 2 million per each plaintiff, such that the aggregate amount for all of the living plaintiffs for this damage component amounts to about NIS 126 million. It follows that, in the assessment of the Company's attorneys, the aggregate amount for the claim is in the range of between NIS 650 million and NIS 800 million, including legal fees and court expenses. The Company's attorneys point out in their opinion that the reference is only to a general estimate, based on the assumptions that they make in the absence of data at this stage, that could turn out to be erroneous when the real data are obtained, in a manner that might significantly change this assessment as to the amount of the claim (since, for example, they assume for the purpose of the estimate of the amount claimed for loss of earnings and future earning capability, that the plaintiffs are among a socio-economic level that is higher than the average, and that they earned double the average wages in the market). In addition, they disregard the various benefits that the plaintiffs are receiving and/or will receive in the future from third parties, such as the National Insurance Institute, the Ministry of Defense, etc., where at this preliminary stage, the value of the benefits cannot be estimated. It should be pointed out that the reference is to an assessment of the amount of the claims and not to the assessment of the risk of defendants and third parties in general and the Company in particular, since at this stage data is unavailable that would enable making such an assessment. The Company rejects the above claims and, according to the opinion of its attorneys, it believes that the Company's allegations present it with a good defense against the claims. As stated above, the claim of Avraham Zohar et al, are in the initial stages and as aforementioned, the prosecution completed presenting its case in the claim of Michael Atzmon et al. Yet in its narrow meaning of the causal connection when it comes to complex and unique claims, primarily in everything concerning the types of pollutants that it is alleged that each of the defendant and third party discharged into the Kishon river's waters and environment, their concentration and the mix created from their being combined and, in addition, the variety of diseases of the plaintiffs and the medical problems in determining the causal relationship between each disease and the Kishon river's waters and its surrounding, the Company's attorneys will be able to update their assessment only in the future when they obtain additional data in the course of clarification of the case. In the Company's opinion, based on the opinion of its attorneys, data that would enable evaluating the Company's risk is unavailable at this stage.

131 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued)

3) Claim on Pollution from the "Ramat Hovav" Industrial Zone 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"). The action was originally lodged by 82 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 respiratory diseases (including asthma) and cancer, allegedly caused by their prolonged exposure to hazardous materials emitted from Ramat Hovav site and/or from high voltage lines of the Company. On May 21, 2008, the Council filed a statement of defense against the actions and a notice to a third party, inter alia against twelve plants operating at Ramat Hovav site, including the Company, against which the Council claims that insofar as the plaintiffs sustained damages, these were caused pursuant 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. On November 23, 2008, defendant 2, The State filed its statement of defense, where it requested to dismiss the plaintiffs’ claim that the State is liable for their medical damages claimed to be caused from their proximity to Ramat Hovav Site. The State even sent notices to third parties, however, unlike the Council, the State did not send a third party notice to the Company at this stage. On February 4, 2009, a preliminary hearing was conducted, where it was decided that the hearing of the main claim will be conducted jointly with clarification of the notices sent to the third parties. The court has also instructed to split the hearing of the claim, whereby in the first stage, every plaintiff will be required to prove a medical causal link between his illness and the material to which he was exposed, insofar as exposed. Only plaintiffs who will successfully prove such a causal link will proceed to the next stage of the legal proceedings, where issues of comprehensive responsibility for civil wrongs law will be heard, e.g., caution duties, contributing guilt and determining the responsibility rate of all the defendants and third parties and among them. The Company filed a statement of defense on March 30, 2009, in which it repudiated the claims and denied any responsibility to illnesses of the plaintiffs. The hearing of the claim is in the preliminary stages and the Company currently acts, together with the other defendants and third parties to file a medical opinion in the relevant disciplines to the claim, e.g., oncology, lung diseases, nephrology, liver diseases, hematology, etc. Additional preliminary hearings, held on July 14, 2009, October 18, 2009 and on December 28, 2009. These hearings were dedicated to discussing various interim appeals on procedural subjects lodged with the court due to unfulfilled and uncompleted preliminary procedures in the case, together with requests to cancel medical claims due to failure of many plaintiffs to appear for the medical tests by medical experts, engaged by the defendants (including the Company) in order to submit an opinion that refutes the claimed causal connection between the residence of the plaintiffs near Ramat Hovav and their claimed diseases. Due to the failure of the plaintiffs to complete the preliminary procedures and show up for medical examinations by experts engaged by the Company together with the defendant and third parties, the court was coerced into ordering another, agreed upon, postponement of submitting the evidence to April 6, 2009 and also to postpone the hearing of evidence in the case to April - June 2010.

132 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 3) Claim on Pollution from the "Ramat Hovav" Industrial Zone (continued)

Failure of many plaintiffs to complete the preliminary processes and to attend medical examinations appointed for them by the medical experts engaged by the Company together with other defendants and several third parties led to a series of decisions on July 1, 2009, July 22, 2009, October 29, 2009 and December 20, 2009, ordering the striking of 12 plaintiffs off this claim. Therefore, the number of plaintiffs in this claim should be updated to 68 as at the date of preparing this report. These are complex and unique claims that raise complicated scientific questions about the existence of a causal connection between the allegedly emitted materials from Ramat Hovav or plants in its vicinity, controlled by the Company and each and every disease of the plaintiffs, especially in view of the wide range of diseases from which the plaintiffs allegedly suffer, which in turn raise medical questions about the ability to determine the causal connection between each disease and the allegedly emitted pollution, if emitted. In view of such complexity, the legal consultants of the Company can only update their estimates later on after additional details come to light during the legal process. In the Company's opinion, based on the opinion of its attorneys, data that would enable evaluating the Company's risk is unavailable at this stage.

4) Derivative Claims On September 10, 2009, a letter was sent to the chairman of the Board of Directors from the representatives of Mr. Dov Zelinger, who claims to hold several shares in the Company. Mr. Zelinger refers in this letter to two offerings of debentures issued by the Company abroad, in May 2008 and in January 2009 ("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 increase in the pension liabilities of the Company. Mr. Zelinger claims that due to the said error in the actuarial calculation, the interest rate paid by the Company on the debentures is higher than the rate it would have paid were it not for the said error, thereby causing damages to the Company. In light of the aforementioned, Mr. Zelinger requests the Chairman of the Board of Directors to ensure that the Company will file a claim with respect to these damages against the members of the Board of Directors related 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 the Company with respect to this error. Mr. Zelinger notified that the said letter is a preliminary appeal according to the Companies Law, prior to filing a request to the court to permit him to file a derivative claim on behalf of the Company against the members of the Board of Directors and the Company's Actuary. 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 damages arising from the error in the provision for pension calculation. 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, it is impossible to know what arguments will be included in the claim (if any) and against whom will the derivative claim be directed, or its scope, and since the full relevant facts have not crystallized at this stage.

133 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued)

5) Claims for payment of municipal taxes from the Municipality of Yavne, Givat Shmuel and Rosh Ha'ayin The municipality of Yavne has made several claims demanding the payment of general property tax for 2000 in an amount aggregating approximately NIS 32 million for occupied land located, as alleged, under high voltage and primary power lines. The Company disputes these demands. The dispute is, in principle, significant, and very likely will impact the manner in which the Company is charged general property tax by all of the local authorities, since the line infrastructure for transmitting electricity is located all across the country. The Company filed a counterclaim against the municipality of Yavne, and a hearing on this claim was scheduled as a preliminary court hearing in the District Court at Tel-Aviv. In addition, the municipality of Yavne sent several additional demands concerning the same matter for the years 2001 and 2002, for an additional amount of approximately NIS 78 million. Subsequent to the Company's application, on September 16, 2003, the Attorney General announced that he would join this proceeding.

On October 9, 2003, the Company filed a request to consolidate the hearings on this case with those of two additional cases (in the amount of about NIS 186 million), which also involve the unlawful charging for electric lines, one by the municipality of Rosh Ha'ayin and the other - by the Givat Shmuel local council. The court ordered the consolidation of the aforesaid cases. On October 12, 2003, the position of the Attorney General, which supports the position of the Company, was furnished to the Company, according to which the electric lines, land beneath them and around them are exempt from the payment of general property tax. The summations were finalized in August 2007. The verdict was announced on April 14, 2008, which accepted the claims of the Company. The three municipalities appealed the verdict, which are pending at the Supreme Court. The hearing of the appeal is scheduled for June 10, 2010, together with the appeals of the municipality of Rosh Ha'ayin and the local council of Givat Shmuel. Based on the opinion of its legal counsel, the Company believes that it is probable that the appeal will be rejected. The Company has not recorded any provisions in the Financial Statements with respect to the claims described above.

6) Other claims for payment of municipal taxes The Company received demands for municipal taxes for periods prior to the balance sheet date, in amounts exceeding the relevant provision that was recorded in the Financial Statements by about NIS 1,053 million. These demands derive from the changes in classification and the increase in the areas being billed. In the Company's assessment, based on the opinion of its legal advisors, it will not be required to pay these amounts.

7) The Planning and Building Law The Planning and Building Law prescribes that the holders of rights in land who were adversely affected by a zoning plan, are entitled to indemnification from the local committees for the sectors to which this zoning plan 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 Company that not providing them would result in the failure to approve the plans or their suspension.

134 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 7) The Planning and Building Law (continued)

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 KW lines will be approved under an outline plan rather than under an authorization process plan (where the Company authorizes transfer of the 161 KW lines as of this date). As of the statement of financial position date, claims are pending against several local committees in an amount of about NIS 634 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. 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, the Electricity Authority will be obligated to recognize them in the electricity rate.

8) Contingent assets In January 2005, there was a malfunction at one of the generation units at the Eshkol power station which is operated by natural gas. The repair of the malfunction was completed in June 2005, and during this period the Company used alternative fuels that resulted in an increase in fuel expenses in the amount of about $ 24 million. According to the Company's insurance policy that covers the Company for cases such as these, the Company filed a claim with the insurance company in an amount of about $ 22 million, which constitutes the cost to the Company in excess of its deductible. The decision of the arbitrator received on June 17, 2009, states that the Company will receive payment in the sum of $ 22.6 million from the insurance company. Payment was received on July 27, 2009.

9) Other Contingent Liabilities Project D According to the development plan assigned to the Company by the Minister, the Company is required to construct and operate a coal operated power station comprised of two generation units of 630 megawatts each, at Rutenberg site in Ashkelon ("Project D"). Project D was already included in the development plan by the Minister of National Infrastructures in 2001. The earliest possible operation date of this project is 2014 and 2015. The power station is in the planning process at the National Planning Committee. An investigator, appointed by this committee conducted a hearing process during August 2009, of comments from district committees and public objections. Planning processes in the committee were not completed as yet. Two appeals against the planning process of Project D were filed with the High Court of Justice (by Adam Teva Vedin and by the Yerukim Party). In the hearing of the appeals on November 30, 2009 and following the court's recommendation to the applicants to withdraw their appeals on the grounds of being premature these appeals were struck off. It was also decided that the applicants have the right to appeal to this court upon completion of the planning process, namely, after the Government decides on approving project D. It should be noted that the Yerukim Party also filed an appeal against the decision made on August 20, 2008 by the Coast Environment Protection Committee to approve the progress of the project, in addition to its appeal to the High Court of Justice. This appeal was dismissed outright on June 7, 2009.

135 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) b. Contingent Claims and Commitments (continued) 9) Other Contingent Liabilities (continued)

It should be noted that the Yerukim Party and Adam Teva Vedin filed an appeal to the High Court of Justice on September 3, 2009 against the decision of the Appeals Committee. This appeal is still pending. The Company is not a party in this appeal.

c. Labor disputes

1) A notice with respect to a strike was submitted on May 26, 2008, according to the Settlements of Labor Disputes Law. The disputed matters are: The intention of the employer to implement a comprehensive organizational change and an efficiency plan, with significant and critical impact on the employees in all aspects, included, but not limited to work conditions, rights, pension rights, status, employment security. The employer intends to perform a massive efficiency plan within the framework of the organizational change and the efficiency plan, including, inter alia, early retirement of 2,000 up to 2,500 tenured employees, from all units of the Company, up to three years from the plan's commencing date, according to lists compiled by Management. The employer is not acting in good faith when it attempts to push the workers organization aside and present it with accomplished facts, by setting, inter alia, a nine months timetable for preparing and implementing the organizational change and the efficiency plan. On January 1, 2009, the CEO and the Employees Committee reached understandings on the implementation of some of the steps of the Matzpen plan and conducting intensive negotiations about subsequent steps, up to February 15, 2009. Because the negotiations failed, the CEO announced on March 10, 2009, that implementation of the organizational restructuring component of the Matzpen plan will continue as follows: handling of the department managers personnel will be transferred to staff administration; the fire fighting function will be defined as a standard department, subordinated to the national safety officer; the candidates location process for the position of regional maintenance managers will begin and the tender for environmental issues and licensing division manager will be completed; preparation for implementing the structure of regional stations and placement of personnel in the jobs; preparation for unifying Haifa and North districts and placement of personnel in jobs in the Northern district; preparation for realizing the structure of the supply and logistics division and placement of personnel in the jobs; subordinate the services and household of management, the main offices building and the administration and household unit to the Deputy Manager of the Logistics and Assets for Agreements and Administration Division; temporarily subordinate the Organization and Quality Division to the CEO, until it is integrated into the Human Resources Division; subordinate the national safety unit to the Deputy Manager Logistics, Security and Emergency Plans; subordinate Information and Telecommunication Division to the Deputy Manager Logistics, Security and Emergency plans; subordinate the national emergency plan department to the National Security Unit Manager. Following the decision of the CEO, the employees opened rolling sanctions on March 12, 2009, changing daily, which mainly refrain from repairing failures in faulty generation units, stop emergency projects, renovations, withholding the mailing of electricity invoices and partial collection in 103 call centers. Regions and districts are working alternately according to Saturday schedules and partial attendance of employees at different work sites. The Company appealed to the Electricity Authority to receive rate coverage for damages caused by the sanctions (see Note 1 k above). In response to the Company's applications to the district labor court, the court issued the following decisions:

136 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) c. Labor disputes (continued)

The decision issued on April 5, 2009 obliges the employees to repair every failure and cooperate with all actions required to prepare and submit the Financial Statements on time. The decision forbids the employees from opening any sanctions that will disrupt the Financial Statements preparation process. It also states that the Company will suspend actions to implement the "Matzpen" plan for 45 days and orders all the parties to open intensive negotiations on reviewing ways to implement the "Matzpen" plan by mutual consent. The decision also states that until another decision is made, the Company will not deduct from the wages of the employees with respect to sanctions up to that date. The decision made on April 16, 2009, obliges the employees to refrain from disruptions that may disrupt regular supply of electricity, namely, enable routine operation of the electricity chain and repair all failures in any of the Company's generation units. This obligation excludes renovation actions in second and third shifts and connection of generation units to natural gas. On April 26, 2009, after several hours of unsuccessful attempts to reach an agreed upon course of understanding between representatives of the State, the workers organization and the Company, another discussion was scheduled for May 3, 2009. On May 3, 2009, the Management and the workers organization reached understandings that will remain in force up to August 1, 2009, or up to a later date, as agreed upon by the parties, relating mainly to the suspension of the Matzpen plan and reverting the situation related to Matzpen plan to its status on the eve of February 15, 2009, removing all sanctions and returning immediately to full normal work routine. A letter, delivered earlier, on April 30, 2009, from the Director General of the Ministry of National Infrastructures and the Director General of the Government Companies Authority, addressed to the CEO of the Company and to the Chairman of the workers organization, announces their intention to conduct discussions on the restructuring of the Company with the parties and negotiate the workers rights under the restructuring plan. See Note 1 (j) above regarding agreements between the Management and the workers organization reached at the beginning of May 2009. 2) Pursuant to the decision of the Salaries Commissioner of June 10, 2009, on implementing the decision of the Salaries Commissioner of August 21, 2006 and all its components (except the issue of refunding vehicle expenses, on which the Company was requested to present the position of the Board of Directors), a notice of a strike was issued on June 30, 2009 according to the Settlements of Labor Disputes Law. The disputed issues: a demand to enter into a collective agreement to regulate all employees rights and terms of their employment, in light to the decision of the Salaries Commissioner at the Ministry of Finance to reduce rights. On August 6, 2009, a special collective agreement was signed, inter alia, stipulating talks on the decision of the Salaries Commissioner of June 10, 2009, freezing payment of a 0.3% addition to the salary in salary/pension of December 2009, and calling off the said labor dispute. On February 3, 2010, the Supervisor of Wages and Work Agreements in the Ministry of Finance instructed the Company to continue implementing his decision of August 21, 2006, correct the other deviations from salaries, specified in his previous decisions, starting from the salary of February 2010; require employees and pensioners to refund payments paid to them , contrary to his decisions, from January 1, 2004 and more. Pursuant to intensive negotiations between the Company's management, the employees organization, the Histadrt and representatives of the Ministry of Finance, the parties reached an understanding on the implementation mode of the decisions of the Supervisor of Wages and Work Agreements, offsetting from agreements and transition to linking the pensions to the CPI. Negotiations are currently conducted in preparation for signing a collective agreement on these subjects.

137 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 24:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES (continued) c. Labor disputes (continued)

On February 21, 2010, the Supervisor of Wages and Work Agreements approved postponement of implementing the instructions of his decisions to the salary of March 2010. In light of the understandings reached by the parties the Supervisor of Wages and Work Agreements approved on March 21, 2010, postponement of implementing the instructions of his decisions to the salary of April 2010. On March 18, 2010, Company pensioners and others filed a request for an injunction that mainly intends to prohibit the Company from signing the collective agreement. The hearing is scheduled for April 13, 2010 or another date set for it.

3) On July 8, 2009, representatives of the State, the Company and the employees organization reached an understanding on the subject of holding intensive discussions on the restructuring and efficiency plan and conducting negotiations on the subject of employees rights in the restructuring, aiming to reach agreed upon principles by September 18, 2009. The process did not mature into an agreement. Representatives of the State, the Histadrut, the employees organization and the Company agreed on March 18, 2010, to start an intensive and continued process of discussions on the subject of the structural and organizational change and employees rights thereto. These discussions, attended by all parties, are scheduled to take place on several days each week, aiming to reach an agreement on the aforementioned subjects

4) A notice of a strike was issued on November 12, 2009, according to the Settlements of Labor Disputes Law. The main disputed issues:

a. Attempts to damage the pension of the employees, reduce the actuarial debt and decrease the pension liability of the employer, including attempts to damage the Central Pension Provident Fund (CPY) and its financial strength. The employer ignores demands of the employees’ representatives to improve pension terms and prevent pension erosion and tries to go back on earlier agreements. b. Demands of the employees’ representatives regarding implications and impact on work conditions, salaries and status of employees of the Accounting and Economic Division, arising from imposing an exceptional work load on these employees.

5) A notice of a strike was issued on January 28, 2010, according to the Settlements of Labor Disputes Law. The dispute issue is the demand of the employees' representatives to enter a new wages agreement for the period starting on January 1, 2010, after the period of the previous wages agreement expired.

138 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 25:- COMPENSATION TO KEY MANAGEMENT PERSONNEL

Key management personnel in the Company include: members of Company Management, CEO, Chairman of the Board of Directors and the supervisor in charge of the load, a total of 31 persons.

For the year ended December 31, 2009 2008 2007 NIS in millions

Total salaries cost 31.0 30.0 29.0 Of which, costs due to the pension plan 3.0 3.0 4.0 One key Management personnel retired during the year, for which:

Payment of compensations and retirement grants (1) - 1.3 5.4

Balance of pension liability 102.0 11.0 111.0

Balance of vacation reserve 1.2 1.2 1.2

(1) Including provisions made in previous years.

NOTE 26:- CAPITAL RESERVES

For the year ended December 31, 2009 2008 2007 NIS in millions Capital reserve according to the Securities Regulations - transactions with controlling shareholders: From the sale of land to the Ports and Railway Authority 65 65 65 From the purchase of the Coal Company (see Note 13.b) (2) (2) (2) Company's assets renewal reserve (1) 779 779 779 Capital redemption reserve fund 48 48 48 Premium on shares 27 27 27 Reserves from realization of assets 33 33 33 950 950 950

(1) The assets renewal reserve represents profits in excess of amounts permitted for payment of dividends under the Concession for 1985 and 1986, which has been designated by the Minister of Energy for the renewal of assets.

The Company has established various reserves pursuant to applicable laws or at the discretion of the Minister responsible for the Company at the time of their establishment. Such reserves, other than the reserves from realization of assets, cannot be distributed as dividends.

139 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS

a. Risk Management Purposes and Policies

The operations of the Company expose it to different financial risks, e.g., market risk (including currency risk, fair value risk arising from interest rate and price risk), credit risk, liquidity risk and cash flow risk with respect to interest rate. The general risk management plan of the Company focuses on actions to minimize possible negative effects on the financial performance of the Company. The Company employs derivative financial instruments to hedge certain exposures to risks. Mr. Harel Zeev Blinde, Senior Vice- President of Finances and Economics, manages the risks according to the policy, as approved by the Board of Directors. The Risks Management department identifies, assesses and hedges financial risks in collaboration with the Company's operating units. The Board of Directors provides written principles for general risk management and also the specific policy for certain exposures to risks, such as exchange rate risk, interest rate risk, credit risk and also use of derivative and non-derivative financial instruments as well as investments of liquidity surplus.

b. Market Risk The Company sells its products at prices determined by an external entity – the Electricity Authority. The price is based on the cost principle, as specified in Note 1 above. At the same time, in determining the recognized cost for the Company, the Electricity Authority determined normative costs of the different components in the rate, which do not match sometimes, the actual costs of the Company. Consequently, the major part of Company activities is not exposed to market risks, except those detailed in following items:

1) Currency risk The Company entered into foreign currency hedging transactions (mainly swap and forward transactions) in order to adjust the structure of expenses to the recognized structure of revenues (composition of the Bank of Israel's basket of currencies) due to real exposure for linked liabilities denominated in foreign currency that have been assigned to the electricity consumers. . (1) The swap transactions will be undertaken for a period of at least two years while taking into consideration the interest rate gaps between the different currencies with an allowed exposure of up to 15% of the balance of loans in the same currency. (2) As for the balance of the Company's exposure in for liabilities in foreign currency (after the adoption of section (1) above), the Company will swap its foreign currency liabilities for CPI-linked liabilities by carrying out foreign currency-CPI hedging transactions (mainly swap and forward transactions) and, should the market conditions justify it, foreign currency-NIS transactions will be made, in order to reduce its foreign currency exposure. (3) The swap transactions will be performed for a period of at least two years while taking into consideration the inflation rates in Israel and the Western countries and the interest rates in the capital markets. (4) As a rule, transactions will be entered into to cover at least 85% of the remaining exposure so that the exposure amount for each currency will not exceed a cumulative 15% of the balance of loans in same currency. (5) In order to allow dynamic implementation of the policy discussed in section (2) above, and in order to avoid random technical irregularities, the Vice President of Finances and Economics instructed that the amount of exposure for each currency, both for the hedged amount and for the balance of the exposure, will not be above or below 5% of the outstanding loan balance in same currency with the addition of 2% of the remaining loans for each 1% interest gap, even if it is negative, that is to the Company's debit.

140 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 27:- FINANCIAL INSTRUMENTS (continued)

b. Market Risk (continued) 1) Currency risk (continued)

An irregularity in excess of 15% will be allowed if the amount of the irregularity does not exceed $ 10 million or an equivalent sum in another foreign currency, each currency taken separately. (6) Other transactions, such as options, IRS in currencies and interest rates will be implemented if market conditions will indicate advisability/risk reduction.

f) Analysis of foreign currency sensitivity (1) As of December 31, 2009 Loss (profit) from Balance as of Loss (profit) from increase in December 31, increase in market market factor 2009 factor Change in currency rate in % 10% 5% 5% 10% NIS in millions Loans and debentures per currency NIS - - 948 - - NIS linked - - 17,204 - - U.S. Dollar 1,749 875 17,493 (875) (1,749) Euro 387 193 3,682 (193) (387) Yen 344 172 3,443 (172) (344) Pounds Sterling 1 1 10 (1) (1) Swiss Franc 2 1 20 (1) (2) Total 2,483 1,242 42,800 (1,242) (2,483) Swap transactions NIS - - 1,011 - - NIS linked - - 6,298 - - U.S. Dollar (575) (287) (5,746) 287 575 Euro 91 45 907 (45) (91) Yen (219) (109) (2,189) 109 219 Pound Sterling 67 33 667 (33) (67) Total (636) (318) 948 318 636

Forward transactions NIS - - (632) - - U.S. Dollar 31 15 309 (15) (31) Euro 27 14 271 (14) (27) Total 58 29 (52) (29) (58)

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 above). 2. Part of the costs with respect to long term liabilities are capitalized to fixed assets. 3. Part of the costs with respect to exposure or linkage to foreign currency are covered in the current electricity rate (see Note 1 c above).

