The Israel Electric Corporation Ltd.

Transcription

1 The Israel Electric Corporation Ltd. Financial Reports For The Nine and Three Months Ended September 30, 2016 FILES INDEX The financial reports, for the nine and three months ended September 30, 2016, 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 Supplement Chapter C Board of Directors' Report on the Status of the Company's Affairs Additional Report Regarding the Effectiveness of the Internal Control Over Financial Reporting Condensed Consolidated Interim Financial Statements Annex 1 Actuarial Valuation

2 The Israel Electric Corporation Ltd. Updated Chapter A (Description of the Company s Business Affairs) for the 2015 Annual Report For the Period Ended September 30, 2016

3 Prominent Disclaimer This English translation of the Updated Chapter A (Description of the Company s Business Affairs) for the 2015 Annual Report for the period ended September 30, 2016 ("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.

4 Updated Chapter A (Description of the Company s Business Affairs) for the 2015 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 nine months that ended on September 30, 2016 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 holds 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. Description of the General Development of the Business Affairs of the Company 1.1. Section 1.1: General Pursuant to the Amendment to the Companies Law, 1999 (Amendment no. 28) of March 17, 2016 (the Amendment ), under which Companies are prohibited from issuing or allocating bearer shares 2, on September 17, 2016, 801 bearer shares issued by the Company in the past, and which are named bearer deriving from 6% preference shares in the Company s shareholders register, changed into treasury shares Section 1.3: The nature and the results of each material structural change, merger or acquisition For details with respect to the structural change in the Electric Company, including the renewed negotiations in this matter with the participation of the Company, employee representatives, and relevant Government entities, and for additional details in this matter, see Note 1e. to the Company s Financial Statements of September 30, 2016 (the Financial Statements ). The information included in this report, and within the Company s financial statements, regarding the Company s estimates pertaining to the manner of implementing the structural change and its cost, including the possibility of implementing a structural change in the electricity sector pursuant to the Steering Team s recommendations draft, insofar as will be adopted, or pursuant to the Yogev Letter, or according to the discussions held between the parties within which possible courses of action to carry out the structural change are being examined, particularly an outline to perform the structural change which will lead to a significant increase in competition in the generation segment, and within which a significant amount of assets (including power stations) will be sold, the required decisions of the regulating bodies in this matter, and with respect to the Company s forecast regarding the extension of its licenses and the period of their extension, is forward looking information, as this term is defined in the Securities Law. This information is based on future data, whose materialization is not certain and not controlled by the Company, but is dependent on receiving regulatory approvals and consents, and relevant legislation amendments, insofar as will be required. Additionally, this information is based on the Company s estimates as of the date of the report, and the Company s position regarding the manner of implementation of the structural change in the electricity sector. These estimates may not materialize or may materialize partially or in a different manner than expected (including thus, because the Company may be required to implement the structural change as it is outlined in the Electricity Sector Law), inter alia due to the continued progress in the contact between the parties and due to changes in the position of the Government, ministers, regulators controlling the Company s operation, other third parties or the applicable law, all of which are not controlled by the Company. 1 As published on March 21, 2016 (reference number: ) 2 Bearer 3 For additional details see the Company s Immediate Report of September 18, 2016 (reference no.: (reference no )). 3

