The Israel Electric Corporation Ltd

The Israel Electric Corporation Ltd.

Financial Reports

For The Three Months Ended March 31, 2018

FILES INDEX

The financial reports, for the three months ended March 31, 2018, are presented in a primary order.

Each chapter is numbered separately by its internal sequence.

Section Description Page Chapter A Description of the Company’s Business Affairs 2 Chapter B Board of Directors' Report on the Status of the 14 Company's Affairs Supplement Additional Report Regarding the Effectiveness of 38 the Internal Control Over Financial Reporting Chapter C Condensed Consolidated Interim Financial 41 Statements Annex 1 Actuarial Valuation 118

The Israel Electric Corporation Ltd.

Updated Chapter A (Description of the Company’s Business Affairs) for the 2017 Annual Report

For the Period Ended March 31, 2018

Prominent Disclaimer

This English translation of the “Updated Chapter A (Description of the Company’s Business Affairs) for the 2017 Annual Report” for the period ended March 31, 2018 ("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 or other information relating to the Company.

The Company and its Directors make no representations as to the accuracy and reliability of the financial information in this English Translation, except 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.

Updated Chapter A (Description of the Company’s Business Affairs) for the 2017 Periodic Report ("the Periodic Report")1 of the Israel Electric Corporation Ltd. (“The Company” or “The Electric Company”)

According to Regulation 39A to the Securities Regulations (Periodic and Immediate Reports), 1970, the following are details of material developments or changes in the Company’s business affairs, in any matter that should be described in the periodic report during the three months that ended on March 31, 2018 and up to the publication date of this report, according to the order of the sections in the Chapter of Description of the Company’s Business Affairs in the periodic report. This chapter of the quarterly report was prepared under the assumption that its reader possesses the Chapter Description of the Company’s Business Affairs of the periodic report. It should be noted that the terms in this chapter will have the same meaning as presented in the Chapter - Description of the Company’s Business Affairs of the periodic report, unless explicitly stated otherwise.

1. The Company’s operation and description of the development of its business affairs 1.1. General: As of the first quarter of 2018, the Company's Chief Operating Decision Maker separately reviews the operating results of the system management and consumer – supply services down to the profit and loss for the relevant period. Consequently, the Company is presenting two new segments: (a) the system management segment; and (b) the consumer – supply services segment. For additional details, including with regard to the circumstances that led to presentation of the two new segments as aforesaid, see Note 11 to the Company’s financial statements as at March 31, 2018 (the “Financial Statements”). 1.2. The nature and results of any material structural change, merger or acquisition Further to the details in section 1.3 in the Chapter of Description of the Company’s Business Affairs in the periodic report in connection with the outline of principles relating to the structural change in the Company, following further discussions and negotiations between the relevant government entities, the Company, the employees’ representatives and the Histadrut, on May 10, 2018, the aforesaid parties reached consents regarding the outline of principles with respect to the structural change for a period of 8 years (the “structural change outline"). For additional details regarding the structural change outline and the collective agreement signed on May 17, 2018, following the structural change outline (the “Collective Agreement”), see Note 1e and Note 5f to the Financial Statements. The Company estimates that the expected costs in connection with the structural change, to the extent that it will be implemented in accordance with the structural change outline, are at an estimated amount of approximately NIS 7 billion, which will be spread over ten years from the approval date of the structural change outline. Subject to the required regulation and as a condition on the part of the Company to implement the reform, the costs due to implementation of the reform outline will be fully recognized for the Company, subject to cost control. In accordance with the consents with respect to the structural change outline, on May 10, 2018, the Board of Directors of the Company approved a business plan that constitutes the basis for the financial model that was presented to the Board of Directors on the date of approval which is based on the principles of the structural change outline formulated during the reform discussions, including the following financial objectives: (a) The ratio of total liabilities to total assets of the Company, will be no more than 68% until the end 2021, while the net financial debt to adjusted EBITDA of the Company, as defined in the understandings, will be no more than 5.5 until the end of 2021

1 As published on March 15, 2018 (reference number: 2018-01-025432) 3

(b) The ratio of total liabilities to total assets of the Company, as defined in the understandings, will be no more than 66% until the end of 2025, while the net financial debt to adjusted EBITDA of the Company, as defined in the understandings, will be no more than 4.6 until the end of 2025. Within the framework of the policy principles regarding structural changes in the electricity sector and in the Company published by the Minister of Energy on May 17, 2018, and in accordance with the response of the Electricity Authority as part of the obligation to consult which applies to it, it was clarified that the costs of implementation of the reform are estimated at approximately NIS 7.1 billion which are composed of approximately NIS 6.4 billion for increasing efficiency in the Electric Company and increasing managerial flexibility in accordance with the collective agreement and approximately NIS 0.7 billion with respect to additional reform costs. In accordance with the provisions of section 31 (b) of the Electricity Sector Law, in implementing the cost principle for the purpose of setting rates, the Electricity Authority will recognize costs deriving from the policy principles set by the Minister of Energy. The aforesaid policy principles will enter into effect upon receipt of a government resolution and necessary legislative amendments. The information included in this report and within the financial statements of the Company, regarding the manner of implementation of the structural change outline and its cost, within which’ inter alia, the Company’s operation in the generation segment will be reduced and existing Company gas-operated generation sites will be sold, a subsidiary fully owned by the Company will be established and it will construct two new combined cycle gas turbines, the system management operation will be removed from the Company and will be sold to a separate government company, a new transmission supervision will be established by the Company, the supply segment will be gradually opened to competition, compliance with the principles of financial stability that will be determined and a material process of organizational change and an efficiency program in the Company will be carried out, recognition of the costs of implementation of the reform and compliance with the financial targets detailed above, and the information included in this report and within the Company's financial statements regarding decisions of the Company's Board of Directors and the regulatory entities required in connection with all of the aforesaid, are forward-looking information, as defined in the Securities Law, 1968. This information is based on future data, whose materialization is not certain and not controlled by the Company, but depends on receiving regulatory approvals and consents, and relevant legislation changes and based on the Company’s estimates as at the date of the report. Said estimates may not materialize or materialize partially or in a different manner than expected, inter alia, if the regulatory approvals and consents and the required legislation amendments as aforesaid will not be received, or if they will be received in a manner or format different that that described above, all of which are not under the control of the Company.

2. Generation Segment 2.1. Section 7.4: Competition 2.1.1. Section 7.4.1: General; the Company as a monopoly; private electricity production – government policy and decisions of the Electricity Authority 2.1.1.1. Private electricity producers – private electricity producers with renewable energy Further to that stated in section 7.4.1.2(d) of the Chapter - Description of the Company’s Business Affairs in the Periodic Report, with respect to several decision proposals for a hearing published by the Electricity Authority on December 4, 2017, aimed at ensuring compliance with a production target of 10% energy of renewable energy from the total production in the electricity sector until the end of 2020, on May 6, 2018, the Company received decisions of the Electricity Authority, which include four arrangements aimed at ensuring compliance with the said production target, combined with competitive procedures in these agreements published by the Electricity Authority, are intended to bring about the establishment of 1,900 megawatts in photovoltaic solar plants by 2020, 300 megawatts completion for net meter and 1,600 megawatts in new quotas.

2.2. Section 7.7: Development of the electricity sector – the generation segment 2.2.1. Section 7.7.5: Emission reduction plan For details regarding the approval of the Ministry of Environmental Protection to postpone the shutdown date of unit 4 at the Rutenberg power station, to reduce emissions, until October 1, 2018, subject to certain terms, see Note 1g to the financial statements. 2.2.2. Section 7.12.10: Coal ash Following the details in section 7.12.10 of the Chapter of Description of the Company’s Business Affairs in the periodic report with respect to the use of coal ash, on March 26, 2018, the Ministry of Environmental Protection, after a public hearing was held in this matter, published an opinion for comments by the public under which the manner of distributing the ash created in Israel should remain unchanged. Furthermore, in March 2018, the Ministry of Environmental Protection announced that it is prohibiting the continued use of coal ash in soil applications - filling and infrastructure as well as treating sewage sludge. The Company applied to the Ministry of Environmental Protection and requested that the cancellation will be suspended until a hearing is held in the matter, in view of the implications the decision may have on the operation of its coal-fired power stations. 2.3. Section 7.9: Raw Materials and Suppliers 2.3.1. Section 7.9.2 The table below presents the generation distribution rate in the Company (in percentage) according to types of fuels used in the generation segment for generating electricity in the three months ended on March 31, 2018 and March 31, 2017: For the Three Months Ended March 31 2018 2017 in percent Coal ...... 43.91 45.49 Natural Gas * ...... 51.93 49.51 Liquid Gas * ...... 4.00 3.90 Diesel Oil ...... 0.11 1.00 Crude Oil ...... 0.05 0.10 Total ...... 100.00 100.00

* The estimate of the distribution of the electricity generation through natural gas according to its sources (Tamar reserve and LNG) was calculated based on the respective relative gas quantities (tons), assuming that the gas from the two sources have identical lower heating values. 2.3.2. Section 7.9.3: The table below presents the total fuel costs (including attributed wages) used to generate electricity in the generation segment in the three months ended on March 31, 2018 and on March 31, 2017: For the Three Months Ended March 31 2018 2017 in NIS millions Coal ...... 784 809 Natural Gas ...... 943 1,055 Liquid Gas ...... 135 141 Diesel Oil ...... 25 121 Crude Oil ...... 21 27 Movement in provision for crude oil impairment ...... 1 (12) Costs of maintaining diesel oil for emergencies for the electricity sector ...... 2 - Total ...... 1,911 2,141

2.4. Section 7.11: Restrictions on and control of the operations of the Company in the generation sector For updates and changes regarding the rate see Note 3 of the Financial Statements.

2.5. Section 7.12.3: Land and water Following the details in section 7.12.3 in the Chapter of Description of the Company’s Business Affairs in the periodic report with regard to filing an indictment against the Company and a number of Company employees following a diesel oil leak at the Hagit site, on May 8, 2018, the Haifa Magistrate's Court decided to adopt the plea bargain with the Company, whereby the Company and a former manager of the Company admitted to the facts of an amended indictment and the commission of offenses under the Water Law and the Maintenance of Cleanliness and Sanitation Law, 1984, and a fine of NIS 350 thousand was imposed on the Company. In addition, the Company signed an undertaking for three years in the amount of NIS 700 thousand under which the Company will refrain from committing the offenses in which it was convicted 2.6. Section 7.12.7: Asbestos Following the details in section 7.12.7 in the Chapter of Description of the Company’s Business Affairs of the periodic report pertaining to the removal of brittle asbestos from all its sites, on March 31, 2018, the generation units at Haifa C were permanently shut down for the removal of brittle asbestos from them.

3. Matters Relating to the Operations of the Company as a Whole

3.1. Section 13: Human capital 3.1.1. Section 13.2: Employee roster by areas of operation As of March 31, 2018, the Company employs 11,893 employees. 3.2. Section 13.9: Labor disputes For details regarding the labor dispute with respect to promoting the outline of reform in the Company, see Note 9c to the Financial Statements. 3.3. Section 18: Financing For details of material raisings and repayments, publication of a shelf prospectus, credit rating during the report period, see Note 7 to the Financial Statements. 3.4. Section 21: Restrictions and control over the operations of the corporation 3.4.1. Section 21.9.2: Restrictive trade practices For details regarding an appeal filed by the Company and officer serving in the Company, pertaining to the determination of the Acting General-Director of the Antitrust Authority under which the Company abused its monopolistic position, and for details regarding a consent decree signed by the Company and the Antitrust Authority for payment of NIS 3 million by the Company following a demand for data which was not fully complied with by the Company, see Note 1h to the financial statements. 3.4.2. Section 22: Material Agreements 3.4.2.1. Section 22.2: The Palestinian PETL Company and the negotiations for sale of electricity at ultra-high and high voltage For details of initialing the draft agreement with the Palestinian Electricity Transmission Limited, see Note 4b1 to the Financial Statements.

4. The Supply Segment 4.1. General information regarding the supply segment 4.1.1. Structure of the area of operation and changes occurring therein The electricity supply operation is carried out under a license received by the Company in 1996 for “transmission, distribution, supply, sale and trade in electricity”, which the Company calls a “general license” (the “General License”). The validity of the General License, including all the activities included therein, including the supply of electricity, was extended along with other licenses held by the Company until November 15, 2018. For further details regarding the General License, see section 21.1.2 in the Chapter of Description of the Company’s Business Affairs. The supply segment includes the collection and service system of the Company, which include editing and producing invoices and collection actions, as well as consumer services including customer call center, customer reception and customer account coordinators. Under the Outline of Structural Change, insofar as it will be implemented, the Electric Company will be a default supplier in the supply segment and will operate in a separate profit center. The supply of electricity to consumers of high voltage, ultra-high voltage and extra-high voltage will be open to full competition The Company will not be permitted to act as a competitive factor. The supply of electricity to low-voltage consumers will be opened to competition as will be decided by the competent government entities and on the date determined. At the opening of the market to competition, the Company will not be permitted to act as a competitive factor in this consumer segment. Accordingly, the Electricity Authority will determine a mechanism in accordance with the policy that will be determined, according to which the State will open the low voltage segment to competition gradually so that the Company's market share is not expected to be less than 60% of the number of customers in the segment during the reform period. If the number of the Company’s low voltage customers will drop below 60%, the Company will be given the opportunity to compete in this household consumer segment in a fair manner and subject to regulation that will be determined. For additional details regarding the Outline of the Structural Change, including in relation to the supply segment, see Note 1e to the Financial Statements. 4.1.2. Restrictions, legislation, standards and special constraints that apply to the area of operation The Company’s operation in the supply segment, similarly to the other areas of its operation, is subject to legislation restrictions, such as those set in the Electricity Sector Law and the Government Companies Law, and to constraints related to licensing issues and requirements for permits from authorities and various government ministries such as the Electricity Authority, the Companies Authority, the Ministry of Energy and the Ministry of Environmental Protection, and to emergency and development plans in the electricity sector. As aforesaid, the electricity supply operation is carried out under the General License. 4.1.3. Changes in the volume of operation in the field and its profitability The Company estimates that the major factors that may affect the volume of the Company’s operation in the field of supply are the Company’s compliance with the efficiency goals detailed in the rate that entered into effect as of 2018, the structure of the rate that will be determined in future which may affect the profitability of the segment, and the terms of competition that will be determined in the market in accordance with criteria to be determined by the Electricity Authority. 4.1.4. Critical success factors in the field of operation and the changes occurring therein The Company estimates that the business success of the supply segment mainly depends on the Company's ability to improve efficiency both in terms of the Company's costs and structurally and in the professionalism of its employees by providing quality service to its customers. In addition, fair competition conditions are required, including an effective rate structure.

4.1.5. Main entry and exit barriers of the field of operation and the changes occurring therein Entry barriers: The Company estimates that the main entry barrier to the field of operation is receipt of a supply license. Exit barriers: The regulation regulates the Company’s operation and it being an “essential service supplier”, pursuant to the Electricity Sector Law and the provisions of its licenses, which obligates it to supply electricity to the general public, reliably and efficiently, according to the conditions of its license, are the main exit barriers from the field of operation. For details of the outline of the structural change, under which, inter alia, changes will be made in the supply segment, see Note 1e to the Financial Statements. 4.2. Products and services The main services in the supply segment include preparation and Issue of invoices and collection actions, customer call center, reception and customer account coordinators. 4.3. Segmentation of revenues products and services For details of the Company’s revenues from electricity sales that were attributed to the supply segment see Notes 11 and 12 to the Financial Statements. 4.4. Competition There are private electricity producers who hold a supply license in addition to the production license granted to them, and therefore they also serve as suppliers to end consumers who engage with them directly and receive electricity from them and not from the Company. In 2017, the Electricity Authority announced that it intends to also distribute supply licenses to private suppliers who do not own production assets, which could significantly harm the Company's market share in the supply segment. As aforesaid, private electricity producers who also operate as suppliers and sellers of electricity to end- customers have an impact on the Company’s scope of operation in the supply segment. However, the Company’s revenues in the supply segment presently constitute approximately only 2% of its total revenues and are collected from the Company’s customers by a fixed payment that is not dependent on consumption. The opening of the supply segment to competition, as expected in the grid rate which is in effect from 2018, may affect the entire electricity sector. For details regarding the outline of the structural change, including with regard to competition in the supply segment, see Note 1e to the financial statements. The Company's estimates regarding the possible implications of the transfer of customers to other suppliers and the opening of the supply segment to competition constitute forward-looking information, as defined in the Securities Law. These estimates are based on information available to the Company at the date of the report, and may not materialize or materialize partially or in a different manner than expected, inter alia, in light of the fact that their materialization depends on various factors, some of which are not under the Company's control, such as: the volume of entry of other suppliers into the electricity sector, the manner in which the rate will be determined, and the costs that will be recognized for the Company in practice. 4.5. Environmental risks and manner of their management – supply segment For details of environmental risks that the Company’s operation is exposed to in the supply segment see section 7.12 in the Chapter of Description of the Company’s Business Affairs in the periodic report. 4.6. Legal Proceedings For details regarding legal proceedings, including proceedings with respect to the supply segment, see Note 9b to the Financial Statements.

5. System Administration 5.1. General information regarding the system administration segment 5.1.1. Structure of the field of operation and the changes occurring therein The operation of the system administration unit is carried out by the Company according to the wording of the general license, even though the Company was not granted a designated license for this purpose. The administration of the system includes, inter alia, the administration for the electricity system in the generation and transmission segments, including a constant balance between the supply and demand of electricity, ensuring the survivability of the electricity generation and transmission array, managing the transfer of energy from power stations through the electricity grids or substations with the required reliability and quality, scheduling the execution of maintenance work in the generation units and the transmission system, managing trade in electricity under competitive, equal and optimal conditions, including execution of agreements for the purchase of available capacity and energy from electricity producers, planning the development of the transmission and transformation system, and integrating private producers into the electricity sector, from the initiation stages, through the construction of the power stations, their testing until the commercial operation stages. Under the provisions of the Electricity Sector Law, an entity which is granted a license to manage the system constitutes an essential service provider. The system administration unit is responsible for the ongoing administration of the generation, transmission and transformation system at the national and regional levels, while directing the generation of electricity in the various generation units and distributing their loads, while ensuring the system's survivability at a reasonable level of risk and maintaining optimal safety, reliability, quality of electricity and its costs. In addition, the unit is a partner in determining the development plan for the short, medium and long term of the generation, transmission and transformation system, and is responsible for managing the operation of gas contracts with gas suppliers and the INGL, and managing the activities of private electricity producers in high voltage and private suppliers from the commercial, operational and project aspects, as well as demand administration. In recent years there has been a significant change in the aspect of securing the survivability of the electricity system with an emphasis on the growth of the volume of electricity generation in the sector. In addition, as part of the operation of the system management unit and in order to meet the electricity demands while maintaining the system’s survivability, the system management unit executes daily risk management which takes into account the limitations associated with the fact that at present there is only one gas pipeline which transports the natural gas from one gas supplier, and that there is a limitation of minimum production in the coal units in accordance with the instructions of the Minister of Energy. For details of the Minister of Energy’s directives with regard to the coal units see Note 1g (Directives of the Minister of Energy – reduction of the use of coal) to the Annual Financial Statements. According to the outline of the structural change, insofar as will be implemented, within 18 months from the date the Government passes a resolution regarding the reform in the electricity sector, a separate government company for system management will begin to operate (“System Administration Company”), provided that during this period, the required legislative amendment was passed. The functions of the new company will be defined by the State in a license to be granted by the Electricity Authority with the approval of the Minister of Energy. Employees from the System Management Unit, the Planning, Development and Technology Division, the Department of Statistics, and employees from other units, in accordance with the needs of the sector and in a manner that will enable the functioning of the new company, will be transferred to the system management company, except for employees or functions from those units with regard to which it was agreed between the parties that they will remain with the Electric Company. For additional details regarding the outline of the structural change, including in connection with the system administration segment, see Note 1e to the financial statements. 5.1.2. Restrictions, legislation, standards and special constraints that apply to the area of operation

The System administrator operates according to the Electricity Sector Law, Electricity Sector Regulations, decisions and criteria of the Electricity Authority, instructions from the Ministry of Energy – such as a generation restriction in the coal units, restrictions by the Ministry of Environmental Protection – such as operating the electricity sector routinely and at times of emergency with alternative fuels, decisions by the Gas Authority regarding gas distribution in times of shortage in the gas sector.

5.1.3. Changes in the volume of operation in the field and its profitability

The operation of the system administration unit in the operating and commercial areas is increasing each year. The change is mainly due to the increase of private producers and suppliers in the electricity sector. As of the date of publication of the report, the production share of the private producers constitutes approximately 30% of the total energy produced in the sector, and the suppliers’ share is even higher. Additional changes are expected, deriving from regulatory requirements: continuous adaptation of the computerized tools and the computer systems, the integration of renewable energies according to the government's goals, and more. 5.1.4. Developments in the markets of the segment of operation, or changes in the characteristics of its customers The main development that affects and will affect the operation of the system management in future is a reform in the electricity sector. The future system administrator will have to provide a solution for all customers of the electricity sector, including the Company independently. When taking into consideration the increase of generation in the sector and the increase of the various means of generation (wind, pumped energy, and more) and changes in the customer profile, the system manager has to take into account many parameters. For details see section 5.1.1 above. 5.1.5. Critical success factors in the field of operation and the changes occurring therein

The Company estimates that the business success of the system management segment depends mainly on management of the electricity system while maintaining the system's survivability and proper commercial activity with all the producers and consumers in the sector, in accordance with the regulatory conditions. 5.1.6. Main entry and exit barriers of the field of operation and the changes occurring therein Entry barriers: The Company estimates that the main entry barrier into the field of operation is receiving a system administration license. Exit barriers: The regulation that regulates the Company's operation and its being an “essential service supplier”, according to the Electricity Sector Law and the provisions of its licenses, which obligates it to provide full services during the whole period of the licenses of the Company, are the main exit barriers from the field of operation. For details regarding the outline of the structural change, including as regards the system administration segment, see section 5.1.1 above and Note 1e to the financial statements. 5.2. Products and services The services provided in the field of the system management mainly include maintenance of a proper electricity supply and the survivability of the electricity system in the generation and transmission segments, coordination and execution of maintenance plans in the generation and transmission segments and the gas system. Execution of gas orders with gas suppliers and the INGL Company for generation units of the Company. Approval of production and consumption plans and issuing a load program for all the players in the electricity sector. Computation of the electricity sector with private producers, production of various reports according to the reporting requirement of the system administrator regarding operation in the electricity sector, accompanying entrepreneurs (in the field of generation) up to the stages of commercial operation. 5.3. Customers The Electric Company, private producers and suppliers, entrepreneurs in the electricity sector, various government ministries, and the Electricity Authority, are among the customers attributed to the system management segment. 5.4. Segmentation of revenues products and services

The revenues of the system administrator are anchored in the decisions of the Electricity Authority and are defined as system costs that are collected from all the consumers of the sector. These costs include services to balance the system, backup services, accompanying arrangements in the electricity sector, and administrative costs. For details regarding Company revenues attributed to the system management segment, see Note 12a to the Financial Statements.

5.5. Fixed assets, real estate and facilities A facility in Haifa and a facility in Ramat Hasharon. 5.6. Development of the electricity sector – system administration segment The long-term development of the electricity sector under the responsibility of the Planning, Development and Technology Division (PDT) includes, inter alia, preparation and submission of multi-year plans for approval by the Minister of Energy, which include plans for the development of the generation, transmission and transformation systems derived from the plans of absorption of private producers and other units of the Company and to initiate, develop and implement the technological and research infrastructure and to evaluate which are the most suitable technologies that will provide affordable, reliable and environmentally friendly electricity. Additionally, the Divisions is responsible to conduct a general gas survey, to prepare outline plans for the transmission lines, switching stations and substations, to manage a pre-project stage and to manage the environmental and statutory aspects of all the projects in the generation, transmission and transformation system. One of the main activities of the Planning, Development and Technology Division in recent years is handling the absorption of private producers/consumers who connect to the transmission grid. 5.7. Human capital For details of the outline of structural change, under which the employees from the system management unit, PDT, the Department of Statistics and employees from additional units according to sector needs and in a manner that will enable the functioning of the new Company, will be transferred to the system administration company, see Note 1e to the Financial Statements. 5.8. Restrictions on and control of the operations of the Company in the system administration segment For details of the general license under which the Company executes the system management operation, see section 5.1.1 above. The Electricity Sector Law determines that the Minister, upon consultation with the Electricity Authority or pursuant to its proposal, may set provisions with respect to the duty of a system administrator license owner to execute actions to be decided by the Minister to secure the development level required in the electricity generation system. As of the date of the report, such regulations have not been set. For details of the regulation that applies to the Company, including to the system management segment, see section 21 in the Chapter of description of the Business Affairs of the Company in the Periodic Report. 5.9. Environmental risks and manner of their management – system administration segment In accordance with the Clean Air Law and the emission permits issued to the generation units of the Electric Company, a loading order has been defined for the generation units according to the requirements of the grid. These environmental guidelines also define the removal of generation units for renovations and repair of malfunctions due to environmental considerations that override economic considerations. This situation limits the flexibility of the system management in dealing with the demand for electricity and requires strict management of the generation array. In addition, in order to maintain electromagnetic field levels in certain transmission lines in accordance with the Ministry of Environmental Protection's instructions, the system management unit is required to ensure that the current levels in these lines do not exceed a predefined threshold, which limits the flexibility of the system management in the transmission of the output. 5.10. Restrictions on and control of the operations of the Company in the system administration segment The rate for system administration services (system rates) includes, inter alia, administrative system management costs, service costs for balancing the system, costs with respect to backup services and related arrangements. Pursuant to the decisions of the Electricity Authority2, in which it was determined that the rates for the system administration services will be applied from June 1, 2013, on August 6, 2015, the Electricity Authority's decision3 was published, under which the system administration rate (system rates) will be imposed on supply license holders and independent producers, in a manner designed to lead to a more equal allocation of the burden of costs between the various electricity producers in the sector. On December 4, 2017, the Electricity Authority

2 Decision number 3 from meeting 400 of May 6, 2013, and decision number 4 of meeting 401 of May 13, 2013.

3 Decision number 4 from meeting 471 of the Electricity Authority of August 6, 2015, regarding “Determination of rates for management services of the electricity system (system rates)”. 11

published a hearing on setting rates for management services of the electricity system. According to the hearing, every consumer consuming electricity from an installation with the ability to generate electricity using renewable energy or natural gas, will be debited with the rate for the system administration services with respect to the electricity consumed from the said generation facility. These rates were applied retrospectively as from September 13, 2015. The decision also determined that a private producer that commenced operation prior to the adoption of this decision will pay its debt, so that for each KWH that it provided from June 1, 2013 until the date of the decision, it will pay 90% of the annual system rate. For additional details, see Note 3k to the Financial Statements. A number of private electricity producers, including independent producers, petitioned the High Court of Justice against the Electricity Authority and against the Electric Company regarding the decision of the Electricity Authority to charge them with a payment of a system costs rate, including payment with respect to a past debt as from June 1, 2013. For additional details, see Note 3k to the Financial Statements. On January 8, 2018, the Electricity Authority reached a decision regarding “2018 electricity rate annual update – for the electricity rates for the consumers of the Electric Company”. In the decision, the Electricity Authority set final system costs for 2016 in the amount of approximately NIS 3.4 billion (approximately 5.58 agorot per kWh) and advance costs for 2017 and 2018 based on a forecast of approximately NIS 3.8 billion and NIS 3.6 billion, respectively (about 6.26 and 5.83 agorot per kWh). Costs for 2017 and 2018 will be determined definitively in the next annual update. For additional details regarding the rate base for the system administration services (system rates), see Note 3 to the Financial Statements. 5.11. Forecast of development in the coming year In 2018, additional private producers are expected to enter commercial operation in the electricity sector at a capacity of approximately 854 megawatts using various technologies, and accordingly, the operating and commercial operations of the system administration unit are expected to grow. The Company’s estimate regarding the entry of additional private producers into commercial operation as aforesaid constitutes forward looking information, as this term is defined in the Securities Law. This information is based on data and forecasts that exist in the Company as of the date of the report and which may not materialize or may materialize in a different scope than the Company’s expectations, and this, inter alia, in light of the fact that their materialization depends on various factors that are not under the control of the Company.

Ofer Bloch Yiftah Ron-Tal Chief Executive Officer Chairman of the Board of Directors

Date of approval: May 24, 2018

The Israel Electric Corporation Ltd.

Chapter B

Board of Directors’ Report on the Status of the Company's Affairs

For the Three Months Ended March 31, 2018

Prominent Disclaimer

This English translation of the "Company's Board of Directors' Report on the Status of the Company's Affairs" for the three months ended March 31, 2018 ("English Translation") is provided for informational purposes only.

The Company and its Directors make no representations as to the accuracy and reliability of the financial information in this English Translation, save that the Company and its Directors represent that reasonable care has been taken to correctly translate and reproduce such information, yet notwithstanding the above, the translation of any technical terms are, in the absence of generally agreed equivalent terms in English, approximations to convey the general 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.

2 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018

The Board of Directors of the Israel Electric Corporation (the “Company") hereby presents the Directors’ Report on the status of the Company's affairs for the three months ended on March 31, 2018, ("The Report Period") according to the directives of the Securities Regulations (Periodic and Immediate Reports) – 1970 ("The Securities Regulations") and the provisions of the Government Companies Authority ("The Companies Authority"). a. Explanations of the Board of Directors on the Business Condition of the Company

1. Brief Description of the Company and its Business Environment

a) General The Company operates as one combined and coordinated system that deals in supplying electricity to consumers, starting from the electricity generation stage through the transmission, distribution, supply and trading electricity stages, all in accordance with licenses granted to each type of activity, which are effective up to November 15, 2018, as of the date of approval of the financial statements. The Company also deals in the construction of infrastructures required for these activities. The operations of the Company include five main areas: electricity generation, transmission and transformation of electricity, electricity distribution, supply of electricity, and the Company also functions as the Electricity Grid Administrator. The Company provides electricity to most of the electricity consumers in the country. The Company is owned by the State of Israel which holds about 99.85% of its share capital, therefore the Company and its operations are subject, inter alia, to the directives of the Government Companies Law – 1975 (hereinafter: the “Government Companies Law”). As of March 5, 1996, the Company operates according to the Electricity Sector Law – 1996 (hereinafter: the “Electricity Sector Law”) and the regulations thereunder. The Electricity Sector Law replaced the Electricity Concessions Order and the Electricity Authority was founded in accordance with this ordinance. The duties of the Electricity Authority are, inter alia, to set electricity rates and define rate amendment processes, to award licenses and to supervise the compliance with the instructions specified in the licenses (which in certain cases require the approval of the Minister of Energy). For further details of the Electricity Sector Law, including the details and role of the Electricity Authority, inter alia, in accordance with the amendment to the Electricity Sector Law, see Note 1 to the Financial Statements of March 31, 2018 (hereinafter: “Financial Statements”), and Note 1 to the Financial Statements as of December 31, 2017 (hereinafter: the “Annual Financial Statements”).

b) Condensed Review of the Changes in the Business Environment during the Report Period 1) For details regarding material legislated provisions applicable to the Company in the field of environmental protection, including details and developments regarding the emission reduction project, see Note 1g to the Financial Statements.

2) For details regarding examinations and decisions by the Director of the Antitrust Authority pertaining to the Company's operations, see Note 1h to the Financial Statements.

3) For details of publication of a shelf prospectus on April 26, 2018, and of raisings and repayments of debentures and loans in the report period and after the date of the Statement of Financial Position, see Note 7 to the Financial Statements.

4) For details regarding rate updates including a decision for the base rate for the grid’s segments, as well as decisions of the Electricity Authority during the report period see Note 3 to the Financial Statements.

5) For details regarding the consents in principle reached with regard to an agreed outline for structural change see Note 1e to the Financial Statements.

6) For details regarding class actions and other material actions, see Note 9b to the Financial Statements.

7) For details regarding the outline and agreements reached with respect to the assets arrangement, see Note 1f to the Financial Statements.

8) For details regarding a collective agreement signed subject to completion of the reform outline, see Notes 5f and 9c to the Financial Statements.

3 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 1. Brief Description of the Company and its Business Environment (continued) b) Condensed Review of the Changes in the Business Environment during the Reporting Period (continued)

9) For details of the Palestinian debt and the draft agreement with the PETL Company, see Note 4 to the Financial Statements.

10) For details on the indictment filed following the leak of diesel oil at the Hagit site, see section 2.5 in the Report on Description of Company's Business as of March 31, 2018.

c) Information Required in Accordance with the Directives of the Government Companies Authority

Major financial targets

Following are the goals for the end of the five-year financial planning period (2017-2021):

1) Real net financial debt ratio to EBITDA: the target is a ratio of 5.5. In practice, as of March 31, 2018, the ratio is approximately 5.73 (the ratio is based on the real net financial debt of the Company as of March 31, 2018, in the amount of NIS 41,535 million and on EBITDA for the last four quarters, in the amount of NIS 7,250 million).

2) Total debt to total assets ratio (leverage) will gradually decrease to 75%. In practice, as of March 31, 2018, the ratio stands at approximately 76%.

3) Maintaining an international rating of at least 'BBB-'. For details of the Company’s credit rating see Note 19f to the Annual Financial Statements.

4) The safety cushion will be of a monetary value of no less than NIS 3 billion, of which the balance of cash and short-term deposits will be no less than NIS 1.7 billion and the balance will be in unused secured credit lines valid for a period exceeding one year. As of March 31, 2018, the Company is meeting the objective.

5) According to the five-year financial plan, the target for decreasing real net financial debt is by at least NIS 0.5 billion per year.

Adjustment of financial targets following the structural change:

Subsequent to the statement of financial position date, on May 10, 2018, the Company's board of directors approved the Company’s undertakings concerning the outline of the structural change, subject to receiving permits and the completion of the necessary procedures. For details see Note 1e to the Financial Statements and section 1.2 in the Report of Update of Description of the Business Affairs of the Corporation of March 31, 2018.

In addition, on the same date, the Company's board of directors approved a business plan that constitutes the basis for the financial model, which is based on the principles of structural change established during the Reform discussions, including the following financial targets (revising targets no. 1, 2 and 5 above):

1) The ratio of total liabilities to total assets, as defined in the understandings between the parties will be no more than 68% until the end of 2021, while the net financial debt to adjusted EBITDA as defined in these understandings will be no more than 5.5 until the end of 2021.

2) The ratio of total liabilities to total assets, as defined in the understandings between the parties will be no more than 66% until the end of 2025, while the net financial debt to adjusted EBITDA as defined in these understandings will be no more than 4.6 until the end of 2025.