141 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (continued) b. Market Risk (continued) 1) Currency risk (continued) f) Analysis of foreign currency sensitivity (continued) (2) As of December 31, 2008 Loss (profit) from Balance as of Loss (profit) from increase in December 31, increase in market market factor 2008 factor Change in currency rate in % 10% 5% 5% 10% NIS in millions Loans and debentures per currency NIS - - 989 - - NIS linked - - 16,972 - - U.S. Dollar 2,105 1,053 20,949 (1,053) (2,105) Euro 380 190 3,671 (190) (380) Yen 370 185 3,672 (185) (370) Pounds Sterling 1 1 15 (1) (1) Swiss Franc 3 2 32 (2) (3) Total 2,859 1,431 46,300 (1,431) (2,859) Swap transactions NIS - - 1,115 - - NIS linked - - 6,655 - - U.S. Dollar (578) (289) (5,775) 289 578 Euro 19 10 191 (10) (19) Yen (214) (107) (2,144) 107 214 Pounds Sterling 54 27 537 (27) (54) Total (719) (359) 579 359 719 Forward transactions NIS - - 3,414 - - U.S. Dollar (357) (178) (3,565) 178 357 Yen (1) (1) (14) 1 1 Total (358) (179) (165) 179 358 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 above). 2. Part of the costs with respect to long term liabilities are capitalized to fixed assets. 3. Part of the costs with respect to exposure or linkage to foreign currency are covered in the current electricity rate (see Note 1 c above).

142 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (continued) b. Market Risk (continued) 1) Currency risk (continued) f) Analysis of foreign currency sensitivity (continued) (3) As of December 31, 2007 Loss (profit) from Balance as of Loss (profit) from increase in December 31, increase in market market factor 2008 factor Change in currency rate in % 10% 5% 5% 10% NIS in millions Loans and debentures per currency NIS - - 762 - - NIS linked - - 17,187 - - U.S. Dollar 1,723 861 17,134 (861) (1,723) Euro 491 245 4,745 (245) (491) Swiss Franc 6 3 63 (3) (6) Pounds Sterling 3 1 28 (1) (3) Yen 314 157 3,111 (157) (314) Total 2,537 1,267 43,030 (1,267) (2,537) Swap transactions NIS - - 1,091 - - NIS linked - - 5,813 - - U.S. Dollar (504) (252) (5,045) 252 504 Euro 26 13 261 (13) (26) Yen (156) (78) (1,558) 78 156 Pounds Sterling 94 47 839 (47) (94) Total (540) (270) 1,401 270 540 Forward transactions NIS - - 106 - - U.S. Dollar - - (8) - - Euro 22 11 220 (11) (22) Yen (15) (7) (147) 7 15 Pounds Sterling (16) (8) (159) 8 16 Total (9) (4) 12 4 9 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 above). 2. Part of the costs with respect to long term liabilities are capitalized to fixed assets. 3. Part of the costs with respect to exposure or linkage to foreign currency are covered in the current electricity rate (see Note 1 c above).

2) Cash flow risk with respect to of interest rates Transactions such as "options" and "IRS options" in currencies and interest rates will be executed if market conditions indicate profitability/risk reduction. The Company has entered into swap transactions of currencies that are designed to partially reduce the Company's exposure resulting from the difference between the actual level of liabilities and the structure of the electricity rate (see paragraph (e) below ). The Company also carries out foreign currency forward transactions for periods of up to 12 months (see Note 18.a above). Interest rate risk of the Company is mainly derived from long term loans. The variable interest risks are immaterial to the Company's cash flows.

143 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 27:- FINANCIAL INSTRUMENTS (continued) b. Market Risk (continued)

3) Fair value risk in respect of interest rates Loans bearing fixed interest rates expose the Group to interest rate risk from fair value.

Interest rates sensitivity analysis Sensitivity analysis is determined on the basis of exposure to interest rates of derivative and non-derivative financial instruments as of the statement of financial position date. Sensitivity analysis of liabilities bearing variable interest is prepared under the assumption that the amount of the liability as of statement of financial position date remained throughout the reported year.

a. Sensitivity analysis as of December 31, 2009: Profit (loss) from Balance as of Profit (loss) from decrease in December 31, increase in market factor 2009 market factor Change in interest rate in % 10% 5% +5% +10% NIS in millions

Long term loans at fixed interest rate - - 6,698 - - Long term loans at variable interest rate 12 6 5,307 (6) (12) Marketable debentures - - 12,871 - - Non-marketable debentures 3 2 17,924 (2) (3) Swap transactions (20) (10) 948 11 22 Forward transactions - - (52) - - Total (5) (2) 43,696 3 7

b. Sensitivity analysis as for December 31, 2008: Profit (loss) from Balance as of Profit (loss) from decrease in December 31, increase in market factor 2008 market factor Change in interest rate in % 10% 5% +5% +10% NIS in millions

Long term loans at fixed interest rate - - 7,238 - - Long term loans at variable interest rate - - 5,390 - - Marketable debentures - - 11,291 - - Non-marketable debentures 5 3 22,381 (3) (5) Swap transactions (26) (14) 579 14 26 Forward transactions - - (165) - - Total (21) (11) 46,714 11 21

144 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (continued) b. Market Risk (continued) 3) Fair value risk in respect of interest rates (continued)

c. Sensitivity analysis as for December 31, 2007: Profit (loss) from Balance as of Profit (loss) from decrease in December 31, increase in market factor 2008 market factor Change in interest rate in % 10% 5% +5% +10% NIS in millions

Long term loans at fixed interest rate - - 8,180 - - Long term loans at variable interest rate 27 14 6,251 (14) (27) Marketable debentures - - 7,140 - - Non-marketable debentures - - 21,189 - - Swap transactions (26) (13) 1,401 14 29 Forward transactions - - 13 - - Total 1 1 44,443 0 2

4) Liquidity risk

The Company's goal is to raise long-term financial resources in capital markets in order to be able to finance the development plans for the electricity sector while maintaining a current cash reserve and credit balances within single borrower limitations of the Israeli bank system.

145 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) b. Market Risk (continued) 4) Liquidity Risk as of December 31, 2009 a) Financial liabilities without derivatives

First Second Third Fourth Fifth Sixth Effective year year year year year onwards Total Interest rate NIS millions % Financial Liabilities

Debentures Debentures in US Dollar (10) 2,635 (6) 107 (8) 9,250 11,968 2.2-9.8 Debentures in Yen 242 162 (2) (1) (1) 3,043 3,443 3.3-4.3 Debentures in indexed NIS 184 148 2,790 2,442 2,605 6,517 14,686 5.0-7.1 Unlinked debentures 4 4 5 5 6 674 698 6.6-7.5 Total debentures 420 2,949 2,787 2,553 2,602 19,484 30,795 Liabilities from banking corporations : Loans in Euro 500 503 483 449 385 1,300 3,620 1.4-6.3 Loans in US Dollars 280 321 335 338 331 3,697 5,302 1.0-8.2 Loans in other foreign currency 17 12 1 - - - 30 1.9-5.2 Loans in indexed NIS 167 128 91 90 67 350 893 2.4-5.7 Unlinked loans - - - - - 250 250 Total liabilities from banking corporations: 964 964 910 877 783 5,597 10,095 Leasing Liabilities 1 1 1 1 1 17 22 Other Liabilities Loans in Euro 34 22 6 - - - 62 1.5-2.1 Loans in US Dollars - - - 223 - - 223 2.0 Loans in indexed NIS 149 108 66 881 241 327 1,772 3.0-6.8

Total other liabilities 183 130 72 1,104 241 327 2,057 Total Financial Liabilities 1,568 4,044 3,770 4,535 3,627 25,425 42,969

146 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) b. Market Risk (continued) 4) Liquidity Risk as of December 31, 2009 (continued) b) Derivative Financial Instruments

First Second Third Fourth Fifth Sixth year year year year year onwards Total NIS millions Swap transactions: Loans in Euro (467) 269 467 638 - - 907 Loans in US (2,275) (2,006) (401) (631) - (433) (5,746) Dollars Loans in Yen (305) (1,884) - - - - (2,189) Loans in other (124) 629 109 53 - - 667 foreign currency Loans in 3,078 3,069 - 151 - - 6,298 indexed NIS Unlinked - 433 - - - 578 1,011 loans Total swap (93) 510 175 211 - 145 948 transactions: Forward transactions: Loans in US 271 - 271 Dollars - - - - Loans in Yen 309 - - - - - 309 Loans in non- (632) - (632) indexed NIS - - - - Total forward (52) - (52) transactions - - - - Total (145) 510 175 211 - 145 896 derivatives

147 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) b. Market Risk (continued) 5) Liquidity Risk as of December 31, 2008 a) Financial liabilities without derivatives First Second Third Fourth Fifth Sixth Effective year year year year year onwards Total Interest rate NIS millions % Debentures Debentures in US Dollars 4,335 (7) 2,759 (4) 113 7,719 14,915 4.2-9.2 Debentures in Yen (3) 259 174 (1) (1) 3,245 3,673 3.3-4.3 Debentures in indexed NIS 176 185 151 2,794 2,446 8,604 14,356 4.0-5.6 Unlinked debentures 4 4 5 5 5 706 729 6.6-7.5 Total debentures 4,512 441 3,089 2,794 2,563 20,274 33,673 Liabilities to banking corporations: Loans in Euro 550 517 459 439 401 1,197 3,563 4.2-6.8 Loans in US Dollars 250 294 337 350 354 4,218 5,803 3.1-8.2 Loans in Yen Loans in other foreign currency 18 17 11 1 - - 47 3.3-7.6 Loans in indexed NIS 167 167 129 90 90 156 799 4.0-5.7 Unlinked loans - - - - - 260 260 Total liabilities to banking corporations: 985 995 936 880 845 5,831 10,472 Financial Liabilities Leasing Liabilities 1 1 1 1 1 18 23 4.5 Other Liabilities Loans in Euro 45 34 22 6 - - 107 5.9-6.5 Loans in US Dollars - - - - 233 - 233 4.0 Loans in indexed NIS 188 180 78 65 883 580 1,974 3.0-6.8 Unlinked loans Total other liabilities 233 214 100 71 1,116 580 2,314 Total Financial Liabilities 5,731 1,651 4,126 3,746 4,525 26,703 46,482

148 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) b. Market Risk (continued) 5) Liquidity Risk as of December 31, 2008 (continued) b) Derivative Financial Instruments (continued)

First Second Third Fourth Fifth Sixth year year year year year onwards Total NIS millions Swap transactions: Loans in (630) (459) 257 443 581 - 192 Euro Loans in US (750) (2,342) (1,263) (295) (596) (434) (5,680) Dollars Loans in Yen (1,839) (307) - - - - (2,146) Loans in (203) (111) 710 - 45 - 441 other foreign currency Loans in 3,531 2,983 - - 143 - 6,657 indexed NIS Unlinked - - 476 - - 639 1,115 loans Total swap (109) (236) 180 148 173 205 579 transactions: Forward transactions:

Loans in US (3,565) - - - - - (3,565) Dollars Loans in Yen (14) - - - - - (14) Loans in non- 3,414 - - - - - 3,414 indexed NIS Total forward (165) - - - - - (165) transactions Total 56 (236) 180 148 173 205 414 derivatives

149 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) b. Market Risk (continued) 5) Liquidity Risk as of December 31, 2007 a) Financial liabilities without derivatives First Second Third Fourth Fifth Sixth Effective year year year year year onwards Total Interest rate NIS millions % Debentures Debentures in US Dollars (10) 4,556 (4) 2,901 (1) 3,056 10,498 7.1-9.2 Debentures in Yen (3) (3) 219 147 (1) 2,754 3,113 3.3-4.3 Debentures in indexed NIS 166 178 184 150 2,775 10,777 14,230 4.0-5.6 Unlinked debentures 4 5 4 5 5 738 761 6.6-7.5 Total debentures 157 4,736 403 3,203 2,778 17,325 28,602 Liabilities to banking corporations: Loans in Euro 664 592 574 507 484 1,752 4,753 4.9-6.9 Loans in US Dollars 295 265 310 353 368 4,800 6,321 5.5-8.2 Loans in Yen - 1 - - - - 1 Loans in other foreign currency 37 20 19 12 1 - 89 3.3-7.6 Loans in indexed NIS 166 166 166 129 89 245 961 4.0-5.7 Unlinked loans ------Total liabilities to banking corporations: 1,162 1,044 1,069 1,001 942 6,797 12,015 Financial Liabilities Leasing Liabilities 1 1 1 1 1 19 24 4.5 Other Liabilities Loans in Euro 54 50 37 25 6 1 173 5.4-5.9 Loans in US Dollars 4 - - - - 245 249 7.0 Loans in indexed NIS 186 218 148 79 65 1,301 1,997 2.7-6.8

Total other liabilities 244 268 185 104 71 1,547 2,419 Total Financial Liabilities 1,564 6,049 1,658 4,309 3,792 25,688 43,060

150 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) b. Market Risk (continued) 5) Liquidity Risk as of December 31, 2007 (continued) b) Derivative Financial Instruments (continued)

First Second Third Fourth Fifth Sixth year year year year year onwards Total NIS millions Swap transactions: Loans in Euro (721) (692) - 292 490 892 261 Loans in US (1,151) 792 - (1,363) (427) (1,322) (5,045) Dollars Loans in Yen - (1,558) - - - - (1,558) Loans in other foreign (101) (291) - 1,026 140 65 839 currency Loans in (2,118) 3,558 - - - 147 5,823 indexed NIS Unlinked 112 - - 452 - 527 1,091 loans Total swap 257 225 - 407 203 309 1,401 transactions: Forward transactions: Loans in Euro 220 - - - - - 220 Loans in US (8) - - - - - (8) Dollars Loans in Yen (147) - - - - - (147) Loans in other foreign (159) - - - - - (159) currency Loans in non- 106 - - - - - 106 indexed NIS Total forward 12 - - - - - 12 transactions Total 141 225 - 407 203 319 1,413 derivatives

151 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 27:- FINANCIAL INSTRUMENTS (continued)

c. Credit Risk Management

The Company's cash and cash equivalents are deposited with banking institutions and accordingly, the Company does not anticipate any credit losses from them.

Except as detailed in the following table, the exposure to credit risks from customers is limited given the large number of the Company's customers and the fact that the Company supplies an essential ongoing service. The Company included provisions for doubtful accounts, which management believes are adequate. Transactions with financial instruments are carried out with banking institutions and the Company does not anticipate any losses resulting from credit risks from them. The Company does not hold or sell financial instruments for trading purposes. 1) Exposure from the credit risk component is NIS 2,093 million.

2) Aging of customer receivables in excess of credit days (for invoices delivered up to November 30, 2008) as of the financial statements date is detailed below:

For the year ended December 31, 2009 2008 2007 NIS in millions

Up to 2 months 212 233 177 From 2 months up to 6 months 200 293 140 Over 6 months 246 371 319 Total 658 897 636

152 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) d. Report of linkage bases

December 31, 2009 Linked to Linked to the Linked to other U.S. Linked to Japanese foreign Linked to Non- Dollar the Euro Yen currency the CPI Unlinked Total monetary Total NIS in millions

Assets: Cash and cash equivalents 1 668 - - - 3,216 3,885 - 3,885 Trade receivables for sales of electricity - - - - - 3,219 3,219 - 3,219 Other current assets 2,471 196 163 - (2,168) 150 812 63 875 Long-term receivables 767 263 - 150 3 51 1,234 3 1,237 Lands lease advance payments ------398 398 Funds in trust - - - - - 1,736 1,736 - 1,736

Total 3,239 1,127 163 150 (2,165) 8,372 10,886 464 11,350 Liabilities : Short-term credit from banks and other credit providers 429 572 103 (107) 784 4 1,785 (58) 1,727 Liabilities to suppliers and service providers 426 211 - 3 665 152 1,457 - 1,457 Regulatory liabilities, net (short term) - - - - 257 1,619 1,876 382 2,258 Other current liabilities 358 14 - 28 384 1,391 2,175 - 2,175 Debentures, liabilities to banking 42,739 corporations and others 13,753 4,934 1,337 654 20,106 1,955 (274) 42,465 Debentures to the State of Israel - - - - 2,338 - 2,338 - 2,338 Regulatory liabilities, net (long term) ------1,529 1,529 Provisions for refunding sums arising from restatement of the financial statements - - - - 1,950 - 1,950 - 1,950 Deferred taxes, net - - - - - (102) (102) 3,996 3,894

Total 14,966 5,731 1,440 578 26,484 5,019 54,218 5,575 59,793

Net Total (11,727) (4,604) (1,277) (428) (28,649) 3,353 (43,332) (5,111) (48,443)

(1) a. A portion of the costs for the exposure in or linked to foreign currency is covered by the current electricity rate. b. A portion of the costs for long-term liabilities is capitalized to fixed assets under construction (see Note 31). (2) The average balance is calculated at quarterly intervals during the reporting year.

153 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) d. Report of linkage bases (continued)

December 31, 2008 Linked to Linked to the Linked to other U.S. Linked to Japanese foreign Linked to Non- Dollar the Euro Yen currency the CPI Unlinked Total monetary Total NIS in millions Assets: Cash and cash equivalents - 2 - - - 3,668 3,670 - 3,670 Trade receivables for sales of electricity - - - - - 3,487 3,487 - 3,487 Other current assets 3,883 - 1,852 - (5,045) 214 904 46 950 Long-term receivables 3,140 699 163 209 (2,710) 59 1,560 3 1,563 Lands lease advance payments ------404 404 Funds in trust - - - - - 1,591 1,591 - 1,591

Total 7,023 701 2,015 209 (7,755) 9,019 11,212 453 11,665

Liabilities : Short-term credit from banks and other credit providers, net 4,517 (5) - (185) 2,426 4 6,757 (52) 6,705 Liabilities to suppliers and service providers...... (503) 6 - - - 1,873 1,376 - 1,376 Regulatory liabilities, net - - - - 257 (491) (234) 362 128 Other current liabilities ...... 406 61 29 - 347 970 1,813 817 2,630 Debentures, liabilities to banking corporations and others…….. 13,775 4,703 3,557 540 17,056 2,100 41,731 (237) 41,494 Debentures to the State of Israel…….. - - - - 2,341 - 2,341 - 2,341 Regulatory liabilities, net, long term ------1,447 1,447 Provisions for refunding sums arising from restatement of the financial statements - - - - 1,863 - 1,863 - 1,863 Deferred taxes, net - - - - - (98) (98) 5,066 4,968 Total 18,195 4,765 3,586 355 24,290 4,358 55,549 7,403 62,952 Net Total (11,172) (4,064) (1,571) (146) (32,045) 4,661 (44,337) (6,950) (51,287) (1) a. A portion of the costs for the exposure in or linked to foreign currency is covered by the current electricity rate. b. A portion of the costs for long-term liabilities is capitalized to fixed assets under construction (see Note 31). (2) The average balance is calculated at quarterly intervals during the reporting year.

154 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) d. Report of linkage bases (continued)

December 31, 2007 Linked to Linked to the Linked to other U.S. Linked to Japanese foreign Linked to Non- Dollar the Euro Yen currency the CPI Unlinked Total monetary Total NIS in millions Assets: Cash and cash equivalents - - - - 290 202 492 - 492 Trade receivables for sales of electricity - - - - - 3,302 3,302 - 3,302 Other current assets 708 - - - - 211 919 49 968 Long-term receivables 1,471 (259) - - 1 65 1,278 7 1,285 Lands lease advance payments ------401 401 Funds in trust - - - - - 1,202 1,202 - 1,202

Total 2,179 (259) - - 291 4,982 7,193 457 7,650

Liabilities : Short-term credit from banks and other credit providers, net (282) 30 (147) (221) 2,639 442 2,434 (56) 2,397 Liabilities to suppliers and service providers...... (381) 76 - 1 - 2,408 2,104 - 2,104 Regulatory liabilities, net - - - - 256 125 391 306 687 Other current liabilities ...... 347 - 25 - 367 1,603 2,342 - 2,342 Debentures, liabilities to banking corporations and others…….. 13,038 5,145 1,584 994 20,422 1,735 42,918 (269) 42,649 Debentures to the State of Israel…….. - - - - 2,326 - 2,326 - 2,326 Regulatory liabilities, net, long term ------1,225 1,225 Provisions for refunding sums arising from restatement of the financial statements - - - - 1,780 - 1,780 - 1,780 Deferred taxes, net - - - - - (91) (91) 4,842 4,751 Total 12,722 5,251 1,462 774 27,790 6,214 54,213 6,048 60,261 Net Total (10,543) (5,510) (1,462) (774) (27,499) (1,232) (47,020) (5,591) (52,611) (1) a. A portion of the costs for the exposure in or linked to foreign currency is covered by the current electricity rate. b. A portion of the costs for long-term liabilities is capitalized to fixed assets under construction (see Note 31).

155 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) e. The following are details of open commitments for carrying out foreign currency swap transactions and forward transactions designed to reduce exposure resulting from differences between linkage terms of the commitments and the structure of the electricity rate as of December 31, 2009, 2008 and 2007 respectively

Swap Forward Transactions (1) Transactions (2) 2009 2008 2007 2009 2008 2007 NIS in millions Purchase of: U.S. Dollars 5,988 6,009 5,046 358 3,565 8 Euro 730 1,330 1,673 - - 155 Japanese Yen 2,189 2,144 1,558 - 14 147 Pounds Sterling 379 399 409 - - 159 Swiss Francs 101 - - - NIS, linked - 989 378 9,286 9,882 8,787 1,347 3,579 847 In exchange for: Linked NIS 6,298 6,655 5,822 357 3,414 483 NIS 1,011 1,115 1,090 - - - Euro 1,637 1,521 1,675 271 - 376 Pounds Sterling 1,046 935 1,351 - - - - U.S. Dollars 242 235 250 667 - - - 10,234 10,461 10,188 1,295 3,414 859

(1) The majority of swap transactions are for a period of up to 10 years. (2) The majority of forward transactions are for a period of up to 12 months.

- The loss from the financial instruments in this item in 2009 amounts to NIS 234 million - The gain from the financial instruments in this item in 2008 amounts to NIS 445 million. - The loss from the financial instruments in this item in 2007 amounts to NIS 692 million.

f. Fair value of financial instruments

Book Value Fair Value December 31, December 31, 2009 2008 2007 2009 2008 2007 NIS in millions Financial liabilities Long-term loans at fixed interest (2) 6,698 7,422 8,212 7,356 7,609 8,807 Marketable debentures (in 7,766 Israel and abroad) (1) 12,871 11,291 7,412 9,742 8,681 Non-marketable debentures (2) 17,924 22,381 21,191 18,493 22,172 21,787

(1) The fair value is based on quoted market prices in an active market as of the statement of financial position date. (2) The fair value is based on fair interest rates as of the statement of financial position dates (the fair value of a long-term loan received, bearing fixed interest is based on the calculation of the present value of cash flows at an interest rate acceptable for a loan of similar characteristics).

156 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 27:- FINANCIAL INSTRUMENTS (Continued) f. Fair value of financial instruments

The carrying amount of cash and cash equivalents, short-term investments, receivables and long term debts, other current assets, payables and accrued expenses is equivalent to or approximates their fair value.

g. Classification of financial instruments

Financial instruments measured at fair value are classified according to the lowest level at which significant use is made to measure the fair value of the whole instrument. The financial instruments of the group, measured at fair value through profit and loss according to levels are presented below:

For the year ended December 31, 2009 2008 2007 Level 2 NIS in millions Financial Assets Forward and Swap transactions 180 635 8 Embedded derivatives 23 36 14 Total 203 671 22 Financial Liabilities Forward and Swap transactions 1,076 1,049 1,421 Total 1,076 1,049 1,421

157 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 28:- REVENUES

For the year ended December 31, 2009 2008 2007 NIS in millions

Residential 7,221 7,873 7,188 Commercial 8,455 9,151 7,865 Agricultural 678 795 718 Industrial 3,937 4,627 4,102 Water pumping 793 979 964 Revenues from the sale of electricity, gross 21,084 23,425 20,837

Add (less): Consumers' participation in fixed assets (951) (725) (316) Collection and provision for regulatory assets (1,647) 1,300 205 Revenues from the sale of electricity, net 18,486 24,000 20,726 Other income** 218 142 *144 18,704 24,142 20,870 * Reclassified. ** Including provisions with respect to works on account of others for the years 2009, 2008, 2007 in an approximate total or NIS 59 million, NIS 26 million and NIS 3 million, respectively.