5 2. Other Information Section 6.5: The policy of the Government of Israel regarding the increase of competition in the electricity sector and electricity consumption saving Following the details in section 6.5 of the Chapter of Description of the Company s Business Affairs in the Periodic Report, with respect to the goal set by the Government of Israel to increase electricity generation by private producers from approximately 4% to 20% of the total electricity generation in the State of Israel by the year and generating electricity from renewable energy at a rate of 10% of the State of Israel s energy requirements for and generating electricity from renewable energy at a rate of at least 13% from the total electricity consumption in 2025 and at a rate of at least 17% from the total electricity consumption in In 2015, the generation rate of private electricity producers, without generation with renewable energy, was 21% of the total electricity generation in the State of Israel in that year (the rate is 23% when including generation by private electricity producers with renewable energy). From the beginning of 2016 and until September 30, 2016, the generation rate of the private electricity producers without generation with renewable energy was 26% of the total electricity generation in the State of Israel during that period (the rate is 28% when including generation by private electricity producers with renewable energy). Additionally, in 2015, the electricity generation with renewable energy was 1.9% of the total electricity consumption in the State of Israel in that year. From the beginning of 2016 and until September 30, 2016, the generation rate with renewable energy in the State of Israel was approximately 2% of the total electricity consumption during that period. For details regarding the Company s application to the General Director of the Antitrust Authority requesting to cancel the declaration of the Company as a monopoly, and alternatively to change and reduce the declaration of the Company as a monopoly, such that it would be clarified that it does not apply to the sale of electricity to big electricity consumers (at ultra-high and high voltage), and regarding developments which occurred with respect to this application, see Note 1.h.2) to the Financial Statements. For details regarding transition of big customers to purchase electricity from private suppliers and the Company s estimate regarding the decrease in the Company s scope of production following the stated transition, see section 3.2 of this report. 3. Generation Segment 3.1. Section : Competition - general; the Company as a monopoly, private electricity production - Government policy and decisions of the Electricity Authority - private electricity producers Following the details in section of the Chapter of Description of the Company s Business Affairs in the Periodic Report, with respect to the decision by the Electricity Authority 7 of August 6, 2015, regarding rates of the electricity system management services, on June 30, 2016, the Electricity Authority published for a hearing a decision draft to amend the decision of August 2015, which relates to the manner of debiting independent producers. The Company delivered its reaction to the decision draft on July 21, Following the details in section of the Chapter of Description of the Company s Business Affairs in the Periodic Report, with respect to the decision of the Electricity Authority of May 13, 2013, regarding determination of a temporary rate for the system management services (administrative costs), on October 5, 2016, the decision by the Electricity Authority was published, dealing with rate base for the administrative costs of the system management activity. The rate set in this decision will replace the temporary rate of the administrative costs determined in the decision of May For additional details see Note 3. e) to the Financial Statements. 4 Decision of the Ministerial Committee for Social and Economic Affairs (Socio-Economic Cabinet) no. SE/43 of November 4, Government Resolution no. 3484: Government Policy in the Field of Energy Production from Renewable Sources, of July 17, Government Resolution no. 542: Greenhouse Gas Emission Reduction and Efficient Energy Consumption in the Sector, of September 20, Within the amendment to the Electricity Sector Law, which entered into effect on January 1, 2016, a new authority was established at the Ministry of National Infrastructures, Energy and Water, named the Electricity Authority, instead of the Public Utilities Authority - Electricity and the Electricity Administration at the Ministry of National Infrastructures, Energy and Water. Accordingly, in this statement, the term Electricity Authority should be construed with attention to the dates it relates to - if it is regarding information relating to dates prior to January 1, 2016, it means the Public Utilities Authority - Electricity, and if it is regarding information relating to dates from January 1, 2016 onward, it means the Electricity Authority which was established within the aforesaid amendment to the Electricity Sector Law. 4

6 3.2. Section : Producers with generation licenses, including independent generation and photovoltaic installation owners of up to 50 kilowatts without generation licenses (namely, generating electricity in practice) As of the date of the report, approximately 240 big customers, purchasing electricity at approximately 2,000 consumption locations 8, have transferred to purchasing electricity from private suppliers. The Company estimates that the decrease in the Company s production as a result of the transfer of these customers to private producers is approximately 9 billion kwh in a full year (less electricity sales to private producers). Additionally, the Company estimates that this process is expected to continue, although the Company has no certainty at this stage as to the number of customers who will transfer to private producers and the implications on the generated and sold kwh and the Company s revenues. The information in this report and within the financial statements, regarding the Company s estimates with respect to a decrease in the Company s generation volume following the transfer of big customers as aforesaid, is forward looking information, as it is defined in the Securities Law, which is based on information held by the Company as of the date of the report, as well as on Company forecasts whose fulfillment is contingent on factors some of which are not controlled by the Company, such as volumes of electricity consumption and accordingly electricity generation by the Company in each of the years Section 7.7: Development of the electricity sector - generation segment For details with respect to the Company s development plan and the application received by the Company from the Minister of National Infrastructures, Energy and Water to submit an updated development plan, see Note 1.g.1) to the Financial Statements. The information included in this report and within the Company s financial statements, regarding the Company s estimate regarding the updated development plan s impact on the Company is forward looking information, as this term is defined in the Securities Law, This information is based on forecasts and estimates existing in the Company as of the date of the report and which may not materialize or may materialize partially or in a different manner than expected, inter alia due to the fact that their materialization depends on various factors, some of which are not controlled by the Company, and inter alia, difficulties in obtaining licenses and/or change of regulation in the field of quality of the environment and licensing, lack of suitable rate cover, and the Company s ability to raise the required financing to execute the updated development plan Section 7.7.6: Major projects in the generation segment According to the emission permits given to the Company, the expected dates of synchronization of the emission reduction installations of the units detailed in section of the Chapter of Description of the Company s Business Affairs in the Periodic Report, are as follows: Unit s name Orot Rabin unit 5 (FGD) December 2016 Orot Rabin unit 6 March 2017 Rutenberg unit 1 December 2017 Rutenberg unit 2 September 2018 Rutenberg unit 3 June 2019 Rutenberg unit 4 March 2019 Date There is a possibility that the Company will not comply with the schedules set in the emission permit. In view of this, the Company applied to the Ministry of Environmental Protection with an application to amend the permit. For more details regarding the Company s emission permits see section below. 8 Consumption location - A plot of land, or a number of plots of land for which connection to the electricity grid was provided and a certain consumer was for them in the books of the essential service provider, including its registration on a meter insofar as was installed in the location (the number of consumption locations indicated here is of those who have transferred or are expected to transfer to private producers. There are customers of whom only some of their consumption locations are transferring to private producers). 5