The resolution of the Company's board of directors and compliance with the Company's commitments as aforesaid, are subject to and contingent on the Government's decision in accordance with the understandings, and provided they are incorporated in primary legislation and/or secondary legislation and/or administrative decisions and/or regulations of the Israeli Electricity Authority , and in licenses provided by the competent institutions in Israel and the appropriate arrangements and procedures, all as required by the relevant law.

4 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued)

2. Financial Position Data on the Company's financial position on March 31, 2018 and December 31, 2017 are as follows:

NIS in millions March 31, December Increase Percent 2018 31, 2017 (decrease) %

CURRENT ASSETS Cash and cash equivalents ...... 4,110 3,428 682 20% Short term investments ...... 2,429 273 2,156 790% Trade receivables for sales of electricity ...... 4,146 4,429 )283( )6%( Accounts receivable ...... 807 608 199 33% Inventory – fuel ...... 1,208 1,161 47 4% Inventory – stores ...... 129 127 2 2% 12,829 10,026 2,803 28%

NON-CURRENT ASSETS

Inventory - fuel ...... 1,133 1,253 )120( )10%( Long-term receivables ...... 1,315 1,471 )156( )11%( Investment in associate ...... 39 39 - 0% 2,487 2,763 )276( )10%(

Assets with respect to post-employment benefits: Surplus pension plan assets over pension liability ...... 5,758 4,672 1,086 23% Funds in trust ...... 1,593 1,617 )24( )1%( 7,351 6,289 1,062 17%

Fixed assets, net: Fixed assets in use, net ...... 53,860 54,480 )620( )1%( Fixed assets under construction ...... 5,349 5,407 )58( )1%( 59,209 59,887 )678( )1%(

Intangible assets, net ...... 1,202 1,231 )29( )2%(

Total assets ...... 83,078 80,196 2,882 4%

Debit balances of regulatory deferral accounts ...... 4,407 4,880 )473( )10%(

Total assets and debit balances of regulatory deferral 87,485 85,076 2,409 3% accounts ......

5 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 2. Financial Position (continued)

Data on the Company's financial condition on March 31, 2018 and December 31, 2017 are as follows: (continued)

NIS in millions March 31, December Increase Percent 2018 31, 2017 (decrease) % CURRENT LIABILITIES Credit from banks and other credit providers ...... 8,826 6,110 2,716 44% Trade payables ...... 1,678 1,728 )50( )3%( Accounts payable and accruals ...... 1,554 1,520 34 2% Customer advances, net of work in progress ...... 504 473 31 7% Provisions ...... 739 732 7 1% 13,301 10,563 2,738 26% NON CURRENT LIABILITIES

Debentures ...... 31,148 30,911 237 1% Liabilities to banks ...... 4,872 5,561 )689( )12%( Liabilities with respect to other post- employment benefits ...... 2,775 2,886 )111( )4%( Deferred taxes, net ...... 6,158 5,992 166 3% Debentures to the State of Israel ...... 2,504 2,511 )7( 0% Liability to the State of Israel ...... 1,628 1,682 )54( )3%( Other liabilities ...... 749 757 )8( )1%( 49,834 50,300 )466( )1%( CAPITAL Share capital ...... 908 908 - 0% Capital reserves...... 598 636 )38( )6%( Capital reserve remeasurement ...... )725( )1,384( 659 )48%( Retained earnings ...... 20,566 20,633 )67( 0% 21,347 20,793 554 3%

Total liabilities and capital ...... 84,482 81,656 2,826 3%

Credit balances of regulatory deferral accounts ...... 3,003 3,420 (417) (12%)

Total liabilities, capital and credit balances of regulatory deferral accounts ...... 87,485 85,076 2,409 3%

6 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 2. Financial Position (continued)

a) Current and Non-Current Assets

Below are details of the major changes:

1) The increase in cash balances and short-term investments derives mainly from the funds received at the issue of the debentures within the GMTN program (see Note 7 to the Financial Statements).

2) The increase in short-term receivables mainly derives from an increase in prepaid expenses with respect to municipal taxes.

3) A decrease in fuels inventory (current and non-current), deriving mainly from a decrease in the coal, diesel fuel and liquified gas inventory.

4) The decrease in long-term receivables mainly derives from the classification of a short-term deposit due to its expected repayment date.

5) The increase in the excess of the pension plan assets over the pension liability derives mainly from a decrease in liability due to an increase in the interest rate and capitalization (for details, see Note 5 to the Financial Statements).

b) Investments in Fixed Assets Below are details of Company investments in Fixed Assets in the Report Period and in the corresponding period the previous year:

For the three months ended on March 31, 2018 March 31, 2017 In NIS millions

Power stations, CCGTs, structures ...... 123 389 Sub-stations and high voltage lines ...... 69 133 Switching stations and ultra-high 400 Kilowatt voltage lines ...... 11 16 Distribution grids and meters ...... 154. 273 Inventory – stores ...... 135 83 Joint property and others ...... 54 58 Total ...... 546. 952

c) Current and Non-Current Liabilities

The increase in the total liabilities mainly derives from the issue of debentures within the GMTN Program (see Note 7 to the Financial Statements), which is partially offset by repayments of debentures and loans (additionally, the current maturities were classified according to the forecasted repayment dates).

d) Regulatory deferral account

For details regarding balances of regulatory deferral accounts and changes in them in the report period see Note 6 to the Financial Statements.

7 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued)

3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding Period in the Previous Year:

a) Statements of Operations and Other Comprehensive Income in Millions NIS:

For the three months ended on Change March 31, 2018 March 31, 2017 Paragraph Statements of Operations In NIS In NIS In NIS millions % millions % millions % Revenues ...... 5,457 100% 5,816 100% )359( )6%( b) Cost of operating the electricity system ...... 4,552 83% 4,659 80% )107( )2%( c) Profit from operating the electricity system ...... 905 17% 1,157 20% )252( Other revenues ...... )2( 0% - 0% )2( - Sales and marketing expenses ...... 242 4% 235 4% 7 3% Administrative and general expenses ...... 164 3% 181 3% )17( )9%( Income from liabilities to pensioners, net ...... )25( 0% )27( 0% 2 )7%( Profit from current operations ...... 526 10% 768 13% )242( Financial expenses ...... 553 10% 274 5% 279 102% e) Profit (loss) before income tax ...... )27( 0% 494 8% )521( Tax on income ...... )3( 0% 123 2% )126( )102%( Profit (loss) after income tax ...... )24( 0% 371 6% )395( Company share in loss due to included companies ...... - 0% )5( 0% 5 )100%( Profit (loss) before regulatory deferral accounts ...... )24( 0% 366 6% )390( Transactions in balances of regulatory deferral accounts, net of tax ...... )43( )1%( )50( )1%( 7 )14%( Profit (loss) for the period ...... )67( )1%( 316 5% )383(

Consolidated Reports of Other Comprehensive Income (Loss): Re-measurements of a defined benefit plan, net of tax ...... 659 12% )433( )7%( 1,092 )252%( f)2) Hedge accounting cash flow, net of tax ...... )38( )1%( )29( 0% )9( 31% Other Comprehensive profit (loss) for the period 621 11% )462( )8%( 1,083

Comprehensive profit (loss) for the period ...... 554 10% )146( )3%( 700

8 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding Period in the Previous Year (continued)

b) Revenues Total revenues for the reporting period are NIS 5,457 million compared to NIS 5,816 million for the previous year. The decrease of approximately NIS 359 million at a rate of approximately 6% derives mainly from a decrease in electricity demand and a drop in the electricity rate during the report period.

Peak electricity demand -

The peak in electricity demand during the period of the report was in January, reaching a level of 11,794 MW which includes 9,378 MW produced by the Company and approximately 2,416 MW produced by private and independent producers. The Company’s standard available capacity at that time reached 11,407 MW.

The peak in electricity demand during the comparative period last year was in February, reaching a level of 12,361 MW, which includes 9,797 MW produced by the Company and approximately 2,414 MW produced by private and independent producers and approximately 150 MW demand decrease by activating consumer agreements. The Company's standard available capacity at that time reached 11,197 MW.

c) Cost of Operating the Electricity System

The cost of operating the electricity system in the reported period amounted to approximately NIS 4,552 million, as compared to approximately NIS 4,659 million last year, a decrease of NIS 107 million (approximately 2%), mainly deriving from:

Fuels consumption cost The cost of fuels consumed in the reporting period amounted to a sum of approximately NIS 1,911 million, compared to approximately NIS 2,141 million the previous year, a decrease of approximately NIS 230 million, which constitutes a decrease of approximately 11%.

The change to the cost of fuels consumption derives mainly from a decrease in demand for electricity which was partially offset due to an increase in the price of fuels (mainly coal).

Following are details of the changes in NIS millions for the three months ended on March 31, 2018 Change in Change in Fuel Type Consumption Prices Total Crude ...... )11( 5 )6( Coal ...... )90( 65 )25( Diesel oil ...... )103( 7 )96( Natural gas ...... )69( )44( )113( Liquid gas - LNG ...... )9( 3 )6( Total ...... )282( 36 )246( Change in crude impairment and provision 16 for sludge Total changes including impairment )230(

On the other hand, there is an increase in depreciation expenses and amortization (see section d below).

9 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued)

3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding Period in the Previous Year (continued)

d) Depreciation and Amortization

Following are details of depreciation and amortization expenses presented in the profit and loss statement:

The three months ended March 31 2018 2017 Depreciation and Amortization Expenses NIS in millions Difference Change in % Electricity system operation ...... 1,132 ...... 1,079 53 5% Sales and marketing ...... 42...... 39 3 8% Administrative and general ...... 29 ...... 30 )1( )3%( Total depreciation expenses ...... 1,203 1...,148 55 5%

The increase in depreciation costs mainly derives from operating the emission reduction installations of units 5 and 6 at the Orot Rabin site.

10 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding Period in the Previous Year (continued)

e) Financial Expenses

For the three months ended March 31 2018 2017 Difference NIS in millions A. Financing expenses (income) due to exchange rate differences and linkage differences and revaluation of hedge transactions Exchange rate differences due to foreign currency financial liabilities mainly deriving from NIS/Dollar differences as a result of an increase at a rate of 1.36% and NIS/Yen differences as a result of an increase at a rate of approximately 7.11% during the report period ...... 468 )1,349( 1,817 Revaluation of hedging transactions resulting from changes in the period of the exchange rates ...... )443..( 1,210 )1,653( Revaluation of hedging transactions resulting from changes in the period of the Consumer Price Index ...... )54( )37( )17( Revaluation of hedge transactions to their fair value mainly deriving from changes of capitalization interest rates and credit risk which occurred during the report period ...... 153 64 89 Linkage differentials due to index linked financial liabilities which decreased at a rate of 0.3% in the report period compared to a decrease of 0.2% in the same period the previous year ...... ).....30( )20( )10( Total expenses (income) due to exchange rate differences and linkage differences and revaluation of hedge transactions ...... 94.. )132( 226

B. Interest and Other Expenses 540 550 )10( Interest expenses ...... )20( )48( 28 Other financing income ...... 520 502 18 Total interest and other expenses: ...... 614 370 244 Total financing expenses before capitalization ......

C. Capitalization of credit costs 61 96 )35( Financing expenses which were capitalized on projects under construction ...... Total financing expenses ...... 553 274 279

Against the foreign currency exposure (mainly Dollar), the Company implements a policy of hedging for the rate of exchange. Hedging transactions executed by the Company throughout the years to swap foreign currency with linked NIS in substance replaced the foreign currency liabilities with fixed interest CPI linked NIS liabilities. Additionally, the Company recognizes regulatory deferral accounts with respect to CPI linkage differentials. For details see Note 6 to the Financial Statements.

11 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding Period in the Previous Year: (continued)

f) Additional Business Results during the Reporting Period:

1) The EBITDA (earnings before interest, taxes, depreciation and amortization) during the reporting period was NIS 1,729 million compared to NIS 1,916 million in the same period the previous year.

2) A change in other comprehensive profit (loss) with respect to re-measurements of a defined benefit plan of approximately NIS 1,092 million, in comparison to the same period last year, deriving mainly from an increase in the capitalization interest rate used to calculate the actuarial liability.

4. Liquidity for the Reporting Period

a) General:

1) Cash Flow from Operating Activities: Cash flow from Operating Activities for the reporting period amounted to a positive flow of approximately NIS 1,888 million, compared to a positive flow of approximately NIS 2,221 million last year, a decrease in the cash flow from current operations of approximately NIS 333 million, mainly deriving from the decrease in demand for electricity and decrease in the electricity rate during the report period.

2) Cash Flow for Investment Activities: Cash used for investment activities in the period reached a negative flow of approximately NIS 2,708 million, compared to a negative flow of approximately NIS 972 million last year. The change in the cash flow from investment activity of approximately NIS 1,736 million derives mainly from deposit of the issue proceeds in deposits during the report period.

3) Cash Flow from Financing Activity: Cash flow from financing activities in the report period amounted to a positive flow of approximately NIS 1,513 million, compared to a negative flow of approximately NIS 1,612 million in the corresponding period last year. A change in the cash flow from financing activity of approximately NIS 3,125 million derives mainly from an increase in debenture issue and a decrease in repayment of debentures and loans and from release of deposits to secure swap transactions in the report period compared to deposits deposited in the concurrent period the previous year.

For additional details regarding the cash flow of the Company see the statement of cash flows of the Company in the Financial Statements.

12 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued)

4. Liquidity for the Reporting Period (continued)

b) Financing Sources

1) General The Company finances its actions from its own sources, from offering debentures in Israel and abroad and from loans from banking corporations in Israel and abroad. The Company’s recruitment of funds during the reporting year includes loans received from banks in the reporting period, see Note 7 to the Financial Statements.

2) Long Term Loans The balance of long-term financial liabilities of the Company on March 31, 2018 and December 31, 2017, is approximately NIS 40,152 million, and approximately NIS 40,655 million, respectively, detailed as follows:

As at March 31, As at December 2018 31, 2017 Millions in NIS Liabilities in Index-Linked NIS Negotiable debentures ...... 5,697 5,705 Non-negotiable debentures 5,273 6,283 Perpetual debentures to the State of Israel ...... 2,504 2,511 Loans ...... 293 295 Total ...... 13,767 14,794

Non-linked NIS Liabilities Negotiable debentures ...... 2,724 2,724 Non-negotiable debentures ...... - 66 Total ...... 2,724 2,790

Dollar Linked Liabilities Debentures in the US ...... 20,610 17,390 Loans ...... * 2,735 2,772 Total ...... 23,345 20,162

Liabilities denominated in other foreign currencies:

2,474 2,310 Debentures in Japan in Yen...... 1,099 1,080 Loans in Euros ...... Total liabilities ...... 43,409 41,136

Coal Company's USD loan ...... 40 40 Premiums, discount and deferred expenses ...... 1,196 1,285 Classification into current maturities ...... )7,512( )5,524( Long term hedge transactions ...... 3,032 3,740 Financial lease classification ...... )13( )12( Total debentures, liabilities to banks, debentures to the State of Israel and long term liabilities to the State of Israel ...... 40,152 40,665

* Including loans guaranteed by the State of Israel in the sum of NIS 391 million as of March 31, 2018, and NIS 386 million as of December 31, 2017.

13 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 a. Explanations of the Board of Directors on the Business Condition of the Company (continued)

4. Liquidity for the Reporting Period (continued) b) Financing Sources (continued)

3) Average Long Term Credit as of March 31, 2018 Credit is taken from banking corporations and others. The average credit for the reporting periods was approximately NIS 47,133 million and is mainly long term loans and debentures (including hedging transactions, deferred, premium/discount of debentures).

4) Suppliers’ and Customers’ Credit

As of March 31 As of December 31 2018 2017 2017 Credit Credit Credit average average average Days ** Days ** Days **

Trade payables ...... 43 ...... 1,404 41 1,510 42 1,520 Trade receivables * ...... 58 3,513...... 50 3,221 52 3,335 Trade receivables excluding the debts of the Palestinian Authority and the East Jerusalem Electricity Company (see Note 6 to the Financial Statements)*...... 41 2,282 (*) 28 1,626 33 1,933

(*) The credit days presented above represent the credit days from the invoice issue date until the payment date. (Past debts with respect to system costs are neutralized from the calculation). (**) In NIS millions

14 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 b. Linkage Basis Report

As on March 31, 2018 (in NIS millions) Linkage to Linkage to Linkage to Linkage US$ Euro Japanese Yen to CPI * Unlinked Non-financial Total Assets Cash and cash equivalents ...... 2,033 - - - 2,077 - 4,110 Short term investments ...... 1,933 216 - - 280 - 2,429 Trade receivables for sale of electricity...... - - - - 4,146 - 4,146 Accounts receivable ...... 59 - - 82 332 334 807 Inventory – fuels ...... - - - - - 1,208 1,208 Inventory – stores ...... - - - - - 129 129 Long term inventory – fuels ...... - - - - - 1,133 1,133 Long term receivables ...... 894 - - 36 385 - 1,315 Investment in an associate company ...... - - - - - 39 39 Assets with respect to post-employment benefits ...... - - - - - 7,351 7,351 Fixed assets, net ...... - - - - - 59,209 59,209 Intangible assets, net ...... - - - - - 1,202 1,202 Debit balances of regulatory deferral accounts ...... - - - - - 4,407 4,407 Total ...... 4,919 216 - 118 7,220 75,012 87,485

* Including adjustments to fair value of hedging transactions (including due to credit risk)

15 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 b. Linkage Basis Report (continued)

As on March 31, 2018 (in NIS millions) Linkage to Linkage to Linkage to Linkage US$ Euro Japanese Yen to CPI * Unlinked Non-financial Total Liabilities

Credit from banks and other credit providers ...... 7,398 163 - 971 294 - 8,826 Trade payables ...... 272 65 - - 1,341 - 1,678 Accounts payable and accruals ...... 374 3 23 178 976 - 1,554 Provisions ...... - - - - - 739 739 Advances from work orders less works in progress ...... - - - - - 504 504 Debentures, liabilities to banks and others ...... 14,628 872 2,460 12,204 2,849 724 33,737 Liabilities with respect to long term hedging transactions ...... )19,680( )977( )2,475( 19,684 6,480 - 3,032 Liability to the State of Israel...... 1,628 - - - - - 1,628 Debentures to the State of Israel ...... - - - 2,504 - - 2,504 Liabilities with respect to other post-employment benefits ...... - - - - - 2,775 2,775 Deferred taxes, net...... - - - - - 6,158 6,158 Capital ...... - - - - - 21,347 21,347 Credit balances of regulatory deferral accounts ...... - - - - - 3,003 3,003 Total ...... 4,620 126 8 35,541 11,940 35,250 87,485

Total exposure, net ...... 299 90 )8( )35,423( )4,720( 39,762 -

16 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 b. Linkage Basis Report (continued)

As of December 31, 2017 (in NIS millions) Linkage to Linkage to Linkage to Linkage to Non-financial US$ Euro Japanese Yen CPI* Un-linked and others Total Assets Cash and cash equivalents ...... 5 104 - - 3,319 - 3,428 Short term investments ...... 173 - - - 100 - 273 Trade receivables for sale of electricity...... - - - - 4,429 - 4,429 Accounts receivable ...... 56 - - 91 254 207 608 Inventory- fuels ...... - - - - - 1,161 1,161 Inventory – stores ...... - - - - - 127 127 Long term inventory fuels ...... - - - - - 1,253 1,253 Long term receivables ...... 888 104 - 40 439 - 1,471 Investment in an associate company ...... - - - - - 39 39 Assets with respect to post-employment benefits ...... - - - - - 6,289 6,289 Fixed assets, net ...... - - - - - 59,887 59,887 Intangible assets, net ...... - - - - - 1,231 1,231 Debit balances of regulatory deferral accounts, net of tax ...... - - - - - 4,880 4,880 Total ...... 1,122 208 - 131 8,541 75,074 85,076

* Including adjustments to fair value of hedge transactions (including with respect to credit risk).

17 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 b. Linkage Basis Report (continued)

As of December 31, 2017 (in NIS millions) Linkage to Linkage to Linkage to Linkage to Non-financial US$ Euro Japanese Yen CPI* Un-linked and others Total Liabilities Short term debentures and credit from banks and other credit 6,110 providers ...... 4,161 155 - 1,517 277 - Trade payables ...... 392 45 - - 1,291 - 1,728 Accounts payable and accruals ...... 296 1 20 285 918 - 1,520 Provisions ...... - - - - - 732 732 Advances from work orders less works in progress ...... - - - - - 473 473 Debentures, liabilities to banks and others ...... 14,466 859 2,298 12,269 2,862 735 33,489 Long term currency exchange transactions ...... )18,360( )179( )2,198( 19,935 4,542 - 3,740 Liability to the State of Israel...... 1,682 - - - - - 1,682 Debentures to the State of Israel ...... - - - 2,511 - - 2,511 Liabilities with respect to post-employment benefits ...... - - - - - 2,886 2,886 Deferred taxes, net...... - - - - - 5,992 5,992 Shareholders’ Equity ...... - - - - - 20,793 20,793 Credit balances of regulatory deferral accounts, net of tax ...... - - - - - 3,420 3,420 Total ...... 2,637 881 120 36,517 9,890 35,031 85,076

Total, Net ...... )1,515( )673( )120( )36,386( )1,349( 40,043 - Exposure cover through hedging mechanism recognized in the 2,079 830 - )2,909( - - - electricity rate (**) ...... Total ...... 564 157 )120( )39,295( )1,349( 40,043 -

* Including adjustments to fair value of hedging transactions (including due to credit risk) Regarding the exposure to the CPI following the transition to IFRS see Note 14q to the Annual Financial Statements. ** The periodic effect with respect to the hedge mechanism is through the transaction in regulatory deferral account balances (and not through the financing expenses). For details of the hedging mechanism and its cancellation as of 2018 see Note 14e to the Annual Financial Statements.

18 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 c. Aspects of Corporate Governance

1. The Internal Audit Following are details regarding the activity of the internal auditor during the report period: During the period January - March 2018, 18 reports were distributed: 16 audit reports and 2 supervision reports. During this period, the Audit Committee of the Board of Directors held 2 discussions on the reports of the internal audit, on: January 25, 2018, and March 15, 2018.

The update of the consolidated work plan for 2017-2018 was discussed and approved by the Audit Committee of the Board of Directors on July 6, 2017 and in the plenum of the Board of Directors on July 13, 2017. An additional discussion of the 2018 work plan was held by the Audit Committee of the Board of Directors on November 30, 2017.

2. Financial Statements Approval Process

As part of the discussion on the subject of the Financial Statements at March 31, 2018, the Committee for Reviewing the Financial Statements held two meetings:

The following attended the meeting held on May 17, 2018: Mr. Shlomo Arbiv Chairman of the Committee, Accountant Orli Garti Seroussi member of the Committee, Adv. Arik Forer Member of the Committee, Accountant Mona Bkheet Member of the Committee, Mr. Ofer Bloch CEO, Accountant Avi Doitchman Senior Vice President of Finance and Economics, Advocate Yael Nevo General Counsel and Company Secretary, Accountant Nitza Rogozinski Internal Auditor, representatives of the Accounting and Economics Division, representatives of the Finance Division, representative of the office of the Auditor Somekh Chaikin.

The following attended the meeting held on May 22, 2018: Mr. Shlomo Arbiv Chairman of the Committee, Accountant Orli Garti Seroussi member of the Committee, Adv. Arik Forer Member of the Committee, Accountant Mona Bkheet Member of the Committee, Mr. Ofer Bloch CEO, Accountant Avi Doitchman Senior Vice President of Finance and Economics, Advocate Yael Nevo General Counsel and Company Secretary, representatives of the Accounting and Economics Division, representatives of the Finance Division, representative of the office of the Auditor Somekh Chaikin, representatives of the Government Companies Authority, representatives of the law firm Herzog Fox Neeman and the financial advisors of the Company.

After discussing the reports, the Committee formulated its recommendations concerning the approval of the reports and transferred them to the Company’s Board of Directors.

The Board of Directors of the Company discussed the Company's Financial Statements and significant issues related to financial reporting. The Company management presented to the members of the Board of Directors the main results of the Company and the financial data during the review period and referred to significant events that occurred during the period. During the presentation, the management responded to questions posed by the Directors and provided any necessary explanations and clarifications.

During a meeting held on May 24, 2018, the Board of Directors approved the financial statements as of March 31, 2018, in accordance with the recommendation of the Committee.

19 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 d. Instructions for Disclosure Related to the Financial Reporting of the Company

1. The Financial Reporting of the Company

The Consolidated Financial Statements of the Company were prepared in accordance with IFRS and the interpretations thereof which were published by the IASB. Furthermore, the Financial Statements are prepared in accordance with the Securities Regulations (Annual Financial Statements), 2010. The Company consolidates the National Coal Supply Company Ltd. (hereinafter: the “Coal Company”) in its Financial Statements. The financial data in the Board of Directors’ Report are data from the Consolidated Financial Statements of the Company. For additional details see Note 2 to the Annual Financial Statements.

2. Critical Accounting Estimates Preparation of the Financial Statements in accordance with accepted accounting principles requires the Management of the Company to make evaluations and estimates which affect the reported values of the assets, liabilities, revenues and expenses and also the disclosure concerning contingent assets and liabilities. For details on the policy regarding use of critical accounting estimates of the Company and for details regarding key factors of the uncertainty in estimates in the period, see Note 2ac to the Annual Financial Statements. Regarding critical accounting estimates pertaining to employee benefits see Note 5 to the Financial Statements. Regarding critical accounting estimates concerning fair value for financial instruments see Note 10 to the Financial Statements.

20 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 d. Instructions for Disclosure Related to the Financial Reporting of the Company: (continued)

3. Material and Highly Material Valuations

a) For details of the Company’s policy regarding the issue see section c3 of the Report of the Board of Directors as of December 31, 2017.

b) The Company has a highly material valuation regarding actuarial liability with respect to benefits for employees in accordance with IAS 19.

Identifying the valuation subject Actuarial obligation with respect to employee benefits in accordance with International Accounting Standard 19 (IAS 19) Valuation date: March 31, 2018 The value of the subject of the NIS 28,469 million valuation determined in accordance with the evaluation Assessor identity and The evaluation was performed by Alan Fefferman - Actuarial Services Ltd by characteristics thereof Alan Fefferman and the staff under his supervision. Alan Fefferman holds an MBA from the Booth School of Business at the University of Chicago in the United States and is qualified as an actuary (a full member of the Society of Actuaries in Israel - FILAA, and the society of actuaries in the United States - FSA). His professional experience of 33 years includes actuarial estimates of employee benefits in similar types of companies, actuarial valuations of pension funds, and determining assumptions and actuarial methods for pension funds and insurance companies as an assessing actuary, a reviewing actuary, or an examining actuary as well as an actuary regulator. Date of agreement with the May 26, 2016 evaluator Dependence on the actuary The actuary of the Company is not dependent on the work or the Company, requester except for the fact that he receives a fee for this work and for other consulting services. The fee is not contingent on the results of the work. The valuation model used by Discounted Cash Flow (hereinafter: “DCF”) the appraiser The assumptions under which The real weighted interest rate inherent in the present value of the liability the evaluation assessor made - 2.51% the valuation, in accordance A real update of salaries during the period of work - individual salary with the evaluation model: development model of active employees and a salary increase with respect to current salary agreements. A real amendment of the pension amounts following the termination of employment – pension development model, from January 2012 the pensions are linked to the CPI Pensioner and survivor mortality, including the updating of the mortality data - in accordance with the Ministry of Finance circular 2013-3-1, and mortality study for pensioners and survivors of the Company. Other actuarial assumptions - see actuary opinions in Appendix A. The function in the Company Head of Accounting and Finance Division which decided on the agreement with the appraiser Preapproval of the evaluator to Existing attach the evaluation Indemnification agreement On May 26 the company granted an indemnification letter for services to be provided by the evaluator to the company.

21 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 d. Instructions for Disclosure Related to the Financial Reporting of the Company: (continued)

4. Disclosure of the Forecasted Cash Flow of the Company for Financing Repayment of the Corporation’s Liabilities:

As of the date of the report, the Company has a working capital deficit, and therefore a warning sign set out in section 10 (b) (14) (a) (4) of the Securities Regulations (Periodic and Immediate Reports), 1970 would have existed for the Company, had the Board of Directors of the Company not determined that the working capital deficit does not indicate a liquidity problem in the Company.

The Board of Directors of the Company, at its meeting of May 24, 2018, after hearing management’s estimates regarding the possibility of receiving financing and raising debt in the capital markets and/or the banking system in Israel and/or abroad, and taking into consideration the cash flow from operating activities for the report period, which amounts to approximately NIS 1.9 billion, and balance of cash and short-term investments as of March 31, 2018, amounting to NIS 6.5 billion (regarding the Company's policy of holding a security cushion, see section a1c4 above), taking into consideration the measures taken by the Company after the statement of financial position date including the publication of a shelf prospectus on April 26, 2018, as detailed in Note 7 to the Financial Statements, and taking into consideration the measures taken by the Company to raise additional amounts it requires, determined that the aforesaid working capital deficit does not indicate a liquidity problem in the Company, and therefore the Company is not required to publish a forecasted cash flow statement.

22 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018 e. Dedicated Disclosure to Debentures Holders - Details of Debentures of the Group

Following are details regarding the debentures as of March 31, 2018, as required by the eighth supplement to the Securities Regulations:

Debenture series Series 26 Series 27 Series 28 Series 29 NIS millions Nominal value 2,124 2,749 601 2,941 Revalued nominal value in 601 2,947 accordance with linkage 2,124 2,749 conditions Accumulated interest 48 49 2 12 Stock exchange value (fair 664 3,683 2,459 3,389 value) of the debentures

For additional details see section D in the Report of the Board of Directors for the year ended December 31, 2017. Existence of liabilities deriving from terms of the debentures as of the date of the report:

• The Company has complied with all the conditions and commitments according to the deeds of trust for the debentures.

• There was no cause to place the debentures for immediate repayment.

• The Company did not receive any notice from the trustees to the debentures on its failure to comply with the conditions and commitments according to these deeds of trust.

23 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE THREE MONTHS ENDED MARCH 31, 2018

The Board of Directors and Management wish to express their appreciation to the Company’s employees and its managers.

Ofer Bloch Yiftah Ron-Tal Chief Executive Officer Chairman of the Board of Directors

Date of Approval: May 24, 2018

The Israel Electric Corporation Ltd.

Supplement

Additional Report Regarding the Effectiveness of the Internal Control Over Financial Reporting

For the Three Months Ended March 31, 2018

Prominent Disclaimer

This English translation of the “Additional Report Regarding the Effectiveness of the Internal Control Over Financial Reporting” for the three months ended March 31, 2018 ("English Translation") is provided for information purposes only.

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.

SECOND ADDENDUM (REGULATION 2)

A REPORT OF THE BOARD OF DIRECTORS AN D THE MANAGEMENT ON THE INTERNAL CONTROL OVER FINANCIAL REPORTING IN ACCORDANCE WITH GOVERNMENT COMPANIES REGULATIONS (ADDITIONAL REPORTS REGARDING THE EFFECTIVENESS OF THE INTERNAL CONTROL OVER FINANCIAL REPORTING), 2007

In the three month period, ended on March 31, 2018, no changes occurred that had a material affect or that are expected to have a material affect on the internal control over financial reporting in the Company.

Avi Doitchman Ofer Bloch Yiftah Ron-Tal Senior Vice-President of Chief Executive Officer Chairman of the Finances and Economics Board of Directors

May 24, 2018

The Israel Electric Corporation Ltd.

Chapter C

Consolidated Interim Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018

Prominent Disclaimer

This English translation of the “Consolidated Interim Financial Statements” for the three months ended March 31, 2018 ("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. TABLE OF CONTENTS

PAGE REVIEW REPORT ...... 4 LETTERS OF REPRESENTATION ...... 6 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ...... 9 CONSOLIDATED STATEMENTS OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME...... 11 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY ...... 12 CONSOLIDATED STATEMENTS OF CASH FLOW ...... 13 NOTE 1 - GENERAL ...... 15 NOTE 2 - REPORTING RULES AND ACCOUNTING POLICIES ...... 23 NOTE 3 - THE ELECTRICITY RATE AND REGULATION ...... 30 NOTE 4 - TRADE RECEIVABLES FOR SALES OF ELECTRICITY ...... 31 NOTE 5 - POST EMPLOYMENT EMPLOYEE BENEFITS ...... 34 NOTE 6 - BALANCE OF REGULATORY DEFERRAL ACCOUNTS ...... 43 NOTE 7 - DEBENTURES AND LIABILITIES TO BANKS ...... 46 NOTE 8 - REVENUES ...... 47 NOTE 9 - AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES, LABOR DISPUTES AND RELATED PARTIES ...... 48 NOTE 10 - FINANCIAL INSTRUMENTS ...... 51 NOTE 11 - SEGMENTAL REPORTING ...... 53 NOTE 12 - ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ATTRIBUTION OF THE STATEMENT OF PROFIT AND LOSS AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION, SYSTEM MANAGEMENT, DISTRIBUTION, AND CONSUMER SERVICES - SUPPLY ...... 56 NOTE 13 - ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY ...... 74

TRANLATED FROM THE HEBREW LANGUAGE

Review Report of the Auditors to the Shareholders of The Israel Electric Corporation Ltd

Introduction

We have reviewed the accompanying financial information of The Israel Electric Corporation Ltd comprising of the condensed consolidated interim statement of financial position as of March 31, 2018 and the related condensed consolidated interim statements of comprehensive income, changes in equity and cash flows for the three month period then ended. The Board of Directors and Management are responsible for the preparation and presentation of this interim financial information in accordance with IAS 34 “Interim Financial Reporting”, and are also responsible for the preparation of financial information for these interim periods in accordance with Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970 and according to the instructions of the Government Companies Authority. Our responsibility is to express a conclusion on the financial information for this interim period based on our review.

We did not review the condensed financial information for interim periods of a consolidated company whose assets included in consolidation represent less than 1% of total consolidated assets as at March 31, 2018, and the income included in consolidation represents 0% of all consolidated income for the three month period ended on that date.

Scope of Review

We conducted our review in accordance with Standard on Review Engagements No. 1, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" of the Institute of Certified Public Accountants in Israel. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review nothing has come to our attention that causes us to believe that the accompanying interim financial information was not prepared, in all material respects, in accordance with IAS 34 and the instructions of the Government Companies Authority.

In addition to that mentioned in the previous paragraph, based on our review nothing has come to our attention that causes us to believe that the accompanying interim financial information does not comply, in all material respects, with the disclosure requirements of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.

Item Emphasis Paragraph (Drawing of attention)

Without qualifying our above conclusion, we draw attention to the following matters: 1. As discussed in Note 1.e in respect of the extension of generation licenses and in respect of the structural change and the implementation of the reform of the electricity sector. As stated in that Note, as of the date of the financial statements the structural change has not yet been implemented and there is significant uncertainty regarding the final format of the structural change, the date of its implementation or its effects on the Company's financial position and its results.