NOTE 29:- SALES AND MARKETING EXPENSES

For the year ended December 31, 2009 2008 2007 NIS in millions

Wages 448 484 504 Consumer services 175 165 137 Depreciation 126 130 132 749 779 773

NOTE 30:- ADMINISTRATIVE AND GENERAL EXPENSES

For the year ended December 31, 2009 2008 2007 NIS in millions

Wages 335 349 380 Provision for doubtful accounts and bad debts (see Note 24 c) 48 (2) 35 Depreciation and amortization 135 139 140 Others 298 188 156 816 674 711 * Reclassified

158 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 31:- WAGE COSTS

For the year ended December 31, 2009 2008 2007 NIS in millions

Total wage costs 3,699 3,850 4,056 Less : Wages charged to works at expense of others 110 121 124

Wages charged to fixed assets 1,441 1,454 1,541

Total wage costs included in statement of operations items, net 2,148 2,275 2,391

159 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 32:- FINANCIAL EXPENSES (INCOME), NET

a. Financial expenses (income), net For the year ended For the year ended For the year ended December 31, 2009 December 31, 2008 * December 31, 2007 * Other Other Other financial Erosion financial Erosion financial Erosion expenses of expenses of expenses of (income) liabilities Total (income) liabilities Total (income) liabilities Total NIS in millions Financial expenses (income) on: Debentures 2,186 (886) 1,300 2,021 439 2,460 1,962 (1,854) 108 Loans 606 (177) 429 679 (782) (103) 894 (902) (8) Hedge transactions - 234 234 - (445) (445) - 693 693 Loans and account receivables 11 167 178 (99) 29 (70) (82) 127 45

2,803 (662) 2,141 2,601 (759) 1,842 2,774 (1,936) 838 Capitalization of financing expenses (income) (317) 77 (240) (222) (37) (259) (241) (14) (255) Transfer of financing (expenses) income to regulatory asset (liabilities) - 489 489 - 965 965 - 1,297 1,297

Financial expenses (income) , net 2,486 (96) 2,390 2,379 169 2,548 2,533 (653) 1,880 * Restated (see Note 35 below). (1) Other financing expenses (income) with respect to debentures include deduction of discount and premium expenses, debentures floating and raising expenses in the amount of NIS (121) million, NIS (114) million, NIS (94) million in 2009, 2008 and 2007 respectively. (2) Financing expenses arising from loans include deduction of capital raising expenses in the amount of NIS 38 million, NIS 43 million and NIS 46 million in 2009, 2008 and 2007 respectively. (3) a. Capitalization rate with respect to non-specific credit sources for the year ending on December 31, 2009, is 4.5051%. b. Capitalization rate with respect to non-specific credit sources for the year ending on December 31, 2008, is 4.8636%. c. Capitalization rate with respect to non-specific credit sources for the year ending on December 31, 2007, is 3.9157%.

160 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 32:- FINANCIAL EXPENSES (INCOME), NET

b. Loss (gain) from erosion of liabilities, net ( 1)

For the year ended December 31, 2009 *2008 *2007 NIS in millions Loss (gain) resulting from the change in the CPI for...... 76 (11) (20) Loss (gain) resulting from the change between the known CPI and the CPI for...... (24) 130 (119) Gain from the real appreciation of foreign currency, net (2)...... (881) (907) (1,924) Loans and receivables...... 167 29 127 (662) (759) (1,936)

(1) Before capitalization of financial expenses (income) and transfer of income to regulatory asset. (2) Net of the effect of hedge transactions, after the offset of the effect of erosion of deposits from the raising of private funds and from other loans, that were deposited in banks. * Restated (see Note 35 below).

161 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 33:- INFORMATION IN NOMINAL VALUES

a. Share Capital

Composed as follows: December 31, 2009 2008 2007 Issued and Issued and Issued and Authorized paid-up paid-up paid-up NIS

80,167,387 Ordinary shares of NIS 0.1 par value each (issued and paid-up - 80,164,986 Ordinary shares)...... 8,016,739 8,016,499 8,016,499 8,016,499 40,053,252 Ordinary "B" shares of NIS 0.1 par value each 4,005,325 4,005,325 4,005,325 4,005,325 39,531 unclassified shares of NIS 0.1 par value each 3,953 - - -

Total 12,026,017 12,021,824 12,021,824 12,021,824

b. Shareholders' Rights

1. Upon distribution of dividends:

The first five percent to the - Ordinary shareholders only. Ordinary shareholders The next five percent to the - Ordinary and Ordinary "B" shareholders - Ordinary shareholders equal percentages, until the cumulative sum of dividends paid to Ordinary shareholders reaches 10% and Ordinary "B" shareholders reaches 5% annually. The next five percent to the - Ordinary "B" shareholders - twice the Ordinary shareholders percentage of Ordinary shareholders, until the cumulative sum of dividends paid to Ordinary shareholders reaches 15% and Ordinary "B" shareholders reaches 15% annually. The following percentages - Ordinary and Ordinary "B" shareholders - equal percentages.

In the Company's opinion, shareholders' rights to dividends relate to the par value of the adjusted share capital.

2. Upon liquidation:

The surplus after refund of paid-up share capital to shareholders, first to Ordinary shareholders and then to Ordinary "B" shareholders, is to be allocated among shareholders on a proportional basis to the paid-up capital of shares held by each of them at the start of the liquidation.

3. On the date of the financial statements, the State of Israel held 120,033,262 Ordinary shares, which represent 99.85% of the paid-up capital of the Company.

162 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 34:- SEGMENTAL REPORTING

a. General The Company implements IFRS 8 from January 1, 2009. This international financial reporting standard replaced IAS 14 "Segmental Reporting". IFRS 8 requires implementation of the "management's approach" that presents the segment's information according to the same basis used for internal reporting needs. 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 the Company.

b. Detailed Reportable Operation Segments The operations of the Company are comprised of three main operational segments making up the entire electricity chain. These activities are: • Generation Segment - includes the operations at 17 sites of the electricity generating power 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 ultra-high, long distance electricity, generates its revenues according to its share in the electricity rate, as determined by the Electricity Authority. • Distribution Segment – includes the electricity grids system and the transformation stations which supply the electricity to the end consumers, except a limited number of customers that purchase high voltage electricity directly from the transmission systems, as well as the customers service and collection system of the Company, generates its revenues according to its share in the electricity rate, as determined by the Electricity Authority.

c. Analysis of Income and Results according to Operational Segments Segmental revenues are calculated on the basis of the electricity rate for the segment, published by the Electricity 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.

163 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 34:- SEGMENTAL REPORTING (continued) c. Analysis of Income and Results according to Operational Segments (continued)

For the year ended December 31, 2009 Generation Transmission Distribution Total segment segment segment Company NIS in millions Revenues** 14,276 1,685 2,743 18,704 Operating income 1,625 536 405 2,566 Income (loss) before income tax 488 (16) (296) 176 Net income (loss) 833 243 112 1,238 Additional Details Depreciation and amortization 1,983 821 1,092 3,896 Financing expenses, net 1,137 552 701 2,390

For the year ended December 31, 2008* Generation Transmission Distribution Total segment segment segment Company NIS in millions Revenues ** 19,606 1,711 2,825 24,142 Operating income 2,613 537 396 3,546 Income (loss) before income tax 1,397 (52) (347) 998 Net income (loss) 1,000 (37) (193) 770 Additional Details Depreciation and amortization 1,863 798 1,027 3,687 Financing expenses, net 1,216 589 743 2,548

For the year ended December 31, 2007* Generation Transmission Distribution Total segment segment segment Company NIS in millions Revenues ** 16,391 1,681 2,798 20,870 Operating income 1,820 567 594 2,981 Income (loss) before income tax 932 126 43 1,101 Net income (loss) 696 94 33 823 Additional Details Depreciation and amortization 1,816 781 1,058 3,655 Financing expenses, net 888 441 551 1,880

(*) Restated, see Note 35 below. (**) Revenues from external customers are attributed to the three segments according to their share in the electricity rate.

164 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 34:- SEGMENTAL REPORTING (continued)

d. Analysis of Assets and Liabilities according to Operational Segments The CODM monitors the tangible assets, the 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, divided into the three segments.

As of December 31, 2009 Generation Transmission Distribution Total segment segment segment Company NIS in millions Assets ...... 41,104 16,545 21,870 79,519 Investments in the period ...... 2,603 573 760 3,936 Liabilities...... 33,171 12,660 16,859 62,690

As of December 31, 2008(*) Generation Transmission Distribution Total segment segment segment Company NIS in millions Assets ...... 43,076 17,251 20,908 81,235 Investments in the period ...... 1, 604 588 651 2,843 Liabilities...... 35,354 13,764 16,526 65,644

As of December 31, 2007(*) Generation Transmission Distribution Total segment segment segment Company NIS in millions Assets ...... 41,409 16,443 19,754 77,606 Investments in the period ...... 1,204 596 1,157 2,958 Liabilities...... 34,429 12,972 15,384 62,785

(*) Restated, see Note 35 below.

(**) Including investments with respect to the emergency plan for the electricity sector, that includes construction of three CCTGs, less consumers participation amounting to NIS 951 million (see also Note 3(e)(2) above)

165 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 35:- RESTATEMENT OF FINANCIAL STATEMENTS FOR PREVIOUS REPORTING PERIODS

a. Pursuant to a decision of the Board of Directors of the Company, the Company launched a new actuarial research regarding the wages and the pension in the Company ("The Research") during the second quarter of 2009. Initial results of the research show that the current pension updating mechanism used by the Company (without effect of future changes that may occur in it), caused the majority of pensioners to reach the ceiling of the wages scale and nearly all active employees will reach this ceiling even before retiring to pension. Consequently, this indicates that the actuarial assumption used as the basis for pension development - at a real annual rate of 2%, is not suitable. b. In light of these findings, the Company's Management presented its position, stating that the assumed pension development rate in the future should be linkage to the Consumers Price Index ("CPI"), after awarding a retirement rank to the retiree. c. The Company failed to reach an agreement with its external auditor on the correct accounting treatment of the issue and especially on two main disputed points: • The First , do current conditions of the pension plan of the Company enable inclusion of the assumption described in section (b) above in the calculations. • The Second, whether the required accounting treatment of the decrease in the estimated pension liability should be a change of estimate or a correction of an error that requires restatement of the Financial Statements. d. The Company conducted extensive deliberations and consultations with external consultants on the aforementioned issues and maintained that the assumption described in paragraph (b) above can still be taken into account under the present conditions of the pension plan and that the correct accounting treatment is through a change in estimate and not through correction of an error. e. In light of the above, the Company addressed the Securities Authority on August 6, 2009, requesting to receive a pre-ruling on this issue. f. The Company received the preliminary guiding decision of the Securities Authority on August 26, 2009, stating that the Company should apply an actuarial assumption regarding future increases on pensioners' salaries, that is mutually compatible with the Company's assumption regarding its active employees, applied to its Financial Statements, which is based on the most up to date actuarial research in the possession of the Company, stating that the real decrease in the ranking scale of the active employees (while neutralizing the effect of promotion to a higher rank in the ranking scale) is approximately 1.54% per year. The decision also stated that applying the assumption regarding estimated future wages increments of pensioners at an annual rate of 2%, implemented by the Company in its Financial Statements is a mistake in the previous reporting period, as defined in the International Accounting Standard 8 (IAS 8) and the Company is required to apply the directives of IAS 8 on the correction of material errors in previous reporting periods and correct its Financial Statements by way of a restatement, to reflect the correction of the error retroactively. g. The Board of Directors of the Company decided to act according to the decision made by the Securities Authority and correct the Financial Statements by way of restatement, performed in the Financial Statements as of June 30, 2009. h. Other related corrections were entered under the actuarial calculations that served as the basis for the restatements, to apply the basic principles of the decision of the Securities Authority to the development of the real wages during the active work period as well. These corrections were entered after professional consultation with the external auditor. i. Pursuant to the restatement of the actuarial liabilities, items including charges of labor costs in the past (e.g., fixed assets and intangible assets) were also restated. Deferred tax balances were also restated.

166 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 35:- RESTATEMENT OF FINANCIAL STATEMENTS FOR PREVIOUS REPORTING PERIODS (CONTINUED) j. Moreover, pursuant to the restatement of the actuarial obligations, provisions were included in the Financial Statements, by way of restatement, to refund sums arising from the restatement of the Financial Statements regarding gaps between calculations previously used to determine the rate and new calculations performed arising from the restatement (see Note 21 above). k. The following are the implications of the restatement, based on the aforesaid in the paragraphs above on the Financial Statements for the relevant dates and periods:

1) Effect of the Restatement on Items in the Statement of Financial Position

As of December 31, 2008 As reported As previously Effect of the presented (December restatement* in these 2008 Financial Statement of Statements Financial Position) In NIS million Excess pension plan assets over pension obligation...... - 4,897 4,897 Liabilities with respect to other benefits after employment termination ...... (6,395) 4,010 (2,385)

Liability with respect to benefits to employees, net ...... (6,395) 8,907 2,512

Fixed assets, net...... 61,573 (821) 60,752 Intangible assets, net ...... 827 (38) 789 Provision for refunding sums arising from the restatement of the Financial Statements ...... - (1,863) (1,863) Deferred taxes, net...... (3,429) (1,539) (4,968) Shareholders’ equity (changes in retained earnings item) ...... (10,977) (4,614) (15,591)

* Other effects with respect to leased lands and trade payables are immaterial and therefore are not presented.

167 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 35:- RESTATEMENT OF FINANCIAL STATEMENTS FOR PREVIOUS REPORTING PERIODS (CONTINUED)

1) Effect of the Restatement on Items in the Statement of Financial Position (continued)

As of December 31, 2007 As reported As previously Effect of the presented (December restatement* in these 2008 Statement Financial of Financial Statements Position ) In NIS million Excess pension plan assets over pension obligation...... - 4,622 4,622 Liabilities with respect to other benefits after employment termination ...... (6,103) 3,833 (2,270)

Liability with respect to benefits to employees, net ...... (6,103) 8,455 2,352

Fixed assets, net...... 62,579 (704) 61,875 Intangible assets, net ...... 838 (38) 800 Provision for refunding sums arising from the restatement of the Financial Statements ...... - (1,780) (1,780) Deferred taxes, net...... (3,280) (1,471) (4,751) Shareholders’ equity (changes in retained earnings item) ...... (10,407) (4,414) (14,821)

As of January 1, 2007 As reported As previously Effect of the presented (Note 32 to the restatement* in these December Financial 2008 Financial Statements Statements) In NIS million Excess pension plan assets over pension obligation...... - 4,050 4,050 Liabilities with respect to other benefits after employment termination ...... (6,087) 3,890 (2,197) Liability with respect to benefits to employees, net ...... (6,087) 7,940 1,853

Fixed assets, net ...... 63,324 (509) 62,815 Intangible assets, net 899 (103) 796 Provision for refunding sums arising from the restatement of the Financial Statements ...... - (1,699) (1,699) Deferred taxes, net...... (3,084) (1,384) (4,468) Shareholders’ equity (changes in retained earnings item) ...... (9,792) (4,206) (13,998)

168 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 35:- RESTATEMENT OF FINANCIAL STATEMENTS FOR PREVIOUS REPORTING PERIODS (CONTINUED)

2) Effect of the Restatement on Items of the Statements of Operations and Comprehensive Income:

For the year ended December 31, 2008 As reported As previously Effect of presented (December the in these 2008 Statement restatement Financial of Operations Statements and Comprehensive Income ) In NIS million Cost of operating the electricity system ...... 19,038 (187) 18,851 Sales and marketing expenses ...... 829 (50) 779 Administrative and general expenses 714 (40) 674 Expenses (income) from pension liabilities, net ...... 379 (87) 292 Financing expenses, net ...... 2,442 106 2,548 Income before taxes ...... 740 258 998 Taxes on income...... 170 58 228 Net income ...... 570 200 770 Total comprehensive income ...... 570 200 770

For the year ended December 31, 2007 As reported As previously Effect of presented (December the in these 2008 Statement restatement Financial of Operations Statements and Comprehensive Income ) In NIS million Cost of operating the electricity system ...... 16,699 (192) 16,507 Sales and marketing expenses ...... 835 (62) 773 Administrative and general expenses 747 (36) 711 Expenses (income) from pension liabilities, net ...... (8) (94) (102) Financing expenses, net ...... 1,774 106 1,880 Income before taxes ...... 823 287 1,101 Taxes on income...... 205 73 278 Net income ...... 618 205 823 Total comprehensive income ...... 618 205 823

* Reclassified.

169 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 36:- SUBSEQUENT EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE, IN ADDITION TO THE DETAILED IN THE AFOREMENTIONED NOTES

a. After the balance sheet date there was a real revaluation of the NIS, especially versus the Pound Sterling and the Euro, to which the Company is exposed in its liabilities, causing financing income for the period from the balance sheet date and up to March 20, 2010, to amount of approximately NIS 30 million. b. On February 1, 2010, the Electricity Authority published its decision on updating the rate base for the generation segment for the years 2010 – 2014. The financial implications of the said decision of the Electricity Authority are detailed in Note 3 "Implications of the Current and Future Electricity Rate for the Company." c. In accordance with regulations 9(e) and 46 of the Securities Regulations (Periodic and Immediate Reports) - 1970, since no Chairman of the Board of Directors was appointed in the Company after the former Chairman, Mr. Mordechai Freidman ended his term of service on February 22, 2010, the Board of Directors decided on March 28, 2010, to authorize the external director, Dr. Ziv Reich (who has accounting and financial qualifications) to sign the financial statements as of December 31, 2009. d. Representatives of the State, the Histadrut, the employees organization and the Company agreed on March 18, 2010 to start an intensive and continued process of discussions on the subject of the structural change and employees rights thereto (see also Note 1 j above).

170 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY

The Minister of Finance, in consultation with the Minister of Justice, and with respect to a public company - in consultation with the Securities Authority, is entitled to determine according to the recommendation of the Government Companies Authority, rules for the preparation of a Government company's Financial Statements which, he has determined is supplying the public with an essential service, including with respect to the details that they will comprise, the accounting principles to be applied in their preparation, and the statements and notes that they will include. 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 file pursuant to any law, provided that the instructions in this regard were not determined in the rules, law or generally accepted accounting principles and by generally accepted reporting principles. If the Government Companies Authority disputes the manner in which details are presented in the Financial Statements or any other report that the Government company is required to file pursuant to all laws, it is entitled, if it feels that the public interest so requires, to instruct the company to disclose the position of the Government Companies Authority and to describe the dispute in the Financial Statements to the satisfaction of the Government Companies Authority. In January 2005, the Company decided to make the preparations necessary to enable preparation of separate Financial Statements of each activity, as required by the stipulation of the Government Companies Authority, ("Separate Financial Statements"), where the work plan includes, inter alia, preparation of methodology, work procedures, internal audit procedures and a computerized solution. Implementation of these preparations was postponed due to sanctions opened by the employees, who prevented the implementation of the decision. On March 26, 2006, the Company received a letter from the manager of the Government Companies Authority, announcing that implementation of the first milestones, required to be completed by March 26, 2006, was postponed by one quarter at least. There was no development in this issue up to the signing date of the Financial Statements. Implementation of the Government Companies Authority stipulations on disclosure of Company activities is a condition in the Government Companies Regulations (Rules for Preparing Financial Statements of Israel Electric Corporation Ltd.) (Temporary Order) – 2004 ("The Regulations") adopted by the Minister of Finance on the subject of preparing adjusted Financial Statements starting from January 1, 2004 and up to December 31, 2007, including an amendment to the Government Companies Regulations dated June 30, 2008, which are in force up to December 31, 2009 (see Note 2 a.4 above). In addition, failure to include information required by law in the Financial Statements may impair the ability of the Company to publish Financial Statements. Pursuant to the provisions of the Government Companies Authority published in the Financial Statements Circular 2008-3, the Company is required by the Companies Authority, in accordance with its authority pursuant to the Government Companies Law (see Note 1.d above), among other things, to include additional information (beyond the information required in the Financial Statements according to generally accepted accounting principles) as follows:

a. According to the Government's decision of August 5, 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 Government companies will be executed in accordance with the law. b. The Government Companies Authority determined targets for the Company whereby the Company will include in its Financial Statements material financial information that is relevant to the State and the other users of the Financial Statements in order to reach economic decisions in a manner that the information will more adequately reflect the economic essence of the events and transactions in carrying out the set targets and will include comparable and consistent information for prior periods.

171 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

The Company will report the following issues: 1) The targets established (see section 2.a(7), P. 6 of the Circular) whether by legislation, the Government's decisions or by an authority qualified by law to set targets and by agreements between the State or any of its institutions and the Company. 2) The monetary execution of the targets established, including the performance rate in the event that the targets and related rate can be quantified according to a reasonable estimate. 3) Financial restrictions and difficulties that arose in the course of achieving the targets and the monetary implications of these restrictions and difficulties. 4) In the event that the Company grants a right that is to limit the State, as discussed in Section 11.a(9)(a) to the Government Companies Law, it will specify the limitations, the reasons and feasibility for creating such limitations and the description of the approvals granted pursuant to the Law. If not, the proper disclosures and explanations will be provided. 5) In the event that the targets established for the Company contain financial targets, including targets for meeting recognized normative costs, they will be disclosed, including the normative costs and differences between these costs and actual costs as they are presented in the Financial Statements: - Compliance with minutes of supply failure. - As for targets established by the Government's decisions, the policy document and Amendment No. 5 to the Law (see Note 1 (d)), these were designated by their issuers to allow, among other things, the following: - The transmission and distribution rates will permit a suitable rate of return on capital and the financial stability of the transmission, system management and distribution companies. - To cause that by January 1, 2012, the holding company's ownership percentage in each of the generation companies will decline to 51% by way of offerings to the public. - Upon the sale of 49% of the holding company's holdings in the generation companies, the holding company will be allowed to engage in water desalination according to the Company's accepted rules for this line of business: - The recognized costs of the restructuring will be expressed in future electricity rates. - The sale of the assets to the new companies will be done such that the assets and revenues that the Company will have subsequent to the restructuring, both directly and indirectly, through its holdings in the subsidiaries to be established, will allow the repayment of its debts to creditors.

- Following is data on financial targets that have been set:

a) Financial leverage 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). The ratio that is reflected in the Financial Statements as of December 31, 2009 is 1:2.49. The payment of the dividends that were provided for and not yet distributed from the Company's earnings in the amount of NIS 2.35 billion would change this ratio to 1:2.8.

172 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

b) Meeting the target determined in the electricity rate regarding the ratio of the exposure between the foreign currency liabilities and the NIS liabilities The Electricity Authority determined that the composition of the foreign capital linked to the basket of currencies out of the total recognized foreign capital, will be reduced annually from 70% in 2002, down to 47.43% in 2008. The ratio that is reflected in the Financial Statements as of the statement of financial position date is 58.5% (net after hedging transactions – 41.7%). c) The rate of return on equity According to the rate policy, the Electricity Authority decided that the annual rate of return on equity will be 7% for the generation segment, 5.5% for the transmission segment and 6.2% for the high and low voltage distribution segments. As of the statement of financial position date, the annual rate of return on equity amounts to a return of 18.3% for the generation segment, a negative return of 4.3% for the transmission segment and a return of 3.7% for the high and low voltage distribution segment, see Note 3.b above (this is in accordance with the Company's Financial Statements according to the generation, transmission and distribution operating segments, see Note 38 below).

d) The Company was required to meet certain deadlines for filing an annual and multi-year work plan and budget with the Ministers and the Government Companies Authority (pursuant to Sections 32, 33.b and 34(a1) to the Government Companies Law, that include, among other things, the implications of the restructuring in the electricity sector. Due to employee sanctions, at this stage, the Company is unable to prepare any business plan that will include the structural changes as required and it intends to prepare such a plan as soon as it becomes possible.

The Company's Board of Directors has discussed a preliminary draft of a business plan that includes assumptions that do not coincide with the effects of the adoption of Amendment No. 5 and the Government's decisions regarding the restructuring and does not include the information required as above.

The Minister, in consultation with the Electricity Authority, may demand that a holder of such license submit a development plan, integral or segmented, for his approval for the purpose of its activities as provided by the license and if such a development plan is not submitted to the Minister's approval, such a plan will be designed for the licensee in consultation with the Electricity Authority and the licensee will have to abide by it. The Minister is entitled to enact regulations concerning the responsibility of the holder of a transmission license for developing the electricity sector, pursuant to the development plan, including planning the electricity network. c. A Government company will provide disclosure in its Financial Statements regarding the Government Companies Authority's policies as to the distribution of dividends out of the Company's earnings (as for the disclosure in accordance with the requirements of this item, see the statement on changes in equity).