7 3.5. Section 7.9: Raw Materials and Suppliers Section 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 nine months ended on September 30, 2016 and September 30, 2015: For the Nine Months Ended September in percent Coal Natural Gas * Liquid Gas * Diesel Oil Crude Oil Methanol Total * 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 has lower identical inference value Section 7.9.3: The table below presents the total fuels costs (including attributed wages) used to generate electricity in the generation segment in the nine months ended on September 30, 2016 and on September 30, 2015: For Nine Months Ended September in NIS millions Coal 2,034 2,868 Natural Gas 2,930 2,917 Liquid Gas Diesel Oil Crude Oil Methanol 6 6 Impairment Provision Crude Oil (55) (2) Total 5,526 6, Section (a) - Contractual Engagements to Purchase Natural Gas - Tamar field For details of the agreement of gas supply from the Tamar field, including with respect to notification of the Antitrust Authority pursuant to which it is examining whether exercising the option given to the Company by the Tamar partners, to increase the contractual quantity supplied during the period of the agreement, through construction of compression facilities, does indeed enable an increase in the gas capacity and does not impair the capacity of the natural gas supply, for details regarding demand for data by the Antitrust Authority, received by the Company, pertaining to the aforesaid agreement and the Take or Pay mechanism existing in it and exercise of the first option, the meetings held with the Antitrust Authority and the Tamar partners and regarding the amendment to the agreement between the Company and the owners of the rights of the Tamar license of September 1, 2016, which was signed as a result of those meetings, see Note 10. a.1) to the Financial Statements. 6

8 3.6. Section : Restrictions and control over the corporation s operation in the generation segment - general: manner of determining the rate For details regarding the electricity rate, particularly a decision draft pertaining to the 2016 annual update published by the Electricity Authority on October 13, 2016, see Note 3 to the Financial Statements Section 7.12: Environmental risks and the ways in which they are managed the generating segment Section : Clean Air Law In June 2016, the Company received an emission permit for the Haifa power station. The permit includes various instructions, including an instruction regarding the degree of blackening of the emission gas plume, which may affect the operation of the backup units. The Company is in contact with the Ministry of Environmental Protection regarding this issue. Following the details in sections and of the Chapter of Description of the Company s Business Affairs in the Periodic Report, in September, 2016, the Company received emission permits under the Clean Air Law for the coal powered power station sites, the Orot Rabin and Rutenberg (hereinafter: the Emission Permits ). For additional details regarding the Emission Permits including the obligation to continue to install emission reduction facilities in all the units at the Rutenberg site, and at units 5 and 6 at the Orot Rabin site, and for details regarding the cessation of operation of units 1-4 at the Orot Rabin site no later than June 1, 2022, and submission of a plan for ceasing their operation and for their conservation, as well as details regarding the operation of the coal powered generation units as little as possible in terms of operating and giving priority to generating electricity with natural gas, as well as for details regarding delays of the works at the Orot Rabin site and submitting an application for the grant of an extension to the schedules set in the emission permit, and for additional details, see Note 1.g. to the Financial Statements. The Company estimates that operating the coal powered generation units as little as possible involves significant costs in view of the need for combustion of more expensive alternative fuels and will also lead to a decrease in the scope of the Company s production in the last quarter of 2016 of approximately 2.5%. The Company is still studying all the impacts and implications deriving from the Emission Permits. Following the details in section of the Chapter of Description of the Company s Business Affairs in the Periodic Report, in September 2016, the Ministry of Environmental Protection published a national plan for implementation of the Paris Agreement. Among the means mentioned for implementing the goals to reduce the greenhouse gases are the closure of units 1-4 at the Orot Rabin site, and changing the load rate for use of coal. The Company is studying the document, its implications, and the relation between it and the provisions of the emission permits. In November 2016, the Government reached a resolution ratifying the Paris Agreement regarding international treatment in respect of climate changes. Beyond the emission permits detailed above, emission permits were received for all the relevant Company sites, according to the provisions of the Clean Air Law. The Company is studying the conditions of the emission permits and all the implications derived from them. The information included in this report and within the financial statements of the Company, regarding the Company s estimate regarding the costs involved in complying with the provisions of the permit, the expected decrease in the actual scope of electricity production by the Company, and the Company s request to extend the schedules set in the permit, is forward looking information as this term is defined in the Securities Law. This information is based on forecasts and estimates existing in the Company as of the date of the report and which may not materialize or may materialize partially or in a manner different than expected, inter alia in view of the fact that their materialization depends on different factors, some of which are not controlled by the Company, inter alia financial difficulties encountered by a contractor at the works project at the Orot Rabin site. 7