2. As discussed in Note 1f in respect of the "Assets Arrangement", the significant uncertainty regarding the implementation of this arrangement and its impact on the Company's financial position and its results.

3. As discussed in Note 9b, regarding class actions and other material claims filed against the Company.

4. As discussed in Note 1g in respect of the decisions of the Minister of Energy (hereinafter –"the Minister") on the transfer of the Orot Rabin 1-4 coal powered units to a state of preservation and in respect of the policy according to which preference will always be given to production of electricity using natural gas over production using coal, while operating coal units at a minimal load. As at the date of the financial statements the Company is unable to reliably estimate the possible effects of the decisions on the financial position of the Company and its results.

Additional Information in accordance with the instructions of the Government Companies Authority

Notes 12 and 13 include additional information required in accordance with the instructions of the Government Companies Authority in Israel (by virtue of section 33b to the Government Companies Law), excluding information regarding land rights as discussed in Note 13g.

Sincerely,

Somekh Chaikin Certified Public Accountants (Isr.)

Haifa, May 24, 2018

ADDENDUM (REGULATION 2) ADDITIONAL REPORT

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

I, Avi Doitchman, certify that:

1. I have reviewed the Quarterly Report within the meaning of Regulation 38 of Chapter D of the Securities Regulations (Periodic and Immediate Reports) – 1970, of The Israel Electric Corporation Limited (“the Company” or the “Electric Corporation”) for the three months ended March 31, 2018 ("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, including its consolidated companies, is made known to us by others in the Company, and in those corporations, 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.

Avi Doitchman May 24, 2018 Senior Vice-President of Finance and Economics

ADDENDUM (REGULATION 2) ADDITIONAL REPORT

I, Ofer Bloch, 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.

Ofer Bloch May 24, 2018 Chief Executive Officer

ADDENDUM (REGULATION 2) ADDITIONAL REPORT

I, Yiftah Ron-Tal, certify that:

1. I have reviewed the Quarterly Report within the meaning of Regulation 38 Chapter D of the Securities Regulations (Periodic and Immediate Reports) – 1970, of The Israel Electric Corporation Limited (“the Company” or the “Electric Corporation”) for the three months ended March 31, 2018 ("the reports").

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.

Yiftah Ron-Tal Chairman of the May 24, 2018 Board of Directors

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (NEW ISRAELI SHEKELS, IN MILLIONS)

As of As of March 31 December 31 Note 2018 2017 2017 Unaudited Audited

CURRENT ASSETS

Cash and cash equivalents ...... 4,110 3,124 3,428 Short term investments ...... 2,429 929 273 Trade receivables for sales of electricity ...... 4 ...... 4,146 4,134 4,429 Other current assets ...... 807 710 608 Inventory - fuel ...... 1,208 934 1,161 Inventory - stores ...... 129 124 127 Total current assets ...... 12,829 9,955 10,026

NON-CURRENT ASSETS

Inventory - fuel ...... 1,133 916 1,253 Long-term receivables ...... 1,315 1,116 1,471 Investment in associate...... 39 52 39

Assets with respect to benefits after 5 employment termination: Excess pension plan assets over pension liability...... 5,758 5,501 4,672 Funds in trust ...... 1,593 1,592 1,617 7,351 7,093 6,289

Fixed assets, net Fixed assets in use, net ...... 53,860 54,542 54,480 Fixed assets under construction ...... 5,349 6,284 5,407 59,209 60,826 59,887

Intangible assets, net ...... 1,202 1,254 1,231

Total non-current assets ...... 70,249 71,257 70,170

Total assets ...... 83,078 81,212 80,196

Debit balances of regulatory deferral 6 accounts ...... 4,407 2,471 4,880

Total assets and debit balance of regulatory deferral accounts ...... 87,485 83,683 85,076

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

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (NEW ISRAELI SHEKELS, IN MILLIONS)

As of As of March 31 December 31 Note 2018 2017 2017 Unaudited Audited

CURRENT LIABILITIES

Credit from banks and other credit providers ...... 8,826 4,683 6,110 Trade payables ...... 1,678 1,893 1,728 Other current liabilities ...... 1,554 1,560 1,520 Customer advances, net of work in progress ...... 504 457 473 Provisions ...... 739 727 732 Total current liabilities ...... 13,301 9,320 10,563

NON CURRENT LIABILITIES

Debentures ...... 7 ...... 31,148 32,283 30,911 Liabilities to banks ...... 7 ...... 4,872 5,356 5,561 Liabilities with respect to other benefits after employment termination ...... 5 2,775 2,754 2,886 Deferred taxes, net ...... 6,158 4,965 5,992 Debentures to the State of Israel ...... 2,504 2,499 2,511 Liability to the State of Israel ...... 1,628 2,021 1,682 Other liabilities ...... 749 784 757 Total non current liabilities ...... 49,834 50,662 50,300

Total liabilities ...... 63,135 59,982 60,863

EQUITY

Share capital ...... 908 908 908 Capital reserves ...... 598 689 636 Capital remeasurement reserve ...... (725) )402( (1,384) Retained earnings ...... 20,566 16,209 20,633 Total equity ...... 21,347 17,404 20,793

Total liabilities and equity ...... 84,482 77,386 81,656

Credit balances of regulatory deferral 6 accounts ......

3,003 6,297 3,420

Total liabilities, equity and credit balance of regulatory deferral accounts ...... 87,485 83,683 85,076

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

Mr. Avi Doitchman Mr. Ofer Bloch Yiftah Ron-Tal Senior Vice-President Chief Executive Officer Chairman of the of Finance and Economics Board of Directors

May 24, 2018 Date of approval of the Financial Statements

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF PROFIT (LOSS) AND OTHER COMPREHENSIVE INCOME (LOSS) (NEW ISRAELI SHEKELS, IN MILLIONS)

For the Year ended For the Three Months ended March 31 December 31 Note 2018 2017 2017 Unaudited Audited Consolidated Statements of Profit (Loss): Revenues ...... 8 5,457 5,816 23,370 Cost of operating the electricity system: Fuels ...... 1,911 2,141 8,414 Purchases of electricity ...... 760 741 3,487 Operation of the generation system ...... 1,075 1,008 4,378 Operation of the transmission and distribution system ...... 806 769 3,056 4,552 4,659 19,335

Profit from operating the electricity system ...... 905 1,157 4,035 Other revenues, net ...... (2) - (54) Sales and marketing expenses ...... 242 235 999 Administrative and general expenses ...... 164 181 619 Income for liabilities to pensioners ...... 5l...... (25) (27) (49) 379 389 1,515

Profit from current operations ...... 526 768 2,520

Financial expenses ...... 553 274 1,530

Profit (loss) before income taxes ...... (27) 494 990

Taxes on income ...... (3) 123 199

Profit (loss) after income tax ...... (24) 371 791 Company’s share of the loss of associated company ...... - (5) (18)

Income (loss) before transaction in balances of regulatory deferral accounts ...... (24) 366 773 Movement in regulatory deferral accounts balances, net of tax ...... (43) (50) 3,967

Profit (loss) for the period ...... (67) 316 4,740

Consolidated Statements of Other Comprehensive Income (Loss):

Amounts that will be attributed in the future to the Statement of Profit (Loss): Loss with respect to cash flow hedging, net of tax ...... (38) (29) (82)

Amounts that will not be attributed in the future to the Statement of Profit (Loss): Remeasurement of a defined benefit plan, net 5 k of tax ...... 659 (433) (1,415)

Other comprehensive profit (loss) for the period, net of tax ...... 621 (462) (1,497)

Comprehensive income (loss) for the period ...... 554 (146) 3,243

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

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (NEW ISRAELI SHEKELS, IN MILLIONS)

For the three months ended on March 31, 2018 Capital Paid-up share Capital remeasurement Retained capital reserves reserves earnings Total Unaudited Balance as of January 1, 2018 ...... 908 636 (1,384) 20,633 20,793 Loss for the period ...... - - - (67) (67) Other comprehensive profit (loss) for the period ...... - (38) 659 - 621 Balance as of March 31, 2018 ...... 908 598 (725) 20,566 21,347

For the three months ended on March 31, 2017 Capital Paid-up share Capital remeasurement Retained capital reserves reserves earnings Total Unaudited Balance as of January 1, 2017 ...... 908 718 31 15,893 17,550 Profit for the period ...... - - - 316 316 Other comprehensive loss for the period ...... - (29) (433) - (462) Balance as of March 31, 2017 ...... 908 689 (402) 16,209 17,404

For the year ended on December 31, 2017 Capital Paid-up share Capital remeasurement Retained capital reserves reserves earnings Total Audited Balance as of January 1, 2017 ...... 908 718 31 15,893 17,550 Profit for the year ...... - - - 4,740 4,740 Other comprehensive loss for the year ...... - (82) (1,415) - (1,497) Balance as of December 31, 2017 ...... 908 636 (1,384) 20,633 20,793

For details regarding assignment of profits and the dividend distribution policy see Note 24 in the Annual Financial Statements. On May 10, 2018, the Company sent a letter to the Government Companies' Authority regarding approval of the Company's Board of Directors' resolution with respect to the allocation of its earnings for 2017, pursuant to which no dividend will be distributed from the Company's earnings in 2017.

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

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF CASH FLOW (NEW ISRAELI SHEKELS, IN MILLIONS)

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 Unaudited Audited Cash flow from operating activities: Profit (loss) before regulatory deferral accounts according to the statement of profit and loss ...... (24) 366 773 Adjustments required to present cash flow from operating activities - Annex A ...... 1,912 1,855 4,980 Net cash provided by operating activities ...... 1,888 2,221 5,753

Cash flow for investing activities: Investment in fixed asset and intangible assets ...... (674) )926( (2,901) Proceeds from sale of fixed assets ...... 12 8 31 Long-term receivables, net...... - (68) 140 Repayment of bank deposits, net ...... (2,046) 14 568 Net cash used in investing activities ...... (2,708) (972) (2,162)

Cash flow from financing activities: Issuance of long-term debentures ...... 3,480 1,384 4,250 Other long-term loans received ...... 6 2 24 Repayment of long-term debentures ...... (1,584) )1,925( (3,710) Repayment of other long-term loans ...... (107) )162( (995) Payment from settlement of derivatives ...... (99) )80( (334) Repayment (depositing) deposits to secure swap transactions, net...... 73 )265( (691) Changes in short-term credit from banks, net ...... 312 51 (29) Interest and commissions paid, net ...... (568) )617( (2,168) Net cash deriving from (used in) financing activities...... 1,513 )1,612( (3,653)

Increase (decrease) in cash and cash equivalents ...... 693 )363( (62) Impact of exchange rate fluctuations on balances of cash and cash equivalents ...... (11) )1( 2 Balance of cash and cash equivalents at the beginning of the year ...... 3,428 3,488 3,488 Balance of cash and cash equivalents at the end of the period ...... 4,110 3,124 3,428

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

THE ISRAEL ELECTRIC CORPORATION LIMITED CONSOLIDATED STATEMENTS OF CASH FLOW (NEW ISRAELI SHEKELS, IN MILLIONS)

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

For the Year ended For the Three Months ended March 31 December 31 2018 2017 2017 Unaudited Audited

Income and expenses not affecting cash flow: Company's share in losses of associates ...... - 5 18 Depreciation and amortization and changes in impairment ...... 1,204 1,155 4,920 Income tax expenses (income) ...... (3) 123 199 Decrease in liabilities with respect to employee benefits, net ...... 20 1 50 Financing expenses recognized in statement of profit and loss...... 553 274 1,530 Capital loss on disposal and sale of fixed assets ...... 8 14 95 1,782 1,572 6,812

Changes in assets and liabilities: Change in trade receivables for sales of electricity (including those presented in long-term receivables) ...... 283 21 (274) Change in other current assets including long-term receivables) ...... (131) )10( 83 Change in inventory (including noncurrent inventory) ...... 71 64 (503) Deposits in funds less payments to pensioners (158) )226( (973) Change in customer advances for work ordered, net of work in progress ...... 29 15 21 Change in trade payables (including long term) ...... (31) 448 32 Change in other current liabilities (including long-term liabilities) ...... 70 )26( (207) 133 286 (1,821)

Taxes on income, which have been paid ...... (3) )3( (11)

1,912 1,855 4,980

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

14 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 1:- GENERAL

a. Company Activities

1) The Israel Electric Corporation Limited (hereinafter: "The Company") engages in the generation, transmission, distribution and supply of and commerce in electricity as well as system administration pursuant to licenses granted to the Company by the State of Israel. The Company is classified as an Essential Service Provider in relation to these services. The Company was declared a monopoly by the General Director of the Israel Antitrust Authority and the directives of the Restrictive Trade Practices Law – 1988 (hereinafter: “Restrictive Trade Practices Law“) apply to the Company (see section h. below). The Company also deals in the construction of the infrastructures required for these activities.

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 – 1975 (hereinafter: “Government Companies Law”) (see section d. below). The Company is also a Public Company as defined by the Companies Law – 1999 (hereinafter: “Companies Law”) and also a Reporting Corporation, as defined by the Securities Law – 1968.

3) These condensed statements should be read in conjunction with the Annual Financial Statements of the Company as of December 31, 2017, and for the year ended on that same date, and their accompanying Notes (hereinafter: the “Annual Financial Statements”).

b. The Electricity Sector Law

From March 4, 1996, the activity of the Electricity Sector is regulated under the Electricity Sector Law, 1996 (hereinafter: the “Electricity Sector Law”) and its regulations and the Company operates accordingly. The provisions of the Electricity Sector Law state that its purpose is to regulate the activity in the electricity sector for the benefit of the public, while securing reliability, availability, quality, efficiency and while creating conditions for competition and minimization of costs.

c. Decisions of the Government Regarding the Electricity Sector and Activities of the Company

Over the years, the Governments of Israel have made decisions that concern the electricity sector and the Company’s operation. Some of the decisions have not yet been implemented due to various considerations. For the main subjects affected by material decisions of the Government, see Note 1c to the Annual Financial Statements.

d. Regulations and Law Provisions Applying to the Company:

For details of the regulations of the law applying to the Company, including the Government Companies Law, and the relevant regulations, as well as additional provisions applying to the Company as a Government Company, see Note 1d to the Annual Financial Statements.

For additional information required according to the directives of the Companies Authority, see Note 13 below.

e. Structural Change

The purpose of the Electricity Sector Law is to regulate the activity in the Electricity sector for the public’s benefit, while ensuring reliability, availability, quality, efficiency, and while creating conditions for competition and minimizing costs. The Electricity Sector Law determines provisions by virtue of which it is obligatory to maintain separation between the electricity generation, transmission, distribution and supply activities and management of the system, under conditions prescribed by the Electricity Sector Law, through distributing the activities among several separate entities (hereinafter: "The Structural Change"), while specifying transition instructions and a timetable for implementing the instructions, which enable the Company to generate, transmit, distribute, supply, sell and trade in electricity, and also act as the electricity system's administrator, according to the licenses, granted to the Company in accordance with the Electricity Sector Law, up to November 15, 2018.

15 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 1:- GENERAL (continued) e. Structural Change (continued):

Over the years, discussions have been held between the Government and regulatory bodies, teams have been appointed, and a number of possible outlines for implementation of the structural change in the Electric Company have been discussed. Since July 2017, consultations were renewed and discussions have been held between the relevant Government entities, the Company, the employees’ representatives in the Company and the Histadrut regarding a proposed outline for a structural change that the Company will implement and the implications of the outline on the workers' rights. Following this, on December 27, 2017, an outline of principles regarding the structural change was formulated, which will serve as a basis for further discussions and negotiations between the relevant parties to each of the issues.

Following further discussions and negotiations between the relevant Government entities, the Company, the employees’ representatives and the Histadrut, on May 10, 2018, the parties reached understandings regarding the proposed outline for a structural change for a period of eight years (hereinafter: "the structural change outline"), which was subsequently approved by the Company's Board of Directors

Below are the Company's main undertakings regarding the structural change outline, as adopted by the Company's Board of Directors in its meeting on May 10, 2018 (hereinafter: "the Company's letter of undertakings"), as well as the main points of the understandings reached which, according to the Company’s understanding, the Ministers intend to present a resolution proposal to the Government with respect to them and to execute legislative amendments as required:

1) Production segment The Company shall reduce its operations in the production segments, as follows:

a) Sale of sites Within a period of approximately five years and as detailed in the table below, the Company will sell, in a competitive process, existing gas-operated generation sites to third parties, including the infrastructures and land of each site, as follows:

Site Name Final date for transfer of possession * Alon Tavor 18 months from the date of the Government's decision on the electricity sector reform. Ramat Hovav 30 months from the date of the Government's decision on the electricity sector reform. Reading 36 months from the date of the Government's decision on the electricity sector reform. Hagit (The part of the site 48 months from the date of the Government's decision on the electricity sector reform. which includes a type E combined cycle area) Eshkol 60 months from the date of the Government's decision on the electricity sector reform.

Part of the area at the Rutenberg power station (designated for Project D) will be transferred pursuant to the arrangement agreements as defined in Note 1f below, within 18 months of the Government's resolution.

* These dates are valid as long as the required legislation is passed by November 30, 2018.

The total installed capacity of the generation sites to be sold by the Company in accordance with the outline of the structural change as of December 31, 2017, is approximately 4,500 megawatts. The Company’s consideration with respect to the sale of the sites will be at the fair value of the asset and in any case will not be less than the value of the sale, plus the value of the land, as will be determined by an expert in the matter. The “value of the sale” for these purposes is the site’s value rate, plus any additional cost that will be recognized by the Electricity Authority and which will be created directly due to the sale process, including the evacuation and construction of the Company infrastructures evacuated from said site, the consideration to be paid to the Company with respect to sale of the site will be paid in cash on the date of delivery of possession thereof – all subject to cost control by the Electricity Authority. Production activities in all generation units remaining in the Company will be reported through a separate profit center. For details regarding the Electricity Authority’s decision pertaining to the arrangement that will apply to producers purchasing power stations from the Company – see Note 3 below. For details regarding the Electricity Authority’s decision pertaining to the Company’s liabilities according to the TOP mechanism insofar as generation stations will be sold by the Company - see Note 9 below.

16 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 1:- GENERAL (continued) e. Structural Change (continued): 1) Production segment (continued):

b) Construction of power stations operating with combined cycle gas turbines

(1) Pursuant to the Government’s resolution in this matter, a wholly-owned subsidiary of the Company will be established (hereinafter: "the generation subsidiary"): (2) Subject to amendment of the Electricity Sector Law and receiving generation licenses, the generation subsidiary shall establish 2 generation units operated by natural gas in the Orot Rabin site with combined cycle technology ("CCGT"). The combined cycle gas turbines shall be registered as the generation subsidiary’s assets. An agreement shall be signed for the purchase of planning and construction services from the Company for the construction of the combined cycle gas turbines. After construction of the combined cycle gas turbines, the generation subsidiary will purchase operation and maintenance services from the Company. The subsidiary will employ up to ten employees. (3) Construction of the first combined cycle gas turbine shall be completed no later than June 2022. Construction of the second combined cycle gas turbine will commence after the sale of the Alon Tavor site and publication of a competitive process for the sale of the Ramat Hovav site. Both combined cycle gas turbines will be at least H technology with a total installed capacity of approximately 1,200 MW, in accordance with the products currently on the market (an upwards variance of 5% will not be considered a deviation from this capacity). (4) In addition to the above understandings, the Company or its generation subsidiary shall not establish, replace, operate, plan or engage in the development of power stations in Israel either by itself or as a contractor for a third party, nor shall it engage in the production of electricity in the framework of microgeneration or renewable energy in Israel. This section will apply both during the reform years and subsequently. The Electric Company has undertaken to the State not to act to obtain new generation licenses or to construct new electricity generation stations and replace existing stations, and not to act to obtain permits for the operation of power stations for other parties in Israel. The aforesaid shall not prevent the Company or the generation subsidiary from engaging in operation and maintenance of their power stations and the planning required for such operations. The Company’s generation licenses pertaining to the generation units that are not sold as part of the reform will be extended until the end of the engineering life-span of each unit.

2) System Management a) Within 18 months of obtaining the Government's resolution regarding the reform of the electricity sector, a separate government company will begin operations to manage the system. The new company's roles will be defined by the state in a license to be granted by the Electricity Authority with the approval of the Minister of Energy. b) Employees from the System Management Unit, Planning Development Technology Division, the Statistics Department and employees from additional units, in accordance with the needs of the economy and in a manner that will enable the functioning of the system management company, will be transferred to the system management company, excluding employees or functions that all parties agreed should remain with the Company. c) The consideration to the Electric Company with respect to the assets the Company will sell to the system management company within the reform will be at the rate value of the assets, as recognized by the Electricity Authority and subject to cost control by the Electricity Authority. d) The system management company will present the Minister with a development plan for the delivery system. e) Agreements with private producers in the transmission grid will be converted from the Electric Company to the system management company until the operation of the system management company, except for aspects pertaining to the responsibility of the Electric Company to connect the facility to the grid and the flow of energy from the facility which will remain under the responsibility of the Electric Company.

17 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 1:- GENERAL (continued) e. Structural Change (continued):

3) Transmission control The Company shall establish a new transmission control that will operate the transmission and transformation system in accordance with the instructions of the system manager, pursuant to the terms that will be set in the licenses and the law.

4) Transmission and distribution segments The Company will continue to act as an essential service provider and execute the transmission operation in accordance with the transmission license updated as of this date. The Company will operate in the transmission and distribution segments through separate profit centers. The licenses for transmission and distribution will be granted for an extended period as customary in the field of public infrastructures such as the natural gas and water sectors.

The volume of distribution licenses in the sector that are not owned by the Company will not exceed 10% of the annual volume of consumption, plus the rate of increase in annual consumption in the distribution areas of those license holders who will be included in this framework. The types of license holders to be included in this framework are: industrial zones that submitted a request for a distribution license or received a distribution license until the date of the Government decision, historical distributors as defined in the criteria and the East Jerusalem Electricity Company Ltd. in the area of the license granted by the Electricity Authority. Insofar as it will be decided to install smart meters for consumers of the Company, the system will be installed by the Company, which will own the meters as part of the distribution segment and the meters will be open access.

5) Supply section a) The Company will be the default supplier for the supply segment and will operate in a separate profit center. The supply of electricity to high voltage and extra high and ultra-high voltage consumers will be opened to full competition. The Company will not be entitled to operate as a competitive entity. The Company will collect a rate as set by the Electricity Authority. The subject will be reexamined after 5 years, inter alia in accordance with the market’s terms of competition, by the Electricity Authority, the Ministry of Energy, the Ministry of Finance, and the Antitrust Authority. b) The supply of electricity to low-voltage consumers will be opened to competition as determined by authorized government officials and at the time determined. At the market opening point the Company will not be allowed to act as a competitive factor in this segment. Accordingly, a mechanism will be determined by the Electricity Authority, in accordance with the policy it shall determine, according to which the state will open the segment to competition gradually so that the market share of the Company is not expected to be less than 60% of the number of customers in the segment during the period of the reform. In the event that the rate of customers drops below 60%, the Company will be given the opportunity to compete in this segment in a fair manner and subject to the Minister’s policy and pursuant to the provisions determined. c) The Company will supply value added services, only as detailed below: (1) Cyber services for all consumers in the ultra-high, extra-high and high voltage supply segments and for its low-voltage consumers. (2) As of the date on which the number of Company consumers in the low voltage supply segment will decrease below 75% of all consumers in this segment, the Company will be entitled to provide cyber services to all consumers and "smart home" services and energy efficiency for low voltage consumers only, and the subject will be defined in the supply license that will be given to the Company.

The "smart home" and "energy efficiency" services for this purpose are services providing information on the characteristics of consumer electricity consumption of each electrical device/appliance, providing consultation services on the ability to reduce power consumption and the efficiency of their use, as well as remote control services for home appliances, including by installation of appropriate equipment at the consumer's private facility for control services.

18 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 1:- GENERAL (continued) e. Structural Change (continued):

6) Financial stability a) Financial goals (1) In accordance with the understandings with respect to the structural change outline, on May 10, 2018, the Board of Directors of the Company approved a business plan that constitutes the basis for the financial model that was presented to the Board of Directors on the date of approval which is based on the principles of the structural change outline formulated during the reform discussions. (2) The financial model, including the financial goals set and the assumptions that served as its basis, were prepared by the Company, presented to the State and discussed in the framework of the reform discussions. (3) During the reform years, a team composed of Government entities headed by the Government Companies Authority Director, with the participation of the Budget Commissioner, the Accountant General and the Director General of the Ministry of Energy or anyone on their behalf, will be established in order to monitor and audit, while consulting with the Company and on the basis of its reports to the team, the compliance with the financial stability targets and the fulfillment of the assumptions underlying the business plan relating to the reform and the structural change (hereinafter: "the Monitoring Team"). The monitoring team will convene once a year or soon after a significant event has occurred that has a direct connection to the implementation of the reform, which significantly affects the Company's financial stability targets, whichever is earlier. To the extent that it is agreed that there is an expected material deviation from meeting the financial stability targets or the assumptions at the base of the business plan relating to the reform and the structural change, the team will hold discussions with the Company regarding possible courses of action.

b) Restrictions and provisions included in the debt raising documents For the avoidance of doubt, all sale or transfer of assets or liabilities by the Company, including to a subsidiary, or the sale of generation sites, will be made subject to any Law and subject to the restrictions included in the Company's debt-raising documents.

7) Organizational changes and efficiency program: The Company will undergo a significant process of organizational change and an efficiency program in which the number of employees in the Company will be reduced by approximately 1,800 employees over 8 years between 2018 and 2025. Following retirement of employees as stated, full-time positions will be deleted in the same number as the number of employees who retire from the Company's employee roster according to the number of early retirements carried out in practice. In addition, it is expected that some of the employees will move to the system management company and to the companies that will purchase the generation units that will be sold. The total number of permanent employees will decrease by approximately 2,200 permanent employees.

At the end of the reform period, the number of permanent employees in the Company will not exceed 6,400 permanent employees. In addition, from January 1, 2022 and during the remainder of the reform period, the number of temporary employees will be between 2,600 and 2,900. Insofar as the tasks imposed on the Company require the employment of additional temporary employees beyond the said volume of temporary employees, their employment will be subject to the approval of the Director of the Government Companies Authority and the Director General of the Ministry of Energy. For this matter – the “reform period” – eight years from the date of the Government’s resolution. That stated in this section pertaining to permanent employees is subject to the removal of the system management activity and sale of the generation sites, as they are defined in the collective agreement, in a full manner and no later than by the end of the reform period.

Furthermore, the outline of the organizational change includes, among other things, an agreed framework for updating labor relations and changes in the organizational culture of the Company, the principles of changing the structure of the organization and efficiency and a timetable for achieving an agreement to change the salary structure for new employees that will be hired. Moreover, agreements were reached regarding payments to permanent employees who will remain in the Company and to employees who retire as part of the efficiency plan, the entitlement to which will be established according to milestones to be agreed upon.

19 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 1:- GENERAL (continued) e. Structural Change (continued): 7) Organizational changes and efficiency program: (continued) For details regarding a collective agreement signed on May 17, 2018, anchoring the principles detailed above with respect to the implications of the structural change and the efficiency plan for the employees and update of the labor relations in the Company, see Note 5f below.

It is noted that the Board of Directors' approval and the compliance with the Company's undertakings as part of the agreements, is subject to compliance with all the preconditions for the execution of the asset arrangement outline, in accordance with the regulatory agreements dated January 3, 2018 (see Note 1f below). For the avoidance of doubt, the execution of the outline of assets arrangement as detailed in Note 1f is not conditional upon the progress or implementation of the structural change according to the understandings.

In addition, as the Government's representatives were notified, the Company's Board of Directors' resolution dated May 10, 2018, and the compliance with the Company's undertakings as stated below are, without exception, subject to and contingent upon the Government making a decision based on the aforementioned agreements, and subject to the incorporation of the requisite arrangements in primary legislation and/or secondary legislation and/or administrative decisions and/or regulations of the Electricity Authority, and in the licenses provided by the competent institutions in Israel, as required by any applicable Law.

In case the Government's decisions and/or legislative amendments and/or administrative decisions and/or Electricity Authority regulations and/or the aforesaid State licenses are not consistent with the agreements (insofar as these are required by the Government), or that the collective agreement between the Company and the employees’ representatives will not be in force, all the Company's undertakings pursuant to the Company's letter of undertakings and its appendixes shall not be in effect and the Government shall not make any claims and/or contentions towards the Company in respect of said undertakings.

Further to the aforesaid, for the purpose of implementing the structural change, if and to the extent that it is implemented, and granting binding legal effect to the agreed structural change, will require, among other things, a Government resolution, regulatory approval, amendments to the relevant provisions of the Law, the Electricity Authority's provisions and the granting of licenses in connection therewith subject to the Law, that have not been received in full as of the date of approval of the financial statements.

The requisite amendments to the relevant statutory provisions, as well as the Electricity Authority's provisions and the amendments to the terms of the licenses may take some time, and their final terms may differ from those expected as of this date. If the provisions of the Electricity Sector Law are not amended, the Company may be required to implement the provisions of the Electricity Sector Law in its current version, including those regarding a restriction on the number of licenses.

It is noted that as of the date of approval of the financial statements, the actual implementation of the structural change has not yet begun. In any outline and despite the agreements reached in principle, there is still uncertainty regarding the final format of the structural change, the date of its implementation or its implications for the Company, its business and its results. However, implementation of the structural change is expected to have a material effect on the Company, its business, its operations and its financial results. On May 24, 2018, a joint notice was published by the Ministry of Energy and the Ministry of Finance on the Government’s information and services website, under which the reform in the electricity sector and the Company will be submitted on May 27, 2018 for the approval of the Government.

For addition details in connection with the structural change, see Note 1e and 1f in the Annual Financial Statements. For details on the National Labor Court proceedings in connection with the labor dispute regarding advancement of the Company's reform plan, see Note 9c1 below.

20 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 1:- GENERAL (continued)

f. Assets Arrangement

The Electricity Sector Law prescribes different directives with respect to certain rights and assets, which were held by the Company on the expiration date of the concessions granted to the Company by force of the Electricity Concession Ordinance (March 4, 1996).

For details on the agreements entered into by the Company, the Government, the Israel Land Administration and the Tel Aviv Municipality regarding the outline for the assets arrangement, see Note 1f to the Annual Financial Statements. The agreements regarding the outline of the assets arrangement were approved by the Audit Committee and the Company’s Board of Directors on May 10, 2018, as a transaction of the Company with its controlling shareholder.

As detailed in Note 1f to the Annual Financial Statements, the agreements are dependent on a number of preconditions which the sides are working on fulfilling. The Company estimates that as of the date of approval of the financial statements, the execution of the assets arrangement under the proposed outline is expected to have a positive impact on the Company’s financial position, but the Company cannot estimate the possible implications of the implementation of the assets arrangement, if the assets arrangement will not be implemented or if its terms will be different than those in the agreed outline for the assets arrangement.

As at the date of the approval of the financial statements, the Company and the relevant State entities are continuing to act to advance the assets arrangement in accordance with the agreements signed on January 3, 2018.

For additional details, including with regard to the provisions of the Electricity Sector Law in this matter, the positions of the Company and the governmental entities and the contacts between them, see Notes 1e and 1f to the Annual Financial Statements.

g. Environmental Protection Laws

1. For details of material provisions of the law applying to the Company in the field of environmental protection, including details regarding the emission reduction project, see Note 1g to the Annual Financial Statements. In addition, below are details of developments which occurred during the report period:

In March 2018, the Company applied for a postponement of the date of shutdown of unit 4 at the Rutenberg site for the benefit of the emission reduction project. The Ministry of Environmental Protection demanded completion and clarifications in this matter. After the statement of financial position date, on April 29, 2018, a written approval was received from the Ministry of Environmental Protection for postponing the date of shutdown date of unit 4 for emission reduction at the Rutenberg power station until October 1, 2018, subject to reduction of the excess emission by proactively shutting down unit 2 at the Orot Rabin power station from March 15, 2018 until April 4, 2018, as has already been executed by the Company. (And in addition to the shutdown of a unit of units 1-4 in the autumn seasons, as required in the emission permit, in light of the policy of the Ministry of Environmental Protection and the Ministry of Energy regarding the reduction of the use of coal).

2. For additional details regarding the decision of the Minister of Energy with respect to reduction of the use of coal and transfer of units 1-4 at the Orot Rabin power station into preservation, see Note 1g (Instructions of the Minister of Energy – Reducing the use of coal) to the Annual Financial Statements. The Company is studying the Minister’s decisions and their implications and at this stage it is unable to estimate the impact of the decisions on its financial position and results.

Within the framework of an application sent by the Company in March 2018 pertaining to a planned shutdown of a unit out of the units 1-4 this spring due to system management considerations, the Ministry of Environmental Protection and the Ministry of Energy clarified that in light of the Ministries’ policy with respect to reduction of the use of coal, shutting down the unit in the spring season will be in addition to shutting down a unit in the autumn season as required by the emission permit.

21 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 1:- GENERAL (continued)

h. The Restrictive Trade Practices Law, 1988:

Further to Note 1h1 to the Annual Financial Statements, on April 25, 2018, the Company and the Antitrust Authority signed a consent decree under section 50b of the Restrictive Trade Practices Law (hereinafter: the “Consent Decree”). The Consent Decree concerns the demand for data delivered by the Antitrust Authority (hereinafter: the “Antitrust Authority”) to the Company. The Company admitted that in retrospect it became clear to it that it did not respond to the first data demands sent to it by the Antitrust Authority fully and completely as required under section 46(b) of the Restrictive Trade Practices Law, and some of the documents requested were transferred to the Authority only after additional demands for data were sent to the Company, pertaining to the issue of client portfolio manager. As part of the Consent Decree, the Company undertook to pay NIS 3 million to the State Treasury. It was also agreed within the Consent Decree that subject to the approval of the Consent Decree by the Antitrust Tribunal, and to fulfilling the Company's obligation to pay as stated above, the Director General of the Antitrust Authority will not take any enforcement measures against the Company and/or anyone acting on its behalf, including Company officers, consultants, employees, managers and holders of rights therein, in the past or in the present, with respect to a breach of Section 46(b) of the Restrictive Trade Practices Law, in connection with documents that were not transferred in response to the first data demands and delivered to the Antitrust Authority prior to signing the decree. The Consent Decree will enter into effect after its approval by the Antitrust Tribunal.