173 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

d. A company is required to perform full reconciliation of the balances with the State, its authorities, other Government companies and interested parties. If written balance confirmations were not received from the authorized parties, as stated above, the company will provide disclosure regarding this in its Financial Statements, subject to materiality. At the end of 2009, the Company sent requests for balance confirmations to 171 customers and approximately 114 suppliers which meet the above criteria, as to which it did not receive confirmations from __ customers and did receive 34 confirmations from suppliers with a full match.

e. A company will provide disclosure regarding assets (land and attached) in its Financial Statements as specified below: 1) The company will provide proper disclosure in the Financial Statements of its rights to material assets (land and attachments), which it holds or that are operated/held by it for the State or others, including assets that are or were in dispute with any of the Government authorities regarding the rights to them. This disclosure shall include the details of the Company's rights to those assets (freehold, leasehold and the respective dates, in trust or other rights) as well as conditions, limitations or commitments that the Company has in connection with the above assets (the obligation to transfer the assets to the State, the obligation to receive approval for transferring the rights thereto etc.). 2) Details of the State's rights to the above assets. 3) Details of others' rights to the above assets. 4) The dates on which the rights discussed in a) through c) above were created. 5) The status of records or approvals granted or received with respect to these rights, such as registration or confirmation of ownership or lease or trust, protected lease, or license, orders for seizing/closing/other, recording caveats with the Land Registry Bureau or any other relevant place and pursuant to any law. 6) Any existing disputes over the assets and rights attached thereto. 7) A company will 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 2006-3 of September 17, 2006. - The information required above is not included in the Financial Statements due to employee sanctions (see Note 24 (c) 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 prescribed by the Electricity Sector Law. In addition, the Company does not currently possess all of the required information due to various problems in registering the many assets that have been accumulated by the Company over tens of years and due to the considerable costs and duration required to issue assessments, current measurements and other planning information for the thousands of assets held by the Company, as required by the Government Companies Authority. The CEO also mentioned that in meetings held with the Government Companies Authority and representatives of the Company's Management in negotiations regarding the restructuring, the representatives of the workers committee announced that they would not allow giving out information to the State or transferring any documents in connection with the Company's assets, etc.

174 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

8) A company will provide proper disclosure in the Financial Statements of the existence of real estate properties that are not economically used for the company's operations and their use in relation to potential is partial and/or the consideration for them is partial and does not reflect adequate real proceeds. - To the best of the Company's knowledge, it will not sustain any material financial losses as above. Regarding certain assets (mostly administrative buildings), which are not populated, the Company has taken measures to realize them by way of sale or lease. 9) A company will provide proper disclosure in the Financial Statements and the Directors’ Report regarding the actions involved in the location, identification and registration of the assets during the reported period and of the aforesaid actions that are to be taken and were not yet carried out. - At the Company's initiative, during the last few years, an intensive, focused and continuous procedure was begun to gather and coordinate 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 organize them as to everything related to establishing an assets ledger, registration of rights (including caveats, insofar as is relevant), administration and oversight, including the evacuation of squatters 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 336 main sites), as well a ledger of less important assets (about 12,991 sites, primarily transformation stations) which is currently being completed. In addition, the Company is acting to register its rights in its assets, both with regard to the principal assets and with regard to the less important assets. During the reported period, the Company registered its rights with the Land Registry Office with respect to 57 sites, and with respect to 42 other sites, caveats were recorded, 47 lease contracts were signed with the Israel Lands Administration, 167 contracts for purchasing transformation rooms were executed, no easements were recorded and 201 other assets were identified. 10) 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 are not recorded at their full amounts as above in the Company's books, including on the basis of appraisals or evaluations performed, or insurance appraisals, if performed. - The electricity rate basis includes full coverage (depreciation and return on capital) for all of the fixed assets presented in the Company's Financial Statements during the base period. - At this stage, the Company does not have any additional valuations, outside and independent, economic or for insurance purposes; however, the Company did perform an examination of the value of its assets as of December 31, 2006 pursuant to the transition to reporting in accordance with the Government Companies Authority Regulations. 11) Significant appraisals or evaluations have been performed and will be delivered to the Board of Directors, to the Government Companies Authority along with all other relevant details in order to insure their reasonableness, accuracy, reliability and independence of those performing, providing a reasonable time frame prior to the discussion of the draft of the Financial Statements by the Company's Board of Directors meeting. The Board of Directors will examine their reasonableness and ascertain that they do not include material misstatement.

175 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

f. If appraisals or evaluations have been performed and the appraisals or evaluations are material, as above, to the value of the details in the Financial Statements, these material appraisals or evaluations will be attached to the Financial Statements and disclosure will be provided, among others, in an appendix of the matters described in the Companies Circular 2007-1. As for the disclosure required in this section, see the actuary's opinion attached to the Financial Statements.

g. In connection with the matters mentioned in Note 1 (e)(7) above regarding the position of Management and the Board of Directors as to the restructuring and in connection with the matter discussed in Note 3 (c) regarding the decisions of the Electricity Authority, the Government Companies Authority's stance is as follows: 1) "Following the enactment of Amendment No. 5 to the Electricity Sector Law, 2007, the Company is bound by its provisions, including the time schedules specified therein and must act accordingly subject to any law". Amendment No. 8 to the Electricity Sector Law was enacted in July 2008 see Note 1 (b). 2) "The Company's reference to the decisions of the Electricity Authority and its implications is inaccurate. Therefore, we wish to examine the accuracy of the presentation of the implications of the Electricity Authority's decision and the manner of presentation in the note, including after receiving the Electricity Authority's reference to this note with relation to its decisions and their implications pursuant to the Authority's Circular 2007-1 and we request that presentations in a Government company's Financial Statements regarding the State and its institutions (including the Electricity Authority) will be provided, as much as possible, in coordination with them and after granting them an opportunity to deliver their comments".

h. With respect to pension liabilities and the capitalization rate, in its letter of March 12, 2008, the Government Companies Authority announced, among other things, its position according to which "disclosure must be provided in the capitalization rate for the risk and uncertainty components underlying the pension liabilities".

i. Transactions with the State of Israel, its institutions and other Government companies: A Government company will provide proper disclosure in its Financial Statements regarding transactions and balances with the State of Israel, its authorities and other Government companies, including the accounting treatment of these transactions and balances. The company is to insure that the presentation of the transactions correlates their substance (transactions with the State as a sovereign, as an interested party etc.). If there is a lack of clarity involving a matter, disclosure should be provided in the Financial Statements and actions should be taken in coordination with the Government Companies Authority and the other State entities to remove said lack of clarity.

j. Disclosure of internal control reports : 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, will be obligated to attach to their annual and Interim Financial Statements, starting with this report, 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, with the following main purposes: examining the processes affecting the Company's records of transactions, 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 authorization of the qualified persons in the Company. In the transitional period commencing from the publication of the regulations until the date on which the Company will be obligated to attach the additional statement, as above, the Company reported the progress of its preparations, including stages and time schedules, for submitting the additional report as stipulated by the regulations.

176 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

The Company made the preparations for implementing the requirements. The Company chose the office of Ernst & Young to act as experts that will guide and accompany the Company until all requirements of the regulations are fully implemented and until the first additional report is published, detailing actions taken to ensure effectiveness of the Internal Audit's control of the Financial Statements. The Company established Administration, Control and Work units. A steering committee, comprised of senior management functionaries and experienced consultants in the field was established and also a Control Committee and a work team. Roles of these committees and convening schedules were defined. The Company completed the preparations required to implement the regulations, the stage of application demarcation, made the required preparations and the documentation and authentication of work processes and general controls of the information systems, conducted the tests of the controls and corrected detected control gaps, except for the tests and correction of control gaps, if found, in the process of "closing a period and preparing financial statements" which will be completed once the annual financial statement is published. All according to the accepted methodologies and standards, the COSO module and the COBIT (for information systems), with expert assistance and full cooperation of the external auditors. A dedicated computerized system was integrated in the project to manage the project and perform current on-going maintenance of the control 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 provided the ability to monitor faults corrections and to generate various control and administration reports.

k. Pursuant to the Companies Regulations (Additional Report Regarding the Measures Taken and Exhibits Presented to Assure the Accuracy of the Financial Statements and Directors' Report), 2005, these Financial Statements include letters of representation on P. 6-9. l. On November 22, 2007, the Finance Committee of the Board of Directors decided to switch between the position of the actuary of the Company and the examining actuary, starting from the Financial Statements as of December 31, 2007.

m. 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 sub-committee to implement the aforementioned ("The Actuary Committee"). This sub-committee 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 presented in the records of the Company. 2) On August 24, 2008, the Deputy Manager of the Companies Authority notified the Company that "pursuant to the audit conducted by the Committee of the Board of Directors of the Israel Electric Corporation Limited ("The Company") and to meetings we held with the Management of the Company on the subject of 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 Companies Authority") is reviewing all matters related to issues pertaining to liability for pension in the Financial Statements of the Company. 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 auditor will contact you to decide on details of the issues to be reviewed for every period."

177 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

The Board of Directors of the Company instructed the CEO and all related parties in the Company to cooperate with the auditor, to the extent required to accomplish the task efficiently. 3) As of the statement of financial position date, several subjects are still being reviewed and the subject of actuary liabilities is examined. 4) 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 announcement of the Electricity Authority that it intends to conduct its own audit of the pension liability of 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 Authority and the Electricity Authority will finally clarify all the various issues in question in this subject. The Company hopes that the audit of the auditor appointed by the Government Companies Authority will yield results soon, to enable assimilation of such results in the Financial Statements for 2008. As of the date of these Financial Statements, the Company has received no notice with regard to the said audit report. 5) On December 10, 2009, following previous requests on the subject, the Chairman of the Board of Directors 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. The Chairman noted that despite previous requests of the Company to receive a draft report of the auditor and although many months elapsed since the auditor commenced his audit, the Company has not received a draft report and main findings of the auditor. The Chairman of the Board of Directors claims that in preparation for publishing updated Financial Statements of the Company, including material changes in the actuarial liabilities and in light of the long time that elapsed, it seems that the time has come to receive the 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 non-binding 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 well-grounded, the actual facts should be presented without any further delay. n. 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 regulating the attribution of employees' pension liabilities to their service periods. 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 issues requiring clarification by the reporting date in June of 2008. The Government Companies Authority proposed that the Government Companies Regulations be amended to include reference to the said matter as above. As stated, the amendment was included in the regulations signed by the Finance Minister on June 29, 2008.

178 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 37:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

o. On November 23, 2008, the Government Companies Authority requested to disclose its position as follows: "The policy of maintaining real wages for pensioners is the current correct accepted policy and should be implemented by the Company. The pensioners' promotion in rank mechanism in the Company is intended, 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 co-exist 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." p. The non-inclusion of material misstatements in the Financial Statements and accompanying information of Government companies: 1) 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 reader of the Financial Statements and related information. 2) The Financial Statements will clearly state that the presentations included in the Financial Statements and in the related information are solely the responsibility of the Company and are not binding to the State of Israel. The Company asserts that, to the best of its knowledge, the disclosures in the Financial Statements, other than disclosures of the positions of the various Government authorities, are the sole responsibility of the Company's Management and Board of Directors and are not binding on the State of Israel.

q. According to the circular published by the Electricity Authority on February 24, 2010 - Financial Statements Circular 2010-1, the Company is required to include a brief and concise disclosure in the Board of Directors' Report about material risks to the Company. These risks should be presented according to their nature and classified into primary categories (according to the extent of the effect of each risk factor on the Company, in the opinion of the Company's Board of Directors).

179 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE)

According to the provisions of the Companies Authority, whose principal points are published in the Circular of March 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 generally accepted accounting principles) regarding the attribution of the statement of operations and balance sheet to the generation, transmission and distribution activity segments. a. Statement of operations for the year ended December 31, 2009 :

Total Generation Transmission Distribution Company segment segment segment NIS in millions

Required revenues 19,233 14,184 1,873 3,176

Adjustment for segment revenues (747) (4) (188) (555)

Revenues from electricity 18,486 14,180 1,685 2,621

Other revenues 218 96 - 122

Total revenues 18,704 14,276 1,685 2,743

Cost for operating electricity system 14,788 12,361 1,041 1,386

Profit from operating electricity system 3,916 1,915 644 1,357

Sales and marketing expenses 749 - - 749

Administrative and general 816 404 123 289 expenses

Expenses from liabilities to pensioners, net (215) (114) (15) (86) 1,350 290 108 952

Income from current operations 2,566 1,625 536 405

Financial expenses, net 2,390 1,137 552 701

Total Comprehensive Income (loss) before income taxes 176 488 (16) (296)

Income taxes (1,062) (395) (259) (408)

Net income 1,238 883 243 112

180 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

b. Details of the generation sites statement of operations for the year ended December 31, 2009 :

Total generation PEP and segment others Rutenberg Orot Rabin NIS in millions

Required revenues 14,184 135 3,917 3,939

Adjustment for segment revenues (4) - (2) (2)

Revenues from electricity 14,180 135 3,915 3,937

Other revenues 96 - 21 24

Total revenues 14,276 135 3,936 3,961

Cost for operating electricity system 12,361 135 3,338 3,575

Profit from operating electricity system 1,915 - 598 386

Sales and marketing expenses - - - -

Administrative and general expenses 404 - 87 98

Expenses from liabilities to pensioners, net (114) - (26) (32) 290 - 61 66

Income from current operations 1,625 - 537 320

Financial expenses, net 1,137 - 378 224

Operating income before income taxes 488 - 159 96

Income taxes (395) - (130) (76)

Net income 883 - 289 172

181 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

b. Details of the generation sites statement of operations for the year ended December 31, 2009 (continued)

Haifa Reading Eshkol Gezer NIS in millions

Required revenues 369 688 1,430 1,444

Adjustment for segment revenues 0 0 0 0

Revenues from electricity 369 688 1,430 1,444

Other revenues 6 8 16 7

Total revenues 375 696 1,446 1,451

Cost for operating electricity system 340 645 1,270 1,195

Profit from operating electricity system 35 51 176 256

Sales and marketing expenses - - - -

Administrative and general expenses 24 32 66 29

Expenses from liabilities to pensioners, net (9) (10) (19) (6) 15 22 47 23

Income from current operations 20 29 129 233

Financial expenses, net 13 21 91 162

Operating income before income taxes 7 8 38 71

Income taxes (5) (8) (31) (56)

Net income 12 16 69 127

182 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

b. Details of the generation sites statement of operations for the year ended December 31, 2009 (continued)

Alon Ramat Other gas Hagit Tavor Hovav Zafit turbines NIS in millions

Required revenues 629 575 447 244 367

Adjustment for segment revenues 0 0 0 0 0

Revenues from electricity 629 575 447 244 367

Other revenues 6 2 2 2 2

Total revenues 635 577 449 246 369

Cost for operating electricity system 457 472 394 200 340

Profit from operating electricity system 178 105 55 46 29

Sales and marketing expenses - - - - -

Administrative and general expenses 25 12 13 10 8

Expenses from liabilities to pensioners, net (4) (1) (3) (2) (2) 21 11 10 8 6

Income from current operations 157 94 45 38 23

Financial expenses, net 109 66 31 26 16

Operating income before income taxes 48 28 14 12 7

Income taxes (37) (23) (13) (8) (8)

Net income 85 51 27 20 15

183 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

c. Details of the transmission sites statement of operations for the year ended December 31, 2009

Total distribution Northern Haifa segment District District NIS in millions

Required revenues 3,176 643 380

Adjustment for segment revenues (555) (112) (66)

Revenues from electricity 2,621 531 314

Other revenues 122 19 8

Total revenues 2,743 550 322

Cost for operating electricity system 1,386 263 170

Profit from operating electricity system 1,357 287 152

Sales and marketing expenses 749 160 84

Administrative and general expenses 289 56 35

Expenses from liabilities to pensioners, net (86) (16) (11) 952 200 108

Income from current operations 405 87 44

Financial expenses, net 701 146 80

Operating loss before income taxes (296) (59) (36)

Income taxes (408) (84) (48)

Net loss 112 25 12

184 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

c. Details of the distribution sites statement of operations for the year ended December 31, 2009 (continued)

Jerusalem Dan Southern District District District NIS in millions

Required revenues 389 662 1,102

Adjustment for segment revenues (68) (116) (193)

Revenues from electricity 321 546 909

Other revenues 50 13 32

Total revenues 371 559 941

Cost for operating electricity system 197 284 472

Profit from operating electricity system 174 275 469

Sales and marketing expenses 94 153 258

Administrative and general expenses 39 56 103

Expenses from liabilities to pensioners, net (11) (17) (31) 122 192 330

Income from current operations 52 83 139

Financial expenses, net 88 146 241

Operating loss before income taxes (36) (63) (102)

Income taxes (51) (84) (141)

Net loss 15 21 39

185 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

d. Balance sheet as of December 31, 2009 :

Total Generation Transmission Distribution Company segment segment segment NIS in millions

Current assets 9,861 6,466 1,437 1,958

Long-term receivables 8,339 4,894 601 2,844

Fixed assets, net 60,537 29,375 14,326 16,836

Intangible assets, net 782 369 181 232

79,519 41,104 16,545 21,870

Current liabilities 8,058 4,374 1,171 2,513

Long-term and extended-term liabilities, net 50,738 26,961 10,590 13,187

Deferred taxes, net 3,894 1,836 899 1,159

Shareholders' equity 16,829 7,933 3,885 5,011

79,519 41,104 16,545 21,870

186 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

e. Details of the generation segment balance sheet as of December 31, 2009 :

Total generation PEP and segment others Rutenberg Orot Rabin NIS in millions

Current assets 6,466 63 1,876 1,636

Long-term receivables 4,894 1,050 899 1,047

Fixed assets, net 29,375 98 8,709 5,085

Intangible assets, net 369 - 122 72

41,104 1,211 11,606 7,840

Current liabilities 4,374 75 1,222 1,110

Long-term and extended-term liabilities, net 26,961 1,136 7,154 4,834

Deferred taxes, net 1,836 - 607 356

Shareholders' equity 7,933 - 2,623 1,540

41,104 1,211 11,606 7,840

187 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

e. Details of the generation segment balance sheet as of December 31, 2009 (continued):

Haifa Reading Eshkol Gezer NIS in millions

Current assets 162 265 609 723

Long-term receivables 281 335 625 212

Fixed assets, net 2,132 502 2,306 3,669

Intangible assets, net 4 7 29 52

2,579 1,109 3,569 4,656

Current liabilities 389 185 467 332

Long-term and extended-term liabilities, net 2,074 736 2,321 2,947

Deferred taxes, net 23 35 147 259

Shareholders' equity 93 153 634 1,118

2,579 1,109 3,569 4,656

188 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

e. Details of the generation segment balance sheet as of December 31, 2009 (continued):

Alon Ramat Other gas Hagit Tavor Hovav Zafit turbines NIS in millions

Current assets 343 288 212 124 165

Long-term receivables 159 60 103 55 68

Fixed assets, net 2,631 1,517 1,205 693 828

Intangible assets, net 35 22 11 8 7

3,168 1,887 1,531 880 1,068

Current liabilities 251 78 116 67 83

Long-term and extended- term liabilities, net 2,000 1,239 1,121 600 799

Deferred taxes, net 172 107 55 40 35

Shareholders' equity 745 463 239 173 151

3,168 1,887 1,531 880 1,068

189 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

f. Details of the distribution segment balance sheet as of December 31, 2009:

Total distribution Northern Haifa segment District District NIS in millions

Current assets 1,958 410 222

Long-term receivables 2,844 546 359

Fixed assets, net 16,836 3,622 1,902

Intangible assets, net 232 49 27

21,870 4,627 2,510

Current liabilities 2,513 513 293

Long-term and extended-term liabilities, net 13,187 2,820 1,512

Deferred taxes, net 1,159 243 132

Shareholders' equity 5,011 1,051 573

21,870 4,627 2,510

190 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

f. Details of the distribution segment balance sheet as of December 31, 2009 (continued):

Jerusalem Dan Southern District District District NIS in millions

Current assets 245 396 685

Long-term receivables 373 566 1,000

Fixed assets, net 2,104 3,425 5,783

Intangible assets, net 29 48 79

2,751 4,435 7,547

Current liabilities 321 492 894

Long-term and extended-term liabilities, net 1,653 2,671 4,531

Deferred taxes, net 146 239 399

Shareholders' equity 631 1,033 1,723

2,751 4,435 7,547

191 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

g. Statement of operations for the year ended December 31, 2008 (*):

Total Generation Transmission Distribution Company segment segment segment NIS in millions

Required revenues 24,230 18,830 1,934 3,466

Adjustment for segment revenues (230) 762 (223) (769)

Revenues from electricity 24,000 19,592 1,711 2,697

Other revenues 142 14 - 128

Total revenues 24,142 19,606 1,711 2,825

Cost for operating electricity system 18,851 16,522 1,041 1,288

Profit from operating electricity system 5,291 3,084 670 1,537

Sales and marketing expenses 779 - - 779

Administrative and general expenses 674 312 112 250

Expenses from liabilities to pensioners, net 292 159 21 112 1,745 471 133 1,141

Income from current operations 3,546 2,613 537 396

Financial expenses, net 2,548 1,216 589 743

Operating income (loss) before income taxes 998 1,397 (52) (347)

Income taxes 228 397 (15) (154)

Net income 770 1,000 (37) (193)

(*) Restated (see Note 35 above)

192 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

h. Details of the generation segment statement of income for the year ended December 31, 2008 (*) :

Total generation PEP and segment others Rutenberg Orot Rabin NIS in millions

Required revenues 18,830 155 4,536 4,820

Adjustment for segment revenues 762 - 185 197

Revenues from electricity 19,592 155 4,721 5,017

Other revenues 14 - 3 4

Total revenues 19,606 155 4,724 5,021

Cost for operating electricity system 16,522 155 3,836 4,306

Profit from operating electricity system 3,084 - 888 715

Sales and marketing expenses - - - -

Administrative and general expenses 312 - 67 80

Expenses from liabilities to pensioners, net 159 - 38 49 471 - 105 129

Income from current operations 2,613 - 783 586

Financial expenses, net 1,216 - 416 257

Operating income before income taxes 1,397 - 367 329

Income taxes 397 - 107 90

Net income 1,000 - 260 239

(*) Restated (see Note 35 above)

193 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

h. Details of the generation segment statement of income for the year ended December 31, 2008 (*) (continued):

Haifa Reading Eshkol Gezer NIS in millions

Required revenues 1,125 527 1,821 1,325

Adjustment for segment revenues 46 22 74 54

Revenues from electricity 1,171 549 1,895 1,379

Other revenues 1 1 3 1

Total revenues 1,172 550 1,898 1,380

Cost for operating electricity system 1,057 439 1,585 1,067

Profit from operating electricity system 115 111 313 313

Sales and marketing expenses - - - -

Administrative and general expenses 22 23 53 16

Expenses from liabilities to pensioners, net 14 18 25 - 36 41 78 16

Income from current operations 79 70 235 297

Financial expenses, net 15 19 100 158

Operating income before income taxes 64 51 135 139

Income taxes 16 10 35 44

Net income 48 41 100 95

(*) Restated (see Note 35 above)

194 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued) h. Details of the generation segment statement of income for the year ended December 31, 2008 (*) (continued):

Alon Ramat Other gas Hagit Tavor Hovav Zafit turbines NIS in millions

Required revenues 2,402 503 989 395 232

Adjustment for segment revenues 98 21 40 16 9

Revenues from electricity 2,500 524 1,029 411 241

Other revenues 1 - - - -

Total revenues 2,501 524 1,029 411 241

Cost for operating electricity system 2,205 396 931 343 202

Profit from operating electricity system 296 128 98 68 39

Sales and marketing expenses - - - - -

Administrative and general expenses 18 8 10 8 7

Expenses from liabilities to pensioners, net 6 1 3 2 3 24 9 13 10 10

Income from current operations 272 119 85 58 29

Financial expenses, net 126 51 31 29 14

Operating income before income taxes 146 68 54 29 15

Income taxes 45 21 16 9 4

Net income 101 47 38 20 11

(*) Restated (see Note 35 above)

195 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

i. Details of the distribution segment statement of operations for the year ended December 31, 2008 (*):

Total distribution Northern Haifa segment District District NIS in millions

Required revenues 3,466 686 425

Adjustment for segment revenues (769) (152) (94)

Revenues from electricity 2,697 534 331

Other revenues 128 28 12

Total revenues 2,825 562 343

Cost for operating electricity system 1,288 244 169

Profit from operating electricity system 1,537 318 174

Sales and marketing expenses 779 162 86

Administrative and general expenses 250 48 32

Expenses from liabilities to pensioners, net 112 22 15 1,141 232 133

Income from current operations 396 86 41

Financial expenses, net 743 152 84

Operating loss before income taxes (347) (66) (43)