9 Section : Air - emission reduction plan Following the details in section of the Chapter of Description of the Company s Business Affairs in the Periodic Report, with respect to the suspension of proceedings order given to the Koor Metals Ltd., which serves as the Company s subcontractor in the emission reduction project, and the Company s concern of delay in schedules as a result of this, in April 2016, Koor Metals Ltd. entered into an agreement with another subcontractor, within which the works will be transferred from the Koor Metals Company Ltd. to the other subcontractor. Delays created in the project until now and which are known to the Company have been assimilated in schedules delivered to the Ministry of Environmental Protection. In July 2016, the Company notified the Ministry of Environmental Protection that the emission values required in relation to the nitrogen oxides were achieved at unit 5 at the Orot Rabin site on the date agreed upon with the Ministry of Environmental Protection. In September 2016, the Company received emission permits according to the Clean Air Law for its coal powered power stations, Orot Rabin and Rutenberg, which determine, inter alia, schedules and milestones within the emission reduction project. For further details see section above. The instructions of the Minister of National Infrastructures with regard to reducing the use of coal Following the details in section of the Chapter of Description of the Company s Business Affairs in the Periodic Report, with respect to the Company s application to the Minister of Environmental Protection and the Minister of National Infrastructures, Energy and Water, requesting that they act in coordination when setting instructions as to the manner and scope of reducing the electricity generation in the coal powered units, the Company and the relevant Ministries are in contact regarding the implementation of the Minister s instruction and the relation between it and the instruction of the Ministry of Environmental Protection to reduce surplus emissions. In September 2016, the Company received an emission permit which includes, inter alia, instructions with regard to reducing the use of coal in the coal powered generating units of the Company. For further details see section above Section : Environmental risks and the ways in which they are managed the generation segment - planning and construction - NPO 3/a/10 - Reading power station Following the details in section of the Chapter of Description of the Company s Business Affairs in the Periodic Report, with respect to the Housing Cabinet s approval of the National Outline Plan (partial) NPO 3/a/10, on March 24, 2016, the aforesaid NPO was given effect as a Government resolution, and on May 24, 2016, the approval of the NOP was published in the Official Gazette. The Company will have to execute, inter alia, investments of evacuation, construction, preservation and environmental costs at the site of hundreds of millions of NIS. Additionally, the NPO includes change of the land designation and expropriation of areas from the Company in sums which, according to the Company s initial estimate, are material sums. Accordingly, the Company applied to the Electricity Authority for recognition of the costs deriving from its approval of the NPO, and upon receiving the response of the Authority, will examine its further steps. For additional details regarding this issue see Note 1c.1) to the Financial Statements. The estimate of the Company, according to which the change of the land designation and expropriation of areas from the Company pursuant to that set in the NPO will impose on the Company expenses in sums which, according to the Company s initial estimate, are material sums, constitutes forward looking information, as this term is defined in the Securities Law, This estimate is based on forecasts and estimates existing in the Company as of the date of the report and which may not materialize or may materialize partially or in a different manner that expected, inter alia as a result of circumstances beyond the Company s control, including if and in which manner these sums will be recognized for the Company in the rate, surveys and changes which will become apparent in the field, as well as the outcome of legal proceedings the Company may take and planning processes initiated by the Company or by others Section : Preserving the coastal environment and preventing marine pollution Following the details in section of the Chapter of Description of the Company s Business Affairs in the Periodic Report, with respect to the investigation conducted regarding an event from October 2015, in which the flexible pipe disconnected from a ship in the Ashdod harbor, the Company received notice in July 2016 that the investigation in this matter has been closed. 8