After the statement of financial position date, on April 26, 2018, an appeal on behalf of the Company and a serving office-holder was submitted to the Antitrust Tribunal, regarding the determination of the Acting Director General with respect to abuse of position contrary to section 29a of the Restrictive Trade Practices Law, and a demand for payment under section 50h of the Law pertaining to the issue of the client portfolio manager.

i. Definitions

The Company – The Israel Electric Corporation Ltd. Interested Parties – As "interested party" is defined in Section 1 of the Securities Law, 1968. Related Parties – As defined under International Accounting Standard 24. Companies Authority – The Government Companies Authority. Dollar – US dollar. Subsidiary Company – Company either directly or indirectly controlled (as defined under IAS 27) by the Company and whose financial reports are fully consolidated with those of the Company. Held Companies – Subsidiary companies and investee companies. Associate Company – Company in which the Company has material influence. Total Electricity Consumers – All the electricity consumers in Israel that are customers of the Company and that are customers of private producers.

22 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES:

a. Declaration of Compliance with International Financial Reporting Standards:

The Condensed Consolidated Interim Financial Statements (hereinafter: the “Interim Financial Statements”) of the Company were prepared in accordance with International Accounting Standard no. 34 “Interim Financial Reporting” (hereinafter: “IAS 34”)”. In preparing these interim financial statements, the Company implemented accounting policies, presentation rules calculation methods and consideration of key factors for uncertainty in estimates and discretion in implementation of accounting policies identical to those detailed in Note 2 to the Annual Financial Statements (hereinafter: the “Annual Statements”). Furthermore, these statements were prepared in accordance with the provisions of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.

The Condensed Consolidated Interim Financial Statements were approved for publication by the Company's Board of Directors on May 24, 2018.

b. Operating cycle period

The Company’s regular operating cycle period is 12 months.

c. Initial implementation of new standards, amendments of standards, and interpretations:

1) IFRS 9 (2014), Financial Instruments

As from the first quarter of 2018 (in this section: the “date of initial application”), the Company applies IFRS 9 (2014), which replaces IAS 39, Financial Instruments: Recognition and Measurement.

The Company has chosen to apply the Standard without amending the comparative data, apart from accounting for the Basis Spread as a separate component in the hedge fund (with no impact on the profit and loss), as specified below, the effect of the amendment to the Standard as of the transition date (date of first-time implementation) is immaterial.

Below are the main changes in the new accounting policy, as a result of the first-time implementation of the Standard:

Financial Instruments

According to the standard the basis of classification for financial assets that are debt instruments is the Company's business model for managing financial assets as well as the contractual cash flow characteristics of the financial asset. Therefore: a) Debt assets that are held within a business model whose objective is to hold financial assets so as to collect contractual cash flows, and include solely payments of principal and interest, are measured according to the standard at amortized cost. b) Debt assets whose contractual cash flow characteristics do not include solely payments of principal and interest (including loans with no defined repayment dates) are measured according to the standard at fair value through profit or loss. c) Investments in equity instruments are measured at fair value through profit or loss. As a result, investments in equity instruments that were classified as available for sale are measured at fair value through profit or loss according to the standard. d) Trade and other accounts receivable - The standard includes a new ‘expected credit loss’ model for financial debt assets not measured at fair value through profit or loss. As of January 1, 2018, there was no material impact on the amount of the provision for impairment of these assets as a result of the implementation of the Standard.

Derivative financial instruments, including hedge accounting

The Group holds financial derivatives for hedging against foreign currency risks and interest rate risks, as well as derivatives that are not used for hedge accounting. Embedded derivatives are separated from the host contract and accounted for separately, provided the host contract is not a financial asset and additional criteria are met. Derivatives are initially recognized at fair value. Subsequent to initial recognition, the derivatives are measured at fair value and any changes thereto are recognized in profit or loss.

23 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued): c. Initial application of new standards, amendments to standards and interpretations (continued)

1) IFRS 9 (2014), Financial Instruments (continued)

Hedge accounting

The new Standard includes some changes in the hedge accounting rules, such that additional hedging strategies used for risk management purposes would qualify for hedge accounting. The Standard replaces the current 80%- 125% test for determining the effectiveness of the hedging strategy, requiring that an economic relationship exists between the hedged item and the hedging instrument, without establishing a quantitative threshold. In addition, pursuant to the Company's accounting policy under IAS 39, in cash flow hedge transactions entered into to hedge foreign currency risks in loans using CCIRS, the Company has included the Foreign Currency Basis Spread, which is used to determine the price of hedging derivatives, in the valuation of the hypothetical derivative used to examine the effectiveness of the hedging and the calculation of ineffectiveness. In accordance with IFRS 9, the Basis Spread may not be included in the calculation of the hypothetical derivative since it does not represent a component in the hedged item. As a result, the Company has elected to retrospectively implement, under the new Standard, accounting policy for existing hedges, according to which the Basis Spread component will be separated and will not be included in the hedging relationship, but rather be accounted for as hedging costs. Changes in the value of this component will be recognized in other comprehensive income and charged to profit and loss over the hedging period. Therefore, as a result of implementing the Standard, on January 1, 2018, the Company separated the amount attributed to the Basis Spread of approximately NIS 152 million, from the hedge reserve, creating a separate capital reserve called "Hedging Costs". If the hedging no longer meets the hedge accounting criteria, or if the hedging instrument is sold, expires, cancelled or exercised, the hedge accounting is discontinued, in a prospective manner. When the hedge accounting is discontinued, the amounts previously accrued in the hedge reserve and in the hedging costs reserve remain in the reserve up to the date in which they are reclassified to profit and loss, during the period or periods in which the future expected cash flow hedges affect the profit and loss (in respect of other cash flow hedges). If the future cash flow hedges are no longer expected to exist, the amounts previously accrued in the hedge reserve and in the hedging costs reserve are immediately reclassified to profit and loss.

Classification and measurement of financial assets and financial liabilities

Initial recognition and measurement The Company initially recognizes trade receivables and debt instruments issued on the date that they are created. All other financial assets and financial liabilities are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Generally, a financial asset or financial liability are initially measured at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issuance of the financial asset or financial liability. A trade receivable without a significant financing component is initially measured at the transaction price. Receivables originating from contract assets are initially measured at the carrying amount of the contract assets on the date classification was changed from contract asset to receivables.

Financial assets – classification and subsequent measurement

Financial assets are classified at initial recognition to one of the following measurement categories: amortized cost; fair value through other comprehensive income – investments in debt instruments; fair value through other comprehensive income – investments in equity instruments; or fair value through profit or loss.

Financial assets are not reclassified in subsequent periods unless, and only if, the Group changes its business model for the management of financial debt assets, in which case the affected financial debt assets are reclassified at the beginning of the period following the change in the business model.

A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated at fair value through profit or loss: - It is held within a business model whose objective is to hold assets so as to collect contractual cash flows; and - The contractual terms of the debt instrument give rise on specified dates to cash flows representing payments of principal and interest on the principal amount outstanding.

24 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued): c. Initial application of new standards, amendments to standards and interpretations (continued)

1) IFRS 9 (2014), Financial Instruments (continued) Financial assets – classification and subsequent measurement (continued)

A debt instrument is measured at fair value through other comprehensive income if it meets both of the following conditions and is not designated at fair value through profit or loss: - It is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and - The contractual terms of the debt instrument give rise on specified dates to cash flows representing solely payments of principal and interest on the principal amount outstanding.

The Company has balances of trade and other receivables and deposits that are held within a business model whose objective is collecting contractual cash flows. The contractual cash flows of these financial assets represent solely payments of principal and interest that reflects consideration for the time value of money and the credit risk. Accordingly, these financial assets are measured at amortized cost.

Financial assets – assessment whether cash flows represent solely payments of principal and interest

For the purpose of examining whether the cash flows represent solely payments of principal and interest, ‘principal’ is the fair value of the financial asset at initial recognition, ‘interest’ comprises consideration for the time value of money, for the credit risk attributable to the principal amount outstanding during a certain period of time and for other risks and basic costs of a loan, as well as a profit margin.

Financial assets – subsequent measurement and gains and losses

Financial assets at fair value through profit or loss These assets are subsequently measured at fair value. Net gains and losses, including interest income or dividends, are recognized in profit or loss.

Financial assets at amortized cost These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.

Financial liabilities – classification, subsequent measurement and gains and losses

Financial liabilities are classified as measured at amortized cost or fair value through profit or loss. A financial liability is measured at fair value through profit or loss if it is classified as held for trading, is a derivative instrument or is designated for measurement as such at initial recognition. Financial liabilities at fair value through profit or loss are measured at fair value, with the net gains and losses, including any interest expenses, being recognized in profit or loss. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expenses and foreign exchange gains and losses are recognized in profit or loss. Any gain or loss on derecognition is also recognized in profit or loss.

Derecognition of financial liabilities

Financial liabilities are derecognized when the contractual obligation of the Group expires or is discharged or cancelled. Furthermore, a substantial modification of the terms of an existing financial liability, or an exchange between an existing borrower and existing lender of debt instruments with substantially different terms, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability at fair value.

The difference between the carrying amount of the extinguished financial liability and the consideration paid (including any non-cash assets transferred or assumed liabilities), is recognized in profit or loss. In the case of an immaterial change in terms (or exchange of debt instruments), the new cash flows are discounted at the original effective interest rate, with the difference between the present value of the financial liability with the new terms and the present value of the original financial liability being recognized in profit or loss.

25 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued): c. Initial application of new standards, amendments to standards and interpretations (continued)

1) IFRS 9 (2014), Financial Instruments (continued)

Impairment

Financial assets, contract assets and lease receivables

The Group recognizes a provision for expected credit losses in respect of: - Financial assets at amortized cost; - Investment in debt instruments at fair value through other comprehensive income; - Contract assets (as defined in IFRS 15); and - Lease receivables.

The Group measures the provision for expected credit losses at an amount equal to the full lifetime expected credit losses, other than the provisions hereunder that are measured at an amount equal to the 12-month expected credit losses: - Debt instruments that are determined to have low credit risk at the reporting date; and - Other debts instruments and deposits, for which credit risk has not increased significantly since initial recognition.

Measurement of expected credit losses

Expected credit losses are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive.

Expected credit losses are discounted at the effective interest rate of the financial asset.

Credit-impaired financial assets

At each reporting date, the Group assesses whether financial assets carried at amortized cost and debt instruments at fair value through other comprehensive income are credit-impaired. A financial asset is ‘credit- impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Presentation of impairment

Provisions for expected credit losses of financial assets measured at amortized cost are deducted from the gross carrying amount of the financial assets.

For investments in debt instruments at fair value through other comprehensive income, the provision for expected credit losses is recognized in other comprehensive income and it is does not reduce the carrying amount of the financial asset.

Impairment losses related to trade and other receivables, including contract assets, are presented in the item of administration and general in the statement of profit or loss. Impairment losses on other financial assets are presented under financing expenses.

26 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued): c. Initial application of new standards, amendments to standards and interpretations (continued)

2) IFRS 15 Revenue from Contracts with Customers

As from January 1, 2018 the Company initially applies International Financial Reporting Standard 15 (hereinafter - “the standard”) which provides guidance on revenue recognition. The effect of the change in the standard as of the transition date (the date of initial implementation) is immaterial.

The standard introduces a new five step model for recognizing revenue from contracts with customers: (1) Identifying the contract with the customer. (2) Identifying distinct performance obligations in the contract. (3) Determining the transaction price. (4) Allocating the transaction price to distinct performance obligations. (5) Recognizing revenue when the performance obligations are satisfied.

Below are the highlights of the accounting policy, which has been applied as of January 1, 2018, following the implementation of the standard:

According to the standard, incremental costs to obtain a contract with a customer are recognized as an asset when it is probable that the Company will recover those costs. Accordingly, costs of connecting customers to the power grid (a contract with a customer) are recognized as an asset and amortized on a systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset relates.

Revenue The Company recognizes revenue when the customer obtains control over the promised goods or services. The revenue is measured according to the amount of the consideration to which the Company expects to be entitled in exchange for the goods or services promised to the customer, other than amounts collected for third parties.

Identifying the contract The Company accounts for a contract with a customer only when the following conditions are met: a) The parties to the contract have approved the contract (in writing, orally or according to other customary business practices) and they are committed to satisfying the obligations attributable to them; b) The Company can identify the rights of each party in relation to the goods or services that will be transferred; c) The Company can identify the payment terms for the goods or services that will be transferred; d) The contract has a commercial substance (i.e. the risk, timing and amount of the entity’s future cash flows are expected to change as a result of the contract); and e) It is probable that the consideration, to which the Company is entitled to in exchange for the goods or services transferred to the customer, will be collected.

For the purpose of paragraph (e) the Company examines, inter alia, the percentage of the advance payments received and the spread of the contractual payments, past experience with the customer and the status and existence of sufficient collateral.

If a contract with a customer does not meet all of the above criteria, consideration received from the customer is recognized as a liability until the criteria are met or when one of the following events occurs: the Company has no remaining obligations to transfer goods or services to the customer and any consideration promised by the customer has been received and cannot be returned; or the contract has been terminated and the consideration received from the customer cannot be refunded.

27 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 2:- REPORTING RULES AND ACCOUNTING POLICIES (continued): c. Initial application of new standards, amendments to standards and interpretations (continued) 2) IFRS 15 Revenue from Contracts with Customers (continued)

Identifying performance obligations On the contract’s inception date the Company assesses the goods or services promised in the contract with the customer and identifies as a performance obligation any promise to transfer to the customer one of the following: (a) Goods or services (or a bundle of goods or services) that are distinct; or (b) A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. The Company identifies goods or services promised to the customer as being distinct when the customer can benefit from the goods or services on their own or in conjunction with other readily available resources and the Company's promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract. In order to examine whether a promise to transfer goods or services is separately identifiable, the Company examines whether it is providing a significant service of integrating the goods or services with other goods or services promised in the contract into one integrated outcome that is the purpose of the contract.

Determining the transaction price The transaction price is the amount of the consideration to which the Company expects to be entitled in exchange for the goods or services promised to the customer, other than amounts collected for third parties. The Company takes into account the effects of all the following elements when determining the transaction price: variable consideration, the existence of a significant financing component, non-cash consideration, and consideration payable to the customer.

Satisfaction of performance obligations Revenue is recognized when the Company satisfies a performance obligation by transferring to the customer control over promised goods or services. In projects executed under contract, the Company transfers control over time and therefore recognizes revenue over time since the Company's performance creates or enhances an asset that is controlled by the customer at the time it is being created or enhanced.

Measurement of progress towards satisfying performance obligations The Company recognizes revenue from performance contracts over time by measuring progress towards full satisfaction of the performance obligation in a manner that reflects the Company's performance in transferring the control over the goods or services that were promised to the customer. When the outcome of a performance obligation cannot be measured reliably (for example in the early stages of a contract) but the Company expects to recover the costs incurred, revenue is recognized only up to the amount of incurred costs (zero margin) up to the date the outcome of the performance obligation can be measured reliably.

The Company applies a method based on inputs for measuring progress in performance. According to this method, the percentage of completion is determined based on an estimate of total costs required to complete the performance obligation. This estimate includes direct costs as well as indirect costs relating directly to satisfaction of the performance obligation and are allocated according to a reasonable allocation key. The Company is of the opinion that using the inputs method best represents the pattern of transferring control to the customer.

When the Company uses an approach based on inputs, it does not include the effects of any inputs that do not reflect the Company's performance in transferring control over the goods or services to the customer.

When the Company uses an approach based on inputs in measuring progress, a cost incurred that is not proportional to the progress towards satisfying the performance obligation, is not taken into account when measuring the stage of completion. In these cases the Company recognizes revenues in an amount equal to the cost of the goods used to satisfy the performance obligation (i.e. zero margin), when all the following conditions are met: The goods are not distinct; the customer is expected to obtain control over the goods long before receiving the related services; the cost of the goods is significant compared to total anticipated contract costs; and the Company purchases the goods from a third party and is not significantly involved in designing and manufacturing the goods.

28 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

Contract costs Incremental costs of obtaining a contract with a customer are recognized as an asset when the Company is likely to recover these costs. Costs to obtain a contract that would have been incurred regardless of the contract are recognized as an expense as incurred, unless the customer can be billed for those costs.

Costs incurred to fulfill a contract with a customer and not in the scope of another standard are recognized as an asset when they: relate directly to a contract the Company can specifically identify; they generate or enhance resources of the Company that will be used in satisfying performance obligations in the future; and they are expected to be recovered. In any other case the costs are recognized as an expense as incurred.

Capitalized costs are amortized in the income statement on a systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset relates.

Every reporting period the Company examines whether the carrying amount of the asset recognized as aforesaid exceeds the consideration the entity expects to receive in exchange for the goods or services to which the asset relates, less the costs directly attributable to the provision of these goods or services that were not recognized as expenses, and if necessary an impairment loss is recognized in profit or loss.

d. New standards that have not yet been adopted

1) IFRS 16, leases

For details see Note 2ab3 to the Annual Statements.

29 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 3:- THE ELECTRICITY RATE AND REGULATION

The revenues of the Corporation are based on the electricity charge rate that the Company charges consumers. In accordance with the Electricity Sector Law, the electricity charge rates and their manners of update are determined by the Electricity Authority (hereinafter: the “Authority”). For additional details regarding the manner of determining the electricity charge rate, the rate update mechanism and the date of its update, the 2018 annual update, the rate base for the generation segment and the grid segments for 2018-2022, the emission reduction project at the coal-powered power stations, rate recognition of pension costs, system costs, temporary rate for sale of electricity to the Palestinian Authority, and more, see Note 3 to the Annual Financial Statements.

Following are the major developments regarding the electricity rate and regulation as of the date of approval of the financial statements:

a. Rate base of the grid segments

After the statement of financial position date, on April 10, 2018, the Company received the Authority’s decision regarding the grid’s rate base, which constitutes an update of the decision of January 8, 2018 (see Note 3e to the Annual Financial Statements). The major change is in the manner of recognition of the costs of the consumer services. The Authority now recognized in this decision at a rate of 55% of the gap between the 2016 consumer services costs and the 2018 consumer services costs and not at 85% of the gap as recognized in the previous decision. The Company is expected to receive this gap up to and including 2022. This decrease has already been included in the rates in effect as of January 15, 2018.

b. The Authority's decisions regarding the sale of generation stations by the Company within the consents of the reform

After the statement of financial position date, on May 17, 2018, the Company received the Authority’s decision under which, in order to ensure sale of power stations by the Company, as part of the reform being formulated, and on condition that the Electricity Sector Law will be amended and the Government’s policy in the matter will be implemented, the Authority intends to publish regulation that will apply to producers that will purchase power stations from the Company. In this framework, the Authority will publish principles under which it will determine the regulation, and the principles will include, inter alia, the following principles:

1) The consideration for the Company with respect to the sale of the sites will be at the fair value of the asset and in any case will not be less than the sale value, plus the land value, as will be determined by an expert in this matter. The sale value is the rate value of the site plus every additional cost that will be recognized by the Authority and which will be created directly due to the sale proceeding, including due to the evacuation and construction of the Company's infrastructures that will be evacuated from the said site.

2) The consideration to be paid to the Company with respect to the sale of the site will be paid in cash on the date of delivery of possession therein.

The decision indicates that the Company's consideration for the assets it will sell to the system management company as part of the reform will be equal to the rate value of the properties, as recognized by the Authority. The decision further states that all of the aforesaid is subject to cost control by the Authority.

In addition, subsequent to the statement of financial position date, on May 17, 2018, the Company received an additional Authority's decision regarding the Company's compliance with its commitments to a minimum purchase of gas in accordance with its gas agreement with the Tamar Partnership in a situation of sale of generation stations as part of the reform. For additional details, see Note 9a below.

30 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 4:- TRADE RECEIVABLES FOR SALES OF ELECTRICITY

a. Composition

As of As of March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Open debts (1) ...... 4,141 4,021 4,217 Provision for doubtful debts ...... )489( )598( )496( Unrecognized income (2) ...... )1,047( )857( )981( 2,605 2,566 2,740 Income receivable (3) ...... 1,541 1,568 1,689

Total customer receivables with respect to electricity sales ...... 4,146 4,134 4,429

(1) Also includes balances as of March 31, 2018, with respect to the accumulated debt of the private suppliers and self-generators with respect to the system management rates for the period from June 1, 2013 to September 13, 2015, in the amount of approximately NIS 50 million (also see Note 3k to the Annual Financial Statements).

(2) The above mentioned relates to income from various customers throughout the Palestinian Authority (hereinafter: the “Palestinian Authority”) and the East Jerusalem Electricity Company as detailed in section b. below. Regarding the examination of the manner of recognizing the income see Note 2q1b to the Annual Financial Statements.

(3) Income with respect to the relative part of the electricity invoices issued after the date of the Statement of Financial Position, that according to an estimate relate to the reporting period. See also Note 2c2 above.

For details on criteria for customer credit days and charging arrears interest, see Note 6a to the Annual Financial Statements.

31 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 4:- TRADE RECEIVABLES FOR SALES OF ELECTRICITY (continued)

b. Debts of the East Jerusalem Electricity Company and the Palestinian Authority

1) The customers balance includes, among others, the debts of the customers of the Palestinian Authority and the East Jerusalem Electricity Company.

Below are details of the balances of the Palestinian Authority and the East Jerusalem Electricity Company after provision for doubtful debts and income that was not recognized:

As of As of March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Issued invoices ...... 1,437 1,417 1,334 Receivables ...... 166 122 186 Total debt ...... 1,603 1,539 1,520 Less: Provision for doubtful debts previous periods ...... )239 ( )374( )374( Change in provision for doubtful debts in the period ...... - - 135 Income not recognized previous periods ...... )981.. ( )751( )751( Income not recognized in the period ...... )66 ( )106( )230( Total debt with respect to sale of electricity 317 308 300

The payments of the Palestinian Authority and the East Jerusalem Electricity Company are executed both through transferring direct payments and through transfers that the Company received from the Ministry of Finance, out of the sums held by the Ministry of Finance that are at the disposal of the Palestinian Authority.

On September 13, 2016, an agreement of principles was signed, to resolve the Palestinian electricity debts and to regulate the Palestinian electricity sector (hereinafter: the “Agreement of Principles”).

For details regarding the agreement of principles as aforesaid, see Note 6c to the Annual Financial Statements.

On May 1, 2018, the Company initialed a draft agreement with the Palestinian Electricity Transmission Limited (hereinafter: the “PETL Company”).

The initialing of the draft agreement does not bind the parties at this stage and reflects only the commercial consents reached by the parties up to this stage. The parties will complete negotiations regarding an operating agreement that will constitute an appendix to the commercial agreement that will be signed. The agreement that will be formulated, including its appendices, will enter into a binding effect if and insofar as it will be approved by all the entities required to approve it, including the Company's Board of Directors and the Electricity Authority.

Within the draft agreement, which will be in effect for 15 years, the Company is expected to sell to the PETL Company electricity and related services through 4 high voltage substations and through high and low voltage connection points, for the purpose of its distribution and supply by the PETL Company or anyone on its behalf, to the consumers in the areas of the Palestinian Authority.

Furthermore, upon signing the agreement that will be formulated, payment of the past debt of the East Jerusalem Electricity Company and the Palestinian Authority will commence, in 48 equal installments, with respect to electricity consumption in the period before September 12, 2016, as was determined in the agreement of principles between the Government of Israel and the Palestinian Authority, of September 13, 2016, as described in Note 6c to the Annual Financial Statements.

To secure all the payments due to the Company by virtue of the agreement, including with respect to the past debt as aforesaid, a bank guarantee and a guarantee by the Palestinian Authority will be provided for the Company, in addition to the other existing collection mechanisms available to the Company.

32 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 4:- TRADE RECEIVABLES FOR SALES OF ELECTRICITY (continued)

b. Debts of the East Jerusalem Electricity Company and the Palestinian Authority (continued)

As at the date of approval of the financial statements, the negotiations on the issues for which agreement has not yet been finalized have not yet been completed, and the agreement has not yet been approved by all the relevant entities.

In light of the fact that the aforementioned steps, which constitute a condition for the continued repayment of the debt, have not yet been completed, the Company did not change the policy of provisions and revenue recognition for the aforementioned debt balance.

2) Further to that stated in Note 6c2b to the Annual Financial Statements regarding the Company's claim against the East Jerusalem Electricity Company and the East Jerusalem Electricity Company’s claim against the Company, subsequent to the date of the statement of financial position, on May 17, 2018, the Company filed an update notice regarding the signing of the draft agreement between it and PETL as described in section 1 above. On the same day, the Court held that after the opinion of the expert had been prepared and before setting the date for the hearing, the Company will provide an update regarding the agreement and announce its position regarding continuation of the proceedings. On May 23, 2018, the East Jerusalem Electricity Company filed a motion to strike out the proceeding "in light of recent events" and because the agreement with PETL allegedly nullifies the investigation of the claim and justifies its removal. The court ruled that the Company must submit its response by May 30, 2018, and suggested that the parties hold discussions to end the proceedings in an alternative procedural format, and agree to terminate the proceedings without an order for costs and their renewal on another date, if at all, from the point at which they were terminated.

The Company’s legal advisors estimate that if the agreement of principles signed by the Company as described above will become effective, it is expected that most of the mutual actions between the East Jerusalem Electricity Company and the Company will be cancelled.

3) Further to that mentioned in Note 6c2c to the Annual Financial Statements regarding a petition to the High Court of Justice by the East Jerusalem Electricity Company against the Minister, the Electricity Authority and the Company and the parties' responses, subsequent to the date of the statement of financial position, on May 3, 2018, the State submitted an update notice regarding the signing of the draft agreement between the Company and PETL as described in section 1 above. On May 7, 2018, the Court ruled that the Company and the East Jerusalem Electricity Company will submit an update notice regarding the agreement between them by June 15, 2018.

The Company is examining the implications of the legal proceedings and sources for repaying the debt and has accordingly included an appropriate provision in the financial statements.

33 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS

a. Excess of amounts of pension plan assets over the pension obligation

As of As of March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Fair value of plan assets (see section i. 2) below) ...... 31,452 29,465 31,477 Present value of pension obligations (see section h. 1) below) ...... )25,257 ( )23,430( )26,330( 6,195 6,035 5,147 Present value of pension obligations with respect to special agreements on early retirement (see section h. 3) below)...... )437..... ( )534( )475(

Excess of pension plan assets over pension obligations ...... 5,758 5,501 4,672

b. Funds in Trust

As of As of March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Fair value of funds in trust (see section j below) ...... 1,593 1,592 1,617

c. Liabilities with respect to other post-employment benefits

As of As of March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Present value of obligation with respect to other post- employment benefits (see section h) 2) below) ...... 2,775 2,754 2,886

Composition according to types of the other benefits:

As of As of March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Discounted electricity ...... 914 970 955 V.A.T. and grossed up tax with respect to discounted electricity ...... 344 366 360 Retirement benefits ...... 1,104 1,031 1,136 Welfare Fund for pensioners insured in the budgetary pension ...... 52 48 55 Holiday gifts including grossed up tax ...... 361.... 339 380

Total ...... 2,775 2,754 2,886

34 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued)

d. The Budgetary Pension Plan of the Company and Other Post-Employment Benefits

The pension regulations from 1958 apply to all Company tenured employees and pensioners and their survivors who were admitted to work in the Company up to June 10, 1996 (inclusive) (hereinafter: “the Insured under the Budgetary Pension Arrangement”). The code of the central provident fund for pension to the Company’s employees, pensioners and their survivors is based on the provisions of the aforesaid pension regulations and prescribes the entitlements of the Insured under the Budgetary Pension Arrangement.

For additional details also see Note 11d to the Annual Financial Statements.

e. Pension to Employees who are not included in the Budgetary Pension Plan The remaining permanent employees of the Company (hereinafter: “Generation C Employees”) who started working on June 11, 1996 and thereafter and are not included under the budgetary pension plan, as described in section d. above are insured by default under a comprehensive cumulative paying pension fund (an external long-standing or new cumulative pension fund, or under another pension insurance policy at the personal choice of the employee). The Company makes deposits on a regular basis in respect of its liabilities to these employees, excluding the severance pay supplement at the rate of 2.33% of the determining salary for severance pay.

For additional details see Note 11e to the Annual Financial Statements.

f. Collective Agreements and Consents

Subsequent to the statement of financial position date, on May 17, 2018, a collective agreement was signed, anchoring the consents reached in the area of labor relations following the expected reform in the electricity sector in general and the Company in particular, including the implications of the structural change and the efficiency plan in the Company on the employees, and the updating of the labor relations in the Company, as detailed in Note 1e above (hereinafter: the “Collective Agreement”).

The collective agreement will enter into effect after the Government's decision on the documents attached thereto, completion of the legislative amendments required for its implementation and subject to the fulfillment of additional conditions specified in the agreement.

The following are the main points of the collective agreement:

1. As part of the agreement, the Company will undergo a significant process of organizational change and an efficiency plan, during which the number of the Company's permanent employees will be reduced by approximately 1,800 employees by the end of 2025, in addition to 1,000 mandatory retirements expected during this period and the granting of 1,000 tenures.

2. The conditions under which additional employees will transfer to a government company for the management of the system, to the generation subsidiary and to companies that will purchase the generation units to be sold were agreed upon.

3. An agreed framework for updating labor relations and changing the organizational culture in the Company, the principles of the structural change of the organization and efficiency, and principles for changing the salary structure for new employees that will be absorbed.

4. In addition, consents were also made regarding the grants to be paid to the employees who remain in the Company and to the retirees, and to payment of a pension supplement, the entitlement to which will be formulated according to agreed milestones. According to the agreement, the Company employees will be entitled, upon the entry into force of the agreement, to a one-time grant of NIS 30,000 gross per permanent employee and NIS 10,000 gross per temporary employee. Existing employees who will retire by special early retirement during the term of the agreement will be entitled, in addition to their pension (and to employees insured in accrual pension - in addition to bridging pension) to a monthly pension increment of NIS 1,250 gross.

35 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued) f. Collective Agreements and Consents (continued)

Existing employees who will retire by mandatory retirement during the reform period or terminate their employment at the Company after the end of the reform period, as well as employees at the stations that will be sold and employees that will transfer to the system management company, will be entitled upon termination of their employment to an addition to their monthly pension, in an amount ranging from NIS 250 to NIS 1,700, in accordance with the progress of the reform stages as stipulated in the agreement.

5. The collective agreement adopts the collective agreement (framework) between the State and additional employers and the Histadrut of January 9, 2018, concerning the postponement of the stages of the wage agreement from December 2016 and the increase of the total cost framework with respect to the said wage agreement at the rate of 0.15%.

For details regarding the main points of the collective agreements, consents, and the early retirement operations carried out in 2016 and 2017, see Note 11f to the Annual Financial Statements.

g. The aforementioned sections of defined benefit obligation, with respect to post-employment employee benefits according to the calculations of the Company as of March 31, 2018, March 31, 2017, and December 31, 2017, amount to a total of NIS 28,469 million, NIS 26,718 million, and NIS 29,691 million respectively.

36 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued)

h. Defined Benefit Obligation

1) Changes in the present value of the obligation for pensions

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited Present value of the obligation for pensions as of the beginning of the year ...... 26,330 23,329 23,329 Cost of interest ...... 254 275 1,120 Current service cost ...... 64 58 232 Employee deposits ...... 6 6 24 Benefits paid ...... )186( )198( (749) 26,468 23,470 23,956 Gains with respect to remeasurement: Actuarial losses (gains) deriving from changes in financial assumptions ...... )1,140( 12 2,718

Impact of differences between the previous actuarial assumptions and that which occurred in practice (hereinafter: “Adjustments based on past experience”) ...... )71( )52( )344( )1,211( )40( 2,374

Present value of the obligation for pensions as of the end of the period ...... 25,257 23,430 26,330

2) Changes in the present value of the obligation for other post-employment benefits

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited Present value of the obligation for other post-employment benefits as of the beginning of the year ...... 2,886 2,766 2,766 Cost of interest ...... 28 33 133 Current service cost ...... 16 15 62 Benefits paid ...... )33( )68( )168( 2,897 2,746 2,793 Losses (gains) with respect to remeasurement: Actuarial losses (gains) deriving from changes in financial assumptions ...... )109( )18( 52 Adjustments based on past experience ...... )13( 26 41 )122( 8 93

Present value of the obligation for other post-employment benefits as of the end of the period ...... 2,775 2,754 2,886

37 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued)

h. Defined Benefit Obligation (continued)

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

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Present value of the obligation as of the beginning of the year 475 562 562 Cost of interest ...... 4 6 26 Additional provision with respect to employee retirement within Special Retirement Plan ...... - - 41 Benefits paid ...... )35( )32( )143( Actuarial income with respect to the obligation charged to the Profit and Loss...... )7( )2( )11(

Present value of the obligation as of the period end ...... 437 534 475

i. Plan Assets:

1) Central Pension Fund

a) From March 8, 2005, the Company deposits funds in the Central Pension Fund (hereinafter: the “Fund”) to cover pension liabilities for pension for its employees entitled by the budgetary pension arrangements.

The Pension Fund acts by force of the Control of Financial Services (Provident Funds) (Rules for Management of a Central Provident Fund) Regulations – 2012. The fund was managed by the managing company accordingly. As of January 1, 2017, Halman-Aldubi IEC Gemel Company Ltd. manages the Central Pension Fund.

b) According to the Financial Statements of the Fund, the actuarial liability as of March 31, 2018, is NIS 33,912 million and the debt of the Company on that date is approximately NIS 2,460 million. According to the Company's Financial Statements, its actuarial liability for the pension obligations as of March 31, 2018, is NIS 25,694 million, and therefore there is surplus of NIS 5,758 million.

For details regarding the nature of the difference and differences in calculation of the liability between the Company and the Fund, the response of the Capital Market, Insurance and Savings Division Officer of the Ministry of Finance, and the Companies Authority’s notification to the Company that it is executing an examination in this matter, see Note 11j1c-e to the Annual Financial Statements.

c) For details of the Control of Financial Services (Provident Funds) (Rules for Management of a Central Provident Fund) Regulations – 2012 and the circular “Instructions for Management of a Central Provident Fund”, see Note 11j1f to the Annual Financial Statements.

d) The Company deposited in the pension fund NIS 152 million, including the program's asset costs, during the period ended on March 31, 2018.

e) The fund approved its Statements as of March 31, 2018 on May 17, 2018.

f) The Fund presents the value of its assets in the Financial Statements at fair value according to International Financial Reporting Standards (IFRS).

g) According to the forecast of the Company, according to the articles in effect, the expected transfers to the fund from the Statement of Financial Position date until the end of 2018 will amount to NIS 603 million.