Income taxes (154) (30) (19)

Net loss (193) (36) (24)

(*) Restated (see Note 35 above)

196 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

i. Details of the distribution segment statement of operations for the year ended December 31, 2008 (*) (continued):

Jerusalem Dan Southern District District District NIS in millions

Required revenues 450 703 1,202

Adjustment for segment revenues (100) (156) (267)

Revenues from electricity 350 547 935

Other revenues 19 21 48

Total revenues 369 568 983

Cost for operating electricity system 188 261 426

Profit from operating electricity system 181 307 557

Sales and marketing expenses 85 154 292

Administrative and general expenses 33 47 90

Expenses from liabilities to pensioners, net 14 21 40 132 222 422

Income from current operations 49 85 135

Financial expenses, net 94 157 256

Operating loss before income taxes (45) (72) (121)

Income taxes (20) (31) (54)

Net loss (25) (41) (67)

(*) Restated (see Note 35 above)

197 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

j. Statement of operations for the year ended December 31, 2008 (*):

Total Generation Transmission Distribution Company segment segment segment NIS in millions

Required revenues 21,945 16,604 1,923 3,418

Adjustment for segment revenues (1,219) (237) (242) (740)

Revenues from electricity 20,726 16,367 1,681 2,678

Other revenues 144 24 - 120

Total revenues 20,870 16,391 1,681 2,798

Cost for operating electricity system 16,507 14,275 1,001 1,231

Profit from operating electricity system 4,363 2,116 680 1,567

Sales and marketing expenses 773 - - 773

Administrative and general expenses 711 353 120 238

Expenses from liabilities to pensioners, net (102) (57) (7) (38) 1,382 296 113 973

Income from current operations 2,981 1,820 567 594

Financial expenses, net 1,880 888 441 551

Operating income (loss) before income taxes 1,101 932 126 43

Income taxes 278 236 32 10

Net income (loss) 823 696 94 33

(*) Restated (see Note 35 above)

198 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

k. Details of the generation segment statement of income for the year ended December 31, 2008 (*) :

Total generation PEP and segment others Rutenberg Orot Rabin NIS in millions

Required revenues 16,604 122 3,727 3,998

Adjustment for segment revenues (237) - (54) (58)

Revenues from electricity 16,367 122 3,673 3,940

Other revenues 24 - (1) 2

Total revenues 16,391 122 3,672 3,942

Cost for operating electricity system 14,275 122 2,969 3,424

Profit from operating electricity system 2,116 - 703 518

Sales and marketing expenses - - - -

Administrative and general expenses 353 - 72 89

Expenses from liabilities to pensioners, net (57) - (13) (17) 296 - 59 72

Income from current operations 1,820 - 644 446

Financial expenses, net 888 - 328 209

Operating income before income taxes 932 - 316 237

Income taxes 236 - 79 60

Net income 696 - 237 177

(*) Restated (see Note 35 above)

199 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

k. Details of the generation segment statement of income for the year ended December 31, 2008 (*) (continued):

Haifa Reading Eshkol Gezer NIS in millions

Required revenues 913 585 1,685 1,217

Adjustment for segment revenues (13) (8) (24) (18)

Revenues from electricity 900 577 1,661 1,199

Other revenues 4 3 8 1

Total revenues 904 580 1,669 1,200

Cost for operating electricity system 838 505 1,438 1,026

Profit from operating electricity system 66 75 231 174

Sales and marketing expenses - - - -

Administrative and general expenses 26 33 54 12

Expenses from liabilities to pensioners, net (5) (5) (9) (1) 21 28 45 11

Income from current operations 45 47 186 163

Financial expenses, net 12 13 78 91

Operating income before income taxes 33 34 108 72

Income taxes 8 9 27 18

Net income 25 25 81 54

(*) Restated (see Note 35 above)

200 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued) k. Details of the generation segment statement of income for the year ended December 31, 2008 (*) (continued):

Alon Ramat Other gas Hagit Tavor Hovav Zafit turbines NIS in millions

Required revenues 2,036 497 1,129 459 236

Adjustment for segment revenues (29) (7) (16) (7) (3)

Revenues from electricity 2,007 490 1,113 452 233

Other revenues 2 1 2 1 1

Total revenues 2,009 491 1,115 453 234

Cost for operating electricity system 1,860 435 1,051 406 201

Profit from operating electricity system 149 56 64 47 33

Sales and marketing expenses - - - - -

Administrative and general expenses 19 12 19 9 8

Expenses from liabilities to pensioners, net (2) (1) (2) (1) (1) 17 11 17 8 7

Income from current operations 132 45 47 39 26

Financial expenses, net 75 24 24 22 12

Operating income before income taxes 57 21 23 17 14

Income taxes 14 6 6 5 4

Net income 43 15 17 12 10

(*) Restated (see Note 35 above)

201 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

l. Details of the distribution segment statement of operations for the year ended December 31, 2008 (*):

Total distribution Northern Haifa segment District District NIS in millions

Required revenues 3,418 666 410

Adjustment for segment revenues (740) (144) (89)

Revenues from electricity 2,678 522 321

Other revenues 120 24 11

Total revenues 2,798 546 332

Cost for operating electricity system 1,231 235 151

Profit from operating electricity system 1,567 311 181

Sales and marketing expenses 773 148 89

Administrative and general expenses 238 46 29

Expenses from liabilities to pensioners, net (38) (8) (5) 973 186 113

Income from current operations 594 125 68

Financial expenses, net 551 111 62

Operating loss before income taxes 43 14 6

Income taxes 10 3 1

Net loss 33 11 5

(*) Restated (see Note 35 above)

202 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

l. Details of the distribution segment statement of operations for the year ended December 31, 2008 (*) (continued):

Jerusalem Dan Southern District District District NIS in millions

Required revenues 452 708 1,182

Adjustment for segment revenues (98) (153) (256)

Revenues from electricity 354 555 926

Other revenues 13 19 53

Total revenues 367 574 979

Cost for operating electricity system 180 246 419

Profit from operating electricity system 187 328 560

Sales and marketing expenses 91 163 282

Administrative and general expenses 32 45 86

Expenses from liabilities to pensioners, net (5) (7) (13) 118 201 355

Income from current operations 69 127 205

Financial expenses, net 69 119 190

Operating loss before income taxes 0 8 15

Income taxes 0 2 4

Net loss 0 6 11

(*) Restated (see Note 35 above)

203 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

204 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009) NOTE 38:- INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE BALANCE SHEET ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 1.c ABOVE) (Continued)

m. 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 March 2, 2004 (see Note 1.c above), the Company is required to provide disclosure in the form of a note to 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. Disclosure will also be provided of the financial targets, including targets to meet normative recognized 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 circular on financial statements (see Note 1 above). 2. The Company's activities are composed of three principal segments: a) Generation - activities of the power plants producing electricity.

b) Transmission - the transmission and transformation system for high-voltage 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 high-voltage electricity and are directly connected to the transmission system), as well as the customer service and collection system of the Company. These segments are called the electricity chain ("the electricity chain"). 3. The rate basis that came into force in July 2002 initially included various rates for four segments 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's system. 4. The Company manages one accounting system that includes all of the activities of the electricity chain. The internal controls principles that exist for everything concerning the internal trade between the activities of the electricity web are not compatible those required for separate audited financial statements.

205 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

n. The principles used in attributing the statements of income are as follows

1. General

a) The principles that the Electricity Authority used for determining the rate for the aforesaid activities segments, will be implemented in these statements of operations.

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 operations to the level of the segments is performed as applicable, as will be described below.

The statements of operations as they are presented in this note do not necessarily reflect the results of operations of the various segments if they had been managed as separate economic entities, as signified by generally accepted accounting principles.

2. Below are the principles for attributing the income between the various segments

a) Revenues from the sale of electricity

The gross revenues for the segment are calculated based on the rate for the segment published by the Electricity Authority, multiplied by the quantity sold (kWh) for that segment.

1) Amount sold per segment

The amount sold in 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 the addition of the quantity purchased from 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 standardizing it according to the actual amount of loss.

Adjustment of the quantities between the segments is required since there is a gap between the quantity sold and the quantity generated and purchased. The gap derives from losses in the systems that are primarily caused by weather conditions, system load and the distance of transmission.

206 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

n. The principles used in preparing these statements of income are as follows (continued) Since there is no continuous quantitative measurement of KWhs transferred between the transmission segments and the distribution segment, it is not possible to estimate the scope of losses in each segment.

For that purpose, they are aided by normative loss coefficients that the Electricity Authority determined for calculating the quantity of sales between the segments.

The total losses in the system are added to segments according the ratio of normative losses that were determined by the Electricity Authority.

2) Rate for the segment

The electricity rates that were determined by the Electricity Authority are divided into two main categories:

(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 (a total of nine rates at the segment level).

(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 the segment level). The uniform rate, in accordance with the various types of consumers, is calculated for the various segments, in accordance with the model that was used by the Electricity Authority in determining the rates for the Company.

3) Calculation of the income for the electricity chain segments

The income for the segment is calculated by multiplying the amount of sales calculated for each segment by the various types of consumers at the appropriate rates. 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.

207 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

n. The principles used in preparing these statements of income are as follows (continued)

4) In addition, in view of the matter discussed in m.5 above, as of July 1, 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. Revenues from usage fees for connections are calculated at a rate per kWh multiplied by the installed transformation capacity.

b. Other income - is attributed to the appropriate segment, according to its nature.

3. Below are the principles for attributing the expenses to the various segments

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, constitute a reasonable estimate for the attribution of those expenses.

a) Cost for operating the electricity system - reflects in the Company's financial statements the operating expenses for the generation, transmission and distribution segments.

b) Selling and marketing expenses - include the expenses for services to consumers that are attributed to the distribution segment.

c) General and administrative expenses (includes salary, depreciation and other expenses)

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 costs are attributed to general and administrative expenses; see the following details:

208 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

n. The principles used in preparing these statements of income are as follows (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 expenses in the electricity chain during the reported period.

2) The expenses for the human resources department are presented according to the ratio of the division of the salary expenses to the electricity chain during the reported period.

3) Doubtful accounts and bad debts - are presented according to the ratio of the gross revenues from electricity sales of the electricity chain during the reported period.

4) Communications, electronics and quality control, planning and technological development expenses - are presented according to the activities of the relevant unit.

d) Expenses (income) from liabilities, net, to pensioners - These expenses (income) are presented according to the ratio for allocating the salary expenses to the electricity chain during the 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 in the Company’s books in the electricity chain during the reported period.

4. Taxes on income - deferred

The deferred taxes are presented according to the ratio of the income before tax for all of the various segments, out of the total pre-tax income of all of the segments.

Income from taxes- and deriving from the effect of the change in tax rates on deferred taxes are allocated to the various segments according to the net operated fixed assets.

209 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

o. The principles used in attributing the aforesaid balance sheet items are as follows

1. The Company is one legal entity and, in effect, the balance sheet 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 every reporting period, based on allocation keys, as described below.

2. The balance sheets as they are presented in this note do not necessarily reflect the financial position of the various segments, if they would have been managed as separate economic entities, as signified by generally accepted accounting principles.

3. Below are the principles for attributing the balance sheet balances to the various segments :

a) Working capital items :

The working capital items were attributed to the segments in accordance with those principles that the Electricity Authority used in determining the electricity rates (principally for the purpose of determining the coverage of the working capital's financial expenses) where the principal allocation keys are:

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 payables and other items were allocated primarily according to the ratio of the operating expenses and salary for the segments.

b) Fixed assets :

Fixed assets that are specifically identifiable are included in the appropriate segment. Joint assets (about 4% of the entire assets) were distributed according to distribution keys that, in management's opinion, constitute a reasonable estimate for attributing these assets.

c) Shareholders' equity and deferred taxes :

Shareholders' equity and deferred taxes are allocated according to the ratio of the active fixed assets, net.

210 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

o. The principles used in attributing the aforesaid balance sheet items are as follows: (continued)

d) Loans and debentures :

The loans and debentures were allocated to the segments in accordance with the other balance sheet 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) The remaining balance sheet items were distributed according to distribution keys that, in the Company's estimation, constitute a reasonable estimate for attributing these items.

p. Information regarding the attribution of the income statement and balance sheet according to 18 reporting units

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 balance sheet, in reference to 18 activities that are included in the three electricity chain segments, as follows:

Generation segment 11 generation sites: Rutenberg, Orot Rabin, Haifa, Reading, Eshkol, Gezer, Hagit, Alon Tavor, Ramat Hovav, Zafit and the other gas turbines. In addition, it also reports on activities for acquiring electricity from private producers. Transmission segment The electricity transmission and transformation system. Distribution segment The Company's five districts: Northern, Haifa, Jerusalem, Dan, Southern.

Below, the 18 operations segments will be called: "reporting units".

2. Below are the primary principles for attributing the income

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 segment level.

211 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

p. Information regarding the attribution of the income statement and balance sheet according to 18 reporting units (continued)

The income is calculated based on the following principles:

a) Calculation of the income from electricity at the level of the electricity chain segments, which is based on the electricity rates and agrees with the total of all revenues from electricity at the total Company level.

b) Determination of the required revenues at the reporting unit level for each reporting period.

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 normative rate of return on capital. 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 various segments.

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 according to the ratio of required revenue of the segment.

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 are determined at the reporting unit level and, therefore, statements of operations according to the 18 reporting units do not necessarily reflect the results of their operations if they were managed as separate economic entities, as signified by generally accepted accounting principles.

3. The principles for the attribution of expenses are as follows :

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 section n. above). Joint expenses for a segment (such as management of the segment) were attributed to the reporting units, generally on the basis of the direct operating costs for each reporting unit. 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 bases use in the reporting according to the electricity chain segments.

212 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 (NEW ISRAELI SHEKELS) (Adjusted to NIS purchasing power of December 2009)

p. Information regarding the attribution of the income statement and balance sheet according to 18 reporting units (continued)

4. Principles that were used in attributing the balance sheet items according to 18 reporting units

According to what is stated in section o. above, the Company is one legal entity and, in effect, the balance sheet balances are not segregated in the Company's books according to the segments of the Company's activities. Therefore, the Company re- attributes the balance sheet balances for the purpose of this note for each reported period based on allocation keys, as described above in section o., while providing additional details for the 18 reporting units.

213

The Israel Electric Corporation Ltd.

Chapter D - Additional Particulars about the Corporation for 2009

Prominent Disclaimer

This English translation of the "Additional Particulars about the Corporation" for the year ended December 31, 2009 ("English Translation") is provided for information purposes only.

The Company reserves the right to effect such amendments to this English Translation as may be necessary to remove such conflict or inconsistency .

Regulation 10c : Use in exchange for securities with respect to the targets for proceeds under the prospectus In 2009, the company raised NIS 500 million and U.S.$ 500 million in Israel and abroad respectively from institutional entities through private placements of bonds in order to finance the development plan of the electricity system and for general needs of the Company, pursuant to its decisions. Regulation 11: A list of investments in subsidiaries and related companies, as of the balance sheet date Name of Type Number Proportion of the Company’s Holding Thousands of NIS Subsidiary In In In In Adjusted Adjusted Securities Capital Voting Appointment Cost Balance Sheet Rights of Directors Value Subsidiaries 1) Jordan Deferred 300,000 of 100.00 12.00 73.17 73.17 Investment NIS 0.0005 Company Ltd. each - - Ordinary A 110,000 of NIS 0.0001 99.99 87.99 26.82 26.82 each 2) Migrashei Preferred 2,000 630** 100.00 76.05 100.00 100.00 Hakablanim Ltd. Deferred of NIS 0.0001 100.00 23.95 0.00 each 100.00 100.00 100.00 0.00 100.00 - - 3) National Coal Ordinary A 909,999 of 100.00 100.00 100.00 100.00 47,537 47,537 Supply NIS 1 each Company Ltd. 4) Advanced Management 12 of 50.00 50.00 50.00 50.00 Training Fund of A Israel Electric NIS 1 each Corporation Ltd. Affiliated Ordinary 3,467,790 of 49.99 49.99 49.99 30.77 company NIS 0.10 each PAMA Energy Resources Development Company Ltd. *Including 66 shares held by officeholders in trusteeship for the company **Held by officeholders in trusteeship for the company − See “Investments in Held Companies” section in the Statement of Financial Position. − See Note 9 of the Financial Statements relating to “Investments in Held Companies.” − See Note 13 of the Financial Statements relating to “Related Parties.’ Balance of loans to held companies: None.

Regulation 12 : Changes in investments in subsidiaries and related companies during the period of the report No changes in investments in subsidiaries and other related companies occurred during the period of the report.

Regulation 13 : Revenues of subsidiaries and related companies and the corporation’s revenues from them as of the balance sheet date, based on their value in the balance sheet Name of Pre-tax Profit in Profit Net of Tax Dividend in Management Interest Company Millions of NIS in Millions of NIS Millions of Fees NIS National Coal 33 24 15 - Supply Company Ltd.

Regulation 14 : A list of groups of loan balances given for the Statement of Financial Position date, if granting loans was one of the corporation’s main fields of business Granting loans is not one of the company’s main fields of business. Regulation 20 : Trading on the stock exchange - listed securities - dates on which trading was discontinued and the reasons why No bond securities of the company were listed for trading during the period of the report, and no stoppages of trading in the company’s securities listed on the stock exchange occurred. Regulation 21 : The company’s payments and the commitments to pay that it assumed (including employers’ costs) for the five officeholders serving in 2009 who received the highest salaries (adjusted to the December 2009 Consumer Price Index) PositionHolding rate in Personal Name Position scope Company Capital Salary Reward Mordechai NIS 1,057,220 (including NIS 268,250 in Chairman of the Board Full None *94 ,685 Friedman employer’s costs) NIS 1,064,851 (including NIS 270,186 in Amos Lasker Chief Executive Officer Full None *52,354 employer’s costs) NIS 1,228,335 (including NIS 381,207 in Asher Dahan VP Customers Full None employer’s costs) Deputy CEO & VP NIS 1,224,193 (including NIS 368,114 in Moshe Bahar Generation & Full None employer’s costs) transmission VP Marketing Yigal Ben- Communications and NIS 1,214,516 (including NIS 376,919 in Full None Arie Strategic Advisor to the employer’s costs) CEO and Special Duties * The aforementioned personal reward amount is a bonus paid in 2009 with respect to 2008.

Regulation 21c: Payments paid by the Company to every stakeholder from January 1, 2009 to December 31, 2009 with respect to 2009 (at current prices) Director's Name Salary Ziv Reich NIS 30,621 Pnina Dvorin NIS 1,100 Michael Lazer NIS 69,195 Yossi Vadana NIS 48,738 Raphael Edery NIS 3,342 Blanche Kay NIS 69,166 Izhak Elyashive NIS 69,096 Shulamit Eshbol NIS 65,732 Philip Mandelker NIS 68,002 Dorit Inbar NIS 196,195

Regulation 22 : Salaries and benefits Directors received NIS 1,270 per meeting (including VAT) in January 2009 and for February 2009 onwards NIS 1,320 per meeting (including VAT), limited to a maximum of 60 meetings per year, except for external directors, to whom this restriction does not apply. The external directors were paid NIS 2,108 per meeting (including VAT) in January 2009 and for September 2009 onwards NIS 2,138 per meeting (including VAT), and also an annual reward, based on time served, from a maximum amount of NIS 60,726 (including VAT) for the year, linked to shekel of 12/2008. Payments to directors in 2009 totaled NIS 621,190 (excluding VAT). The Chairman of the Board and the CEO are paid for full-time positions, as determined from time to time, in accordance with the instructions of the Government Companies Authority and the decisions of the company board of directors. The overall cost of their salaries for 2009 totaled NIS 2,122,000.

Regulation 24 : Convertible shares and securities held by parties at interest in the corporation, its subsidiaries, and a related company, as close as possible to the date of the report Name of “Party at Interest” Type of Share Nominal No. of Proportion of Holding (%) Company Value in Shares NIS In Capital In Voting In Appointment Rights of Directors In the corporation State of Israel Ordinary 0.1 79,980,010 99.77 99.77 100.00 Israel Electric Ordinary B 40,053,252 100.00 100.00 100.00 Corporation Adv. David Yahav Ordinary 1 0 0 0 Mordechai Friedman Ordinary 1 0 0 0 Subsidiaries 1) 0.0001 Jordan Investment Moshe Bachar Ordinary A 5 0.0045 0 0 Company Ltd. Amos Lasker Ordinary A 41 0.037 0 0 Mordechai Friedman Ordinary A 5 0.0045 0 0 Adv. David Yahav Ordinary A 5 0.0045 0 0 Harel Zeev Blinde Ordinary A 5 0.0045 0 0 Zecharia Kay Ordinary A 5 0.0045 0 0 2) Migrashei Harel Zeev Blinde Deferred Shares 0.0001 100 3.8 0 0 Hakablanim Ltd. Amos Lasker Deferred Shares 380 14.44 0 0 Mordechai Friedman Deferred Shares 150 5.7 0 0 Israel Electric Redeemable 0.0001 2000 76.05 100 100 Corporation Preferred Shares 3) National Coal Israel Electric Ordinary A 909,999 100 100 100 Supply Company Corporation Ltd. 4) Land of Israel Moshe Bachar Ordinary 0.0001 5 0.25 0 0 Construction Ltd. Mordecai Friedman 5 0.25 0 0 Adv. David Yahav 5 0.25 0 0 Zecharia Kay 5 0.25 0 0 Harel Zeev Blinde 5 0.25 0 0 Amos Lasker 32 0.16 0 0 Jordan Investment 19,943 99.715 100 100 Company Ltd. 5) Ma’abarot Moshe Bachar Ordinary 0.0001 9 8 0 0 HaYarden Ltd. Harel Zeev Blinde 9 8 0 0 Mordechai Friedman 9 8 0 0 Adv. David Yahav 9 8 0 0 Zecharia Kay 9 8 0 0 Amos Lasker 65 59 0 0 Jordan Investment Deferred 0.0005 100,000 100 100 100 Company Ltd. Affiliated State of Israel Foundation 0.1 1 100 0.0000144 38.46 companies PAMA Israel Chemicals Ordinary 1,733,896 25.00 25.00 15.38 Energy Resources Oil Refineries Ltd. Ordinary 1,733,896 25.00 25.00 15.38 Development Israel Electric Ordinary 3,467,790 49.99 49.99 49.99 Company Ltd. Corporation

Regulation 24A : Registered and issued capital and convertible securities Registered Share Capital Issued Share Capital Conferring voting rights 80,167,387 ordinary shares 80,164,986 ordinary shares 40,053,252 ordinary shares B 40,053,252 ordinary shares B Not conferring voting rights 39,531 special shares The company has no convertible securities

Regulation 25 A : General information about the company Company Name : Israel Electric Corporation Ltd. Company No. : 52-000047-2 Address: : 1 Netiv Ha'Or Street, P.O. Box 10, Haifa 31000 Telephone : 04-8184470 Fax : 04-8186078 Balance sheet date : December 31, 2009 Statement approval date : March 31, 2010 Statement period : January 1, 2009 – December 31, 2009 Company website : www.israel-electric.co.il

Regulation 26 : Board members of corporation

The following are particulars of the board members of our company who served as of December 31, 2009:

1. Shlomit Barnea Farago (1) Name: Shlomit Barnea Farago (1A) Identity card no.: 055088991 (2) Year of birth: 1958 (3) Address: 18/39 HaCarmel St., Ganei Tikva 55900 (4) Citizenship: Israel (5) Membership on Board committees: Chairperson of Audit; Supreme Tenders; Organization, Personnel, and Procedures; Finance, Balance Sheet, and Issues; Corporate Government Affairs and Ethical Code. (6) External director: No. Has no accounting or financial expertise. (7) Is she an employee of the corporation? No. (8) Date of appointment: Initially appointed in April 2002. Appointed for a second time in April 2005 and appointed again in April 2008 (9) Education: LLB and LLM in law from Bar Ilan University. (10) Is she a relative of another party at interest in the corporation? No. (11) The company does not regards her as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) Her employment over the past five years: Legal counsel to the Prime Minister’s Office. (13) List of corporation in which she serves as a director: The Western Wall Heritage Foundation.