10 Section : Coal Ash For details regarding the validation of the procedural arrangement of July 6, 2016, following which the petitions submitted following the instruction to clear fly ash from its coal powered power stations will be stricken off without order for costs, see section of the Chapter of Description of the Company s Business Affairs for the period ended on June 30, Section : Business licensing In May 2016, the Company was summoned to a hearing at the Ministry of Environmental Protection regarding an odor hazard, claimed to derive from the operation of the Rutenberg power station. During the hearing, the Company expressed the position that on the date of the event, the personnel of the station did not sense the odor and the station is in close proximity to industrial sources that hold liquid fuel which may be the source of the odor. In July 2016, the Ministry of Environmental Protection announced its intention to open a criminal investigation into the matter. As of the date of this report, a summons for a criminal investigation in connection therewith has not yet been received. 4. Transmission and Transformation Segment Section 8.9.2: Restrictions and control of the corporation s activity in the transmission and transformation segment - the future electricity rate in the transmission and distribution segments As of the date of the report, the Electricity Authority has not yet published the 2016 transmission and distribution rate base update. For details with respect to the Court s decision regarding the petition to grant orders nisi submitted by the Company to the High Court of Justice against the Electricity Authority in light of non-update of the transmission and distribution segment, see Note 3.b) to the Financial Statements. 5. Distribution Segment Section : Environmental Risks and Manner of their Management - Non-Ionizing Radiation For details with respect to the petition submitted to the High Court of Justice against the Minister of Environmental Protection, Minister of National Infrastructures, Energy and Water, and the Minister of Finance, regarding their duty to regulate regulations pertaining to threshold values pursuant to the Non-Ionizing Radiation Law, and the State s notification under which consents have been reached between the relevant Government ministries regarding this matter, and for additional details, see Note 1.g.4) to the Financial Statements. 6. Matters Relating to the Operations of the Company as a Whole 6.1. Section 10: Customers - electricity consumers For details of a provisional order prohibiting the Company from executing restrictions to the electricity supply to the lines of the East Jerusalem Electricity Company until a decision is reached in the petition submitted by the East Jerusalem Electricity Company to grant an interim order in this matter, as well as details regarding the State s position pertaining to that decision, and the court s decision in this matter of July 16, 2016, see Note 4.b. to the Financial Statements. For details of an agreement of principles to resolve the Palestinian electricity debts and to regulate the Palestinian electricity sector which regulates repayment of the total debt of the East Jerusalem Electricity Company and the Palestinian Authority, as signed on September 13, 2016, as well as for details regarding the amount of NIS 590 million received by the Company as part of the implementation of this agreement, and for additional details, see Note 4.b to the Financial Statements. 9