38 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued)

i. Plan Assets (continued)

2) Changes in the fair value of the plan's assets

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Fair value of plan assets as of the beginning of the year ...... 31,477 29,878 29,878 Interest income on plan assets ...... 303 354 1,440 Deposits including plan asset costs ...... 152 152 873 Benefits paid ...... )222( )220( )878(

Gains (losses) with respect to remeasurements of plan assets: Yield on plan assets (except for sums included in the net interest cost) ...... )258( )699( 164

Fair value of plan assets as of the period end ...... 31,452 29,465 31,477

3) Return on the plan’s assets

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Interest income on plan assets ...... 303 354 1,440 Gains (losses) with respect to remeasurements of plan assets )258( )699( 164

Actual yield on plan assets ...... 45 )345( 1,604

j. Funds in Trust

1) Funds in trust are designated to cover actuarial liabilities to employees and liabilities as related to the termination of employer/employee relationships and are invested in Government and corporate bonds. See Note 11k to the Annual Financial Statements.

Transferring funds from the Trust Account After the statement of financial position date, the Company received current refunds from the Trust Account with respect to October – December 2017 in the amount of approximately NIS 24 million.

39 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued)

j. Funds in Trust (continued):

2) Changes in fair value of funds in trust designated to cover actuarial liabilities (assets according to section 116 A of IAS 19):

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Fair value of funds in trust as of the beginning of the year...... 1,617 1,615 1,615 Interest income from funds in trust ...... 16 19 77 Current repayments according to the District Court’s ruling )24( )4( )82(

Gains (losses) with respect to remeasurement: Yield on plan assets (except for sums included in the net interest cost) ...... )16( )38( 7 Fair value of funds in trust as of the period end ...... 1,593 1,592 1,617

3) Yield of funds in trust:

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Interest income from funds in trust ...... 16 19 77 Gains (losses) with respect to remeasurement of funds in trust ...... )16( )38( 7

Actual yield on funds in trust ...... - )19( 84

k. Capital Reserves with Respect to Remeasurements of the Liability (asset), net (Before Tax Effect)

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Balance as of the beginning of the year ...... )1,794( 45 45 Profits (losses) with respect to remeasurements ...... 856 )565( )1,839(

Balance as of the end of the period ...... )938( )520( )1,794(

40 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued)

l. Amounts Presented in Cost of Salaries and in Expenses with respect to Liabilities to Pensioners and in fixed assets

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

1) Cost of Salaries and Expenses with respect to Liabilities to Pensioners Current service cost ...... 80 73 294 Cost of interest excluding the cost of interest for early 1,253 retirement ...... 282 308 Interest revenues (*) ...... )319( )373( )1,517( Costs (revenues) due to early retirement and other costs ...... )3( 6 85 Total cost recognized in salaries cost and expenses with respect to liabilities to pensioners ...... 40 14 115

2) Expenses with respect to Liabilities to Pensioners alone Cost of interest excluding the cost of interest for early retirement ...... 133 146 593 Interest revenues (*) ...... )155( )178( )725( Costs (revenues) due to early retirement and other costs ...... )3( 5 83 Total cost recognized in expenses with respect to liabilities to pensioners ...... )25( )27( )49(

(*) With respect to the plan’s assets and funds in trust

m. Remeasurements that were capitalized to assets cost (fixed assets):

For the Year For the Three Months ended ended March 31 December 31 2018 2017 2017 NIS in millions Unaudited Audited

Increase (decrease) in fixed assets ...... )203( 140 457

41 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued)

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

For the year For the three months ended on ended on March 31 December 31 2018 2017 2017 Unaudited Audited

Weighted real discount rate grossed in the present value of the 2.51% 2.85% 2.25% obligation at the end of the period Nominal rate of return used to calculate the interest cost 3.92% 4.83% 4.83% Anticipated annual nominal rate of return grossed in the fair 3.92% 4.83% 4.83% value of plan assets Average liability lifetime 16.1 years 16.0 years 16.3 years

Regarding real update of salaries during the work period, real update of pension sums after employment termination and pensioners’ mortality and survivors including mortality data update see Note 11o to the Annual Financial Statements.

o. Analysis of sensitivity of main actuarial assumptions as of March 31, 2018:

Increase in Decrease in Actuarial assumptions Change % liability Change % liability

Rate of interest for capitalization )0.1( 438 0.1 428

Future salary increase rate with respect to general salary agreements and cost of living increment less the CPI (real increase) 0.5 630 )0.5( 594

Method of determining the sensitivity – the actuarial liability for each of the above mentioned actuarial assumptions was calculated according to the base assumption (as appears in the Financial Statements) and according to an adjusted assumption (according to a specific scenario), and the increase (decrease) was calculated with respect to the change of this assumption.

p. The pension reserves 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.

42 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 6:- BALANCE OF REGULATORY DEFERRAL ACCOUNTS

a. For additional information regarding regulatory deferral accounts see Note 14 to the Annual Financial Statements.

b. Details of the balances and transactions in regulatory deferral accounts for the three months ended on March 31, 2018 (before tax effects):

NIS in millions Period remaining for Transactions for the three refund / Balance months ended on March 31, 2018 Balance cancellation As of January Creation / Refund / As of March 1, 2018 recognition cancellation 31, 2018 Years Audited Unaudited Debit balance of regulatory deferral accounts With respect to non-consecutive update of the fuels 1-3 component in the rate ...... 2,506 ...... 73 .. )370( 2,209 With respect to social rate...... 324 ...... 66 )79( 311 1-3 With respect to load management arrangements ...... 104 ...... )4( )26( 74 1-3 With respect to deemed interest...... 187 ...... 11 )2( 196 10-20 With respect to recognition of investments that were 14-22 reduced in the past ...... 205 ...... - ...... )4( 201 With respect to gap between update date of fixed payment 1-2 component ...... - ...... 19 - 19 With respect to past debt of system costs...... 88 ...... - .... )16( 72 1-3 With respect to retirement costs generation A and B ...... 1,220 ...... - )70( 1,150 4-5 With respect to linkage differentials ...... 88 )42...... ( - 46 11-18 With respect to cancellation of debt of East Jerusalem 1-3 Electricity Company ...... 158 ...... - ...... )29( 129

Total ...... 4,880 ...... 123 )596( 4,407

Credit balance of regulatory deferral accounts With respect to the erosion of the Company’s liability in foreign currency ...... 189...... -...... )28( 161 1-2 With respect to gap between actual rate update dates and the theoretical rate...... 2,679...... )16( ...... )464( 2,199 1-2 With respect to electricity purchases from private electricity 1-3 producers and photo-voltaic installations ...... 546 ...... 139 ... )42( 643 With respect to gap between update date of fixed payment - component ...... 6 ...... - )6( -

Total ...... 3,420 ...... 123 )540( 3,003 Change Total balance of regulatory deferral accounts, net) ...... 1,460 ...... 1,404 (56)

43 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 6:- BALANCE OF REGULATORY DEFERRAL ACCOUNTS (continued)

c. Details of the balances and transactions in regulatory deferral accounts for the three months ended on March 31, 2017 (before tax effects):

NIS in millions Period Transactions for the three remaining months ended on March 31, for refund / Balance 2017 Balance cancellation As of January Creation / Refund / As of March 1, 2017 recognition cancellation 31, 2017 Years Audited Unaudited Debit balance of regulatory deferral accounts With respect to the erosion of the Company's liabilities in foreign currency ...... 53 ...... (46) ...... (7) - With respect to non-consecutive update of the fuels component in the rate ...... 1,456 ...... 131 ...... 175 1,762 1-3 With respect to social rate (see section f below) ...... 20 ...... 168 ...... (58) 130 1-3 With respect to not updating the electricity rate for the transmission and distribution segment ...... 159 ...... 1 ...... - 160 1-2 With respect to deemed interest ...... 160 ...... 13 - 173 8-20 With respect to recognition of investments that were reduced in the past ...... 222 ...... - ..... (4) 218 14-22 With respect to gap between update date of fixed payment component ...... 9 ...... - ...... (4) 5 1-3 With respect to past debt of system costs ...... 19 ...... 4 - 23 1-3 Total ...... 2,098 ...... 271 ..... 102 2,471

Credit balance of regulatory deferral accounts

With respect to erosion of the Company's liabilities in foreign currency - 115 - 115 1-2 With respect to gap between actual rate update dates and the theoretical rate 1,778 214 135 2,127 2-3 With respect to electricity purchases from private electricity producers and photo-voltaic installations 711 107 (15) 803 1-3 With respect to arrangements to manage load) 44 )4( (5) 35 1-3 With respect to consumers' participation in financing emergency plan stage B ...... 392 ...... 3 (96) 299 1-3 With respect to linkage differentials 76 )43( - 33 11-18 With respect to regulatory liability of restitution to consumers 2,857 28 - 2,885 2-5 Total ...... 5,858 ...... 420 ..... 19 6,297 Change Total balance of regulatory deferral accounts, net) ...... (3,760) ...... (3,826) (66)

44 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 6:- BALANCE OF REGULATORY DEFERRAL ACCOUNTS (continued)

d. Details of the amounts and transactions in regulatory deferral accounts for the year ended on December 31, 2017 (before tax effect):

NIS in millions Period remaining for Transactions for the year ended refund / Balance on December 31, 2017 Balance cancellation As of As of January Creation / Refund / December Debit balance of regulatory deferral accounts 1, 2017 recognition cancellation 31, 2017 Years With respect to the erosion of the Company's liabilities in foreign currency ...... 53 )46(...... )7( - - With respect to non-consecutive update of the fuels component in the rate ...... 1,456 ...... 273 .. 777 2,506 1-3 With respect to social rate...... 20 ...... 540 )236( 324 1-3 With respect to load management arrangements ...... - ...... 104 - 104 1-3 With respect to not updating the rate for the transmission and distribution segment ...... 159 ...... )159( - - - With respect to deemed interest...... 160 ...... 33 )6( 187 10-20 With respect to recognition of investments that were reduced in the past ...... 222...... - ...... )17( 205 14-22 With respect to gap between update date of fixed payment component ...... 9 ...... - )9( - - With respect to past debt of system costs...... 19 ...... 69 .... - 88 1-3 With respect to retirement costs generation A and B ...... - 1,220...... - 1,220 5 With respect to linkage differentials ...... - 88...... - 88 11-18 With respect to cancellation of debt of East Jerusalem - Electricity Company ...... -...... 158 ...... 158 1-3 Total ...... 2,098 ...... 2,280 502 4,880

Credit balance of regulatory deferral accounts With respect to the erosion of the Company’s liability in foreign currency ...... - 165...... 24 189 1-2 With respect to gap between actual rate update dates and the theoretical rate...... 1,778...... 349 ...... 552 2,679 1-2 With respect to electricity purchases from private electricity producers and photo-voltaic installations ...... 711 ...... )102( ... )63( 546 1-3 With respect to arrangements to manage load ...... 44 ...... )23( ) 21( - - With respect to consumers' participation in financing emergency plan stage B ...... 392 ...... 7 )399( - - With respect to linkage differentials ...... 76 )76...... ( - - - With respect to regulatory liability of refund to consumers ...... 2,857...... 84 ...... )2,941( - - With respect to gap between update date of fixed payment - component ...... - ...... 6 6 1-3 Total ...... 5,858 ...... 404 (2,842) 3,420 Change Total balance of regulatory deferral accounts, net) ...... (3,760) ...... 1,460 5,220

e. The rate of return used to calculate the balance of the regulatory deferral accounts as of March 31, 2018 is 3.90% (3.59% as of March 31, 2017 and as of December 31, 2017).

45 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 7:- DEBENTURES AND LIABILITIES TO BANKS

a. Raisings and Substantial Repayments:

1) Material raisings during the reporting period

On February 12, 2018, the Company completed the debenture issue through Citibank and J.P. Morgan Investment Banks to qualified institutional buyers in the USA and outside the USA, in a total of USD 1 billion par value out of a comprehensive plan (GMTN) to issue debentures in a total amount of up to USD 7.5 billion par value. The remaining par value balance for use by the Company within the GMTN plan is USD 1.5 billion par value. The debentures that were issued as aforesaid within the plan were listed for trade on the Tact Institutional System of the TASE as debentures of Series 2028 USD Electric. The debentures were issued at a price of 99.089% so that the issue proceeds (gross) were approximately USD 990.9 million. The nominal interest at a rate of 4.25% (effective yield to maturity of 4.359%) will be paid in semi-annual installments. The principal of the debentures will be repaid in one payment on August 14, 2028.

2) Material repayments during the reporting period

a) On January 17, 2018, the par value balance of debenture series issued in the US through Goldman Sachs and Dexia Investment Banks on January 17, 2008, in the amount of approximately USD 151 million (approximately NIS 521 million), was repaid. b) On February 1, 2018, private debentures (non-negotiable) of Series 2018 Linked Electric, which were issued to institutional bodies in 2007, were fully repaid in the amount of NIS 831 million par value (a total of approximately NIS 997 million including linkage differentials). c) On February 1, 2018, private debentures (non-negotiable) not linked to the CPI of Series 2018 NIS Electric, which were issued to institutional bodies in 2007, were fully repaid in the amount of NIS 66 million par value.

3) Material repayments after the Statement of Financial Position date

On April 30, 2018, the Company executed a partial early repayment of USD 600 million par value of a series of debentures issued abroad on May 7, 2008, in a total amount of USD 1 billion par value, the original repayment date being in January 2019. The early repayment was executed at a net price of USD 103.186 per USD 100 par value such that the total payment amounted to NIS 2,221 million and will create in the second quarter of 2018 an accounting loss from early repayment in the amount of approximately USD 69 million.

b. Publication of shelf prospectus:

On April 26, 2018, the Company published a shelf prospectus on the basis of the Company’s financial statements as on December 31, 2017. The shelf prospectus will enable the Company to issue non-convertible debentures, exercisable option warrants for debentures and negotiable securities that will be listed for trade on the Tel Aviv Stock Exchange Ltd. for a period of 24 months (which may be extended by an additional 12 months) on the basis of the publication of a shelf offering report.

c. Credit rating

There are no changes in the Company's credit rating during the report period. For details of the existing rating, see Note 19f to the Annual Financial Statements.

d. Terms of the Company's financing 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. For details see Note 19d to the Annual Financial Statements.

To the best of the Company's knowledge, at the date of approval of the financial statements, none of the lenders with whom the Company entered into agreements have a reason to demand immediate repayment of the Company's debt.

e. State Guarantee

The balance of State guarantee that was provided for loans raised by the Company amounts to approximately NIS 391 million as on March 31, 2018.

46 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 8:- REVENUES

a. Demand for electricity in Israel is seasonal. In this context, the seasons are defined as summer (the months of July and August), winter (the months of December through February) and the transitional seasons – spring (the months of March to June) and autumn (the months of September to November). Demand is higher in summer (due to the use of air conditioners) and in winter (due to the use of heaters) in comparison to the transitional seasons. In summer and winter, the average electricity consumption is higher than during the transitional seasons and is even characterized by peak demand due to extreme conditions of heat or cold. In addition, the Company's revenues in the various seasons are affected by changes in rates for consumers paying in accordance with load and time, since average load and time rates are higher in summer and winter, in comparison to the load and time rates in the transitional seasons. b. Composition:

For the Three months For the Year ended ended March 31 December 31 2 0 1 8 2 0 1 7 2 0 1 7 Unaudited Audited

Revenue from the sale of electricity ...... 4,567 4,918 20,170 Revenue from the sale of infrastructure services and system management (1) ...... 316 317 1,272 Revenue from the sale of electricity to the East Jerusalem Electric 492 521 1,613 Company and the Palestinian Authority ...... Miscellaneous (2) ...... 82 60 315

5,457 5,816 23,370

(1) Are not included in the supply sector. (2) Are mainly included in the generation, supply and distribution sector.

c. Scope of sales arising from private producers:

For the Year For the Three months ended ended March 31 December 31 2018 2017 2017 Unaudited Audited

Total electricity sales of the Company (in millions of kWh) (*) ...... 11,905 12,737 52,111 Scope of electricity purchases by the Company from private producers (in millions kWh) ...... 1,875 1,644 7,564

Their part of the total electricity sales of the Company (in %) ...... 16% 13% 15%

(*) Without infrastructure services which are mainly electricity transmission and distribution services provided for private electricity producers.

47 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 9:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES, LABOR DISPUTES AND RELATED PARTIES

a. Agreements

Agreement for the Supply of Gas from the Tamar Field

In March, 2012, the Company signed an agreement with the holders of the rights of the “Tamar” license (Nobel Energy and the limited partnerships Isramco Negev 2, Delek Drillings, Avner Oil Exploration and Dor Gas Exploration (all together in this section: the “Sellers” or “Tamar Partnership”) under which the Company undertook to purchase natural gas at a total minimal volume of approximately 42.5 Billion Cubic Meters ("BCM") natural gas (hereinafter: the “Agreement”).

For additional details regarding the agreement, applications to the Antitrust Authority, decisions of the Audit Committee and the Board of Directors in this matter, Take or Pay mechanism, sale of surplus gas and regulating the use of the gas pipeline capacity, see Note 34a1 to the Annual Financial Statements.

The Company is examining currently, twice a year, whether the minimal annual gas quantity with respect to which the Company is required to pay the Tamar Partnerships under the TOP mechanism existing in the gas purchase agreement is expected to be larger than the quantity the Company expects to use in practice every year during the years of the agreement.

In light of results of analysis of the Company’s updated gas consumption forecasts, the Company is not expected to pay for gas it will not consume. Additionally, and following, inter alia, the reduction in the Company's use of coal (see Note 1g to the Annual Financial Statements), the Company estimates that it is not expected to bring forward payment with respect to gas consumption in the foreseeable future. Subsequent to the date of the financial statements, on May 15, 2018, the Electricity Authority published a clarification in which the Electricity Authority wishes to clarify that if generation stations are sold in accordance with the Company's undertaking under the reform, as detailed in Note 1e above and as a result, the Company will not use the full minimum gas purchase commitment in accordance with its gas agreement with the Tamar Partnership, and if it had complied with the other conditions stipulated for the recognition of TOP in accordance with the decision of the Authority of June 12, 2017, "Regulation of the Use of Fuels for the Implementation of a General Load Plan in the Electricity Sector", and provided that the Company acted in accordance with the decision, particularly in the matter of trying to minimize costs, the gas costs will be recognized for the Electric Company. In addition, the Company will not split the gas agreement for stations that will be sold and these will be sold without a gas agreement. Further to that stated in Note 34a1g to the Annual Financial Statements, the Company conducted negotiations with the Tamar Partnership, which ended after the date of the financial statements, it was agreed that the Tamar Partnership would compensate the Company for an amount similar to the amount calculated in accordance with the compensation mechanism for non-supply of gas in the gas agreement (shortfall), pursuant to the agreement signed between the parties, while maintaining the Tamar Partnership's claim for the existence of a force majeure event. On May 16, 2018, the Company received a draft resolution for a hearing within which the Electricity Authority will deduct from the cost recognized to the Company under the system rate the amount that the Company will receive from the Tamar Partnership as compensation for non-supply of gas at the time of the malfunction. The Company is studying the resolution and formulating its response accordingly.

b. Contingent Claims and Liabilities:

1) Following are the main changes which occurred during the report period in class actions and applications for their recognition as class actions which have been filed against the Company compared to the details in Note 34b to the Annual Financial Statements:

a) Further to Note 34b1 regarding two applications to approve class actions in the matter of a claim for damages caused following the storm events, in an amount of approximately NIS 354 million and NIS tens of millions, it was agreed that the case will transfer to a mediation proceeding. Dates were set for mediation meetings, and accordingly, dates for evidentiary hearings were set, insofar as mediation will not succeed. The estimate of the Company’s legal consultants remained unchanged from that stated in the Annual Financial Statements, that it is more likely than not that the application for approval will be rejected.

48 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 9:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES, LABOR DISPUTES AND RELATED PARTIES (continued) b. Contingent Claims and Liabilities: (continued)

b) Further to that stated in Note 34b2 regarding an application to approve a class action in the matter of charging arrears interest in the electricity bill in the amount of approximately NIS 13 million, the estimate of the Company's legal advisors as of the date of approval of this report is that it is more likely than not that the application for approval will be rejected.

c) Further to that stated in Note 34b2 regarding an application to approve a class action in the matter of “concentrated sale rate” in the amount of “NIS tens of millions”, the estimate of the Company’s legal advisors is that it is more likely than not that the application for approval will be rejected.

d) Further to that stated in Note 34b2 regarding an application to approve a class action in the matter of a claim of non-crediting interest differentials as part of an assessment without reading a meter, in the amount of approximately NIS 130 million, the Company filed its response to the application for approval on May 3, 2018. The estimate of the Company’s legal advisors as of the date of approval of this report is that it is more likely than not that the application for approval will be rejected.

e) Further to that stated in Note 34b3a regarding an application that was recognized as a class action in the matter of a claim of illegal salary payments in the amount of approximately NIS 5,000 million, the Court instructed the parties to file an agreed version for a notice to be published in the press in accordance with section 25.a.(1) of the Class Action Law. An additional pre-trial hearing was scheduled for July 9, 2018.

f) Further to that stated in Note 34b3b regarding an application to approve a class action in the matter of a claim of illegal salary payments in the amount of NIS 2,000-3,000 million, in a decision of April 22, 2018, the Court instructed to transfer the hearing of this claim to the beneficiary presiding over the claim on the same matter (Note 34b3a to the Annual Financial Statements), to continue the hearing under its instructions.

2) Further to that stated in Note 34b6c1 in the Annual Financial Statements regarding the Tzafit betterment levy, on March 5, 2018, the Company filed an application for leave to appeal to the Supreme Court, regarding one of the decisions of the District Court in its ruling of February 8, 2018, within which it was decided to strike-off the appeal of the local committee appealing against the decision of the appeals committee, which cancelled a betterment assessment of July 13, 2014. The decision of the District Court with respect to which the application for leave to appeal was filed is that the determinations of the appeals committee in its decision to cancel the betterment assessment, in all that relates to the issue of laches, do not constitute a court ruling between the parties.

On March 26, 2018, the Supreme Court rejected the application for leave to appeal filed by the Company, stating that the Company should be regarded as a litigant who was granted all the relief it requested and is not entitled to appeal the judgment in this matter, and while the Supreme Court notes that rejecting the application for leave to appeal does not determine a position with regard to the comments of the District Court in its judgment with regard to the court ruling regarding the issue of laches.

With these decisions of the District Court and the Supreme Court, the payment demand of July 13, 2014, with which the Company was charged, can be regarded as a demand that was permanently cancelled.

3) Further to that stated in Note 34b6d to the Annual Financial Statements regarding financial demands of fixed asset contractors, settlement agreements were signed and monetary demands of fixed-asset contractors were settled in the amount of approximately NIS 210 million. The amounts of the compromises reached amounted to approximately NIS 21 million and were not materially different from the amounts of the provisions included with respect to these demands in the Annual Financial Statements as at December 31, 2017.

4) Further to that stated in Note 34b to the Annual Financial Statements, there were no additional material changes in the report period and thereafter in material claims, monetary demands, other contingent liabilities and other legal proceedings in relation to that stated in the Annual Financial Statements, except for the aforesaid changes.

49 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 9:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES, LABOR DISPUTES AND RELATED PARTIES (continued)

c. Labor disputes

1) A labor dispute with respect to promotion of the reform outline in the Company, further to Note 34c1 to the Annual Financial Statements, in an updating notice filed on behalf of the State to the Supreme Court on April 10, 2018, the State notified it is prepared allocate 45 days to exhaust the negotiations between the parties, and as long as during this period the consents will be anchored in signed and approved collective agreements, and an application will be filed to end the hearing of the petition by way of striking off the rulings of the National and Regional Court regarding the right to strike, and the agreement will have the validity of a ruling, this will be sufficient for it for exhausting the petition.

After the Board of Directors approval of May 10, 2018, regarding the understandings with respect to the outline of principles and the Company’s liabilities, on May 17, 2018, a collective agreement was signed, anchoring the consents reached in the area of labor relations following the expected reform in the electricity sector in general and the Company in particular, including the implications of the structural change and the efficiency plan in the Company on the employees, and the updating of the labor relations in the Company. The agreement will enter into effect after receiving the Government’s decision and the documents attached thereto, completion of the legislative amendments required for its implementation, and subject to fulfillment of additional terms detailed in the agreement.

2) A labor dispute with respect to unification of districts and outsourcing – as set forth in Note 34c8 to the Annual Financial Statements. As at the date of approval of the financial statements, the sanctions will be frozen, the parties will hold talks and update the Court regarding the results of the negotiations by July 2, 2018.

3) For details regarding additional labor disputes existing as at the date of approval of the financial statements, see Note 34c2,3,4,5,6,7,9, to the Annual Financial Statements.

Upon the collective agreement’s entry into effect as stated in section 1 above, all open labor disputes will be cancelled.

d. Related parties:

1) Assets arrangement: See Note 1f above for details regarding the outline of the assets arrangement.

2) Contractual engagement for transmission of natural gas: Further to that mentioned in Note 33b2e to the Annual Financial Statements, subsequent to the statement of financial position date, on May 15, 2018, the Company and the Israel Natural Gas Lines Company ("INGL") signed a document of "binding consents", the main points of which are as follows: a) The Company will pay the Gas Lines Company, by May 30, 2018, an amount of approximately NIS 16 million plus VAT with respect to past debts; the parties will have no additional demands and/or claims in respect of deviations from capacity and forced capacity for a period of up to the date of signing the document of binding consents. The Company made an appropriate provision in its books with respect to the results of the agreement. b) Pending an official update of the transmission agreement, INGL and the Company will act in accordance with the consent that the Company will be exempt from fines for capacity deviations of up to 25% of the Company's original capacity in the current transmission agreement. c) The companies will forward the consents to the Natural Gas Authority and request that it acts to publish an official update of the transmission agreement that will express the consents as stated above. d) The Government Companies Authority will apply to the Electricity Authority with respect to recognition under the electricity rate, in payment under the settlement arrangement.

50 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 10:- FINANCIAL INSTRUMENTS

a. Financial instruments measured at fair value for disclosure purposes only

The book value of certain financial assets and liabilities, including cash & cash equivalents, trade receivables, current and long term assets, short term investments, deposits, long and short term credit, trade payables, other current liabilities are matched to close to their fair value.

Book value Fair Value As of As of December December As of March 31 31 As of March 31 31 2018 2017 2017 2018 2017 2017 (in NIS millions) Unaudited Audited Unaudited Audited Financial liabilities – level 1 Long term debentures (including current maturities and interest payable)

Fixed interest negotiable debentures in Israel ...... 9,645 8,004 9,683 10,195 8,107 10,248

Financial liabilities – level 2 Debentures and long term loans (including current maturities and interest payable) Long term loans at fixed interest ...... 2,284 2,675 2,330 2,522 3,002 2,589

Long term loans at variable interest ...... 1,830 2,314 1,791 1,920 2,412 1,884

Fixed interest non-negotiable debentures in Israel ...... 5,647 7,494 6,857 6,402 8,001 7,626

Fixed interest non-negotiable debentures abroad ...... 23,312 20,345 19,366 25,535 22,860 22,000

Variable interest non-negotiable debentures abroad ...... - 550 530 - 547 530

Perpetual debentures for the State of Israel (2) ...... 2,549 2,530 2,539 3,818 2,850 3,758

* For details regarding the policy of determining fair value see Note 25j to the Annual Financial Statements. ** For details of classification of the financial instruments according to levels see section b below.

51 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 10:- FINANCIAL INSTRUMENTS (continued)

b. Hierarchy of Fair Value of Instruments Measured at Fair Value

Following are details of the financial instruments of the Company that are measured at fair value through profit and loss according to levels:

Classification of the financial instruments that are measured at fair value is based on the lowest level in which substantial use is made for measuring the fair value of the instrument in general.

Level 1: Quoted (unadjusted) prices of assets and financial liabilities in active markets. Level 2: Data that is not quoted prices included in level 1, but that are observed directly (i.e. prices) or indirectly (data derived from prices), regarding assets and financial liabilities. Level 3: Data regarding financial assets and financial liabilities that are not based on observed market data.

The hedge transactions, located at level 2, are calculated according to fair value that is based on observed interest curves.

As of March 31, As of March 31, As of December 2018 2017 31, 2017 Level 2 (NIS in millions) Unaudited Audited Financial assets Swap transactions intended to hedge cash flows ...... 2 - - Other swap and forward transactions ...... 227 130 148

Financial liabilities Swap transactions intended to hedge cash flows ...... 888 597 934 Other swap and forward transactions ...... 2,898 2,676 3,143 Total liabilities with respect to hedge transactions, net ...... 3,557 3,143 3,929

52 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 11:- SEGMENTAL REPORTING

a. General

The basis for division by segment and the basis of measurement of segment profit and loss is identical to that presented in Note 35 regarding operating segments in the Annual Financial Statements, except as set out below:

1) On January 8, 2018, the Electricity Authority published a resolution regarding the basis of electricity rates for the transmission, distribution and supply segments, in which the Electricity Authority identified and measured each segment's costs and revenues separately for consumer services – supply, which mainly consist of the Company's billing, collection and service systems, including the preparation and production of invoices and billing expenses, installation, operation and meter reading, consumer services that include a customer call center, public reception and customer portfolio coordination. For addition information see Note 3e to the Annual Financial Statements. This activity was previously presented under the distribution segment. 2) Further to Note 1e4 to the Company's Annual Financial Statements and to Note 1e above, as part of the structural change discussions, the system management operation will be sold and/or transferred to a separate government company. The activities of this segment were previously presented under the generation segment and the transmission segment. As of the first quarter of 2018, the Company's Chief Operating Decision Maker (Company CEO) separately reviews the operating results of the system management and consumer services-supply segments down to the profit and loss level for the period. Consequently, the Company has presented two new segments as aforesaid. Comparative figures were restated to reflect the change in the structure of the Company's reportable segments.

b. Detailed Reportable Operation Segments

The operations of the Company are comprised of five main operational segments making up the entire electricity chain. These operations are:  Generation Segment - includes the operations at 17 sites of the electricity generating power stations.  Transmission Segment - includes the transmission and transformation system of the high and ultra-high long distance electricity.  System Management Segment – includes the operating and capital costs of the following services: supervision of unit loading, short-term and long-term planning of power generation, long-term planning of the transmission network, and electricity market statistics. In addition, this segment includes costs relating to the purchase of electricity from private producers of extra-high voltage, including producers of renewable energy at extra-high voltage, overload management arrangements and social rates.  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 extra-high voltage electricity directly from the transmission systems, as well as meter reading services (the cost of the meters and the reading of them) and costs and services related to communication with distribution consumers. In addition, this segment includes the costs of purchasing electricity from high voltage and low voltage private producers, including high-voltage and low-voltage renewable energy facilities.  Consumer services - supply segment – includes the customer service and collection system of the Company.

c. Income and Results according to Operational Segments

Segmental revenues are calculated based on a price model that was used by the Electricity Authority to determine the electricity rates for the Company. Segment revenues are calculated by multiplying these rates by the sold quantity (kW/h) to the end consumer, while making the required adjustments based on the activities defined by the Company for each of the 5 segments: generation, transmission, system management, distribution and consumer services-supply. The revenues of the consumer services–supply segment for comparative periods were calculated based on the network segment electricity rate in effect in 2017.

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 profit or loss level for the period. The separation of income and expenses in comparative figures was made according to the aforementioned criteria.

For additional information, in accordance with the requirements of the Companies Authority, see Note 12 below.

53 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 11:- SEGMENTAL REPORTING (continued)

c. Income and Results according to Operational Segments (continued)

For the Three Months ended March 31, 2018 Consumer- System supply Total Generation Transmission management Distribution services Company )NIS in millions) Unaudited

Revenues ...... 3,245 315 643 1,139 115 5,457 Profit (loss) from ordinary operations ...... 218 7 115 235 (49) 526 Income (loss) before income tax...... (25) (113) 113 50 (52) (27) Income (loss) before transactions in balances of regulatory deferral accounts ...... (22) (101) 101 44 (46) (24) Transactions in balances of regulatory deferral accounts, net of tax ...... 88 9 (89) (63) 12 (43) Income (loss) for the period ...... 66 (92) 12 (19) (34) (67)

Additional Details Depreciation and amortization ...... 632 214 9 332 16 1,203 Financing expenses ...... 243 120 2 185 3 553

For the Three Months ended March 31, 2017 * Consumer- System supply Total Generation Transmission management Distribution services Company (NIS in millions) Unaudited

Revenues ...... 3,549 469 467 1,239 92 5,816 Profit (loss) from ordinary operations ...... 347 162 (28) 383 (96) 768 Income (loss) before income tax ...... 226 102 (29) 293 (98) 494 Income (loss) before transactions in balances of regulatory deferral accounts ...... 170 77 (22) 215 (74) 366 Transactions in balances of regulatory deferral accounts, net of tax...... 77 (45) 24 (104) (2) (50) Profit (loss) for the period ...... 247 32 2 111 (76) 316

Additional Details Depreciation and amortization ...... 580 221 9 321 17 1,148 Financing expenses ...... 121 60 1 90 2 274

For the Year ended December 31, 2017* Consumer- System supply Total Generation Transmission management Distribution services Company (NIS in millions) Audited

Revenues ...... 13,776 2,011 2,224 5,031 328 23,370 Profit (loss) from ordinary operations ...... 829 825 29 1,301 (464) 2,520 Profit (Loss) before income tax ...... 148 496 23 796 (473) 990 Profit (loss) for the year before regulatory deferral accounts ...... 118 394 19 620 (378) 773 Transactions in balances of regulatory deferral accounts, net of tax ...... 2,033 445 228 1,248 13 3,967 Profit (loss) for the period ...... 2,151 839 247 1,868 (365) 4,740

Additional Details Depreciation and amortization ...... 2,642 894 34 1,315 85 4,970 Financing expenses ...... 681 329 6 505 9 1,530

* Restated

54 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 11:- SEGMENTAL REPORTING (continued)

d. Assets and Liabilities according to Operational Segments

The CODM monitors the tangible, intangible and financial assets of each segment for purposes of controlling the segments and resources allocation among the segments. All Company assets are allocated to the different segments. Investments for the year include investments in fixed assets and exclude financial instruments and deferred tax assets. The CODM also receives data of the total liabilities of the Company, divided into the five segments.