2. Aura Sova-Gindin (1) Name: Aura Sova-Gindin (1A) Identity card no.: 051669661 (2) Year of birth: 1952

(3) Address: Kibbutz Na’an (4) Citizenship: Israel (5) Membership on board committees: Organization, Personnel, and Procedures; Marketing Communications and Customer Relations; Environment, Planning, Budgeting and Computerization; Assets and Construction; Risk Management. (6) External director: No. Has no accounting or financial expertise. (7) Is she an employee of the corporation? No. (8) Date of appointment: First appointed in January 2004, appointed for a second time in February 2007. (9) Education: BA in Sociology and Anthropology from the Hebrew University of Jerusalem. (10) Is she a relative of another party at interest in the corporation? No. (11) The company does not regards her as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) Her employment over the past five years: Senior Deputy Director General for Administration & Manpower at the Ministry of National Infrastructures, member of Disciplinary Tribunal. (13) List of corporation in which she serves as a director: None.

3. Blanche Kay (1) Name: Blanche Kay (1A) Identity card no.: 48202717 (2) Year of birth: 1930 (3) Address: 10 Manya and Israel St. Afeqa Tel Aviv (4) Citizenship: Israel (5) Membership on board committees: Tenders; Finance, Balance Sheet, and Issues; Regulation; Corporate Government Affairs and Ethical Code, Organization, Human Resources and Procedures; Risk Management. (6) External director: No. Has no accounting or financial expertise. (7) Is she an employee of the corporation? No. (8) Date of appointment: July 2007. (9) Education: Masters Degree (Master of Jurisdiction) from the Hebrew University of Jerusalem. (10) Is she a relative of another party at interest in the corporation? No. (11) The company does not regards her as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) Her employment over the past five years: Head of the Tel Aviv District Court Appeal Tribunal for Victims of Enemy Actions; member of Tenders Committee at the Ministry of Defense; member of the Governmental Committee for the Allocation of Endowments to the State of Israel; director at Optima Initiation and Investments Co; Chairperson of the Fines Committee of the Poultry Council. (13) List of corporation in which she serves as a director: Israel Railways.

4. Yaffa Vigodsky (1) Name: Yaffa Vigodsky (1A) Identity card no.: 007428253 (2) Year of birth: 1946 (3) Address: 3 Sinai St., Ramat Hasharon (4) Citizenship: Israel (5) Membership on board committees: Chairperson Human Resources and Procedures; Audit; Marketing Communications and Customer Relations; Supreme Tenders; Risk Management; Planning and Budgeting. (6) External director: No. Has accounting and financial expertise. (7) Is she an employee of the corporation? No. (8) Date of appointment: February 2007. (9) Education: BA General and Educational Administration, MA Educational Administration. (10) Is she a relative of another party at interest in the corporation? No. (11) The company regards her as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) Her employment over the past five years: Manager of Science and Technology Administration at the Ministry of Education, General Manager of Educational Television. (13) List of corporation in which she serves as a director: the AMAL network of science and technology schools, ILA - Israel Association for Science and Technology, Zeev Jabotinski Council.

5. Mordechai Friedman (1) Name: Mordechai Friedman (1A) Identity card no.: 051644979 (2) Year of birth: 1952 (3) Address: 26 Oscar Schindler, Tel Aviv (4) Citizenship: Israel (5) Membership on board committees: All the committees except for Audit. (6) External director: No. Has accounting and financial expertise. (7) Is he an employee of the corporation? No. (8) Date of appointment: February 2007. (9) Education: BA in Accounting and Economics from Tel Aviv University, CPA. (10) Is he a relative of another party at interest in the corporation? No. (11) The company regards him as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) His employment over the past five years: Deputy Chairman and CEO at Deloitte Brightman Almagor, chairman of the board at Israel Electric Corporation. (13) List of corporation in which he serves as a director: Mordechai Friedman Blue White Ltd.

6. Michael Lazer (1) Name: Michael Lazer (1A) Identity card no.: 008709123 (2) Year of birth: 1945 (3) Address: 10 Filikovsky St., Tel Aviv (4) Citizenship: Israel (5) Membership on board committees: Chairman Finance, Balance Sheet, and Issues; Assets and Construction; Supreme Tenders; Reviewing Actuarial Liabilities; Organization, Personnel, and Procedures; Audit; Corporate Government Affairs and Ethical Code; Strategy. (6) External director: No. Has accounting and financial expertise. (7) Is he an employee of the corporation? No. (8) Date of appointment: First appointed in December 2001. Appointment again in December 2004 and appointed again in December 2007. (9) Education: Graduated the Hebrew University (Tel Aviv branch) in accounting. (10) Is he a relative of another party at interest in the corporation? No. (11) The company regards him as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) His employment over the past five years: Partner in an accounting firm. (13) List of corporation in which he serves as a director: None.

7. Dr. Ziv Reich (1) Name: Ziv Reich (1A) Identity card no.: 25078544 (2) Year of birth: 1972 (3) Address: 1 Eliyahu Berlin, Tel Aviv (4) Citizenship: Israel (5) Membership on board committees: Tenders; Audit; Finance, Balance Sheet, and Issues; Assets and Construction. (6) External director: Yes. Has accounting or financial expertise. (7) Is he an employee of the corporation? No (8) Date of appointment: December 2009. (9) Education: CPA, B.A. in Business Management specializing in Accountancy from the College of Management, Tel Aviv, MBA in Administration and Internal Auditing, Bar Ilan University and Ph.D. in Business Management, Warborough University, London. (10) Is he a relative of another party at interest in the corporation? No. (11) The company regards him as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) His employment over the past five years: Academic lecturer on accountancy, taxation and finance. Author of numerous books on accountancy and taxation. Deputy Chairman 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 and CEO of The Ramle Foundation for Eductation, Culture and Development. (13) List of corporation in which he serves as a director: None.

8. Yossi Vadana (1) Name: Yossi Vadana (1A) Identity card no.: 065426223 (2) Year of birth: 1956 (3) Address: 10 Paamonei Yosef St. Tel Aviv (4) Citizenship: Israel (5) Membership on board committees: Chairman Marketing Communications and Customer Relations; Budget and Computer Planning; Regulation; Audit, Environment, Reviewing Actuarial Liabilities. (6) External director: No. Has no accounting or financial expertise. (7) Is he an employee of the corporation? No. (8) Date of appointment: First appointed in August 2006, appointed a second time in September 2009. (9) Education: BA mathematics and social sciences from Haifa University. (10) Is he a relative of another party at interest in the corporation? No. (11) The company does not regards him as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) His employment over the past five years: General Manager at Shavakim Panorama Consultation and Research Company Ltd. (13) List of corporation in which he serves as a director: None.

9. Amit Oberkovitch (1) Name: Amit Oberkovitch (1A) Identity card no.: 059030015 (2) Year of birth: 1964 (3) Address: 3, Sitvanit Street, Nes Ziona (4) Citizenship: Israel (5) Membership on board committees: Budget and Computer Planning; Finance, Balance Sheet and Issues; Marketing Communications and Customer Relations; Environment; Strategy; Risk Management. (6) External director: No. Has no accounting or financial expertise. (7) Is he an employee of the corporation? Yes. Power Stations and Gas Turbines Department Manager. (8) Date of appointment: June 2008. (9) Education: B.A. Business Management, Derby University, MBA from Derby University. (10) Is he a relative of another party at interest in the corporation? No.

(11) The company does not regards him as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) His employment over the past five years: Power Stations and Gas Turbines Department Manager. (13) List of corporation in which he serves as a director: None

10. Itzhak Elyashiv (1) Name: Itshak Elyashiv (1A) Identity card no.: 02337285 (2) Year of birth: 1945 (3) Address: 35 Echad Ha'am Street, Azur (4) Citizenship: Israel (5) Membership on board committees: Chairman Supreme Tenders; Budget and Computer Planning; Audit; Assets and Construction; Environment. (6) External director: No. Does not have accounting and financial expertise. (7) Is he an employee of the corporation? No. (8) Date of appointment: January 2008. (9) Education: BA in Political Science and Labor Studies from Tel Aviv University. (10) Is he a relative of another party at interest in the corporation? No. (11) The company does not regard him as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) His employment over the past five years: CEO K.K.L; Director in Israel Lands Administration and Himnuta Co. (13) List of corporation in which he serves as a director: Landmark.

11. Shulamit Eshbol (1) Name: Shulamit Eshbol (1A) Identity card no.: 058787607 (2) Year of birth: 1964 (3) Address: 27 HaGidonim Street, Zichron Ya'akov (4) Citizenship: Israel (5) Membership on board committees: Chairperson of the Committee for Corporate Government Affairs and Ethical Code; Chairperson of the Committee for reviewing Actuarial Liabilities; Chairperson of the Committee for the Environment; Assets and Construction, Audit, Finance, Balance Sheet and Issues; Strategy. (6) External director: No. Has accounting and financial expertise. (7) Is she an employee of the corporation? No. (8) Date of appointment: February 2008. (9) Education: BA in accounting specializing in finance from the College of Management, LLB in Law from the Interdisciplinary Centre Herzliya.

(10) Is she a relative of another party at interest in the corporation? No. (11) The company regards her as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) Her employment over the past five years: Principal of a Private Law Firm, Chairperson of Audit Committee of Haifa University. (13) List of corporation in which she serves as a director: None.

12. Phillip Mandelker (1) Name: Phillip Mandelker (1A) Identity card no.: 015136385 (2) Year of birth: 1946 (3) Address: 44/26 Tagor Steet, Tel Aviv (4) Citizenship: Israel and American (5) Membership on board committees: Chairman of the Strategy Committee, Regulation; Finance, Balance Sheet and Issues; Corporate Government Affairs and Ethical Code; Budget and Computer Planning; Environment; Risk Management. (6) External director: No. Does not have accounting and financial expertise. (7) Is he an employee of the corporation? No. (8) Date of appointment: February 2008. (9) Education: BA in English and Comparative Literature for Columbia College, JD Law from the Law School of Columbia University. (10) Is he a relative of another party at interest in the corporation? No. (11) The company does not regard him as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) His employment over the past five years: Deputy in Zion Oil & Gas; Attorney in the private sector, Consultant at Adam Attorney Firm. (13) List of corporation in which he serves as a director: None. 13. Dorit Inbar (1) Name: Dorit Inbar (1A) Identity card no.: 56089816 (2) Year of birth: 1959 (3) Address: 65a Yosef Zvi Street, Ramat Gan. (4) Citizenship: Israel (5) Membership on board committees: Chairperson of the Committee for Regulation; Assets and Construction, Audit; Finance, Marketing Communication; Supreme Tenders; Corporate Government Affairs and Ethical Code; Finance, Balance Sheet and Issues. (6) External director: No. Has no accounting and financial expertise. (7) Is she an employee of the corporation? No. (8) Date of appointment: July 2008. (9) Education: LLB, Law from Tel Aviv University, MBA, from Tel Aviv University.

(10) Is she a relative of another party at interest in the corporation? No. (11) The company does not regards her as an accounting and financial expert for purposes of meeting the minimum number determined by the board of directors under Section 92(A) (12) of the Companies Law. (12) Her employment over the past five years: Vice Chairperson of the Broadcast Authority, Lecturer in Tel Aviv University and the Academic College of Tel Aviv Yafo, MA Studies, CEO, the New Fund for Movies and Television. (13) List of corporation in which she serves as a director: Director in the Israeli Opera; Member of the Managing Committee and Trustees of Beit Berl College.

Regulation 26A : Senior position holders in the corporation The following is a list of the current senior officeholders in our company, as of December 31, 2009: 1. Amos Lasker (1) Name: Amos Lasker (1A) Identity card no. 009409475. (2) Year of birth: 1950. (2A) Date on which he began his term: 12/2007. (3) Position in the corporation: CEO. (4) Is he a relative of another senior officeholder or a party at interest? No. (5) Education: BA in economics, MBA from Tel Aviv University. (6) Business experience over the past five years: Founder and CEO of Med Group. (7) Citizenship: Israel (8) Position in a subsidiary of the corporation or in a party at interest in the corporation: Chairman of the National Coal Supply Company Ltd. (9) Pursuant to the definition of a stakeholder as stated in section 1 of the Securities Law, 1968, the CEO is a stakeholder in the Company, by force of his position as the CEO.

2. Yakov Hain (1) Name: Yakov Hain (1A) Identity card no. 011373461 (2) Year of birth: 1950. (2A) Date on which he began his term: 01/2007. (3) Position in the corporation: VP engineering projects (4) Is he a relative of another senior officeholder or a party at interest? No. (5) Education: BA in electricity from Riga Polytechnic, MA in electrical engineering, MBA from University of Derby. (6) Business experience over the past five years: Manager Production Department from 9/2004 until 01/2007. (7) Citizenship: Israel

(8) Position in a subsidiary of the corporation or in a party at interest in the corporation: Director in the National Coal Supply Company, director in Jordan Investment Company Company, director at Migrashei Hakablanim.

3. Yigal Ben-Arie (1) Name: Yigal Ben-Arie (1A) Identity card no. 007932452 (2) Year of birth: 1946. (2A) Date on which he began his term: 11/2008. (3) Position in the corporation: VP customers. (4) Is he a relative of another senior officeholder or a party at interest? No. (5) Education: BA in sociology and social work the Hebrew University of Jerusalem. (6) Business experience over the past five years: VP and Head of Jerusalem District. (7) Citizenship: Israel (8) Position in a subsidiary of the corporation or in a party at interest in the corporation: None.

4. Asher Dahan (1) Name: Asher Dahan (1A) Identity card no. 068541143 (2) Year of birth: 1945. (2A) Date on which he began his term: 10/2008. (3) Position in the corporation: VP Customers. (4) Is he a relative of another senior officeholder or a party at interest? No. (5) Education: BA in business administration. (6) Business experience over the past five years: Manager of the Southern District. (7) Citizenship: Israel (8) Position in a subsidiary of the corporation or in a party at interest in the corporation: None.

5. Adrian Bianu (1) Name: Adrian Bianu (1A) Identity card no. 016830648 (2) Year of birth: 1948. (2A) Date on which he began his term: 03/2003. (3) Position in the corporation: VP strategic resources. (4) Is he a relative of another senior officeholder or a party at interest? No. (5) Education: BA in electrical engineering from Bucharest Polytechnic (Romania), MA and PhD in electrical engineering DSC from the Technion - Israel Institute of Technology. (6) Business experience over the past five years: Manager of the Planning, Development & Technology Division. (7) Citizenship: Israel

(8) Position in a subsidiary of the corporation or in a party at interest in the corporation: Director at Jordan Investment Company.

6. Moshe Bachar (1) Name: Moshe Bachar (1A) Identity card no. 050036979 (2) Year of birth: 1950. (2A) Date on which he began his term: 12/2007. (3) Position in the corporation: VP Production and Conduction (9/2004 - 7/2007), Deputy CEO and VP Production and Conduction (7/2007 - 8/2007) and Acting CEO (8/2007 - 12/2007). (4) Is he a relative of another senior officeholder or a party at interest? No. (5) Education: BA in mechanical engineering from the Technion - Israel Institute of Technology, MBA from University of Derby. (6) Business experience over the past five years: VP Generation and Transmission from 09/2004 until 07/2007, deputy CEO and Senior VP Generation and Transmission from 07/2007 until 08/2007, acting CEO from 08/2007 until 12/2007. (7) Citizenship: Israel (8) Position in a subsidiary of the corporation or in a party at interest in the corporation: None.

7. Zvi Harpak (1) Name: Zvi Harpak (1A) Identity card no. 6642243 (2) Year of birth: 1948. (2A) Date on which he began his term: 01/2009. (3) Position in the corporation: VP Organization, Logistics, Security and Emergency. (4) Is he a relative of another senior officeholder or a party at interest? No. (5) Education: BA in mathematics from the Hebrew University, MA in Technological Management from Tel Aviv University. (6) Business experience over the past five years: Manager, Information and Telecommunication Division from 11/1996 until 12/2008. (7) Citizenship: Israel (8) Position in a subsidiary of the corporation or in a party at interest in the corporation: None.

8. Harel Zeev Blinde (1) Name: Harel Zeev Blinde (1A) Identity card no. 024399634 (2) Year of birth: 1969. (2A) Date on which he began his term: 04/2008. (3) Position in the corporation: Deputy CEO for Finance and Economics. (4) Is he a relative of another senior officeholder or a party at interest? No.

(5) Education: BA in Economics and Mathematics. (6) Business experience over the past five years: The Ministry of Finance. (7) Citizenship: Israel (8) Position in a subsidiary of the corporation or in a party at interest in the corporation: None.

9. David Yahav (1) Name: David Yahav (1A) Identity card no. 050258946 (2) Year of birth: 1950. (2A) Date on which he began his term: 08/1996. (3) Position in the corporation: Legal advisor and secretary of the company and its subsidiaries. (4) Is he a relative of another senior officeholder or a party at interest? No. (5) Education: BA in law from Tel Aviv University, MA from military prosecutor's school of the US Armed Forces at the University of Virginia, MA in international relations. (6) Business experience over the past five years: General Counsel and Company Secretary of the company and its subsidiaries. (7) Citizenship: Israel (8) Position in a subsidiary of the corporation or in a party at interest in the corporation: Company Secretary of Jordan Investment Company and Migrashei Hakablanim, shareholder in Jordan Investment Company, Land of Israel Construction, and Ma’abarot HaYarden Company.

Regarding Regulations 26(a) (3) and 26(b) , pursuant to the decision of the Board of Directors on January 17, 2008, two approved signatories at least are entitled to represent the Company in accordance with the stipulations of the decision, represent the Company and act in its behalf in all business transactions and actions with banks or with the Accountant General of the Ministry of Finance. Therefore, the Company does not have independent approved signatories for all business transactions and actions with banks or with the Accountant General. Nevertheless, according to signature authorities procedure of the Company, position holders in the Company (including position holders, except Directors) are entitled, subject to the signature authorities procedure stipulations, to sign independently on external financial and non-financial commitments of the Company (e.g., contracts), and also internal commitments, provided that an advance written approval is issued by the relevant finance and economic department, attesting that the commitment is made within the framework of an approved budget. Therefore, every senior position holder in the Company, except Directors, has an independent authority to sign external commitments (financial and non-financial) and also internal commitments, subject to the signature authorities procedure stipulations, and except transactions with banks and the Accountant General of the Ministry of Finance.

Regulation 27 : Accountant of the corporation Brightman, Almagor, and Co., CPAs - 5 Maalei HaShichrur St., Haifa. Regulation 28 : Changes in memorandum or articles of association No changes in the Articles of the Company during 2009.

Regulation 29 : Recommendations and decisions of the board of directors On December 9, 2009, the Company's Board of Directors reconfirmed its decision of November 29, 2007, to buy a Directors and Position Holders Liability insurance policy for the period from January 16, 2008 and up to January 15, 2009, inclusive. On December 9, 2009, the Company's Board of Directors reconfirmed its decision of November 27, 2008, to buy a Directors and Position Holders Liability insurance policy for the period from January 16, 2009 and up to January 15, 2010, inclusive. On December 9, 2009, the Company's Board of Directors approved the acquisition of a Directors and Position Holders Liability insurance policy for the period from January 16, 2010 and up to January 15, 2011, inclusive. On December 9, 2009, the Company's Board of Directors reconfirmed its decision of November 29, 2008, to buy a Personal Accidents insurance policy for the period from April 1, 2007 and up to March 31, 2010, inclusive. On December 9, 2009, the Company's Board of Directors reconfirmed its decision of September 25, 2008, to approve a personal reward at a 10% rate of the periodic wages to Mr. Mordechai Freidman, for the period from March 1, 2007 (Mr. Freidman's starting date in the position of Chairman of the Board of Directors) and up to December, 2008. On December 9, 2009, the Company's Board of Directors approved the purchase of a third party liability insurance policy from "Harel Insurance Company, jointly with the broker MARSH, for the period from July 10, 2008 up to June 30, 2010, inclusive. On December 9, 2009, the Company's Board of Directors approved the terms for ending the service term of the chairman of the Board of Director, including a personal reward at a 10% rate of his periodic wages for the period from January 1, 2009 and up to February 21, 2010, and also increased retirement compensation at the rate of 100%, namely, compensation in the total sum of his last salary for each of the three years in which he acted as the Chairman of the Board of Directors. On August 27, 2009, the Company's Board of Directors approved the amendment to the natural gas purchase agreement between the Company and the Egyptian company E.M.G. On December 24, 2009, the Company's Board of Directors reconfirmed its decision of August 27, 2009, to approve the amendment to the natural gas purchase agreement between the Company and the Egyptian company E.M.G. Regulation 29(A) (1) : No provision was made for dividends in the Financial Statements for 2008. In 2009 the Company's Board of Directors did not make any decision on the distribution of a dividend. Regulation 29A (3) : Exceptional transactions requiring special approval under Section 270(1) of the Companies Law None Regulation 29A (4) : Exemption, insurance, or liability for indemnity in respect of officeholders in effect on the report date Particulars of the exemption, insurance, or liability for indemnity in respect of officeholders: the company contracted an agreement for liability insurance for directors and other company officeholders. The limits of liability are $300 million per claim and per period, and up to $60 million for legal expenses per event and total for the period. The deductible for the company varies from $50,000 to $350,000, depending on the type of event. Directors and officeholders are not required to pay a deductible sum. The company is obligated to pay an annual premium of $575,000 in this context. The company also insures its directors in the following insurance policies: 18

Personal accident. The limit of liability is $100,000 with no deductible. Third Party liability insurance. The limit of liability is $100 million, deductible $ 500,000, annual premium $ 883,500. Regulation 29(C) : Decisions of a special shareholders meeting Regarding decisions taken at the special shareholders meeting on December 2, 2009, see the immediate report dated December 2, 2009 (reference no. 2009-01- 307743).

Name of Signatory Position Signature Dr. Ziv Reich External director

Amos Lasker CEO

19 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

ANNEX 1

Actuarial Liabilities of the Israel Electric Corporation At December 31, 2009

1 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

31 March 2010

Israel Electric Corporation Limited P.O. Box 10 Haifa 31000

Dear Sir,

Re: Actuarial Obligation of the Company at 31 December 2009

Personal details

Name: Alan Dubin, Actuary Education Baccalaureate in Mathematics, Massachusetts Institute of Technology (1973). Baccalaureate in Electronic Engineering (computers), Massachusetts Institute of Technology (1973). Fellow of Society of Actuaries (FSA). Member of American Association of Actuaries (MAAA). Full Member of Israeli Association of Actuaries (FILAA).

Introduction This opinion sets forth the actuarial liabilities of the Israel Electric Corporation Limited (henceforth "the Company" or "IEC") for the fourth quarter of 2009; it is based upon the financial statement of the Company as of 30/06/2009, in which the Company restated its financial statements retroactively from 31.12.2007.

1. General 1.1. Commencing on January 1, 2008, the Israel Electric Corporation Limited (hereinafter – “the Company”), acts according to the Government Companies Regulations (Principles for the Preparation of Financial Statements of the Israel Electric Corporation Ltd.) (Temporary Order), (Amendment), 2008. Per these regulations, the Company’s financial reporting is based on International Financial Reporting Standards and clarifications thereof, as published by the International Accounting Standards Board (IASB). The Company’s actuarial obligation calculation is based on International Accounting Standard 19 (henceforth "IAS19") and its relevant clarifications.

1.2. The actuarial valuation that I have prepared was requested by the Israel Electric Corporation Limited for inclusion in the Company’s financial statements, in accordance with IAS19 (using the Projected Unit Credit Method).

1.3. I performed my first actuarial valuation of the Company on 31 December 2007.

2 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

1.4. The calculations disclosed in this report were performed according to the interpretation of the Company of IAS19, as per their letter to me of 23/12/2009. According to my understanding, the interpretation of IAS19 is different from the Company's interpretation, as detailed in Schedule H. In any event, the basis for the calculations in this report is the full and sole responsibility of the Company. 1.5. As already stated, this opinion was prepared for inclusion in the financial statements of the Company according to IAS19. It should be noted that the actuarial results for other purposes - for example, the assurance of benefits in the event of discontinuance of the pension plan or the calculation of ongoing contribution levels - might be materially different from the results reported in this report. 1.6. On 01/09/2009, the Company decided to restate its financial reports retroactively beginning from 1996 (hereinafter: the restatement) after it became clear that a change had taken place in the estimate of the increase in future payments to the Company’s pensioners. (hereinafter: change in estimate) and that the change in estimate is a prior-period error, which mandated restatement of the Company’s financial statements. 1.7. According to my understanding and experience, and relying upon the opinions of other experts, the change in estimate does not require that the company to restate its financial statements retroactively, however, the Company, forced me to prepare the restatement by means of the courts, and subject to the Company tendering its indemnification agreement to me, that would protect me and Alan Dubin F.S.A. Ltd., my employer, and its workers, from the high exposure to professional risks to which we are subject due the immense volume of work, the tight timetable for completion of the work, and as protection from new and varying requests and directives that the Company transmitted to me at the demand of the Company’s external auditor. 1.8. Only on 20/12/2009, did the Company inform me that its decision to carry out the restatement derived from accounting changes made by the Company. 1.9. On 30/09/2009, the Company provided me with its indemnification agreement under which the Company undertook to indemnify me and/or my employer up to a limit of 25 million U.S. dollars for event which occurred after 01/01/2008. 1.10. On 10/12/09, the Company once again forced me, via the courts, to accept an indemnification agreement provided by the Inbal Insurance Company Ltd., to replace the previous indemnification agreement, on the condition that the indemnification agreement will be absolutely identical to the indemnification agreement provided to me by the Company, upon the request of the external auditor of the Company, who informed the Company that he was not permitted, according to law, to rely upon my actuarial report, as long as the indemnifier was the Company.

1.11. On 23/12/2009, Inbal provided an indemnification agreement to Alan Dubin F.S.A. Ltd. Thereafter, the Company confirmed that the replacement indemnification agreement was

3 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034 acceptable to the Company’s external auditor, and thereby he could sign the financial statements of the Electric Company 1.12. In April 2009, in order to convince me to continue our relationship, the Company purchased a professional liability policy to cover damages up to 25 million U.S. dollars. The premium was paid by the Company. After receiving the insurance policy, it became apparent to me that the insurance did not cover the risks that the Company promised that the policy would cover and therefore, a contractual agreement was not signed, to which the policy was to be attached as an appendix. 1.13. This report includes the actuarial obligation of the Company for the permanent employees, its retirees and survivors (hereinafter – “the workers”), who are categorized into generations A and B (whose benefit components are identical) and generation C. Workers from generations A and B are those who commenced work in the Company on or before June 10, 1996, inclusive, and workers from Generation C are those who commenced work after that date. For workers from generations A and B, there is a Defined Benefit pension plan and complementary benefits (see details in table below); and for workers from generation C there is a Defined Contribution pension plan, a complementary severance pay of 2 1/3% and complementary benefits (see table below). The actuarial obligation for generation C workers relates to the complementary severance payments and the complementary benefits. 1.14. In addition to the actuarial obligation for the permanent workers of generations A, B and C, the actuarial obligation also includes the obligations for increased severance payments for workers of the Company who work under special agreement. 1.15. Below is a detailed list of the benefit components and the qualifying population for the purpose of this report and the past service obligation accounting methods:

4 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Benefit component Qualifying Population Past service obligation accounting method Post employment pension Generations A and B The past service obligation is calculated payments (due to old-age, according to the plan’s benefit formula, i.e. disability or death while according to the accumulation of percentage employed) pension rights in the pension plan. Discounted electricity (on the Generations A, B and C Full obligation is recognized for workers basis of the full domestic who have at least 10 years service and have rate) and holiday presents, reached age 40 (age 60 for Generation C). including gross-up for For those workers who have not yet served income tax for 10 years or have not yet reached age 40 (age 60 for Generation C), the past service obligation is calculated as the past service divided by the service required until both conditions will be fulfilled. Early retirement benefit Generations A and B According to the service accumulated as of see 3.6.3 below balance sheet date Severance payments for Generations A and B According to the service accumulated as of employment termination balance sheet date. without pension rights see 3.6.4 below Grant for Up To 35 Years of Generations A, B and C According to the service accumulated as of work balance sheet date. see 3.6.6 below Upon 35 years of service, the benefit is fully recognized. Additional Years Benefit Generations A and B This obligation is not recognized until 35 see 3.6.1 below 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. Unused sick days benefit Generations A, B and C According to sick days as of balance sheet see 3.6.7 below date. Disability retirement benefit Generations A and B According to the service accumulated as of see 3.6.2 below balance sheet date.

The additional company Generation C According to the service accumulated as of obligation for severance balance sheet date payments 2 1/3% (28%) see 3.6.8 below 20 Year Grant Generations A, B and C Straight line over twenty years. see 3.6.5 below Increased severance Company workers Straight line until the end date of the payments under special agreement agreement. see 3.6.9. below (who are not permanent workers)

5 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

1.16. The data, the pension obligation components, and the technical and actuarial bases according to which computations have been made are explained below.

1.17. I was informed by the Company that a committee of the Company’s Board of Directors has undertaken an enquiry into the actuarial obligation. In the framework of the committee’s discussions, data and documents regarding the rights for which there is an actuarial obligation, the method of calculation, and accounting presentation of this obligation was transferred to the committee and to the Government Companies Authority. The Government Companies Authority is carrying out an enquiry into all subjects connected to pension obligation in the Company’s financial statements. For this purpose, among others, the Government Companies Authority appointed an auditor, in accordance with Paragraph 55 of the Government Companies Law 1975 and the Regulations for Government Companies (rules for the appointment of an auditor by the Authority) 2005.

Likewise, the State Controller informed the Company on the February 22, 2009 of his decision to include in his audit program for the year 2009, among other things, the subject of the financial position of the Company and provisions for employee entitlements. I was informed the Company does not know of any findings of these examination processes.

1.18. The Company informed me that, pursuant to the directive of the Commissioner of Wages from 10/6/2009, I should take into consideration in the computation of the actuarial liability as of 30/06/09, as of 30/9/2009 and as of 31/12/2009 (but not for prior periods) the following decisions:

1) Entitlement to 14th salary – to be granted to an employee after 30 years of service for a male and 25 years of service for a female (previously it was 25 years of service for a male and 20 years of service for a female). See paragraphs 3.7 and 4.7. 2) After retirement, the salary-grade of the pension increases every three years (previously every two years) See Schedule I. 3) To reduce the pension compensation of a group of pensioner and survivors according to a list which the Company provided me in an updated file.

2. Data 2.1. The computations are based on the following data which I received from the Company and were not checked by me: 2.1.1. Data about pensioners and survivors a) ID number b) Sex c) Birth date d) Pension type (old-age, early retirement, disability or survivor) e) Monthly pension amount as of 31/12/2009, according to the following detail

6 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

1) Pension from normal salary (the 13 th salary must be added to the pension) 2) Pension for shift work 3) Pension for home service 4) Pension for Aravah additions 5) Pension for convalescence payments 6) Pension for holiday presents including gross-up for income tax 7) Discounted electricity - full domestic rate including gross-up for income tax 8) Pension rights to a 14 th salary f) Date of employment commencement for the purpose of categorising workers as Generation A, B or C g) Date of first retirement for pension h) Pension percent i) Details of capitalization of the portion of the pension for those pensioners who carried out capitalization j) The severance pay percentage for those who left with over 75% severance pay k) The current salary-grade of each pensioner and survivor (see paragraph Schedule I) l) Effective date of the current salary grade – the date that the pensioner received the current salary-grade. m) Percentage of salary components (out of total salary components) that increase with a change in salary level. n) An additional file with the updated pension amounts for those pensioners for whom the Company reduced their pension amounts. The calculation for them is based upon the amounts in this file. 2.1.2. Data about active workers: a) ID number b) Sex c) Birth date d) Monthly salary as of 31/12/2009 split into: 1) Normal salary (including 13 th salary) 2) Shift work 3) Home service 4) Aravah addition 5) Convalescence payments

7 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

6) Holiday presents, including gross-up for income tax 7) Discounted electricity – at full domestic rate, including gross-up for income tax 8) 14 th salary 9) Current salary grade of the worker 10) The effective date of the current salary grade. 11) Job-classification factor 12) The number of years service for the Service Factor. 13) The annual increase in the Service Factor for each year or service (1% or 1.5%) 14) The split-out components of the regular salary (table salary, job classification addition, service addition, continuing education payments, extra effort and personal extra) e) Beginning date of employment for calculating years of service for pension rights (excluding leaves of absence). f) Beginning date of employment for the purpose of categorizing workers as Generation A, B or C

2.1.3. See paragraph 4.10.

2.1.4. In addition to the salaries paid to active workers and the pensions paid to pensioners, the Company is obligated to cover the cost of social welfare activities to the sum of 0.49% of the salary of each worker and the monthly pension of each pensioner.

2.1.5. The workers’ benefits upon which the actuarial computation are as reported to me by the Company.

2.1.6. See Schedule H regarding senior employees.

3. Details of the components of the actuarial obligation The calculations are based upon the following benefits components as I received them from the Electric Company (including a document, dated 07/03/2010 and updated to 23/03/2010, describing the main benefits).

3.1 Compulsory retirement pension (generations A and B) 3.1.1. Compulsory retirement age: 67 for men and for women 3.1.2. Qualification period - 10 years at least

8 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

3.1.3. Percentage of pensionable salary received as pension - after ten years of work: 25%. - for each additional year until 30 years: 2% for each such year of work (in addition to the 25% above). - from 31 to 35 years: 1% for each such year of work (in addition to the percentages above). - ceiling: 70% 3.1.4. Rounding of the pension percentage: in the calculation of the pension percentage, in practice, the pension percentage is rounded up to the nearest whole percent.

3.2 Disability pension (generations A and B) 3.2.1. Eligibility - a permanent employee who is unable – due to disability - to continue to perform any work. 3.2.2. Percentage of pensionable salary received as pension in the case of such a retirement is calculated according to the following rules: a) After 1 year of work and after 2 years of work - 20% of salary. b) After 3 years of work and after 4 years of work – 25% of salary. c) After 5 years of work – 30% of salary. d) After 6 and after each additional year up to 25 years of work – the amount in c) plus 2% for every extra year e) After 1 to 5 years of work – the pension is increased by 10% of salary for each dependent of the disabled person (wife, children and / or parents), as long as the total payments to the disabled person do not exceed 50% of his salary. A child is considered a dependent family member if they are under age 18 or if they are unable to support themselves. f) After 6 years of work – the pension is increased as explained in e), but the total payments to the disabled person can be increased up to 70% of employee’s salary. 3.2.3. Rounding – in the calculation of the pension percentage in practice, the pension percentage is rounded up to the nearest whole percent.

3.3. Pension to survivors of active workers (in the case of death of a worker while in active employment) (generations A and B) 3.3.1. Since all the workers in generations A and B have been working for the Company for more than six years, if a worker dies while employed, the widow is eligible to a pension of 42% of the worker’s final salary and each additional dependent is eligible to a pension of 15%, up to an overall maximum of 70% for all the survivors together.

9 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

3.3.2. In the case of the death of a worker while employed, the widow of the worker is eligible to receive the full salary of the worker for the 3 months after the death of the worker, and thereafter to receive the survivors’ pension of active workers as described in paragraph 3.3.1.

3.3.3. Entitled Persons - the widow for her entire life or until she remarries and also additional dependants (orphans until age 21, dependant orphan, dependant parent).

3.4. Pension to survivors of pensioner (in the case of the death of a pensioner) (generations A and B) 3.4.1. Pension rate– the pensioner’s widow will be paid a monthly pension equal to 60% of the pension paid to her deceased husband. In addition, 25% for all dependants jointly (children and / or parents) if there are any, as long as the total payments do not exceed 85% of the pension of the deceased. 3.4.2. In the case of the death of a pensioner, the widow of the pensioner is eligible to receive the full pension of the pensioner for 3 months after the death and from then on to receive the pension to survivors of pensioner. 3.4.3. Entitled Persons - the widow for the rest of her entire life or until she remarries and also additional dependants (orphans until age 21, dependant orphan, dependant parent).

3.5. Early retirement (generations A and B) 3.5.1. According to the pension plan rules, there are several options for early retirement with pension rights: a) A worker who was terminated involuntarily over age 40 and after 10 years of work for the reasons detailed in the work rules. For this type of involuntary termination, the terminated worker will receive 50% severance pay. b) A worker who has accumulated 30 years of service and is over the age of 55 for men or 50 for women. (These workers are included in that said in paragraph 3.5.3 below) 3.5.2. A worker who retires early with pension rights receives immediately upon retirement a monthly pension according to the pension percentages in paragraphs 3.1.3 and 3.1.4, without actuarial reduction. 3.5.3. The calculation of the actuarial obligation is carried out under the assumption that all of the workers retiring under early retirement will be entitled to receive an early retirement pension benefit (see paragraph 3.6.3 below) in accordance with the pension regulations.

10 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

3.6. Lump Sum benefits (see table in paragraph 1.6 for qualifying populations)

3.6.1. 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. Only workers who retire after age 60 for males or after age 55 for females are eligible .

3.6.2. Disability grant – a worker retiring with a disability pension is eligible for a grant at the level of 50% of a monthly salary for each year worked. The grant is limited to a total amount of 15 monthly salaries. The grant is calculated on the basis of ordinary salary only.

3.6.3. Early retirement to pension grant– a grant at the level of 50% of a monthly salary for each year worked. The grant is calculated on the basis of ordinary salary with the addition of the 13th salary. This grant is not calculated for the years for which the retiring worker is entitled to receive excess years grant.

3.6.4. Severance payments for employment termination without pension – upon termination without pension entitlement, a worker is eligible to a severance payment at the level of one monthly salary for each year of employment. The severance pay is calculated on the basis of the normal salary with the addition of the 13th salary.

3.6.5. 20 Year grant – permanent workers who have completed 20 years of employment with the Company are entitled to a one-time grant of the ordinary monthly salary.

3.6.6. Grant for Up To 35 Years – a monetary grant given to a worker retiring to pension, equal to one ordinary monthly salary for every ten years of actual employment (according to seniority 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. This benefit is not paid in the event of early retirement.

3.6.7. Unused sick days benefit - an amount of money paid to a worker upon retirement to pension, according to the percentage of sick days used to which he was entitled during all his years of employment at 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 greater of the sick days, a grant is not paid.

11 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

The salary per sick day for purposes of calculation of the grant is the normal monthly salary, including the 13 th salary, divided by 25. The salary per sick day after 35years of service and after age 60 (55 for women) includes the portion of the 14th salary.

3.6.8. Supplement of Company obligation for severance payments to Generation C workers - According to the relevant collective agreement, the Company provides a sum each month equal to 6% of workers’ monthly insurable salary for the severance pay obligation to Generation C workers (permanent workers who began work after 10/6/96) 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. However, these workers will receive a severance benefit of 28% of their last salary only if they are entitled to severance pay (a worker who voluntarily terminates his employment does not receive severance pay). The supplementary severance payments for these workers are as follows: Last ordinary salary (including the 13 th salary portion) multiplied by the years of employment with the Company and multiplied by 28%.

3.6.9. The increased severance payments for workers under special agreement - According to the relevant collective agreement, Company workers under special agreement (non-permanent staff) are eligible for increased severance payments beyond those covered by an external defined contribution pension plan with monthly contributions of 8.33% of salary. 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 third year and thereafter, two additional monthly salaries. An employee who leaves work voluntarily is not eligible for this extra severance benefit in excess what was provided for him to the pension plan. The maximum term of employment for these workers is ten years for those who began work before or on 31/12/2004 and five years for those who began work from 1/1/2005 and onwards. 3.7. Pensionable salary components - normal salary (combined salary, management payment, seniority, personal addition, continual education addition, physical effort addition), shift work payment, permanent home service, Aravah addition, convalescence, holiday presents (grossed up for income tax), discounted electricity (at the full domestic rate, grossed-up for income tax), 13 th salary (fraction of 1/12) and 14 th salary (fraction of 1/12) if the worker has over 25 years of service for a man or over 20 years of service for a woman. 3.8. Pensionable salary (of which the pension payments are calculated as a fraction) a) The beginning pensionable salary is the last salary that was paid to the worker according to the worker’s rank at retirement.

12 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034 b) The pensionable salary is updated according to wage agreements that apply to all workers and pensioners of the Company and cost of living agreements in the economy that are applied from time to time. c) In addition, the pensionable salary is updated immediately upon retirement on the condition that the retiree spent 12 months in his previous rank and once every two years according to the salary of the next highest rank, until the highest rank on the scale of ranks that we would have attained during his period of work. If the employee did not spend 12 months at his rank, he will wait until he fulfils this condition to receive a higher retirement rank.

4. Technical and Actuarial Bases 4.1. Discount rates – The discount rates used for calculating the actuarial obligation are according to yield rates for Israeli government bonds as of 31/12/2009 as determined by the company Shaarey Ribit Inc. 4.2. Real increase in salary during period of employment– 4.2.1 – For generation A, generation B and generation C, according to a personal projection for each employee according to the framework of advances in salary and according to forecasted negotiated salary agreements and cost of living increases offsets less the anticipated increase in the Consumer Price Index (see Schedule H) 4.2.2 For special contract workers - According to the wage increase model including both the general update in wage scales as well as the personal increase of the worker (see Schedule G).

13 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

4.3. Decrement tables 4.3.1. Pensioners’ mortality tables – Table 3P in the circular of the Finance Ministry, of 17/5/2007. 4.3.2. Mortality tables for survivors – According to Table 5P in the circular of the Finance Ministry, of 17/5/2007. Since Table 5P only gives mortality rates for men from age 60, and for women from age 55, and since the Finance Ministry circular does not include any tables for survivors, I used the mortality rates contained in the previous table (Table 4.a.1., from the Finance Ministry circular from 2000/1) for ages to 60 (55). Choice of the table for mortality rates to age 60 (55) does not have a material effect on the computational results. 4.3.3. Mortality tables for active employees – According to Table 1P, in the circular of the Finance Ministry, of 17/5/2007.. 4.3.4. Mortality tables for disabled employees – 2% per annum up age 60. From age 60, according to Table 3P in the Finance Ministry circular of 17/5/2007.. 4.3.5. The rate of decline in mortality rates – The mortality rates detailed above are correct as of 31/12/2001. The rate of decline in mortality rates is according to Table 7P and the model presented in section 8 of the Schedule to the Finance Ministry circular of 17/5/2007. 4.3.6. Termination Rates without pension rights– On the basis of actual experience in the Company, in the years 1997-2004 (see Schedule F). 4.3.7. Early retirement Rates – as detailed in Schedules C and F. 4.3.8. Disability Rates – According to Table 8P in the circular of the Finance Ministry, of 17/5/2007... 4.3.9. Recovery from Disability – The disability considered in the calculation is permanent disability.

4.4. Demographic Data 4.4.1. Rates of marriage and age difference between spouses – According to tables 9P and 10P in the circular of the Finance Ministry, of 17/5/2007... 4.4.2. Orphans – The number and age of children are according to Table 11P in the circular of the Finance Ministry, of 17/5/2007...

4.5. Employee participation The pension obligation has not been reduced by the participation by the workers of generations A and B in the cost of the budgetary pension.

4.6. Computation of past service obligation As detailed in section 1.15 above.

14 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

4.7. Rates of Updating Salary Components and Pension Component Salary Increase Rate for Rate of Increase for Comments Active Employees Pensioner or Survivor Normal salary / See Schedule H See Schedule I According to personal Normal pension model Shift work addition See Schedule H See Schedule I According to personal model Home service See Schedule H See Schedule I According to personal model Aravah addition See Schedule H See Schedule I According to personal model Convalescence A fixed amount (linked A fixed amount Multiplied by the to the CPI) (linked to the CPI) pension percentage Holiday gifts and A fixed amount (linked A fixed amount Not multiplied by the Discounted electricity to the CPI) (linked to the CPI) pension percentage (grossed-up for income tax) 13 th salary According to total Same rate as the rate of The rates are real . salary increase model pension increase See Schedule H 14 th salary According to total Same rate as the rate of For periods until salary increase model pension increase 3/2009, an employee See Schedule H with 25 years service for men or 20 years service for women is eligible.

From 6/2009, an employee with 30 years service for men or 25 years service for women is eligible.

4.8. Other assumptions - ••••••••• Pensions for “dependent orphans” over age 21 were not taken into account for future orphans, but pensions for existing “dependent orphans” were taken into account in the calculation of the obligation.

••••••••• There is no negative IBNR for pensioners and survivors who have died, but whose death has not yet been reported to the Company.

••••••••• No account was taken of the cessation of payment of widows’ pensions upon their remarriage.

15 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

••••••••• No account was taken of future pensions for “dependent parents” for a worker or a pensioner who dies.

••••••••• No account was taken of pensions to dependents in the absence of a widow.

••••••••• No account was taken of administrative expenses for pension payments. In my opinion, the effects of these items are not material.

4.9. All female references apply to males and vice versa, unless expressly stated or implied otherwise. Without detracting from the general rule above, it is clarified that widows and widowers are treated identically.

4.10. The increase in the actuarial liability according to the latest wage agreement - the actuarial liability was increased by a total rate of 0.2865% for salary and pension components only (with no increase in the convalescence, holiday presents and discounted electricity components). The latest wage agreement was signed in June 2008 with a total increase of 5% over a period of 4.5 years (July 2005 - December 2009). According to an agreement between IEC and the Government Wage Authority, in practice the workers and pensioners were paid regarding this agreement a wage increase of only 4.7% as of 31/12/2009. The difference between 4.7% and 5% is against benefits that according to the Government Wage Authority the workers are not eligible for but are still receiving. In the valuation I reduced these rights in accordance with the opinion of the Government Wage Authority, therefore I increased the wages according to the original agreement.

5. Valuation of the Actuarial Obligation Schedule A attached herein details the valuation of the actuarial obligation, prepared by me on the basis of the assumptions, data and technical bases set forth above. The valuation includes the split of the actuarial obligation between the part relating to the past and the part relating to the future (corresponding to the principles detailed above). Schedule B attached herein provides additional information in accordance with IAS 19. All the attached schedules comprise an inseparable part of this actuarial valuation.

Alan Dubin, FSA, MAAA, FilAA

Actuary

16 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule A Present Value of the Actuarial Obligation Present value of the obligation – for the past and the future – At 31/12/2009 (In million NIS inflation-adjusted to December 2009) without the obligation for special agreements on early retirement, for “20 Year Grant” and for increased severance payments for workers under special agreement

Past Service Future Service Total Active employees 8,558.1 2,154.3 10,712.4 Pensioners and survivors 7,289.8 - 7,289.8 Total 15,847.9 2,154.3 18,002.2

Present value of the obligation for special agreements on early retirement – At 31/12/2009 (In million NIS inflation-adjusted to December 2009)

Past Service Total 316.9 316.9

Present value of the obligation for 20 Year Grant – for the past and the future – At 31/12/2009 (In million NIS inflation-adjusted to December 2009)

Past Service Future Service Total Active employees 29.6 7.2 36.8

The present value of the obligation for increased severance payments for workers under special agreement – for the past – At 31/12/2009 (In million NIS inflation-adjusted to December 2009)

Past Service Total Active employees 19.9 19.9

The above obligation is gross, without offset for pension plan assets and without separating out of actuarial gains and losses.

17 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule B: Additional information in accordance with International Accounting Standard 19

The numbers are in millions of NIS – inflation-adjusted to December 2009

The information on the actuarial obligation relates to the past portion of the Defined Benefit plan, excluding the obligation for special agreements on early retirement and for the “20 Year Grant”

The actuarial obligation is split into two: The pension obligation Other post-retirement benefits

1. Surplus at The End of The Period of The Pension Plan Assets over the Pension Obligation 01/01/2007 31/12/2007 31/12/2008 31/12/2009 Fair Value of Plan Assets 17,562 18,016 17,410 19,027 Present Value of the Pension Obligation (13,206) (12,948) (13,437) (13,658) Unrecognized Actuarial (Gains) 0 (203) 1,298 (106) Losses Surplus of the Pension Plan Assets 4,356 4,865 5,271 5,263 over the Pension Obligation

2. Funds in Trust - Designated to Cover Actuarial Obligation (Plan Assets According to Paragraph 104A) 01/01/2007 31/12/2007 31/12/2008 31/12/2009 Funds in Trust - Designated to Cover 924 1,202 1,591 1,736 Actuarial Obligation (Assets per paragraph 104A)

18 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

3. The Obligation at The End of The Period for Other Post-Retirement Benefits including special agreements for early retirement

01/01/2007 31/12/2007 31/12/2008 31/12/2009 Present Value of the Obligation for 2,197 2,216 2,295 2,233 Other Post- Employment Benefits Unrecognized Actuarial Gains 0 54 90 223 (Losses) Liability for Other Post-Retirement 2,197 2,270 2,385 2,456 Benefits

4. The Movement in the Present Value of the Pension Obligation

Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09 Present Value of the Pension Obligation 13,206 12,948 13,437 Beginning of Period

Interest Cost 472 479 476 Current Service Cost 199 185 176 Past Service Cost - Changes in the Plan 0 0 (123) Rules following the Decisions of the Government Wage Authority

Benefits Paid (592) (518) (497) Actuarial Losses (Gains) (337) 343 189 Present Value of the Pension Obligation 12,948 13,437 13,658 End of Period

19 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

5. The Movement in the Present Value of the Obligation for Other Post-Employment Benefits (including Special Retirement Agreements)

Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09 Present Value of the Obligation for Other Post-Employment 2,197 2,216 2,295 Benefits Beginning of Period

Interest Cost 79 83 80

Current Service Cost 46 45 18 Cost of New Retirements – Early Retirements - 13 2 Past Service Cost - Changes in the Plan Rules following the - - (11) Decisions of the Commissioner of Wages of the Finance Ministry Changes in Liability Due to Special Agreements for Early - (1) - Retirement

Benefits Paid (52) (73) (62)

Actuarial Losses (Gains) (54) 12 (89) Present Value of the Pension Obligation 2,216 2,295 2,233 End of Period

20 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

6. The Movement in the Fair Value of Plan Assets

Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09 Fair Value of Plan Assets Beginning of Period 17,562 18,016 17,410 Expected Return on Plan assets 705 727 710 Company Contributions 478 406 2 Employee Participation Contributions - - -

Benefits Paid (595) (594) (602) Actuarial Gains (Losses) (134) (1,145) 1,507 Fair Value of Plan Assets End of Period 18,016 17,410 19,027

21 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

7. The Movement in the Fair Value of the Funds in Trust Designated to Cover Actuarial Obligation (Plan Assets According to Paragraph 104A)

Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09 Fair Value of Trust Funds Beginning of Period 924 1,202 1,591 Expected Return on Trust Funds 38 50 55 Company Contributions to Trust Funds 240 286 40 Benefits Paid 0 0 0

Actuarial Gains 0 53 50 Fair Value of Trust Funds End of Period 1,202 1,591 1,736

The movement for the years 2007 and 2008 in the funds in trust was provided by the Company.