As of March 31, 2018 Consumer- System supply Total Generation Transmission management Distribution services Company (NIS in millions) Unaudited

Assets ...... 42,544 15,238 1,509 26,101 2,093 87,485 Investments in the period ...... 177 118 4 242 5 546 Liabilities and credit balances of regulatory deferral accounts ...... 33,473...... 10,748 1,402 18,617 1,898 66,138

As of March 31, 2017* System Consumer- Total Generation Transmission management Distribution supply services Company (NIS in millions) Unaudited

Assets ...... 41,503 15,156 995 24,003 2,026 83,683 Investments in the period ...... 420 118 9 332 13 952 Liabilities and credit balances of regulatory deferral accounts ...... 33,973...... 11,448 910 18,061 1,887 66,279

As of December 31, 2017* Consumer- System supply Total Generation Transmission management Distribution services Company (NIS in millions) Audited

Assets ...... 42,445...... 14,690 1,422 24,420 2,099 85,076 Investments in the period ...... 1,758 689 46 1,332 57 3,882 Liabilities and credit balances of regulatory deferral accounts ...... 33,367...... 10,390 1,324 17,284 1,918 64,283

* Restated

55 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 12:- ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION, SYSTEM MANAGEMENT, DISTRIBUTION AND CONSUMER SERVICES-SUPPLY (SEE NOTE 3 d, e & k TO THE ANNUAL FINANCIAL STATEMENTS)

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 profit and loss and statement of financial position to the generation, transmission and distribution activity segments.

a. Statement of operations for the three months ended March 31, 2018:

Consumer Total System Services - Company Generation Transmission Management Distribution Supply (NIS in millions)

Required revenues ...... 5,600 3,359 454 530 1,110 147

Adjustment for segment revenues ...... (225 ) (146) (142) 112 3 (52)

Revenues from electricity ...... 5....,375 3,213 312 642 1,113 95

Other revenues, net ...... 82 32 3 1 26 20

Total revenues ...... 5,457 3,245 315 643 1,139 115

Cost for operating the electricity system ...... 4,552 2,978 298 506 770 -

Income from operating the electricity system ...... 905 267 17 137 369 115

Other revenues ...... (2) (1) - - (1) - Sales and marketing expenses ...... 242 - - - 97 145 Administrative and general expenses ...... 164 63 11 23 45 22 Income from liabilities to pensioners ...... ( 25) (13) (1) (1) (7) (3) 379 49 10 22 134 164

Income (loss) from current operations ...... 526 218 7 115 235 (49)

Financial expenses ...... 553 243 120 2 185 3

Income (loss) before income taxes ...... ( 27) (25) (113) 113 50 (52)

Income taxes ...... (3) (3) (12) 12 6 (6)

Income (loss) after income tax ...... ( 24) (22) (101) 101 44 (46)

Company’s share of the loss of associate company ...... ------

Profit (loss) for the period before regulatory deferral accounts ...... ( 24) (22) (101) 101 44 (46)

Movements in regulatory deferral accounts balances, net of tax ...... ( 43) 88 9 (89) (63) 12

Profit (loss) for the period and net movements in regulatory deferral accounts balances ...... ( 67) 66 (92) 12 (19) (34)

56 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

b. Details of the generation sites statement of operations for the three months ended March 31, 2018: Total generation PEP and Ramat Other gas segment others Rutenberg Orot Rabin Haifa Reading Eshkol Gezer Hagit Alon Tavor Hovav Zafit turbines (NIS in millions)

Required revenues ...... 3,359 1 658 838 247 63 402 324 334 123 212 130 27 Adjustment for segment revenues . (146) - (29) (36) (11) (3) (17) (14) (15) (5) (9) (6) (1) Revenues from electricity ...... 3,213 1 629 802 236 60 385 310 319 118 203 124 26

Other revenues ...... 32 - 8 8 2 1 4 2 3 1 1 1 1 Total revenues...... 3,245 1 637 810 238 61 389 312 322 119 204 125 27

Cost for operating the electricity system...... 2,978 - 558 762 218 56 367 278 300 107 194 119 19 Income from operating the electricity system ...... 267 1 79 48 20 5 22 34 22 12 10 6 8

Other revenues, net ...... (1) - (1) ------Sales and marketing expenses ...... ------Administrative and general expenses ...... 63 - 15 15 4 3 8 4 6 2 3 2 1 Income from liabilities to pensioners ...... (13) - (3) (3) (1) (1) (2) (1) (1) - (1) - - 49 - 11 12 3 2 6 3 5 2 2 2 1

Income from current operations ... 218 1 68 36 17 3 16 31 17 10 8 4 7

Financial expenses ...... 243 1 63 48 18 4 22 29 24 10 12 7 5

Income (loss) before income taxes (25) - 5 (12) (1) (1) (6) 2 (7) - (4) (3) 2

Income taxes ...... (3) - - (1) - - (1) - - - (1) - - Profit (loss) after income taxes .... (22) - 5 (11) (1) (1) (5) 2 (7) - (3) (3) 2

Company’s share of the loss of associate company ...... ------Profit (loss) for the period before regulatory deferral accounts ...... (22) - 5 (11) (1) (1) (5) 2 (7) - (3) (3) 2

Movements in regulatory deferral accounts balances, net of tax ...... 88 - 20 19 7 5 10 5 10 3 4 3 2 Profit for the period and net movements in regulatory deferral accounts balances ...... 66 - 25 8 6 4 5 7 3 3 1 - 4

57 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

c. Details of the distribution sites statement of operations for the three months ended March 31, 2018

Total distribution Northern Haifa Jerusalem Dan Southern segment District District District District District (NIS in millions)

Required revenues ...... 1,110 249 103 136 157 465

Adjustment for segment revenues .. 3 1 1 - - 1

Revenues from electricity ...... 1,113 250 104 136 157 466

Other revenues ...... 26 6 3 3 5 9

Total revenues ...... 1,139 256 107 139 162 475

Cost for operating the electricity system ...... 770 179 66 93 96 336

Income from operating the electricity system ...... 369 77 41 46 66 139

Other revenue, net ...... (1) - - - - (1) Sales and marketing expenses ...... 97 20 11 11 16 39 Administrative and general expenses ...... 45 9 6 6 7 17 Income from liabilities to pensioners ...... (7) (1) (1) (1) (1) (3) 134 28 16 16 22 52

Income from current operations .... 235 49 25 30 44 87

Financial expenses ...... 185 39 20 24 35 67

Income before income taxes ...... 50 10 5 6 9 20

Income taxes ...... 6 1 1 1 1 2

Income after income tax ...... 44 9 4 5 8 18

Company’s share of the loss of associate company ...... ------

Profit for the period before regulatory deferral accounts ...... 44 9 4 5 8 18

Movements in regulatory deferral accounts balances, net of tax ...... (63) (13) (6) (8) (11) (25)

Profit for the period and net movements in regulatory deferral accounts balances ...... (19) (4) (2) (3) (3) (7)

58 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

d. Statement of Financial Position as of March 31, 2018:

Consumer Total System Services - Company Generation Transmission Management Distribution Supply (NIS in millions)

Current assets ...... 12,829 6,944 1,727 546 3,389 223

Long-term receivables ...... 9,838 5,720 470 229 2,306 1,113

Fixed assets, net...... 59,209 26,387 12,796 274 19,194 558

Intangible assets, net ...... 1,202 284 140 31 560 187

Debit balances of regulatory deferral accounts ...... 4,407 3,209 105 429 652 12

87,485 42,544 15,238 1,509 26,101 2,093

Current liabilities ...... 13,301 6,711 1,994 240 3,868 488

Non-current liabilities ...... 49,834 24,738 8,563 845 14,279 1,409

Capital ...... 21,347... 9,071 4,490 107 7,484 195

Credit balances of regulatory deferral accounts ...... 3,003 2,024 191 317 470 1

87,485 42,544 15,238 1,509 26,101 2,093

59 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

e. Details of the generation segment Statement of Financial Position as of March 31, 2018:

Total generation PEP and Ramat Other gas segment others Rutenberg Orot Rabin Haifa Reading Eshkol Gezer Hagit Alon Tavor Hovav Zafit turbines (NIS in millions)

Current assets ...... 6,944 18 1,380 1,700 561 106 809 684 687 252 420 281 46

Long-term receivables ...... 5,720 449 1,123 1,428 373 178 695 363 479 155 253 160 64

Fixed assets, net ...... 26,387 130 8,086 5,390 2,152 285 2,390 2,395 2,296 824 1,342 953 144

Intangible assets, net ...... 284 2 59 66 26 3 30 30 28 10 16 12 2

Debit balances of regulatory deferral accounts ...... 3,209 - 735 728 282 150 356 172 379 108 133 102 64

42,544 599 11,383 9,312 3,394 722 4,280 3,644 3,869 1,349 2,164 1,508 320

Current liabilities ...... 6,711 103 1,971 1,612 469 114 656 483 538 188 309 215 53

Non-current liabilities ...... 24,738 446 7,049 5,116 1,918 402 2,454 2,106 2,188 774 1,251 861 173

Capital ...... 9,071 50 1,899 2,124 829 111 946 947 904 319 520 368 54

Credit balances of regulatory deferral accounts ...... 2,024 - 464 460 178 95 224 108 239 68 84 64 40

42,544 599 11,383 9,312 3,394 722 4,280 3,644 3,869 1,349 2,164 1,508 320

60 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

f. Details of the distribution segment Statement of Financial Position as of March 31, 2018:

Total distribution Northern Haifa Jerusalem Dan Southern segment District District District District District (NIS in millions)

Current assets ...... 3,389 725 341 441 571 1,311

Long-term receivables ...... 2,306 472 290 321 356 867

Fixed assets, net ...... 19,194 4,046 1,967 2,538 3,406 7,237

Intangible assets, net ...... 560 106 72 79 97 206

Debit balances of regulatory deferral accounts ...... 652 138 67 86 116 245

26,101 5,487 2,737 3,465 4,546 9,866

Current liabilities ...... 3,868 808 391 520 648 1,501

Non-current liabilities ...... 14,279 3,001 1,527 1,896 2,479 5,376

Capital ...... 7,484 1,579 771 987 1,335 2,812

Credit balances of regulatory deferral accounts ...... 470 99 48 62 84 177

26,101 5,487 2,737 3,465 4,546 9,866

61 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

g. Statement of operations for the three months ended March 31, 2017: (restated)

Consumer Total Services - Company Generation Transmission System Distribution Supply (NIS in millions)

Required revenues ...... 5,728 3,559 444 498 1,051 176

Adjustment for segment revenues ...... 28 (25) 24 (31) 161 (101)

Revenues from electricity ...... 5....,756 3,534 468 467 1,212 75

Other revenues, net ...... 60 15 1 - 27 17

Total revenues ...... 5,816 3,549 469 467 1,239 92

Cost for operating the electricity system ...... 4,659 3,142 295 470 752 -

Income (loss) from operating the electricity system ...... 1,157 407 174 (3) 487 92

Other revenues ...... ------Sales and marketing expenses ...... 235 - - - 67 168 Administrative and general expenses ...... 181 73 14 26 44 24 Income from liabilities to pensioners ...... ( 27) (13) (2) (1) (7) (4) 389 60 12 25 104 188

Income (loss) from current operations ...... 768 347 162 (28) 383 (96)

Financial expenses ...... 274 121 60 1 90 2

Income (loss) before income taxes ...... 494 226 102 (29) 293 (98)

Income taxes ...... 123 56 25 (7) 73 (24)

Income (loss) after income tax ...... 371 170 77 (22) 220 (74)

Company’s share of the loss of associate company ...... (5) - - - (5) -

Profit (loss) for the period before regulatory deferral accounts ...... 366 170 77 (22) 215 (74)

Movements in regulatory deferral accounts balances, net of tax ...... ( 50) 77 (45) 24 (104) (2)

Profit (loss) for the period and net movements in regulatory deferral accounts balances ...... 316 247 32 2 111 (76)

62 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

h. Details of the generation sites statement of operations for the three months ended March 31, 2017: (restated) Total generation PEP and Ramat Other gas segment others Rutenberg Orot Rabin Haifa Reading Eshkol Gezer Hagit Alon Tavor Hovav Zafit turbines (NIS in millions)

Required revenues ...... 3,559 1 592 811 364 128 348 312 430 166 255 128 24 Adjustment for segment revenues . (25) - (4) (6) (3) (1) (2) (2) (3) (1) (2) (1) - Revenues from electricity ...... 3,534 1 588 805 361 127 346 310 427 165 253 127 24

Other revenues ...... 15 - 3 4 1 1 2 1 1 1 1 - - Total revenues...... 3,549 1 591 809 362 128 348 311 428 166 254 127 24

Cost for operating the electricity system...... 3,142 - 482 735 332 120 309 262 390 148 234 116 14 Income from operating the electricity system ...... 407 1 109 74 30 8 39 49 38 18 20 11 10

Other revenues, net ...... ------Sales and marketing expenses ...... ------Administrative and general expenses ...... 73 - 15 19 5 5 9 5 6 3 3 2 1 Income from liabilities to pensioners ...... (13) - (3) (3) (1) (1) (2) (1) (1) - (1) - - 60 - 12 16 4 4 7 4 5 3 2 2 1

Income from current operations ... 347 1 97 58 26 4 32 45 33 15 18 9 9

Financial expenses ...... 121 - 32 21 10 2 11 15 12 5 6 4 3

Income before income taxes ...... 226 1 65 37 16 2 21 30 21 10 12 5 6

Income taxes ...... 56 - 16 9 5 1 5 7 5 2 3 2 1 Profit after income taxes ...... 170 1 49 28 11 1 16 23 16 8 9 3 5

Company’s share of the loss of associate company ...... ------Profit for the period before regulatory deferral accounts ...... 170 1 49 28 11 1 16 23 16 8 9 3 5

Movements in regulatory deferral accounts balances, net of tax ...... 77 - 11 12 5 4 7 4 5 2 2 2 23 Profit for the period and net movements in regulatory deferral accounts balances ...... 247 1 60 40 16 5 23 27 21 10 11 5 28

63 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

i. Details of the distribution sites statement of operations for the three months ended March 31, 2017 (restated)

Total distribution Northern Haifa Jerusalem Dan Southern segment District District District District District (NIS in millions)

Required revenues ...... 1,051 243 101 123 143 441

Adjustment for segment revenues .. 161 37 15 19 22 68

Revenues from electricity ...... 1,212 280 116 142 165 509

Other revenues ...... 27 7 2 10 3 5

Total revenues ...... 1,239 287 118 152 168 514

Cost for operating the electricity system ...... 752 177 66 89 86 334

Income from operating the electricity system ...... 487 110 52 63 82 180

Other revenue, net ...... ------Sales and marketing expenses ...... 67 18 9 10 12 18 Administrative and general expenses ...... 44 9 6 6 7 16 Income from liabilities to pensioners ...... (7) (1) (1) (2) (1) (2) 104 26 14 14 18 32

Income from current operations .... 383 84 38 49 64 148

Financial expenses ...... 90 19 10 12 17 32

Income before income taxes ...... 293 65 28 37 47 116

Income taxes ...... 73 16 7 9 12 29

Income after income tax ...... 220 49 21 28 35 87

Company’s share of the loss of associate company ...... (5) (1) - (1) (1) (2)

Profit for the period before regulatory deferral accounts ...... 215 48 21 27 34 85

Movements in regulatory deferral accounts balances, net of tax ...... (104) (22) (11) (14) (19) (38)

Profit for the period and net movements in regulatory deferral accounts balances ...... 111 26 10 13 15 47

64 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

j. Statement of operations for the year ended December 31, 2017: (restated)

Consumer Total System Services - Company Generation Transmission Management Distribution Supply (NIS in millions)

Required revenues ...... 23,550 14,406 1,723 2,206 4,445 770

Adjustment for segment revenues ...... (495 ) (700) 277 16 399 (487)

Revenues from electricity ...... 23,055.... 13,706 2,000 2,222 4,844 283

Other revenues, net ...... 315 70 11 2 187 45

Total revenues ...... 23,370 13,776 2,011 2,224 5,031 328

Cost for operating the electricity system ...... 19,335 12,756 1,156 2,110 3,313 -

Income from operating the electricity system ...... 4,035 1,020 855 114 1,718 328

Other revenues ...... ( 54) (27) (4) (1) (12) (10) Sales and marketing expenses ...... 999 - - - 291 708 Administrative and general expenses ...... 619 243 37 87 150 102 Income from liabilities to pensioners ...... ( 49) (25) (3) (1) (12) (8) 1,515 191 30 85 417 792

Income (loss) from current operations ...... 2,520 829 825 29 1,301 (464)

Financial expenses ...... 1,530 681 329 6 505 9

Income (loss) before income taxes ...... 990 148 496 23 796 (473)

Income taxes ...... 199 30 100 4 160 (95)

Income (loss) after income tax ...... 791 118 396 19 636 (378)

Company’s share of the loss of associate companies ...... ( 18) - (2) - (16) -

Profit (loss) for the year before regulatory deferral accounts ...... 773 118 394 19 620 (378)

Movements in regulatory deferral accounts balances, net of tax ...... 3,967 2,033 445 228 1,248 13

Profit (loss) for the year and net movements in regulatory deferral accounts balances ...... 4,740 2,151 839 247 1,868 (365)

65 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

k. Details of the generation sites statement of operations for the year ended December 31, 2017: (restated) Total generation PEP and Ramat Other gas segment others Rutenberg Orot Rabin Haifa Reading Eshkol Gezer Hagit Alon Tavor Hovav Zafit turbines (NIS in millions)

Required revenues ...... 14,406 4 2,829 3,227 1,160 391 1,742 1,277 1,606 626 998 427 119 Adjustment for segment revenues . (700) - (137) (157) (56) (19) (85) (62) (78) (30) (49) (21) (6) Revenues from electricity ...... 13,706 4 2,692 3,070 1,104 372 1,657 1,215 1,528 596 949 406 113

Other revenues ...... 70 - 17 17 4 4 9 4 5 4 3 2 1 Total revenues...... 13,776 4 2,709 3,087 1,108 376 1,666 1,219 1,533 600 952 408 114

Cost for operating the electricity system...... 12,756 - 2,398 2,887 1,039 359 1,587 1,090 1,450 557 922 379 88 Income from operating the electricity system ...... 1,020 4 311 200 69 17 79 129 83 43 30 29 26

Other revenues, net ...... (27) - (6) (7) (1) (1) (4) (2) (2) (1) (1) (1) (1) Sales and marketing expenses ...... ------Administrative and general expenses ...... 243 - 57 63 16 14 33 12 17 10 10 7 4 Income from liabilities to pensioners ...... (25) - (5) (8) (2) (1) (3) (1) (2) (1) (1) (1) - 191 - 46 48 13 12 26 9 13 8 8 5 3

Income from current operations ... 829 4 265 152 56 5 53 120 70 35 22 24 23

Financial expenses ...... 681 2 179 138 51 10 61 81 66 28 32 20 13

Income (loss) before income taxes 148 2 86 14 5 (5) (8) 39 4 7 (10) 4 10

Income taxes ...... 30 - 18 3 1 (1) (2) 8 1 1 (2) 1 2 Profit (loss) after income taxes .... 118 2 68 11 4 (4) (6) 31 3 6 (8) 3 8

Company’s share of the loss of associate companies ...... ------Profit (loss) for the year before regulatory deferral accounts ...... 118 2 68 11 4 (4) (6) 31 3 6 (8) 3 8

Movements in regulatory deferral accounts balances, net of tax ...... 2,033 - 464 546 116 95 298 105 146 54 67 44 98 Profit for the year and net movements in regulatory deferral accounts balances ...... 2,151 2 532 557 120 91 292 136 149 60 59 47 106

66 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

l. Details of the distribution sites statement of operations for the year ended December 31, 2017 (restated)

Total distribution Northern Haifa Jerusalem Dan Southern segment District District District District District (NIS in millions)

Required revenues ...... 4,445 1,025 413 513 580 1,914

Adjustment for segment revenues .. 399 92 37 46 52 172

Revenues from electricity ...... 4,844 1,117 450 559 632 2,086

Other revenues ...... 187 57 11 52 17 50

Total revenues ...... 5,031 1,174 461 611 649 2,136

Cost for operating the electricity system ...... 3,313 789 271 387 353 1,513

Income from operating the electricity system ...... 1,718 385 190 224 296 623

Other revenue, net ...... (12) (2) (2) (2) (2) (4) Sales and marketing expenses ...... 291 75 39 44 54 79 Administrative and general expenses ...... 150 32 20 22 25 51 Income from liabilities to pensioners ...... (12) (3) (2) (2) (2) (3) 417 102 55 62 75 123

Income from current operations .... 1,301 283 135 162 221 500

Financial expenses ...... 505 107 54 65 95 184

Income before income taxes ...... 796 176 81 97 126 316

Income taxes ...... 160 35 16 20 26 63

Income after income tax ...... 636 141 65 77 100 253

Company’s share of the loss of associate companies ...... (16) (3) (2) (2) (3) (6)

Profit for the year before regulatory deferral accounts ...... 620 138 63 75 97 247

Movements in regulatory deferral accounts balances, net of tax ...... 1,248 263 129 164 226 466

Profit for the year and net movements in regulatory deferral accounts balances ...... 1,868 401 192 239 323 713

67 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

m. 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, were 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. c) As of the first quarter of 2018, the Company presents two new segments, as aforesaid. d) The methodology used by the Company to distribute the income and expenses to the generation, transmission, distribution, transmission, system management and consumer services-supply segments is based on the Electricity Authority's resolutions regarding a new cost base for network segments as of January 8, 2018, other than the attribution of revenues in respect of the "system management" segment and electricity purchases from private consumers. The attribution of these revenues differs from the price methodology of the Electricity Authority and is made by the Company in line with the principles of the department handling/responsible for each of the activities.

2) Below are the principles for attributing the revenues between the various segments

a) Revenues from the sale of electricity: The gross revenues for the segment are calculated based on the rate model that was used by the Electricity Authority to determine the rates for the Company. In this model, the rate for each segment is calculated separately for every consumer. The final rate published by the Authority for every consumer is a scheme of rates that were calculated in every segment. The revenues per segment are calculated by the product of the segment rate multiplied by the sales (kWh) for the end consumer, while making the necessary adjustments in line with the activities defined by the Company for each of the 5 segments: generation, transmission, system management, distribution and consumer services-supply.

(1) Amount sold per segment The amount sold by each segment is calculated based on data of the amount of sales to the end customers according to the type of the customer and rates according to load and time ("LTR").

(2) Rate for the segment The electricity rates that were determined by the Electricity Authority are divided into two 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 (5 types of consumers, 9 rates at an hourly level for each type of consumer).

(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 (6 types of uniform rates). 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.

68 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

m. The principles used in attributing the statements of income are as follows:

2) Below are the principles for attributing the revenues between the various segments (continued)

a) Revenues from the sale of electricity: (continued)

(3) Calculation of the revenues for the electricity chain segments

The calculation of the revenue 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 revenue and the calculated revenue obtained, is distributed among the segments mainly based on the scope of their calculated revenue.

(4) In addition, in view of the matter discussed in section m2a3 above, 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 and connections are calculated at a rate per kWh multiplied by the sales to the end consumer.

(5) Additionally, it is clarified that various adjustments are carried out for the revenues calculated in each segment, such as: attribution of system-related costs and distribution of revenues from the purchase of electricity to the relevant segment, addition of the fixed component in the electricity bill, giving various discounts, decrease of revenues with respect to non-recognition of the revenues of the East Jerusalem Electricity Company and the Palestinian Authority etc.

b) Other revenues - are 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 - in the Company's financial statements it reflects the operating expenses for the generation, transmission and distribution segments. Fuels costs are fully attributed to the generation segment. Costs with respect to the purchase of extra-high voltage electricity are attributed to the "system management" segment. Costs with respect to the purchase of high and low voltage electricity are attributed to the "distribution" segment.

b) Other revenues, net – Expenses with respect to the impairment of KARAT companies were attributed to segments in accordance with the ratio of distribution of the expenses in the item of administrative and general expenses (see also section c below). Update of the Rogozin land value, pursuant to the appraiser’s assessment, was attributed to segments in accordance with the ratio of common property.

b) Selling and marketing expenses - include the expenses for services to consumers that are attributed to the "distribution" segment and to the "consumer services-supply" segment.

69 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

m. The principles used in preparing these statements of income are as follows (continued)

3) Below are the principles for attributing the expenses to the various segments (continued)

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:

(1) The expenses of the General Administration, Finance and Economic Division (except for the Department of Statistics, see section 6 below) and asset maintenance expenses - are presented according to the distribution ratio of the operating expenses in the electricity chain during the reported year.

(2) The expenses for the human resources department are presented according to the distribution ratio of the salary expenses in the electricity chain during the reported year.

(3) Doubtful accounts and bad debts - are presented according to the ratio of the gross revenues from electricity sales in the electricity chain during the reported year.

(4) Communications and electronics expenses - are presented according to the activities of the relevant unit.

(5) Expenses of the Technological Planning and Development – are fully attributed to the "system management" segment.

(6) The Statistics Department's expenses - are fully attributed to the "system management" segment.

d) Expenses (income) from liabilities, to pensioners, net - These expenses (income) are presented according to the distribution ratio of the salary expenses in the electricity chain during the reported year.

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 year.

f) Income Taxes - The tax expenses attributed to the segments according to the rate of taxes on income from profit (loss) before taxes on income at the Company level. The effect of the change in tax rate is attributed to segments according to the ratio of the fixed assets of each segment out of the fixed assets of the Company.

g) Movements and net balances in regulatory deferral accounts net balances after tax effect - movements and balances of regulatory deferral accounts are attributed to the segments in relation to the nature of the income or expense, in accordance with the guiding principles for determining the electricity rate in the segment. The division into stations in the generation segment and into districts in the transmission segment was executed according to the ratio of active fixed assets.

70 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

n. The principles used in attributing the aforesaid statement of financial position items are as follows:

1) The Company is one legal entity and, in effect, the Statement of Financial Position balances are not separated according to the Company's activities segments in its accounts (except for direct fixed assets). Therefore, the Company reallocates the Balance Sheet balances for the purpose of this note, in every reporting year, based on allocation keys, as described below.

2) The Statement of Financial Position as presented in this note does not necessarily reflect the financial position of the various segments, should they have been managed as separate economic entities, in accordance with generally accepted accounting principles.

3) Below are the principles for attributing the statement of financial position 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:

Fuels inventories and balance for fuels suppliers - were fully attributed to the generation segment, divided between the units according to the fuel costs in practice. The trade receivables balance was allocated according to the distribution ratio for 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 3% of the entire assets) were distributed according to distribution keys that, in management's opinion, constitute a reasonable estimate for attributing these assets.

c) Other assets

Other assets which can be specifically identified were included in the appropriate segments. Other assets which could not be specifically identified were allocated according to the ratio of active fixed assets.

d) Shareholders' equity and deferred taxes:

Shareholders' equity and deferred taxes were allocated according to the ratio of the active fixed assets, net.

e) Loans and debentures:

The loans and debentures were allocated to the segments in accordance with the other statement of financial position items, and principally according to the distribution ratio of fixed assets to segments, pursuant to the nature of the financing for the Company's assets under the rate principles.

f) The remaining statement of financial position items were distributed according to distribution keys that, in the Company's estimation, constitute a reasonable estimate for attributing these items.

71 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

o. Information regarding the attribution of the income statement and statement of financial position according to 20 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 statement of financial position, in reference to 20 activities that are included in the five 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. Transmission segment The electricity transmission and transformation system. System management segment Day-to-day management of the generation, transmission and transformation systems. Distribution segment The Company's five districts: Northern, Haifa, Jerusalem, Dan, Southern. Consumer services-supply segment Includes the Company's customer services and collection system.

The 18 operations segments shall hereinafter be referred to as: "reporting units".

2) Below are the primary principles for attributing the revenue The revenue 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.

The revenue is calculated based on the following principles:

a) Calculation of the revenue 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 year. Required revenue - coverage of the actual costs during the reported year (operating costs including fuel and depreciation) neutralized by the various other revenue 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 20 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.

72 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

o. Information regarding the attribution of the income statement and statement of financial position according to 20 reporting units (continued)

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 five electricity chain segments (see section m. above). Joint expenses for a segment (such as segment management) 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 expenses) were attributed to the reporting units in accordance with the loading bases used in the reporting according to the electricity chain segments.

4) Principles that were used in attributing the statement of financial position items according to 20 reporting units According to that stated in section m. above, the Company is one legal entity and, in effect, the statement of financial position balances are not segregated in the Company's books according to the segments of the Company's activities. Therefore, the Company re-attributes the statement of financial position balances for the purpose of this note for each reported year based on allocation keys, as described above in section m, while providing additional details for the 20 reporting units.

73 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 13:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY

a. For information about attributing the statement of profit and loss to the Statement of Financial Position according to the generation transmission and distribution segments, see Note 36 to the Annual Financial Statements and Note 12 above.

b. 1) Regarding disclosure about reports on internal controls, see Note 37b to the Annual Financial Statements.

2) The Companies Authority required the Company to conduct audits according to the Government Companies Regulations (Additional Reports on the Effectiveness of Internal Control over Financial Statements) – 2007 and according to the Government Company Regulations (Additional Report on Actions Taken and Representations Given to Ensure the Correctness of the Financial Reports and the Board of Directors’ Report) – 2005, and according to the circular of the Companies Authority on the subject of risk management in Government companies, of June 11, 2009, and present disclosure of them in the notes to the financial statements on the internal controls over the financial reporting related to assets / liabilities / activities / trusts / projects and services managed through service providers assets / liabilities / activities / trusts / projects and services, as these are defined in SAS 70 (Statements on Auditing Standards 70). In the framework of the controls tested as listed above, also tested were controls relating to service providers' assets / liabilities / activities / trusts / projects and services, as these are defined in SAS 70. The Companies Authority wished to ensure that within the framework of the chain of signings and backing the declarations carried out for the purpose of implementing the above stated regulations regarding SOX 302 and SOX 404 and the Government Companies Risk Management Circular, all the key advisors and other service providers relevant to the internal controls over the financial reporting in the Company in the stated spheres will provide a statement regarding the audits they executed and their findings with respect to the existence or non-existence of weaknesses or faults in accordance with the stated Regulations regarding SOX and the Risk Management Circular, SAS 70 including its amendments, including SSAE 16 (“Statements on Standards For Attestation Engagements 16”), as well as regarding the issue of conflict of interests, this in addition to the chain of signings and backing the declarations of those responsible for the processes, sub-processes and additional controls relevant to the internal controls over the financial reporting of the Company.

The position of the Company: SAS 70 deals with an opinion of an auditor on the reliability of the controls that exist in service bureaus. The key advisors and other service providers relevant to the internal controls over the financial reporting of the Company are experts and not service bureaus and therefore they are not comprised in SAS 70. For the purpose of relying on the work of the expert, the Company examines his professional qualifications, his professional authorization by an appropriate professional entity, his experience and reputation, and also carries out tests in order to verify the use he makes of the data, assumptions and the methods he uses, and examines the outcome of his work. The Authority is not accepting the Company’s position and is of the opinion that in the absence of declarations as aforesaid, weaknesses or defects may exist according to the SOX Regulations and the Risk Management Circular or they will not be disclosed as required. So, for example, as stated in the non-implementation of the instructions of the Authority on execution of a risk survey in accordance with the Risk Management Circular. Moreover, under the SSAE 16 the interpretation included in the position of the Company is overly limited and the term “Service organization” is defined as: “An organization or segment of an organization that provides service to user entities, which are likely to be relevant to those user entities' internal controls over financial reporting". A similar definition is also included in the ISAE 3402 (International Standard on Assurance Engagements 3402).

c. Government Companies are required to ensure that a misleading item will not be included in the Financial Statements and the accompanying information they submit, including information that might mislead a reasonable reader of the Financial Statements and their accompanying information.

d. The Company will provide proper disclosure in the Financial Statements of significant assets where 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 in the Company's books, including on the basis of appraisals or evaluations performed, or insurance appraisals, if performed. The Company does not have valuations of specific assets (except with respect to the Rogozin land, see Note 12d to the Annual Financial Statements). The Company periodically reviews signs for impairment of its assets according to IAS 36 and if needed performs a valuation of all its assets, which is attached as an annex to the financial statements.

74 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 13:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

e. In June, 2015, the Companies Authority notified the Company that it is performing an examination of all the issues related to calculation of the actuarial liability of the Company and deposits to the pension fund, and requested and received data from the Company for this purpose.

f. The Government Companies Authority required the Company to ascertain and provide disclosure, that the rights recorded in the financial statements related to liabilities with respect to employee-employer relations did not deviate from the current binding rights from aspects of Labor laws and that these liabilities were recorded accurately.

The Company's position is: The Company tightened controls over salary and pension payments and established a procedure, approved by the Company's Board of Directors, on the subject of the manner of updating changes in employee rights and benefits. The Company estimates that these steps strengthened internal controls over financial reporting for subjects related to handling the employees’ wages rights section from now onwards. Regarding rights of wages deriving from the past, the Company received an opinion of its legal advisers, and in 2011 the Company applied to the Commissioner of Wages to receive his approval for validity of wage rights that had not yet received approval. The Commissioner of Wages stated that he cannot provide an approval as requested, and that he intends to conduct an examination of the salary components of the Company. Following the decision of the Commissioner of Wages regarding deviations in Company salaries of October 10, 2013, a legal proceeding was conducted regarding four salary components in the Company and a judgment was rendered on May 3, 2016, which approves most of the determinations of the Commissioner of Wages in this matter. The parties filed an appeal regarding this judgment. In view of the Court's judgment, the Company, employees' union and the New National Labor Federation held intensive negotiations with the participation of the Ministry of Finance, following which a collective agreement was signed on December 11, 2016. The collective agreement determines, inter alia, repayment with respect to payment of the deviating components in the period beginning on the date of the Commissioner's decision and arrangement of the deviating components from August 1, 2016. Following the agreement, the judgment of the Haifa District Court of Labor was cancelled with the parties' consent, and the appeal proceedings submitted by the parties against the judgment were stricken off. A group of employees, the Company's engineers' union, and a group of pensioners filed claims to the Court of Labor regarding the collective agreement of December 11, 2016. As of the date of approval of the financial statements, the proceedings are being conducted at the District Court.

g. According to the circular of the Companies Authority the Company is required to provide disclosure in the Financial Statements of the implementation of the directives of the Government Companies Authority regarding control and reporting rules for land and attached assets in Government companies in accordance with the Financial Statement Circular 2006-3 of September 17, 2006.

For additional details see Note 37l to the Annual Financial Statements.

h. Regarding the disclosure of the implications of the Law to Promote Competition and Reduce Centralization, 2013 (hereinafter: the “Centralization Law”), see Note 37g to the Annual Financial Statements.

i. The Companies Authority requested that it will be expressly noted in the Financial Statements that the presentations included in the Financial Statements and in the enclosed information are at the sole responsibility of the Company and do not bind the State of Israel.

The Company notes that, to the best of its knowledge, the Company’s presentations, except for positions expressed by various governmental bodies which are included in the Financial Statements and the accompanying information, are at the sole responsibility of the Company’s Management and Board of Directors and do not bind the State of Israel, subject to law.

j. The Companies Authority requested to provide disclosure with respect to all the engagements, existing and expected, with the private producers including production licenses granted to private producers and with respect to which agreements with the Company have not yet been signed. For additional details see Note 8c2 above.