22 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

8. The Movement in Unrecognized Actuarial Gains (Losses) for the Pension Obligation and for the Plan Assets

Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09 Unrecognized Actuarial Gains Beginning of 0 203 (1,298) Period Actuarial Gains (Losses) for the Period from:

Pension Obligation 337 (343) (189)

Plan Assets (134) (1,145) 1,507 Actuarial Gains Recognized in Period (*) 0 (13) 86 Unrecognized Actuarial Gains (Losses) End of 203 (1,298) 106 Period

23 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

9. The Movement in Unrecognized Actuarial Gains (Losses) for the Other Actuarial Obligations and for the Funds in Trust (Assets According to Paragraph 104A)

Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09 Unrecognized Actuarial Gains Beginning of 0 54 90 Period Actuarial Gains (Losses) for the Period from: - Obligations for Other Post-Employment Benefits 54 (12) 89 Trust Assets (104A Assets) 0 53 50 Actuarial Gains Recognized in Period (*) 0 (5) (6) Unrecognized Actuarial Gains (Losses) End of 54 90 223 Period

(*) 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 in real terms. Hence changes in the Consumer Price Index do not appear in the actuarial gain and loss.

24 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

10. Components of the costs for the period

Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09

Current Service Cost 245 230 194

Interest Cost 551 562 556 Recognized Actuarial (Gains) Losses - (18) 80 Expected Return on Plan Assets (705) (727) (710) Expected Return on Trust Assets (104A assets) (38) (50) (55) Total Costs for the Period 53 (3) 65

11. The Actual Return on Plan Assets Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09 Expected Return on Plan Assets 705 727 710 Actuarial Losses on Plan Assets (134) (1,145) 1,507 Actual Return on Plan Assets 571 (418) 2,217

12. The Actual Return on Trust Assets Designated to Cover Actuarial Obligation (Assets According to Paragraph 104A)

Year Year Year Ending Ending Ending 31/12/07 31/12/08 31/12/09 Expected Return on Trust Assets 38 50 55 Actuarial Gains on Trust Funds 0 53 50 Actual Return on Trust Assets 38 103 105

25 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

13. Principal Assumptions

01/01/2007 31/12/2007 31/12/2008 31/12/2009 Weighted Average Real Interest Rate Used to Compute the Present Value of the Obligation 3.61% 3.72% 3.51% 3.34% Weighted Average Real Interest Rate Used to Compute the Expected Return on Plan Assets 4.00% 4.00% 4.10% 4.16% Weighted Average Real Interest Rate Used to Compute the Expected Return on Trust Funds (104A Assets) 4.16% 3.55% 3.57% 3.35% Weighted Average Real Rate of Salary Increase During Period of Employment Used to Compute the Present Value of the Obligation (Approximate) 1.00% 1.00% 1.00% 1.00%

14.Year-End Liability for Special Agreements for Early Retirement (Termination Benefits)

01/01/2007 31/12/2007 31/12/2008 31/12/2009 Liability at the end of the period for Special Agreements for Early Retirement - Pension 284 243 374 295 Liability at the end of the period for Special Agreements for Early Retirement – Other Benefits 23 18 28 22 Liability at the end of the period for Special Agreements for Early Retirement - Total 306 262 401 317

15. Year-End Liability for 20 Year Grant (Other Long Term Employee Benefits)

01/01/2007 31/12/2007 31/12/2008 31/12/2009

32 32 31 30

26 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule C

Actuarial Changes that took effect from the implementation date of International Financial Reporting Standards (1 January 2007)

Changes that took effect in June 2007

Section New Assumptions Old Assumptions Mortality rate for pensioners According to Table 3P, in the On the basis of 90% of Table Finance Ministry circular of 4.A.1. in the Finance Ministry 17/5/2007 circular of 29/2/ 2000. Mortality rate for survivors From age 60 for men and age According to Table 4.a.1. in the 55 for women, according to Finance Ministry circular of Table 5P in the Finance Ministry 29/2/2000. circular of 17/5/2007. Until age 60 (55) according to Table 4.A.1. in the Finance Ministry circular of 29/2/ 2000. Mortality rate for active According to Table 1P in the On the basis of 60% of Table employees Finance Ministry circular of 4.A.1. in the Finance Ministry 17/5/2007 circular of 29/2/2000. Disability rate According to Table 8P in the According to Table 2B in the Finance Ministry circular of Finance Ministry circular of 17/5/2007 29/2/2000. Mortality rate for the disabled 2% until age 60. After age 60, 2% until age 60. After age 60, according to Table 3P in the according to Table 4.a.1. in the Finance Ministry circular of Finance Ministry circular of 17/5/2007 29/2/2000. Marriage rate According to Table 9P in the According to Table 3 in the Finance Ministry circular of Finance Ministry circular of 17/5/2007 29/2/2000.

Reasons for the changes: In light of the publication of the final Finance Ministry circular letter of 17/5/2007, 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 Company’s 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 for 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 2009).

27 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

The adoption of the actuarial tables according to the instructions of the aforementioned Finance Ministry circular, starting with the financial statements as 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 by 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. 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 updated 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.

28 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Changes that took effect in June 2008

Section New Calculation Methods and Old Calculation Methods and Assumptions Assumptions Past obligation for pension The past service obligation is payments after ending calculated according to the plan’s employment (because of old- benefit formula, i.e. according to the age, because of disability or accumulation of percentage pension because of death while rights in the pension plan. employed), including convalescence Rates of early retirement for 25 workers a year according to the pension existing mix of the relevant population (this number of workers is equivalent to the Early Retirement table in Schedule F). Discounted electricity and Full obligation is recognized for holiday presents, grossed-up workers who have at least 10 years for income tax service and have reached age 40 (age 60 for generation C). For those workers who have not yet served for 10 years or have not yet reached age 40 (age 60 for generation C), the past service obligation is calculated as the past service divided by the service required until both conditions will be cumulatively The new methods and fulfilled. assumptions were applied Additional Years Benefit This obligation is not recognized retroactively with the transition until 35 years of service in the to full application of IAS19. 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) as of the balance sheet date. Past service obligation for: According to the service Disability benefit accumulated as of the balance sheet date. Past service obligation for: According to the service Grant for Early retirement accumulated as of the balance sheet to pension date. Past service obligation for: According to the service Severance payments for accumulated as of the balance sheet employment termination date. without pension Past service obligation for: According to the service Up To 35 Years Benefit accumulated as of the balance sheet date.Upon 35 years of service, the benefit is fully recognized.

29 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

The reasons for the changes:

All of the above changes result from transition to full application of IAS19.

The updated assumption 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) which was set by the Board of Directors at its meeting on 1.9. 2008 and also at its meeting of 30.4.2009.

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 by the Early Retirement table brought in Schedule F.

Changes that took effect in June 2009

The changes that took effect in this report concerning salary increases and pension increases result from accounting changes (according to the 20/12/2009 letter from the Company) and are therefore not relevant to this Schedule.

Changes that took effect in December 2009

1) Calculation of past liability for discounted electricity and holiday presents: the liability is fully recognized for all those who have accrued service of at least ten years and have reached age 40 (age 60 for generation C). For those who have not yet reached age 40 (age 60 for generation C) or have not accrued 10 years of service, the past liability is the accrued service in relation to the period of service remaining until the two conditions above are both fulfilled. In the past, the liability was recognized for generation C as for generations A and B. Effect: a decrease in liability of 26.6 million NIS.

2) The salary increase assumption for special contract workers - 1.5% per annum real. In December 2009 I carried out a study to set an assumption for these workers. The findings are that the salary increase for them is lower than th e salary increase for permanent workers. Effect: about 2.5 million NIS.

30 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule D

NOT IN USE

31 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule E

Interest vector for discounting the actuarial liability to 31/12/2009 Year Future interest (in %) 1 -0.3480430% 2 0.7283219% 3 1.8939564% 4 2.7628121% 5 3.3259860% 6 3.6648568% 7 3.8594527% 8 3.9675887% 9 4.0261438% 10 4.0571434% 11 4.0731778% 12 4.0812348% 13 4.0851409% 14 4.0869072% 15 4.0876018% 16 4.0877628% 17 4.0876992% 18 4.0875492% 19 4.0873351% 20 4.0871428% 21 4.0869430% 22 4.0867897% 23 4.0866489% 24 4.0865004% 25 and thereafter 4.0863905%

32 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule F

Tables of Early Retirement rates and Resignation rates Rate of employee termination without entitlement Basic Rate of early retirement – in percentages of to a pension – in percentages of total population in total population in age group at the Company age group at the Company

Employee Termination rate (in percentages) Early retirement rate (in percentages) Age Men Women Men Women 30 0.660 0.411 31 0.603 0.472 32 0.549 0.521 33 0.498 0.557 34 0.450 0.582 35 0.404 0.594 36 0.361 0.594 37 0.321 0.583 38 0.283 0.559 39 0.248 0.523 40 0.216 0.475 0.017% 41 0.187 0.414 0.017% 42 0.160 0.342 0.017% 43 0.136 0.258 0.017% 44 0.115 0.161 0.017% 45 0.096 0.053 0.017% 0.037% 46 0.080 0.000 0.017% 0.037% 47 0.067 0.000 0.017% 0.037% 48 0.056 0.000 0.017% 0.037% 49 0.049 0.000 0.017% 0.037% 50 0.043 0.000 0.021% 0.193% 51 0.041 0.000 0.052% 0.164% 52 0.041 0.000 0.046% 0.172% 53 0.044 0.000 0.058% 0.223% 54 0.050 0.000 0.121% 0.325% 55 0.000 0.000 0.240% 0.488% 56 0.000 0.000 0.393% 0.720% 57 0.000 0.000 0.552% 1.028% 58 0.000 0.000 0.703% 1.420% 59 0.000 0.000 0.886% 1.906% 60 0.000 0.000 1.241% 0.831% 61 0.000 0.000 2.068% 1.900% 62 0.000 0.000 3.892% 2.471% 63 0.000 0.000 1.400% 2.100% 64 0.000 0.000 1.400% 2.100% 65 0.000 0.000 1.400% 2.100% 66 0.000 0.000 1.400% 2.100%

33 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule G - Real Salary Increase Rates During the Period of Employment for Temporary Workers

1.5% per annum for every age and sex.

34 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule H Assumptions and Methods used for Projecting Salary Increases for Active Employees in Generations A, B and C.

Background “Pensionable Salary” is the sum of those elements of an employees’ salary upon which post- employment and long-term benefits are based. The employees’ pensionable salaries increase through the following three mechanisms, each of with is explained in detail herein:

1) Negotiated General Salary Increases

2) Salary Framework – Increases are automatically granted to employees with increasing service to the Company and/or upon completing educational requirements.

3) Promotion – An employee is granted a salary increase when he moves to a higher job description. His salary-grade may also increase upon promotion. There are approximately 175 senior positions in the Company. Upon promotion to a senior position, the employee’s salary increases considerably.

Discussion of the Elements Above

1) Negotiated General Salary Increases

The salaries of all the employees are increased by a flat percentage from time to time through negotiation between the employees’ union and the State of Israel. Negotiated general increases include "Tosefet Yoker" - those increases that are granted to all Israeli employees to offset inflation.

The Company prescribed assumption for negotiated salary increases is that, on an annual basis, the Consumer Price Index (CPI) increases will be 1.54% greater than the negotiated general salary increases.

2) Salary Framework

2.1 The Salary Framework The Pensionable Salary can be split into the core salary and additional salary components. 2.1.1. Base Salary The “Base Salary” is defined as the product of a, b, and c, as defined below: a) The table salary for the salary-grade of the employee. Salary-grades automatically increase bi-annually, until the employee reaches the maximum salary-grade. An employee is paid according to the next highest salary-grade (called starred grade) upon accruing 25 years (20 years for females) of service to the IEC.

The Company has reported to me that there are currently 175 employees classified as senior employees. Senior employees have a distinct salary-grade scale, with five

35 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

grades, the lowest being the Hebrew letter Heh and the highest Aleph . Senior employees do not automatically receive an increase in salary-grade with service; they receive a higher salary-grade only upon promotion. Like regular employees, they are eligible for the next higher senior grade (starred grade) upon accruing 25 years (20 years for females) of service to the IEC. b) Service factor (Vetek ) – This equals the number per paragraph i) below taken to the power of the number of years of service, as described in ii) below:

i) For those technicians, engineers or academic employees (henceforth "technical employees") who have a second degree (master’s degree), this number is 1.015. For those technical employees who do not have a second degree and for all other employees (henceforth "non-technical employees"), this number is 1.01.

ii) The number of years of service of the employee for the purpose of determining the service factor, which is often greater than the number of years actually worked for the Company.

iii) This calculation is capped at 1.48886 (1.01 ^ 40). Note that this cap applies even to technical employees with a second degree.

iv) For those technical employees who receive their second degree while working for the Company, the service factor is equal to 1.01 to the power of the number of service years before receiving the second degree, multiplied by 1.015 to the power of the number of service years after receiving the second degree, subject to the aforementioned cap per item iii) above.

c) Job Classification Factor (Pikudi ) – This equals from 1.025 to 1.21 depending on the job classification of the employee.

2.1.2. Additional Salary Components a) Extra effort ( Maamatz ) –This component increases according to the negotiated general salary increases only. b) Shift work ( Mishmeret ) – This component is a set percentage of the Base Salary. The percentage for each employee is not expected to change. c) Aravah addition - This component increases only with Tosefet Yoker and not with the union-negotiated general salary increases. d) Duty roster (Toranut ) - This component increases only with Tosefet Yoker and not with the union-negotiated general salary increases. e) Continuing education for non-technical employees ( Gmul Hishtalmut Minhali ) – This component increases only with negotiated general salary increases. The proportion of

36 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

workers with this benefit increases as the workers approach retirement, as the number of required hours of study for receiving this benefit decreases with increasing service. Approximately 80% of the workers have attained this benefit. We have assumed that the remaining 20% of employees will attain this benefit prior to their retirement over a period of 10 years from the valuation date.

f) Continuing education for technical employees A ( Gmul Hishtalmut Aleph) – designated only for technical employees. This component increases according to the negotiated general salary increases only. The vast majority of technical employees receive this salary component. We have assumed that any worker that has not received this component as of the valuation date will not receive it in the future.

g) Continuing education for technical employees B ( Gmul Hishtalmut Bet) – only for technical employees, almost all of whom are eligible for this component receive it. This component increases according to the negotiated general salary increases only. For a worker that reaches the salary-grade 4400, this component changes from a flat amount to the lesser of: i. 9% of the base salary for the salary-grade of the employee, multiplied by ii. The Job Classification Factor, and iii. The maximum amount of Gmul Hishtalmut Bet - currently 857.71 NIS as of 30.6.2009. It increases in proportion to the negotiated general salary increases. iv. The vast majority of technical employees receive this salary component. We have assumed that any worker that has not received this component as of the valuation date will not receive it in the future.

h) Personal extra ( Odef Ishi ) – This has been granted to a limited number of long-term workers. It will not be granted in the future. It increases in proportion to the negotiated general salary increases.

2.1.3. Total Pensionable Salary – This equals the sum of the Base Salary and the Additional Salary Components

2.2. For each employee, the following information was provided by the IEC as of the valuation date:

a) Salary Grade b) Job Classification Factor c) Years of Service for the Service Factor d) Status of employee: technical or non-technical, with or without a second degree e) All Eight Additional Salary Components (as enumerated above in 2.1.2.)

37 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

2.3 Additional Assumptions used for Automatic Increases in the Salary Framework For the Service factor ( Vetek ), we have not taken into consideration the possibility of technical workers who do not yet have a second degree receiving a second degree in the future (see 2.1.1.b.iv above), as the effect of this increase is minimal. This is because almost all academics will reach the cap before retirement (see 2.1.1.b.iii above). Similarly, we have not taken into consideration the promotion of senior employees to higher senior salary-grades. This issue is discussed later in this Schedule. 3) Promotion

a) Promotion of a Regular Employee to a higher job classification:

For a regular employee that moves to a higher job classification, yet remains a regular employee even after the promotion - pensionable salary will increase by: i. An increase in salary-grade. Per a letter received from the Human Resource Division, this increase is not applicable for the vast majority of employees in Generations Aleph and Bet as they have already achieved the higher salary-grade for the higher job classification by virtue of their years of service with the company.

ii. An increase in the Job Classification Factor. The Company has assumed that the annual average increase over all employees is 0.04% per annum (increasing arithmetically). Additionally, the Job Classification Factor for a regular employee cannot exceed 1.21.

b) Promotion as a Regular Employee to a Senior Employee - A Regular Employee who is promoted to Senior Employee will have an increase in the Job Classification Factor to 1.235 or 1.26 (according to his Salary Grade). Additionally, the Base Salary will be determined by the higher salary-grades for Senior Employees. The company has assumed an average overall increase of 0.6% of current salary. This percentage increase will be spread linearly over a period equal to 60 minus the employee’s current age.

4) Projecting Salary

a. the Base Salary is determined by the expected salary-grade of the employee, taking into account the date of his last salary-grade increase, his salary-grade in the prior period, the starred salary grade, and the maximum salary grade b. the Job Classification Factor increases arithmetically by 0.04% per annum, subject to the maximum of 21% c. the Service Factor is increased for the additional period of service subject to the maximum d. a), b) and c) above are multiplied to determine the core salary e. The Company maintains that the Additional Salary Components are assumed to be unchanged by promotion, except for:

38 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

i. Arava Addition and Duty Roster are assumed to decrease at the rate of 1.00% per annum, as these elements do not increase with negotiated salary increases, except for Tosefet Yoker . As Tosefet Yoker has not been updated to the current levels of inflation, we have assumed that there will be no future Tosefet Yoker.

ii. Continuing education for technical employees B – This component is increased as explained above in paragraph 2.1.2 g.

iii. Continuing education for non-technical employees - This component is increased as explained above in paragraph 2.1.2 e.

The total salary as computed above is reduced by 1.54% per annum. As the interest rates used in the valuation are real interest rates, the salary must be expressed likewise. This decrease takes into account both negotiated salary increases and increases in the CPI as explained above.

Comments Regarding Methods and Assumptions Determined by the IEC for Computing the Salary Increase of Employees

A. Real Salary Erosion 1) The company assumption is, that on an annual basis, the increase in the consumer price index will exceed the negotiated salary increases by 1.54%

2) In my opinion, according to IAS 19, this assumption is imprudent, without taking into account future envisioned enhancements in the salary framework.

3) The company informed me that it "believes with a very high probability that salary enhancements will be granted, but that according to the company's accounting approach this should not be taken into account in computing the actuarial liability."

4) According to my understanding, IAS 19 fundamentally establishes that future envisioned improvements in the salary framework should be taken into account, and even if the company's position were to be accepted that future envisioned improvements in the salary and pension framework should not be taken into account, then the assumption in paragraph 1) above should be mutually compatible with the situation that there are no future improvements. Therefore, the rate in paragraph 1) above should be a lower number.

B. Pensionable Salary for Senior Employees of salary–grade A and salary-grade B

1) According to the numbers that I received from IEC, the pensionable salary that is actually paid to pensioners of salary-grade A and 10 specific pensioners of salary- grade B, includes an addition of approximately 10,000 NIS per month for global overtime hours.

39 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

2) The company directed me not to take into account these amounts.

3) Likewise, the company directed me not to take into account extra liability for the promotion of current employees to senior salary-level A of current employees.

4) In a letter that I received from the company dated 24/12/2009, not to take into account the overtime hours of senior employees of salary-level A until a final determination can be made of the legal basis for this benefit.

C. Promotion The assumptions regarding promotion, described above, were orally prescribed to me by the company; however, I did not receive them in writing.

40 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Schedule I - Post Retirement Pension Increase – Assumptions and Methods

Assumptions and Methods used for Projecting Pension Increases after Retirement for Generations A and B.

Background The employees’ pensions increase through the following mechanisms, each of with is explained in detail herein:

1) Negotiated General Salary Increases (see Schedule H)

2) Increase in Salary Grade - A pensioner is granted a salary –grade increase every two or three years, as described below. The percentage increase in his pension will equal the percentage salary increase that he would have received if he was employed by the company. Salary-grades are described in section H of this opinion.

3) For periods until March 2009 – the calculations are based on a salary-grade increase every two years. Following the decision of the Government Wage Authority of 30/6/2009, the calculations are based on a salary-grade increase every three years.

Increase in Salary Grade a) For each pensioner, I received his/her salary-grade and the date that the salary-grade was last increased. b) For each employee, we determined the salary-grade at retirement (for each possible time of retirement) as per Schedule H. c) Each current employee will receive a "retirement salary-grade" at the time of retirement if the last salary-grade was granted more than one year before retirement. Otherwise, the pensioner receives the "retirement salary-grade" one year after he received his last salary-grade increase. d) There are special "retirement salary-grades." Therefore, the new pensioner will receive this grade even though he has reached the maximum salary grade. e) Pensioners that did not reach the maximum salary grade (taking into account the "retirement salary-grade") will continue to receive salary-grade increases until he reaches the maximum salary grade (but will not receive the special "retirement salary- grade"). f) Some elements of salary will not increase with increasing salary grade, as described in Schedule H. We have adjusted the percent increase, on an average basis, for each salary grade to reflect this. g) Senior employees have a distinct salary-grade scale, with five grades, the lowest being the Hebrew letter Heh (E) and the highest Aleph (A). Senior employees who retire at senior salary-grades – Hebrew letters Gimmel (G), Dalet (D) and Heh (E) receive one retirement salary-grade increase to the next senior salary-grade. Senior employees that retire at senior salary-grades Bet (B) and Aleph (A) do not receive any salary- grade increases on retirement. Except for the retirement salary-grade, there are no further salary grade increases for pensioners that were senior employees.

41 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

Projecting Future Pensions

a) the salary-grade of the pensioner is determined taking into account the date of his last salary-grade increase, his salary-grade in the prior period, the starred salary grade, and maximum salary grade.

b) Arava Addition and Duty Roster are assumed to decrease at the rate of 1.00% per annum, as these elements do not increase with negotiated salary increases, except for Tosefet Yoker – an economy wide increase in salary to offset inflation. As Tosefet Yoker has not been granted at the current levels of inflation, we have assumed that here will be no future Tosefet Yoker.

c) The total pension as computed above in items a) and b) is reduced by 1.54% per annum. As the interest rates used in the valuation are real interest rates, the salary must be expressed likewise. This decrease takes into account both negotiated salary increases and increases in the CPI as explained above.

Comments Regarding Methods and Assumptions Determined by the IEC for Computing the Salary Increase of Employees

A. Real Salary Erosion 1) The company assumption is, that on an annual basis, the increase in the consumer price index will exceed the negotiated salary increases by 1.54%

2) In my opinion, according to IAS 19, this assumption is imprudent, without taking into account future envisioned enhancements in the salary framework.

B. Obligation and Constructive Obligation

This report is based on the determination of the Israel Securities Authority in a pre-ruling ( against the position that I presented to them) as follows:

42 Alan Dubin F.S.A. Ltd. Shaulson Street 16 P.O.B. 43102 Jerusalem, Israel 91430 Tel 972-2-6519-034

1. There is no constructive obligation that pension amounts will be linked to the inflation index, despite it being known that almost all pensions paid in the State of Israel are linked to the inflation index. 2. No consideration should be taken of the possibility that in future there will be higher salary-grades than those currently existing.