75 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 13:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

k. The Companies Authority requested to provide disclosure regarding the effectiveness of the procedures included in the declaration given by the Vice President for Human Resources of the Company, which, based on his knowledge, the reports delivered to the fund do not include misrepresentation of material or misleading facts regarding the period of the account.

The position of the Company:

As noted in the declaration given by the Senior Vice President Human Resources of the Company to this report to the CEO of Halman-Aldubi IEC Gemel Ltd., the controls in the processes included in the declaration are effective.

l. Regarding the financial statements of the Jordan Assets Incorporated Company see Note 38k to the Annual Financial Statements.

m. Regarding a special audit under section 45 of the Government Companies Law, see Note 38c to the Annual Financial Statements.

n. The Companies Authority applied to the Company to clarify the examination of embedded derivatives in the Tamar agreement carried out by the Company in the past. The Company responded on March 1, 2017 and clarified its accounting policy in a letter to the Companies Authority. Also see Note 34a1 to the annual financial statements. On November 19, 2017, the Companies Authority notified the Company that its response is being examined and that the Companies Authority requested to receive additional responses from the Company relating to the information delivered by the Authority to the Company.

76 THE ISRAEL ELECTRIC CORPORATION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2018

NOTE 13:- ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued)

o. Composition of fixed assets: Depreciated COST ACCUMULATED DEPRECIATION AND IMPARTMENT balance (1) Changes in the period ended March 31, 2018: Balance on Balance on Balance on Balance on January 1, Net addition March 31, January 1, March 31, On March 31, 2018 Classification Deduction (*) 2018 2018 Deduction Addition 2018 2018 (NIS in millions) Audited Unaudited Audited Unaudited FIXED ASSETS IN USE Power plants (including land, buildings and machinery) ...... 76,426 11 )16( 31 76,452 54,361 )15( 612 54,958 21,494 Sub-stations ...... 14,157 3 )3( 18 14,175 9,283 )3( 93 9,373 4,802 Overloading control center ...... 988 - - 1 989 899 - 5 904 85 Telecommunications ...... 1,928 2 - 9 1,939 1,574 - 14 1,588 351 Switching stations ...... 6,664 - - 1 6,665 4,343 - 53 4,396 2,269 400 KV voltage lines ...... 2,303 - - - 2,303 1,412 - 18 1,430 873 High voltage transmission lines ...... 6,582 277 )6( )9( 6,844 3,670 )5( 45 3,710 3,134 Distribution networks ...... 39,094 64 )22( 148 39,284 21,918 )17( 264 22,165 17,119 Meters ...... 2,046 6 )9( 6 2,049 1,574 )8( 24 1,590 459 Land, office buildings ...... 3,691 - )1( 4 3,694 2,180 )1( 25 2,204 1,490 Office equipment and tools ...... 1,710 1 - 6 1,716 1,555 - 8 1,563 153 Computers...... 1,665 11 )4( )9( 1,663 1,596 )4( 7 1,599 64 Motor vehicles ...... 770 - )29( 7 748 510 )27( 20 503 245 Mobile mechanical equipment ...... 550 - - - 550 346 - 10 356 194 Emergency equipment ...... 104 - - - 104 62 - 1 63 41 Coal Company ship ...... 105 - - - 105 8 - 1 9 96 Other projects ...... 415 3 - 2 420 118 - 3 121 299 Spare parts for power plants and substations ...... 1,308 )8( )6( 10 1,304 617 )6( 1 612 692 Total fixed assets in use ...... 160,506 370 )96( 225 161,004 106,026 )86( 1,204 107,144 53,860

FIXED ASSETS UNDER CONSTRUCTION Power plants, buildings and other installations ...... 3,212 20 - 92 3,324 3 - - 3 3,321 Sub-stations ...... 464 - - 18 482 56 - - 56 426 High voltage lines 785 )269( - 42 558 1 - - 1 557 Switching stations ...... 62 - - 1 63 - - - - 63 400 KV voltage lines 184 2 - 9 195 - - - - 195 Payments on account of equipment ...... 10 )24( - 23 9 - - - - 9 Other investments 378 )11( - 11 378 67 - - 67 311 Materials and payments on account of materials designated for investments in fixed assets ...... 439 )88( )9( 125 467 - - - - 467 Total fixed assets under construction...... 5,534 )370( )9( 321 5,476 127 - - 127 5,349

Total fixed assets ...... 166,040 - (105) 546 166,480 106,153 )86( 1,204 107,271 59,209

(*) Less proceeds from development works orders.

ANNEX 1

Actuarial Liabilities of the Israel Electric Corporation as at March 31, 2018

Alan Fefferman – Actuarial Services Ltd.

May 30, 2018

Mr. Avi Doitchman Senior Vice-President, Finance and Economics Israel Electric Corporation Ltd. P.O. Box 10 Haifa 31000, Israel

Dear Sir,

Re: Actuarial Liabilities for Employee Benefits as at March 31 2018 in Accordance with International Financial Reporting Standard IAS 19 Employee Benefits

1. General

1.1 This report consists of the following sections and appendices:

1. General 2. Benefits included in the valuation 3. Methodology as well as actuarial and accounting principles underlying the valuation 4. Data on which the valuation is based 5. Assumptions on which the valuation is based 6. Valuation changes in the current reporting year 7. Valuation results 8. Uncertainties and risks Appendix A – Additional reports for disclosure in the financial statements Appendix B – Presentation of expected benefit cash flows Appendix C – Additional details regarding financial assumptions Appendix D – Additional details regarding data Appendix E – Valuation changes made prior to the current year

1.2 We were asked by the Israel Electric Corporation Ltd. ("the Company") to prepare this actuarial valuation of the Company's employee benefit liabilities for the purpose of financial statement reporting in accordance with International Financial Reporting Standard IAS 19 Employee Benefits ("IAS 19"). The valuation was requested by Mr. Avi Doitchman, Senior Vice-President, Finance and Economics. Our engagement agreement was signed on May 26, 2016. We agree that this report be published with the Company's financial statements.

1.3 On May 26, 2016, the Company also granted us a letter of indemnity in respect of the services that we are providing to the Company. Our position is that the letter of indemnity does not create a presumption of dependence of the Company, since the granting of a letter of indemnity and valuations of this kind are accepted practice and do not create a specific dependency on the Company.

We will receive fees for this engagement and for other consulting services that we provide to the Company, and this in no way changes our position regarding the absence of dependency as stated. Likewise, we confirm that the fees we receive from the Company are not dependent on the results of our work.

1.4 This valuation was performed solely for the purpose stated above and this report may not be used, nor may conclusions be based upon it, for any other purpose such as determining the level of contributions required for the funding of benefits, valuations of the net worth of the

Alan Fefferman – Actuarial Services Ltd.

Company, etc. The actuarial results appropriate for any other purpose may differ materially from the results reported in this document.

1.5 This report is intended to present valuation results and to provide explanations regarding the valuation. The report is prepared for the purpose of its inclusion in the Company's financial statements.

1.6 The amounts reported herein were calculated in accordance with the Company's interpretation of IAS 19 and its accounting policies regarding its implementation (see section 3 below). The Company is solely responsible for any such interpretation and policies.

1.7 According to this valuation, there is a surplus of assets over liabilities in the pension plan. Based on the Company's instructions, this surplus is presented as an asset of the Company in whole. According to legal regulations of the Central Pension Fund for Employees of the Israel Electric Corporation Ltd. ("the Fund"), under certain circumstances a surplus will be returned to the Company, where the surplus is determined according to an actuarial valuation of the Fund. The actuarial valuation of the Fund differs from the Company’s valuation presented in this report, primarily due to different actuarial assumptions regarding discount rates. According to the most recent actuarial valuation of the Fund (as of March 31, 2018), liabilities were higher than those calculated in this valuation, and there were no surplus assets.

1.8 In order to calculate the amounts presented in this report, we relied on information concerning employee benefit terms and conditions (including constructive obligations) and on historical and current employee data, as provided to us by the Company, that were not verified by us. The Company bears full responsibility for the completeness and reliability of the information and data provided to us.

1.9 Valuation results are highly sensitive to actuarial assumptions. Actual demographic and economic experience is likely to differ from the assumptions, and assumptions are likely to change in future, which will affect the valuation of the liability for accrued benefits. Additional information is provided in Section 8 below.

1.10 The valuation was performed by Mr. Alan Fefferman, a qualified actuary, and his actuarial team at Alan Fefferman – Actuarial Services Ltd. Mr. Fefferman has a B.Sc. in mathematics (with Distinction) from the University of Alberta in Canada, an M.B.A. (Beta Gamma Sigma) from the University of Chicago in the United States, is a Fellow of the Society of Actuaries (FSA) in the United States, and is a Fellow of the Israel Association of Actuaries (FILAA). His approximately thirty four years of professional experience include actuarial valuations of employee benefits similar to those of the Company, actuarial valuations of pension plans, and the determination of actuarial methods and assumptions for pension plans and insurance companies, in his various roles of valuation actuary, peer reviewing or audit actuary, and regulatory actuary.

1.11 This report has been prepared in accordance with the following standards:  International Standard of Actuarial Practice 1 – General Actuarial Practice, approved by Council of the International Actuarial Association on November 18, 2012;  International Standard of Actuarial Practice 3 – Actuarial Practice in Relation to IAS 19, adopted by Council of the International Actuarial Association on April 11, 2015.

Alan Fefferman – Actuarial Services Ltd.

1.12 Definitions:  "salary" – pensionable salary  "pension plan" – the set of benefits provided by the Fund  "date of valuation" – March 31, 2018  "linked pensions agreement" – the collective agreement between the Company, the Histadrut (association of trade unions), and the permanent committee of Company employees, which inter alia changed the method of pension adjustments (by linking pensions to changes in the consumer price index ("the Index"), instead of linkage to salary promotions and wage agreements).

2. Benefits Included in the Valuation

2.1 Our calculations are based on information regarding the benefits and their terms, as presented in a Company document dated January 1, 2018 that is attached to this report as Appendix F. The information in that document, which we relied upon for the purpose of preparing this report, was not verified by us.

2.2 The valuation relates to benefits in respect of permanent employees, pensioners (including those who retired because of disability) and surviving spouses and orphans (for convenience sake, pensioners and survivors shall hereinafter be referred to as "pensioners"). Employees and pensioners are divided into two groups:  those covered by the defined benefit pension plan (for whom benefits are identical), who commenced their employment at the Company on or before June 10, 1996;  those included in employee-generation C, who are permanent employees that commenced their employment at the Company after that date. The valuation also relates to the supplemental severance pay benefit in respect of employees employed under a special agreement. The valuation does not relate to severance pay benefits for senior managers who are employed under personal contracts with the Government Companies Authority.

2.3 The benefits to which the valuation relates are as follows (for more details, please refer to Appendix F of the report on the actuarial valuation as at 31/12/2017):

2.3.1 Regarding employees and pensioners covered by the defined benefit pension plan, benefits include the following:  post-retirement pension based on pensionable salary. Pensionable salary is comprised of the following components, subject to each employee/pensioner's individual entitlement to each component: regular salary1, shift work, home service, Arava additions, convalescence pay (one- twelfth of the annual amount), 13th salary (one-twelfth of annual salary) 14th salary (one-twelfth of annual salary) and "CPI increment";  disability pension;  survivors' pension in respect of employees who die while in Company

1 includes combined salary, management increment, seniority increment, personal addition, continual education addition, and physical effort addition. 3

Alan Fefferman – Actuarial Services Ltd.

service2 or after retirement (including employees who died after disability retirement);  retirement grant for service exceeding 35 years, and to survivors upon the death of a spouse as above, and also including an apprenticeship period grant;  "up to 35 years" grant paid upon retirement, and to survivors in the event of the employee's death;  disability retirement grant (not to exceed 15 times salary);  grant for unutilized days of sick leave;  severance pay at the rate of 8.33% of salary for each year of service, received upon termination of employment without entitlement to pension;  reduction of electricity costs for pensioners (includes VAT and is grossed up to cover the cost of other taxes);  holiday gifts for pensioners (grossed up to cover the cost of taxes);  grant after 20 years of service;  social welfare activities (valued at 0.49% of the cost of grants and pensions, excluding convalescence pay, reduced electricity costs, holiday gifts, and the two salary components of home service and Arava addition);  social welfare fund for pensioners of the defined benefit pension plan;  CPI-linked life insurance benefits for pensioners (includes two-thirds of the sum assured, since one-third of the cost of benefits is paid by pensioners)3.

2.3.2 Regarding generation C employees, the benefits consist of:  supplementary severance pay at the rate of 2.33% of regular salary (including 13th salary) for each year of service. In addition, in respect of 14th salary for employees who started work at the Company before January 1, 2004, supplementary severance pay for service exceeding 35 years is also provided;  "up to 35 years" grant paid upon retirement and to survivors in the event of the employee's death;  grant for unutilized sick leave;  reduction of electricity costs for pensioners (includes VAT and is grossed up to cover the cost of other taxes);  holiday gifts for pensioners (grossed up to cover the cost of taxes);  grant after 20 years of service;  social welfare activities (valued at 0.49% of the cost of other benefits);  CPI-linked life insurance benefits for pensioners (includes two-thirds of the sum assured, since one-third of the cost of benefits is paid by pensioners)4.

2.3.3 In respect of non-permanent employees who are employed by special agreement: supplementary severance pay upon termination of employment, retirement, or upon termination of the maximum period allowed for this type of employment (5 years), whichever comes first.

2 any lump sum which is paid upon the employee's death as a result of a work-related accident, was not taken into consideration in the valuation (please refer to section 7.2 of Appendix F of the report on the actuarial valuation as at 31/12/2016, under the heading "Rights of Employees Entitled to Pension from the Pension Fund of Company Employees and Rights of Pensioners"). 3 To the extent that there exists an arrangement with an insurer, the valuation also recognizes a margin for the cost of insurance. 4 Ditto 4

Alan Fefferman – Actuarial Services Ltd.

2.4 Pensions are adjusted every January, according to the rate of change in the consumer price index (the ratio of the index for the most recent month of December to the index for the previous December).

2.5 The valuation does not take into consideration the possible payment of other benefits or increases to existing benefits at Company discretion, except for the allowance for early retirements requiring Company approval that is based on assumed early retirement rates (please see section 5.4 below).

3. Methodology and Actuarial and Accounting Principles

3.1 In accordance with IAS 19, liabilities were calculated using the projected unit credit method. Under this method, the liability is calculated as the present value of projected payments to employees and pensioners in respect of the relevant benefits based on the accrued rights of employees and pensioners as of the valuation date (the "past obligation"). The calculation projects each employee and pensioner's expected benefit payment amounts and dates, while taking into account the projected salary growth rate, mortality, termination and disability rates of employees and pensioners, as well as the labor agreements and the Company's benefit payment policy.

3.2 The liabilities and additional disclosures in this report were calculated and presented in accordance with the Company's accounting policy as detailed in sections 3.3-3.10 below.

3.3 Benefits are attributed to periods of employment, as follows:

Benefit Benefit Accrual Percentage as at the Date of Valuation Post-employment pension (including Based on the benefit formula in the pension plan, disability pension) and social welfare including the pension percent per year of service and activities the number of years of past service. The benefit is fully accrued after reaching 10 years of service and age 40 (age 60 for Generation C Reduction of electricity costs employees). Until the age and service criteria are (including VAT) and holiday gifts met, the benefit accrual percentage is based on the for pensioners, grossed up to cover ratio of the number of years of past service to the the cost of taxes number of years of past and future service up to the date that the criteria will be met. Death-in-service survivors' pension The benefit is always fully accrued. Based on eligibility on the valuation date. Benefit is Severance pay upon termination of accrued based on service. For the "up to 35 years of employment without entitlement to employment" grant, there is a 35-year accumulation pension, and "up to 35 years" grant maximum. Grant for service exceeding 35 years Accrual begins upon reaching 35 years of service. According to the number of unutilized sick leave Grant for unutilized sick leave days as of the valuation date. Based on the number of years of past service, up to a Grant for disability retirement maximum of 30 years. Based on the ratio of accrued service to 20 years. (There is no liability in respect of employees with 20-year grant over 20 years of service, as they would have already received the grant). The benefit accrual percentage is based on the ratio Supplementary severance pay for of the number of years of past service to the number non-permanent employees of years of past and future service up to the end of (employed under special agreement) the maximum period allowed for this type of 5

Alan Fefferman – Actuarial Services Ltd.

employment or until retirement age 67, whichever comes first. The benefit accrual percentage is based on the ratio of the number of years of past service to the number Social welfare fund of years of past and future service up to the date that the employee reaches age 50/55 (male/female) or reaches 30 years of service, whichever comes last. The benefit accrual percentage is based on the ratio of the number of years of past service to the number Life insurance benefits of years of past and future service until the average retirement age of 66.

3.4 For post-employment benefits5, actuarial gains or losses are credited or charged directly to owners' equity. For employee benefits that are not post-employment benefits, actuarial gains or losses are credited or charged to profit and loss.

3.5 Valuation results are presented in Appendix A on a nominal basis. Consequently, the interest cost and the expected return on assets are calculated according to nominal interest rates at the beginning of the year.

3.6 Current service cost is calculated in respect of benefits accrued during the reporting period using the method described in section 3.3. For example, for the post-retirement pension benefit:  until an employee reaches 35 years of service, the current service cost reflects the incremental pension percent;  after an employee reaches 35 years of service, the current service cost reflects the incremental grant. After a benefit is accrued fully, the current service cost for that benefit is zero. The current service cost for a calendar year is calculated once a year, based on the actuarial assumptions in effect as at the end of the previous year. At the end of each calendar quarter, one-quarter of the annual current service cost is charged to profit and loss. Any difference between the current service cost charged to profit and loss, and the actual current service cost based on updated actuarial assumptions and plan experience, constitutes an actuarial gain or loss.

3.7 The interest cost and expected return on plan assets, are based on a nominal annual interest rate of 3.92%; that is, the uniform discount rate inherent in the defined benefit obligation as at December 31, 2017.

3.8 The current service cost presented in this report has been reduced in respect of employees' contributions6. That is, a net service cost is presented.

3.9 The value of assets presented in Appendix A was disclosed to me by the Company and was not checked by me.

3.10 Termination benefits7 presented in Appendix A, are defined as payments to existing pensioners until they reach the expected average age of retirement (as derived from actuarial assumptions regarding the probability of retirement at each age). Actuarial gains or losses from termination benefits are not included in those presented in appendix A, but are credited or charged to the Company's profit and loss statement.

5 As the term is defined in IAS 19 6 Data regarding the sum of employees’ contributions was received from the company. 7 As the term is defined in IAS 19 6

Alan Fefferman – Actuarial Services Ltd.

4. Data on which the Valuation is Based

The valuation is based on data that we received from the Company. We have not performed detailed checks of the data nor have we compared them to the original data source. We have checked the reasonability of the data in general and by comparison to the previous quarter's data. The primary data that we received is described as follows (for additional details, please see Appendix D):

4.1 Employee and pensioner data – we received files on April 10, 2018 containing data for each employee and pensioner entitled to their relevant benefits. The data includes information regarding age, gender, pension or salary components, rank, service, etc. as at the valuation date. In addition, these files include data for the average monthly value of the holiday gift (grossed up to cover the cost of taxes).

4.2 We made the following adjustments to the data as per the Company's instructions8:

4.2.1 Increase of salaries and pensions by 0.49% to cover the cost of social welfare activities. This increase applies to all components of salary and pension, except for convalescence pay, the Arava addition, home service, holiday gifts and reductions in the cost of electricity.

4.2.2 We received a file from the Company, containing a list of employees who retired soon before the date of the valuation, and whose status needed to be changed from "employee" to "pensioner". The file also included their pension benefit amounts.

4.2.3 On December 11, 2016, a collective agreement was signed by the Company. This agreement includes the “managerial increment” component and the "global overtime" component of salary that employees and pensioners will be entitled to. According to the company, the data we received as at March 31, 2018 contained components that were adjusted in accordance with paragraphs 35-37 and 53-63 of the collective agreement, with the exception of 6 pensioners who asked for a private hearing with the Supervisor of Wages and Work Agreements in the Ministry of Finance for whom the reduction was calculated by us, similar to previous valuations.

8 The manner and rates of adjustment, were stipulated in the Company's instructions, and were not determined or checked by us. 7

Alan Fefferman – Actuarial Services Ltd.

4.3 Below is a summary of the data mentioned above:

Before the adjustments mentioned in section 4.2 above Average Average service Group Number Monthly salary/pension in NIS age (years) Defined benefit pension plan * Employees 6,166 101,651,269 55.3 28.9 Pensioners – former employees 4,683 60,866,189 72.3

Pensioners – survivors (including 1,922 13,957,794 74.7 children) Generation C** Employees 2,412 22,224,510 44.4 14.6 Pensioners – former employees 35 5,162 69.7

Pensioners – survivors (including 15 2,212 44.6 children) Employees under special agreements (non-permanent employees) *** Employees 521 3,132,565 38.7 3.4

After the adjustments mentioned in section 4.2 above

Average Average service Group Number Monthly salary/pension in NIS age (years) Defined benefit pension plan * Employees 6,144 101,706,532 55.3 29.0 Pensioners – former employees 4,705 61,431,337 72.2

Pensioners – survivors (including 1,922 14,017,924 74.7 children) Generation C** Employees 2,412 22,331,667 44.4 14.6 Pensioners – former employees 35 5,162 69.7

Pensioners – survivors (including 15 2,212 44.6 children) Employees under special agreements (non-permanent employees) *** Employees 521 3,147,915 38.7 3.4

* Salary and pension data presented for employees and pensioners covered by the defined benefit pension plan include all the components to which the employee or pensioner is entitled, including regular salary9, shift work, home service, Arava addition, convalescence pay, 13th salary (one-twelfth of the annual amount), 14th salary (one-twelfth of the annual amount) and value of holiday gifts (grossed up for tax). The amounts of the 13th and 14th salaries were calculated by dividing the regular salary by 12 in respect of all those qualifying based on service data.

9 Includes "combined salary", "managerial increment", "service addition", "personal addition", "continuing education addition" and "physical effort" addition.

Alan Fefferman – Actuarial Services Ltd.

** The generation C salary (for the purpose of calculating grants and severance pay) include all the components to which the employee or pensioner is entitled, including regular salary, 13th salary (one-twelfth of the annual amount) and grossed up value of holiday gifts. The amount of the 13th salary was calculated by dividing the regular salary by 12.

*** The displayed salary for non-permanent employees who are employed under a special agreement, is the salary eligible for severance pay only. (In the data file there are two salary fields – regular salary and severance pay. The field that is used for calculations is the severance pay.)

4.4 The data received regarding assets, payments and contributions (in nominal terms), include all of the following:

Data item NIS '000

Assets as at the valuation date 4.4.1 Balance of plan assets for post-employment benefits 31,452,424 4.4.2 Balance of assets according to paragraph 116 of IAS 19 1,593,419

Payments during the reporting period 4.4.3 Increased severance pay to employees under special agreements 1,172 4.4.4 Supplemented severance pay (2.33%) to generation C employees – 4.4.5 "20-year grant" 548 4.4.6 Termination benefits – for paid benefits by the Fund, and for benefits not paid 37,599 by the Fund (electricity discount, holiday gifts) Termination benefits – for paid benefits by the fund 35,746 4.4.7 Grant for unutilized sick leave 5,959 4.4.8 Post-employment benefits (excluding termination benefits) 214,631 4.4.9 "up to 35 years" grant 2,418 4.4.10 Electricity discount and holiday gifts 14,687 4.4.11 Withdrawals from plan assets for payment of benefits 221,899 4.4.12 Withdrawals from trust assets for payment of benefits 23,521

Contributions during the reporting period 4.4.13 Company's contributions to plan assets or assets according to paragraph 116 of 150,000 IAS 19 4.4.14 Employees' contributions to plan assets or assets according to Section 116 of 5,647 IAS 19

5. Actuarial Assumptions

The assumptions detailed below represent the Company's assumptions – the Company being the entity authorized to set assumptions according to IAS 19. The financial assumptions (please see section 5.1 below) are based on generally accepted market data as published by an external party. The remaining assumptions were set by the Company, and in my opinion they are reasonable.

In future, there may be changes to the assumptions, because of checks of demographic data regarding employees and pensioners or of other relevant data, that are performed from time to time, or because of the publication of new mortality or morbidity tables by the ministry of finance or other relevant body, to the extent that it will be decided that such tables are relevant to the Company.

Alan Fefferman – Actuarial Services Ltd.

5.1 Financial assumptions

5.1.1 Inflation rate – the difference between the nominal spot interest rate (on non- indexed, high quality corporate bonds) and the real spot interest rate (on indexed, high quality corporate bonds). For the actuarial valuation there is essentially no requirement for an explicit assumption for inflation, since, according to the Company’s accounting policy, the interest discount rate is set according to CPI- indexed bonds, and since the assumed salary increases are mostly set in real terms. The rate of inflation is relevant for calculating the erosion in value of pension payments and the electricity discount, convalescence pay and holiday gift components of salary, since they are all linked to CPI on a yearly basis (and not monthly). The future rate of inflation that was derived for the purpose of evaluating the erosion in real values, is based on a duration of 16.1 years, and stands at 1.53%.

An adjustment to pension amounts and to the electricity discount, convalescence pay and holiday gift components of salary, is made in respect of the change in the CPI index from the time of their last update until the date of valuation.

From a technical perspective, the cash flows that we calculated for the valuation are the projected future payments of pensions and other benefits, without the effect of future inflation. Therefore, the real discount rates described below (based on the CPI-indexed corporate bonds) are appropriate for discounting the cash flows.

5.1.2 Discount rates – on November 25, 2014, the Israel Securities Authority published its position that in Israel there exists a deep market in high quality CPI-indexed corporate bonds. According to the accounting policy of the Company, the discount rates used in the valuation are taken from a yield curve based on market data for high quality, CPI-indexed corporate bonds as at March 31, 2018, as determined by Mervach Hogen Ltd. The use of these interest rates is required by IAS 19, given the Company's opinion (which coincides with that of other Israeli corporations) regarding the existence of a deep market in high quality corporate bonds in Israel. If plan assets yield lower real returns than the discount rates, based on their fair value, the net liabilities (total liabilities minus the value of plan assets) will increase, and vice versa. See Appendix B for details of the projected benefit cash flows. See Appendix C for information regarding the interest rates.

5.1.3 The interest cost and expected return on plan assets and trust assets for the reporting period were based on an interest rate of 3.92%, as explained in paragraph 3.7 above.

5.2 Salary and Benefit Increases

The actuarial valuation was performed in accordance with IAS 19, which requires that liabilities should be calculated based on existing labor and pension agreements on the valuation date. Accordingly, the valuation took into consideration that salary components will increase according to the framework of salary increases and increases in rank which is found in the Company's existing labor agreements and policies (as described in Appendix F of the report on the actuarial valuation as at 31/12/2017), and according to general salary and cost- of-living agreements (as described in paragraph 5.2.1.1), without the possibility of creating

Alan Fefferman – Actuarial Services Ltd.

new ranks or other changes to employment terms and to the existing system of salary increases and increases in rank.

5.2.1 For employees covered by the defined benefit pension plan and for generation C employees, it is assumed that future salary and benefit increases will be as follows:

5.2.1.1 The annual increase in respect of general salary and cost-of-living allowance agreements will be as follows:

 In respect of the years 2013 - 2017: On December 11, 2016 the company signed a collective agreement which gives the employees a cumulative increase of 7.25%. One-half of the increase would be provided in the form of a uniform shekel amount and the rest would be provided as a percentage increase. According to the above agreement, the cumulative uniform shekel increase will be 357.73 NIS a month per employee and an additional cumulative percentage increase of 3.625% in nominal terms.

 In respect of the period starting in year 2018: the annual salary increase will be at the rate of the annual increase in CPI, less 0.3% (that is, a 0.3% per year erosion of real values).

This assumption affects virtually all salary components, but does not affect the electricity discount, holiday gifts and convalescence (it is assumed that the Arava and home service components of salary will be included in future salary agreements).

5.2.1.2 It is assumed that the average annual salary increase resulting from promotions (including promotion to senior management rank) and from changes in eligibility to new or increased salary components related to the "managerial increment", master's degree, "shift work", "home service", and additional salary grade at Eilat, will be at the following annual rates: Employees who are Not Senior Age Managers Senior Managers 0 – 32 1.43% 1.27% 32 – 37 0.77% 1.27% 37 – 42 0.43% 1.27% 42 – 47 0.37% 1.27% 47 – 52 0.34% 1.27% 52 – 57 0.26% 1.65% 57 – 62 0.20% 0.91% Over 62 0.17% 0.76%

Alan Fefferman – Actuarial Services Ltd.

5.2.1.3 For employees who at the valuation date are not entitled to continuing-education-payment A and/or continuing-education- payment B, the annual rate of eligibility is as follows:

Eligible for Eligible for Age payment A payment B Until 40 7.8% 3.5% 40 – 50 3.5% 1.5% 50 – 60 1.1% 0.8% Over 60 0.0% 0.4%

5.2.1.4 It is assumed that the ceiling for continuing-education-payment B for employees at professional salary grade 44 and above will be linked to salary and cost-of-living allowance agreements. As at the valuation date, the ceiling stands at NIS 942.91.

5.2.1.5 According to labor agreements, the value of holiday gifts (grossed- up for the cost of taxes) and convalescence pay will increase by the actual rate of increase in the CPI, and that the update (for CPI) of convalescence pay takes effect in June of each year, and the update of holiday gifts takes effect in January of each year. The cost of holiday gifts for pensioners is increased to cover the cost of taxes, at a rate of 15.24% (at all ages), and for pensioners who retired before statutory retirement age the cost is also grossed-up for National Insurance tax at a rate of about 19.26%, until they reach statutory retirement age.

5.2.1.6 The cost of the electricity discount is calculated according to the electricity tariff of a domestic consumer at the valuation date (the fixed monthly fee before VAT is NIS 17.17 and the variable rate per kilowatt-hour before VAT is NIS 0.4619) and according to the following assumptions:

 The change in the electricity discounts tariff (including VAT and grossing-up for other taxes) is in accordance with the forecast that we received from the Company, and is an approximation of cost.

 Towards the end of year 2016, we performed an experience study of subsidized electricity consumption among Company pensioners during the years 2006-2015. Actuarial assumptions were updated based on the results of the study, including assumptions regarding subsidized electricity consumption (in terms of kilowatt-hours) that vary according to age and type of pensioner: (a) old-age or disability pensioner, (b) recipients of survivors’ pensions (widows and orphans). It is assumed that the average level of electricity consumption for a pensioner at any given age will remain constant:

Alan Fefferman – Actuarial Services Ltd.

Recipients Recipients Recipients Old-age or Old-age or Old-age or of of of Age Disability Age Disability Age Disability Survivors’ Survivors’ Survivors’ Pensioners Pensioners Pensioners Pensions Pensions Pensions

40 1,234 1,099 58 1,084 974 76 938 736 41 1,234 1,099 59 1,076 962 77 930 726 42 1,234 1,099 60 1,068 950 78 922 715 43 1,234 1,099 61 1,060 911 79 913 704 44 1,234 1,099 62 1,052 879 80 905 693 45 1,234 1,099 63 1,044 854 81 897 683 46 1,234 1,099 64 1,035 835 82 889 674 47 1,224 1,089 65 1,027 820 83 881 668 48 1,215 1,079 66 1,019 808 84 873 664 49 1,205 1,069 67 1,011 799 85 865 664 50 1,195 1,059 68 1,003 792 86 857 668 51 1,186 1,049 69 995 786 87 848 679 52 1,176 1,039 70 987 780 88 848 697 53 1,166 1,029 71 979 774 89 848 723 54 1,157 1,019 72 970 768 90 848 723 55 1,147 1,008 73 962 761 91 848 723 56 1,101 997 74 954 754 92 848 723 57 1,092 985 75 946 745 93 + 848 723

Alan Fefferman – Actuarial Services Ltd.

 Based on the experience study described above, actuarial assumptions were also updated regarding the incidence of pensioners who do not utilize the electricity subsidy benefit:

46- 9.50% 28.50% 65 4.40% 9.10% 84 4.50% 12.50% 21 47 9.50% 28.00% 66 4.10% 8.90% 85 4.90% 13.40% 48 9.50% 27.50% 67 3.80% 8.80% 86 5.30% 14.20% 49 9.50% 27.00% 68 3.60% 8.40% 87 5.70% 15.00% 50 9.50% 26.60% 69 3.30% 8.00% 88 6.10% 15.90% 51 9.50% 26.10% 70 3.10% 7.50% 89 6.60% 16.70% 52 9.00% 25.60% 71 3.00% 7.10% 90 7.10% 17.50% 53 8.70% 25.10% 72 2.90% 6.70% 91 7.60% 18.40% 54 8.40% 24.70% 73 2.80% 6.20% 92 8.10% 19.20% 55 8.10% 24.20% 74 2.80% 6.50% 93 8.70% 20.10% 56 7.70% 21.70% 75 2.80% 6.80% 94 9.20% 20.90% 57 7.30% 19.30% 76 2.80% 7.10% 95 9.70% 21.70% 58 6.90% 16.80% 77 2.90% 7.40% 96 10.20% 22.60% 59 6.60% 14.40% 78 3.00% 7.70% 97 10.70% 23.40% 60 6.20% 12.00% 79 3.10% 8.00% 98 11.20% 24.20% 61 5.80% 9.50% 80 3.30% 8.90% 99 11.70% 25.10% 62 5.40% 9.40% 81 3.60% 9.80% 100 12.10% 25.10% 63 5.10% 9.30% 82 3.80% 10.70% 101 + 12.50% 25.10% 64 4.70% 9.20% 83 4.20% 11.60%

5.2.1.7 It is assumed that there were no changes, and will not be any changes in future, to each employee's level of full or part-time employment, and that each employee's current level of full or part-time employment applied in the past and will also apply in the future.

5.2.1.8 There is a group of employees who were entitled in the past to a "shift work addition" to their salary, and who are classified as entitled to this addition as part of their pensionable salary. It is assumed that their pensions will be increased accordingly.

5.2.1.9 An update for pension amounts takes place in the month of January each year, in accordance with the rate of annual change in the Consumer Price Index (the ratio of the index for the most recent month of December to the index for the previous December). In cases when the change in CPI is negative, pension amounts are not revised downwards. Instead, a future pension adjustment in respect of a 14

Alan Fefferman – Actuarial Services Ltd.

positive change in the CPI index will be implemented only after offsetting the negative change in CPI that had accumulated since the previous pension update. Consequently, we assumed that pension amounts will be updated only after the index has increased by 1.09%, which is the rate by which the CPI index declined since the previous pension adjustment in January 2014.

5.2.2 In respect of non-permanent employees under special agreements, a real annual salary growth of 2.0% is assumed, that covers both general salary increases as well as individual employee salary increases.

5.3 Mortality and Disability rates

5.3.1 See Appendix E below regarding changes made in the past to mortality assumptions.

5.3.2 Life Expectancy Improvements (Decline in Mortality Rates)

The mortality assumption is a significant assumption for the valuation of actuarial liabilities. Life expectancy changes with changes in medical practice and lifestyles. The actuarial assumptions take into account a continuing increase in life expectancy for the future.

The base mortality rates detailed below are correct as at December 31, 2008. The assumed rate of decline in mortality rates (leading to extended life expectancy) after December 31, 2008, is according to Pension Circular 2013-3-1 on the subject of "the Manner of Calculating Actuarial Balance Sheets and Annuitization Factors for Pension Funds" published in 2013 by the Capital Markets, Insurance and Savings Division of the Israeli Ministry of Finance (referred to below as "Pension Circular 2013").. It should be emphasized that there is a great deal of uncertainty regarding future changes in mortality rates, and that an alternative assumption may be just as reasonable (please see section 8.4 below).

5.3.3 Pensioner mortality tables

In the year 2015, a study was made of mortality experience among employees and pensioners of the Company during the years 1996-2015 (referred to below as "the study"), with comparisons to the mortality tables published in Pension Circular 2013. On the basis of the study, the Company adopted the tables published in Pension Circular 2013, with adjustments that take into account the mortality experience of the Company. More weight was given to Company mortality experience (and less weight to the tables of Pension Circular 2013) to the extent that Company mortality experience was more credible statistically.

Regarding pensioners the mortality assumption is:  for males –table P3 of Pension Circular 2013, without adjustment  for females –table P3 of Pension Circular 2013, without adjustment

Alan Fefferman – Actuarial Services Ltd.

Below is a sample of the remaining life expectancies of pensioners, based on the assumptions above, including assumed future improvements in life expectancy:

Age and Year Male Female Age 67 at end of year 2010 19.52 21.94 Age 67 at end of year 2020 20.31 22.84 Age 67 at end of year 2030 20.93 23.53

5.3.4 Mortality Tables for Survivors

Based on the study described above, the mortality assumptions for survivors are:  for males – before age 60, according to table P2 of Pension Circular 2013, reduced by 2%; starting at age 60, table P5 of Pension Circular 2013, reduced by 2%.  for females – before age 55, according to table P1 of Pension Circular 2013; starting at age 55, according to table P3 of Pension Circular 2013.

5.3.5 Mortality Tables for Active Employees

Based on the study described above, the mortality assumptions for employees are:  for males – according to table P1 of Pension Circular 2013, reduced by 22%.  for females – according to table P1 of Pension Circular 2013, reduced by 16%.

5.3.6 Mortality Tables for Disabled Employees

Based on the study described above, the mortality assumptions for disabled employees are:  for males – before age 67, a mortality rate of 17% in the first year after disability retirement, and 1.6% in each year thereafter; starting at age 67, according to table P3 of Pension Circular 2013 increased by 21%.  for females – before age 67, a mortality rate of 17% in the first year after disability retirement, and 1.6% in each year thereafter; starting at age 67, according to table P3 of Pension Circular 2013 increased by 15%.

5.3.7 Disability Incidence According to Table P8 of Pension Circular 2013.

5.3.8 Recovery from Disability There are no assumed recoveries.

Alan Fefferman – Actuarial Services Ltd.

5.4 Retirement Age, Termination of Employment and Early Retirement

5.4.1 As stated in section 5, these assumptions were determined by the Company.

5.4.2 It is assumed that normal retirement will occur at the mandatory retirement age of 67 for both men and women. Employees over age 67 are assumed to retire immediately.

5.4.3 Termination of Employment (prior to normal retirement age), for Generation C Employees:

At year-end 2016, we performed an experience study of withdrawal rates among Generation C employees during the years 2013-2016. Actuarial assumptions were updated based on the results of the study, including assumed rates of termination of employment, both voluntary and involuntary, that vary according to age and gender:

Rates of Voluntary Rates of Involuntary Termination Termination (From age 60 and 10 years of service, with (without benefit eligibility for all benefits relevant to Generation entitlements) C. Under age 60, with eligibility only for supplementary severance pay at the rate of 2.33% of salary per year of service) Years of Age Men and Women Women Men Service Below 20 Up to 24 0.0% 0.0% 0.0% Below 20 25-29 0.9% 0.0% 0.0% Below 20 30-34 0.9% 0.0% 0.0% Below 20 35-39 0.3% 0.0% 0.0% Below 20 40-44 0.1% 0.0% 0.0% Below 20 45-49 0.1% 0.0% 0.0% Below 20 50-59 0.0% 0.0% 0.0% Below 20 60 0.00% 0.12% 0.12% Below 20 61 0.00% 0.12% 0.12% Below 20 62 0.00% 0.85% 0.87% Below 20 63 0.00% 0.85% 0.87% Below 20 64 0.00% 0.85% 0.87% Below 20 65 0.00% 1.62% 1.73% Below 20 66 0.00% 4.76% 2.56% 20 and Over All ages 0.00% 0.00% 0.00%

Alan Fefferman – Actuarial Services Ltd.

5.4.4 Terminations and Early Retirements (Prior to Normal Retirement Age), for Employees Covered by the Defined Benefit Pension Plan:

It is assumed that there will be no employment terminations, except for early retirement.

Rates of early retirement constitute an assumption regarding early retirements that are not categorized as "termination benefits" under IAS 19. According to IAS 19, it is not permitted to recognize in advance the cost of terminations from employment, except under certain conditions. In practice, it is difficult to distinguish between early retirements that must be categorized as “termination benefits” and other early retirements, so that it is very difficult to set the actuarial assumption. It is even more difficult to set the assumption because employees' behavior regarding retirement is greatly affected by past special retirement programs and anticipated future special retirement programs.

The early retirement assumption is based on Company experience during the years 2002-2016, not including employees who retired under special early retirement programs. Assumed rates of early retirement vary by age and sex, as detailed in the two tables below:

Early Retirement Rates for Employees Covered by the Defined Benefit Pension Plan Age Female Male Age Female Male Up to 40 0.0% 0.0% 53 0.2% 0.1% 40 0.0% 0.1% 54 0.2% 0.1% 41 0.0% 0.1% 55 0.2% 0.1% 42 0.0% 0.1% 56 0.2% 0.1% 43 0.0% 0.1% 57 0.4% 0.1% 44 0.0% 0.1% 58 0.4% 0.1% 45 0.0% 0.1% 59 0.4% 0.2% 46 0.0% 0.1% 60 0.4% 0.4% 47 0.0% 0.1% 61 0.4% 0.6% 48 0.1% 0.1% 62 2.6% 1.0% 49 0.1% 0.1% 63 0.7% 1.3% 50 0.1% 0.1% 64 0.7% 1.6% 51 0.1% 0.1% 65 4.4% 1.9% 52 0.1% 0.1% 66 7.3% 2.3%

Alan Fefferman – Actuarial Services Ltd.

5.4.5 Termination of Employment for Non-Permanent Employees Employed Under Special Agreements:

Assumed rates of termination with eligibility for the benefits included in this valuation, by service, are detailed in the following table:

Service Rates of Involuntary Rates of Voluntary Termination Termination (eligible for benefits) (not eligible for benefits) 0 3.0% 0.0% 1 1.5% 0.0% 2+ 0.0% 0.0%

For non-permanent employees employed under special agreements, it is also assumed that their employment will be terminated at the end of the maximum working period according to the special agreements (5 years) and that they will receive enhanced severance pay.

5.5 Marriage Rates and Age Differences Between Spouses

At year-end 2016, an experience study was performed of the proportion of Company pensioners who are married, and of the age differences between spouses. The actuarial assumptions were updated accordingly, as detailed in the two tables below:

Alan Fefferman – Actuarial Services Ltd.

 Proportion of Married Pensioners:

Age Males Females Age Males Females Age Males Females Age Males Females

30 82.80% 81.20% 53 84.80% 81.60% 76 81.40% 44.40% 99 38.20% 2.00% 31 82.80% 81.80% 54 84.80% 81.10% 77 80.40% 41.70% 100 35.40% 1.70% 32 82.80% 82.30% 55 84.80% 80.40% 78 79.30% 39.00% 101 32.50% 1.40% 33 82.80% 82.70% 56 84.80% 79.70% 79 78.20% 36.30% 102 29.50% 1.10% 34 82.80% 83.10% 57 84.80% 78.90% 80 76.90% 33.60% 103 26.40% 0.90% 35 82.80% 83.50% 58 84.80% 78.00% 81 75.60% 30.90% 104 23.30% 0.80% 36 82.80% 83.80% 59 84.70% 77.10% 82 74.20% 28.20% 105 20.00% 0.60% 37 82.80% 84.00% 60 86.70% 76.00% 83 72.70% 25.60% 106 16.70% 0.50% 38 82.80% 84.20% 61 87.00% 74.90% 84 71.20% 23.10% 107 13.30% 0.40% 39 82.80% 84.30% 62 87.20% 73.70% 85 69.50% 20.70% 108 9.90% 0.30% 40 82.80% 84.40% 63 87.30% 72.30% 86 67.80% 18.40% 109 6.30% 0.30% 41 83.10% 84.50% 64 87.30% 70.90% 87 66.00% 16.10% 110 2.70% 0.20% 42 83.40% 84.50% 65 87.30% 68.70% 88 64.10% 14.10% 111 0.00% 0.20% 43 83.60% 84.50% 66 87.10% 67.00% 89 62.20% 12.10% 112 0.00% 0.10% 44 83.80% 84.40% 67 86.90% 65.20% 90 60.10% 10.20% 113 0.00% 0.10% 45 84.00% 84.30% 68 86.60% 63.30% 91 58.00% 8.50% 114 0.00% 0.10% 46 84.10% 84.10% 69 86.20% 61.30% 92 55.80% 6.80% 115 0.00% 0.10% 47 84.30% 83.90% 70 85.80% 59.10% 93 53.50% 5.50% 116 0.00% 0.10% 48 84.40% 83.70% 71 85.30% 56.90% 94 51.20% 4.70% 117 0.00% 0.00% 49 84.50% 83.40% 72 84.70% 54.60% 95 48.80% 4.00% 118 0.00% 0.00% 50 84.60% 83.00% 73 84.00% 52.20% 96 46.20% 3.40% 119 0.00% 0.00% 51 84.70% 82.60% 74 83.20% 49.70% 97 43.60% 2.90% 120 0.00% 0.00% 52 84.70% 82.20% 75 82.40% 47.10% 98 41.00% 2.40%

 It is also assumed that widows will not remarry; that is, it is assumed that the payment of widow pensions will not stop because of remarriage.

Alan Fefferman – Actuarial Services Ltd.

 Age Differences Between Spouses:

Age of Age of Age of Age of Age of Male Age of Male Female Male Female Female Employee Employee or Employee Employee Employee Employee or or Pensioner, or or or Age Pensioner, Age Age Pensioner, Minus Pensioner, Pensioner, Pensioner, Minus Minus Spouse's Minus Minus Minus Spouse's Spouse's Age Spouse's Spouse's Spouse's Age Age Age Age Age 30 3 (3) 61 3.1 (3) 92 6.6 (3) 31 3 (3) 62 3.1 (3) 93 6.7 (3) 32 3 (3) 63 3.2 (3) 94 6.8 (3) 33 3 (3) 64 3.2 (3) 95 7 (3) 34 3 (3) 65 3.2 (3) 96 7.1 (3) 35 3 (3) 66 3.3 (3) 97 7.3 (3) 36 3 (3) 67 3.4 (3) 98 7.4 (3) 37 3 (3) 68 3.5 (3) 99 7.6 (3) 38 3 (3) 69 3.6 (3) 100 7.7 (3) 39 3 (3) 70 3.8 (3) 101 7.9 (3) 40 3 (3) 71 3.9 (3) 102 8 (3) 41 3 (3) 72 4 (3) 103 8.2 (3) 42 3 (3) 73 4.1 (3) 104 8.3 (3) 43 3 (3) 74 4.2 (3) 105 8.5 (3) 44 3 (3) 75 4.3 (3) 106 8.6 (3) 45 3 (3) 76 4.5 (3) 107 8.8 (3) 46 3 (3) 77 4.6 (3) 108 8.9 (3) 47 3 (3) 78 4.7 (3) 109 9.1 (3) 48 3 (3) 79 4.8 (3) 110 9.3 (3) 49 3 (3) 80 5 (3) 111 9.4 (3) 50 3 (3) 81 5.1 (3) 112 9.6 (3) 51 3 (3) 82 5.2 (3) 113 9.8 (3) 52 3 (3) 83 5.3 (3) 114 9.9 (3) 53 3 (3) 84 5.5 (3) 115 10.1 (3) 54 3 (3) 85 5.6 (3) 116 10.3 (3) 55 3 (3) 86 5.7 (3) 117 10.4 (3) 56 3 (3) 87 5.9 (3) 118 10.6 (3) 57 3 (3) 88 6 (3) 119 10.8 (3) 58 3 (3) 89 6.1 (3) 120 10.8 (3) 59 3 (3) 90 6.3 (3) 60 3.1 (3) 91 6.4 (3)

Alan Fefferman – Actuarial Services Ltd.

5.6 Orphans

The assumed number of children and their ages are in accordance with table P11 of Pension Circular 2017-3-6.

5.7 Utilization of Sick Leave Days (for calculating the grant for unused sick leave)

It is assumed that every employee's sick-leave utilization rate10 in the future will be equal to his average utilization rate in the past.

5.8 It is assumed that all non-permanent employees employed under special agreements will receive increased severance pay.

5.9 Future Company expenses for the administration of the pension plan were not taken into account.

5.10 Below are a number of matters that were not given expression in the valuation. In my opinion their impact overall would be immaterial:  pensions for future "dependent orphans" over the age of 21;  pensions for "dependent parents" of future deceased employees or pensioners;  increases in pensions to future orphans of both parents;  the actual dates on which pensions are paid for 13th and 14th salaries (we assumed that one-twelfth of the annual amount is paid monthly);  possible grant of electricity discount and holiday gifts to orphans (we assume that all orphans have a parent receiving such benefits);  a few pensioners receive a temporarily reduced monthly pension in exchange for a lump-sum amount that was paid in the past. The valuation does not reflect any such temporary reduction;  additional severance pay or grants in respect of the difference between the salary reported in the data file and minimum wage, to be paid to a small number of generation C employees who retire or leave with salary lower than minimum wage;  the supplement to the disability pension in respect of dependents was not taken into account for future disabled pensioners. On the other hand, for existing disabled pensioners, no reduction in the supplement to the disability pension with respect to dependents was taken into account (such a reduction would apply upon the future death of dependents);  the liability in respect of the additional benefit for life insurance in the event of an accident;  the increased bereaved parent pension, in respect of active employees;  the lump sum benefit which is paid upon an employee's death as a result of a work- related accident;  the liability in respect of severance pay benefits for senior managers employed under personal contracts of the Government Companies Authority;  the following additional benefits for pensioners or survivors: o bonuses upon marriage and the birth of a child (including grossed-up taxes); o gifts for children of pensioners or survivors, who are serving in the Israel Defense Forces (including grossed-up taxes); o Company participation in the cost of a tombstone and a bouquet of flowers – in cases of death as a result of a work accident;

10 number of sick-leave-days actually taken, divided by the number of sick-leave-days to which the employee was entitled 22

Alan Fefferman – Actuarial Services Ltd.

o compensation in cases of death as a result of a work accident, to the amount of 36 months of salary; o meals partially subsidized by the Company at Company facilities – up to 10 meals per month; o Higher Education grants for children of widows of employees who died while working for the Company; o an outing for widows of workers who died while working for the Company; o discount from cost of connecting electricity to the pensioner's apartment as well as transfer or increase of existing connection; and o for a very small number of employees and pensioners, any possible effect of "the Division of Pension Savings Among Separated Spouses Law".

6. Changes to the Valuation in the Current Reporting Year

For changes made prior to the current valuation, see Appendix E.

In the first quarter of 2018:  There was an update of the assumed tax rate by which pensioner benefits will be grossed-up, which resulted in an increase in liabilities of about NIS 4 million.

In the year of this report there were no additional changes to assumptions or to the rules according to which the liability is calculated, except for changes to the discount rate and the changes detailed above.

Alan Fefferman – Actuarial Services Ltd.

7. Valuation Results

The values of liabilities (in million NIS) as at March 31, 2018, without offsetting the value of benefit plan assets, are as follows:

7.1 The liabilities, for all the benefits included in this valuation, except for liabilities in respect of special agreements for early retirement, for the "20 year grant", and for enhanced severance pay for non-permanent employees covered under special agreements:

Active employees 14,579.7 Pensioners and survivors 13,402.3 Total 27,982.0

7.2 Liability in respect of special early retirement agreements:

Pensioners and survivors 466.6

7.3 Liability for the “20 year grant”:

Active employees 12.9

7.4 Liability for enhanced severance pay for non-permanent employees under special agreement – in respect of the past:

Active employees 18.4

In Appendix A, additional information is provided for financial statement disclosure, as required by IAS 19.

Alan Fefferman – Actuarial Services Ltd.

8. Uncertainties and Risks

8.1 Due to the nature of the employee benefits and the long future period over which they will be paid, the level of future payments is uncertain and there may be a material difference between actual payments in the future and those assumed payments that underlie this valuation, despite the efforts made to assess the benefits as accurately as possible. For this reason, the Company is exposed to risk that the estimated liability does not properly represent future payments and, consequently, that additional costs will be incurred in the future for accrued benefits that are under-estimated or that additional revenues will be realized from accrued benefits that are over-estimated. Below are the main drivers of uncertainty and risk, in our opinion.

8.2 Interest, Inflation and Investment Returns

Future fluctuations in the market interest rates that are used to value liabilities (market interest rates are used to calculate the present value of forecasted future benefit payments) will change the gross value of the liabilities. Higher or lower rates of return on plan assets, by comparison to these interest rates, will lead to a decrease or increase in the net liabilities, respectively. At times, the effect of changes in market interest rates may be offset to a certain extent by the effect of changes in the rate of return on plan assets, depending on the level of matching between assets and liabilities.

Sensitivity analysis: a) If the discount rate should fall by 1%, the liability would increase by NIS 4,882 million (17.1%). b) If the discount rate should fall by 0.1%, the liability would increase by NIS 438 million (1.5%). c) If the discount rate should increase by 0.1%, the liability would decrease by NIS 428 million (-1.5%).

Actual changes in the rate of inflation, affect the value of the liability (indirectly due to the connection between salary / pension and inflation) and the value of plan assets (due to index- linked assets). The two effects may offset one another to a certain extent.

Anticipated changes in the future rate of inflation may affect the value of the liability and the value of plan assets, depending on the effect of the anticipated change in inflation on current market interest rates and on the current values of unlinked assets.

8.3 Future Salary Increases

Assumed general salary increases (in respect of salary and cost-of-living-allowance agreements) have considerable effect on cash flow projections. The assumption (described in section 5.2.1.1 above) is as follows:  For the years 2013-2017: a cumulative increase of NIS 357.73 per month for each employee, and a further nominal increase of 3.625%.  For each year starting in 2018: an annual salary increase equal to the rate of change in CPI less 0.3%.

Alan Fefferman – Actuarial Services Ltd.

Sensitivity analysis: a) If starting from March 31, 2018, actual general salary increases were higher than what is assumed by 0.5% per year, then the liability would increase by approximately NIS 630 million (2.2%). b) If starting from March 31, 2018, actual general salary increases were lower than what is assumed by 0.5% per year, then the liability would decrease by approximately NIS 594 million (-2.1%).

8.4 Life Expectancy

Although mortality rates are relatively stable, and the mortality assumption corresponds with current experience relatively well, there is considerable uncertainty regarding the level of mortality that will emerge in the long-term future, owing to the fact that future changes in life expectancy are very difficult to predict (and may differ significantly from the assumption underlying the valuation). The rate of change in life expectancy is affected by behavioral and social changes and by medical developments, both past and future, and any such future changes or developments are themselves difficult to predict.

Sensitivity analysis: a) if annual rates of change in mortality rates would be double the assumed rate of change, then the life expectancy of a 67 year-old male at the end of 2020 (for example) would rise from 20.3 to 23.1 years, the life expectancy of a 67 year old woman would rise from 22.8 to 26.2 years, and the liabilities would rise by approximately NIS 1,932 million (6.8%).

b) For comparison sake: if actual mortality rates would be 20% lower than assumed, then the life expectancy of a 67 year-old male at the end of 2020 (for example) would rise from 20.3 to 22.0 years, the life expectancy of a 67 year-old woman would rise from 22.8 to 24.4 years, and the liabilities would increase by approximately NIS 1,331 million (4.7%).

8.5 Early Retirement

As stated in paragraph 5.4.3 above, early retirement constitutes a significant but unstable phenomenon, and setting the assumption regarding future rates of early retirement is highly problematical. Early retirements have a significant effect on the level of benefit payments and on the valuation of liabilities, because at the time of early retirement, the employee begins to receive his full pension without any deferral or reduction that could offset the extra cost of making pension payments in the years until normal retirement age.

Sensitivity analysis: in the event that actual early retirement rates are double the assumed rates (see paragraph 5.4.3 above), then liabilities would increase by approximately NIS 199 million (0.7%).

Alan Fefferman – Actuarial Services Ltd.

Yours truly,

Alan Fefferman, F.S.A., F.IL.A.A.

Alan Fefferman – Actuarial Services Ltd.

Appendix A – Additional Reports for Disclosure in the Financial Statements

Introduction

 In this section, the actuarial liability and additional results are divided into 3 sections:

1. Amounts relating to all "post-employment benefits"11 which are paid by the Fund, and assets of the Fund. See Tables 1, 4, 6 & 9 below.

2. Amounts relating to other post-employment benefits (including severance pay, all grants after the termination of employment, electricity discounts, and holiday gifts to pensioners) and assets not in the Fund but dedicated to the payment of employee benefits. See Tables 2, 3, 5, 7 & 10 below.

3. Amounts relating to "other long-term benefits"12, including the "20 year benefit". See Table 12 below.

(Table 8 relates to all pension and other post-employment benefits.)

 This report is presented on a nominal basis.

 All amounts are in NIS millions.

1. Surplus assets at end of the period

31/03/2018 31/03/2017 31/12/2017 Fair value of plan assets 31,452 29,465 31,477 Present value of the gross pension obligation (25,257) (23,430) (26,330) Subtotal 6,195 6,035 5,147 Liability for special, early retirement, pension (437) (534) (475) agreements Surplus pension assets 5,758 5,501 4,672

2. Funds held in trust – dedicated to the funding of employee benefits (paragraph 116 of IAS 19)

31/03/2018 31/03/2017 31/12/2017 Funds in trust – dedicated to cover actuarial 1,593 1,592 1,617 obligations (assets as per paragraph 116)

3. Liability at the end of the period for other post-employment benefits

31/03/2018 31/03/2017 31/12/2017 Present value of obligations for other post- employment benefits (including liabilities for 2,773 2,752 2,884 special retirement agreements)

11 As the term is defined in IAS 19 12 Ditto 28

Alan Fefferman – Actuarial Services Ltd.

4. Reconciliation of the Beginning and Closing Values of the Pension Defined Benefit Obligation

Three Months Three Months Year Ending Ending Ending 31.12.2017 31.03.2018 31.03.2017 Present value of the obligation –beginning of 26,330 23,329 23,329 period Interest cost 254 275 1,120 Current service cost 64 58 232 Employee contributions 6 6 24 Benefits paid (186) (198) (749) Losses (gains) on re-measurement:  Demographic assumption changes - - -  Financial assumption changes (1,140) 12 2,718  Experience adjustments (71) (52) (344)  Total actuarial losses (gains) on re- (1,211) (40) 2,374 measurement Present value of the obligation – end of period 25,257 23,430 26,330

5. Reconciliation of the Beginning and Closing Values of the Defined Benefit Obligation for Other Post-Employment Benefits (including special early retirement agreements Three Months Three Months Year Ending Ending Ending 31.12.2017 31.03.2018 31.03.2017 Present value of the obligation – beginning of 2,884 2,764 2,764 period Interest cost 28 33 133 Current service cost 16 15 62 Benefits paid (33) (68) (168) Losses (gains) on re-measurement:  Demographic assumption changes - - -  Financial assumption changes (109) (18) 52  Experience adjustments (13) 26 41  Total actuarial losses (gains) on re- (122) 8 93 measurement Present value of the obligation – end of period 2,773 2,752 2,884

Alan Fefferman – Actuarial Services Ltd.

6. Reconciliation of the Beginning and Closing Fair Value of Plan Assets

Three Months Three Months Year Ending Ending Ending 31.12.2017 31.03.2018 31.03.2017 Fair value of plan assets – beginning of period 31,477 29,878 29,878 Interest income from plan assets 303 354 1,440 Contributions 152 152 873 Benefits paid (222) (220) (878) Gains (losses) on re-measurement: return on plan assets (excluding amounts included in interest (258) (699) 164 income) Fair value of plan assets – end of period 31,452 29,465 31,477

7. Reconciliation of the Beginning and Closing Fair Values of Funds Held in Trust to Cover Actuarial Obligations (paragraph 116 assets Three Months Three Months Year Ending Ending Ending 31.12.2017 31.03.2018 31.03.2017 Fair value of trust assets – beginning of period 1,617 1,615 1,615 Interest income from trust assets 16 19 77 Benefits paid (24) (4) (82)

Gains (losses) on re-measurement: return on trust assets (excluding amounts included in interest (16) (38) 7 income) Fair value of trust assets – end of period 1,593 1,592 1,617

8. Total Period Costs Three Months Three Months Year Ending Ending Ending 31.12.2017 31.03.2018 31.03.2017 Current service cost 86 79 318 Employee participation (6) (6) (24) Net current service cost 80 73 294 Interest cost 282 308 1,253 Early retirement costs (3) 6 57 Interest income on plan assets (303) (354) (1,440) Interest income on trust assets (par. 116 assets) (16) (19) (77) Total costs for the period 40 14 87

Alan Fefferman – Actuarial Services Ltd.

9. Actual Returns on Plan Assets Three Months Three Months Year Ending Ending Ending 31.12.2017 31.03.2018 31.03.2017 Interest income on on plan assets 303 354 1,440 Re-measurement gains (losses) (258) (699) 164 Actual return on plan assets 45 (345) 1,604

10. Actual Returns on Assets Held in Trust to Cover Actuarial Obligations (paragraph 116 assets) Three Months Three Months Year Ending Ending Ending 31.12.2017 31.03.2018 31.03.2017 Interest income on assets 16 19 77 Re-measurement gains (losses) (16) (38) 7 Actual return on assets (0) (19) 84

11. Obligation for Special Early Retirement Agreements (termination benefits) 31.03.2018 31.03.2017 31.12.2017 Obligation at end of period - pensions 437 534 475 Obligation at end of period – other benefits** 30 37 33 Obligation at end of period – total 467 571 507

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

12. Obligation for “20 year grant” (other long-term employee benefits) 31.03.2018 31.03.2017 31.12.2017 Obligation at end of period 13 14 13

Appendix F – Details of Benefits Appendix B – Forecasted Benefit Payments

Below is a graph of the expected cash flows included in the valuation (including all benefits for employees and pensioners), in real terms and in nominal terms (including the future expected influence of inflation). Nominal cash flows are presented in red, while inflation-adjusted cash flows are presented in blue.

The payments shown are annual. Expected Payments Of Accrued Benefits 2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

- 01/04/201831/03/202801/04/203831/03/204801/04/205831/03/206801/04/207831/03/208801/04/2098

Appendix C – Additional Detail Regarding Financial Assumptions (annual rates shown)

31/12/2017 31/03/2018

Weighted average real discount rate used to compute liabilities at the end of the 2.25% 2.51% period * Expected inflation rate 1.60% 1.53% Nominal interest rate used to compute the 4.83% 3.92% interest cost on pension liabilities Nominal interest rate used to compute the interest cost on other post-employment 4.83% 3.92% liabilities Nominal interest rate used to compute the 4.83% 3.92% expected return on plan assets Nominal interest rate used to compute the 4.83% 3.92% expected return on trust assets (116 assets)

* In practice the valuation was performed according to a vector of interest rates (a yield curve) which was prepared by Mervach Hogen Ltd. (see section 5.1.2). Each rate shown in the table represents the vector of interest rates, taking into consideration the expected liability cash flow at each future point in time. A valuation performed according to the interest rate shown in the table, would produce the same results that are presented in this report.

Appendix D – Additional Detail Regarding Data

List of data files received from the Company:

1. "ong0318" – 15,233 records – data including all employees / retirees / survivors (permanent workers only). records – file specifies whether each retiree is a 50 – "פנסיונרים ושאירים דור ג מרץ 2018" .2 pensioner or a surviving beneficiary 3. "actuarpizuisug13410318" - 521 records – data including all non-permanent workers (special agreement). .records 22 – "פורשי מרץ 2018 " .4 5. "change012018", "change022018", "change032018", "change032018g" – files that describe status changes of employees / retirees in the months January to March 2018. .data regarding electricity rates, VAT rate and grossed-up taxes – "חשמל מרץ 2018" .6 .value of holiday gifts grossed-up for taxes – "שי מרץ 2018" .7 8. “tzmemone1” – A list of 6 ID numbers of pensioners who have asked not to be included in the new salary agreements and have asked for a private hearing with the Supervisor of Wages and Work Agreements in the Ministry of Finance

Appendix E – Changes to the Valuation that Took Effect in the Three Years Preceding the Current Year

Changes that took effect in the course of 2017

 In the first quarter of 2017:

o The assumed increase in the future electricity tariff was updated in accordance with Company expectations. This change reduced the liability by about NIS 2 million.

o The assumed tax rate was updated, according to which pensioner benefits will be grossed-up, leading to a reduction in liabilities of about NIS 12 million.

 In the second quarter of 2017:

o The assumed increase in the future electricity tariff was updated in accordance with Company expectations. This change reduced the liability by about NIS 5 million.

 In the third quarter of 2017:

o The assumed increase in the future electricity tariff was updated in accordance with Company expectations. This change increased the liability by about NIS 3 million.

o The assumed early retirement rates for women ages 62-64 was updated. This change increased the liability by about NIS 3 million.

 In the fourth quarter of 2017:

o The salary increase assumption was updated for the period starting from the year 201813. This change increased the liability by about NIS 261 million.

o The assumed increase in the future electricity tariff was updated in accordance with Company expectations. This change decreased the liability by about NIS 179 million.

o The electricity tariff rates were updated. This change increased the liability buy about NIS 10 million.

o Assumptions were updated regarding the expected number of children and their ages, when an employee or pensioner is deceased. The resulting change in liability was trivial.

Changes that took effect in the course of 2016

 In the first quarter of 2016:

o The assumed increase in the future electricity tariff was updated in accordance with Company expectations. This change reduced the liability by about NIS 2 million.

13 According to paragraph 5.2.1.1.

o Following the ruling dated March 5, 2016 regarding salary irregularities in the "managerial increment" component, as well as in the "global overtime" component for management employees, the Company provided me with updated pensions and salary data, reflecting the correction of the salary irregularities. The change in salary and pensions data reduced the liability by about NIS 390 million.

 In the second quarter of 2016, the uniform shekel amount of salary increase, calculated in accordance with the collective bargaining agreement signed on April 18, 2016, was revised from NIS 356 to NIS 353.1. This change reduced the liability as at June 30, 2016 by approximately NIS 2 million.

 In the third quarter of 2016:

o The uniform shekel amount of salary increase, calculated in accordance with the collective bargaining agreement signed on August 8, 2016, was updated from NIS 353 to NIS 382. This change increased the liability as at September 30, 2016 by approximately NIS 28 million.

o The assumed increase in the future electricity tariff was updated in accordance with Company expectations. This change increased the liability as at September 30, 2016 by about NIS 2 million.

o The characterization of life insurance benefits for retirees was updated. This change reduced the liability as at September 30, 2016 by about NIS 13 million.

 In the fourth quarter of 2016:

o The “managerial increment” and "global overtime" components of salary were updated according to a collective agreement which was signed on December 11, 2016. This change decreased the liability as at March 31, 2017 by about NIS 134 million.

o The uniform shekel salary increase and the percentage salary increase were updated according to a collective agreement which was signed on December 11, 2016 (from NIS 382 to NIS 357 and from 3.75% to 3.625%, respectively). This change decreased the liability as at March 31, 2017 by about NIS 44 million.

o The assumed increase in the future electricity tariff was updated in accordance with Company expectations. This change decreased the liability as at March 31, 2017 by about NIS 51 million.

o As part of a collective agreement that was reached with the company on December 11, 2016, 314 employees retired under a special retirement program. This change increased the liability for early retirement as at March 31, 2017 by about NIS 280 million and decreased the liability for other benefits by about NIS 27 million. An additional 36 employees are expected to retire under the conditions of this special retirement program, their retirement will increase the liabilities by about 27 million.

o The following actuarial assumptions were updated based on the results of experience studies:

. Proportion of married pensioners - decreased liabilities by about NIS 5 million.

. Age difference between spouses - increased liabilities by about NIS 13 million.

. Subsidized electricity consumption for pensioners - increased liabilities by about NIS 24 million.

. Early retirement rates for Generation A and Generation B employees - decreased liabilities by about NIS 57 million.

. Withdrawal rates for Generation C employees - increased liabilities by about NIS 2 million.

Changes that took effect in the course of 2015

 In the third quarter of 2015, the VAT rate was revised to 17% (from 18%) for the purpose of calculating the cost of electricity. This change reduced the liability by about NIS 20 million.

 In the fourth quarter of 2015, the salary increase assumption was updated. This change increased the liability by about NIS 616 million. Similarly, the mortality assumptions for female pensioners and female widows were updated – this change increased the liability by about NIS 160 million.

Changes that took effect in the course of 2014

 In each quarter of 2014, interest rates were updated in accordance with market interest rates at the valuation date. In the valuation at December 31, 2014, there was a transition to discounting based on the returns of high quality corporate bonds. The impact of the transition from a discount rate based on Government bonds to a discount rate based on corporate bonds was a decrease in the liability of about NIS 5,188 million.

 In the fourth quarter of 2014:

o the salary increase assumption was updated in accordance with our recommendation which is based on actual past experience, the Company's expectations and inflation expectations. The main change is to the assumed salary increase that results from general wage agreements, from -1.38% real (and 1% nominal for 2013 to 2014) to -0.75% real (and 0.8% nominal for the years 2013 to 2016 inclusive), which increased the liability by NIS 1,078 million. Other changes in salary increase assumptions reduced the liability by about NIS 11 million.

o the assumed increase in the future electricity tariff was updated in accordance with the Company's expectations. This change increased the liability by about NIS 53 million.

o we received updated information regarding the determining service for entitlement to severance pay for generation C employees. This update reduced the liability by about NIS 8 million.