11 6.2. Section 13: Human capital Section 13.2: Human capital - employee roster by areas of operation As of September 30, 2016, the Company has 12,203 employees Section : Employee compensation plans, benefits and employment agreements - claims of salary deviations For details of collective agreements (wage agreements) signed in the public service, see Note 5.f. to the Financial Statements. For details of the ruling of the Haifa Regional Court of Labor, of May 3, 2016, regarding the decision of the Supervisor of Wages with respect to salary deviations in the Company, regarding the letter of the Supervisor of Wages to the Company of May 5, 2016, regarding separate appeals of the ruling submitted by the Company, the State and the employees union, and regarding the application for stay of execution submitted by the employees union, and regarding the decision of the National Court of Labor of June 13, 2016 pertaining to the stay of execution of the judgment until the date of a hearing with the participation of the parties and the joint communication between the parties being conducted at present, see Note 5.g. to the Financial Statements. An application on behalf of a group of the Company s employees was submitted at the beginning of August 2016 to the National Court of Labor, requesting to join the hearing in the status of friend of the court in order to stop the understandings turning into an agreement, claiming that they are depriving employees. The Court has dismissed this application Section 13.9: Labor Disputes For details regarding labor disputes see Notes 5.g and 10.c to the Financial Statements Section 14.1: General - Fixed assets, real estate and installations In order to meet the requirements of the transformation array in the distribution grid, the Company is required to purchase rights in certain real estate to establish transformation stations. Some of this real estate is owned by the Israel Land Authority ( ILA ). Commercial and legal disagreements have arisen between the Company and ILA regarding various sections in the lease agreements which are meant to be signed between the parties with respect to the stated real estate, which may delay the electricity supply in these areas. The disagreements which might have placed the supply in immediate risk were recently resolved, but nonetheless, in certain circumstances, and as long as the parties have not signed an obligating agreement, there is apprehension that the delays in the electricity supply due to this reason may lead to actions against the Company, and at this stage it is not yet possible to estimate their scope Section 18: Financing Section 18.1: Credit received from the date of the statements until the date of signing this statement For details of debt raising through expansion of the Company s debenture series (Series 26 and Series 27) through issue under a shelf offering report of September 7, 2016, which was published pursuant to the Company s shelf prospectus of on November 27, 2015 see Note 7.a.1)b. to the Financial Statements Section 18.4: Credit rating For details of material repayments of debentures and a Bank Hapoalim loan balance by the Company after the date of the report, and approval of the Board of Directors for partial buyback of the debenture series issued abroad on January 17, 2008, see Note 7.a.3) to the Financial Statements Section 18.8: Credit rating For details of the Company s credit rating, see Note 7.b to the Financial Statements Section 21.9: Restrictions and regulation of the Company s operations - Antitrust For details with respect to the response of the General Director of the Antitrust Authority to the Company s application, requesting to cancel the declaration of the Company as a monopoly and, alternatively, that the declaration of the Company as a monopoly will be changed and minimized, such that it will be clarified that it does not apply on sale of electricity to big electricity consumers (of high- and ultra- high voltage), and for details of an appeal submitted by the Company to the Antitrust Court in accordance with this response, and the Court s suggestion to wait with this matter until the 2017 work plan of the Antitrust Authority is formulated, which was accepted by the parties, see Note 1.h to the Financial Statements. 01

12 6.6. Section 23: Legal proceedings - pending actions Section 23.1: Class actions For information regarding class actions, including approval to consolidate three applications to approve class actions submitted against the Company in light of disruptions to the electricity supply following the stormy weather in the country at the end of October, 2015, and applications to approve additional class actions against the Company and applications to strike off applications to approve actions as class actions, see Note 10.b.1) to the Financial Statements Section 23.3: Pending proceedings For details of implementation of the judgment to a compromise agreement signed between the Company and Siemens AG ( Siemens ) and Siemens Israel Ltd. (together: the Siemens Companies ), within which Siemens undertook to pay a total amount of NIS 90 million in return for settling the Company s action against the Siemens Companies with respect to bribery payments given by the Siemens Companies to factors in the Company, see the Company s Immediate Report of November 14, 2016 (reference no.: ), whose content is included herein by way of reference, as well as Note 10.b.1)b)(3) to the Financial Statements Section 25.3: Information regarding business entrepreneurship Cybergym Control Company Ltd. ( Cybergym ), its shareholders - Cyber Control Ltd. and Ofir Hasson (hereinafter together: the Entrepreneurs ), and the Electric Company signed a memorandum of understandings with a foreign company (the Purchaser ) on June 16, 2016, within which were defined the terms for a sale transaction of 100% of Cybergym s shares from the entrepreneurs to the purchaser in consideration for allocating shares in the purchaser to the entrepreneurs as part of a comprehensive transaction, in which the purchaser will become a foreign public company, and the entrepreneurs will be its major shareholders. The sale transaction has not yet perfected and is subject to receiving the approvals required by law and a series of additional suspending conditions which were determined in the memorandum of understandings including the entry of the entrepreneurs and the Electric Company into an agreement regarding the Electric Company s contractual rights in the entrepreneurs rights in the purchaser after execution of the transaction Section 27.2: Event or matter outside of the ordinary business affairs of the Company Following the details in section 27.2 of the Chapter of Description of the Company s Business Affairs in the Periodic Report, with respect to the arrest of several past and present employees by the Securities Authority, on suspicion of accepting bribes from the Siemens Company, on May 2, 2016, the Company received notice that indictments were filed against the aforesaid Company employees including the Deputy CEO Planning, Development and Technology, Mr. David Elmakias. Mr. Elmakias has been absent from work for an extended period of time due to personal circumstances, and he is not fulfilling his position at this stage. Mr. Shimon Fisher serves as substitute for Mr. David Elmakias, in addition to his position as head of the Company s electricity system division. For details regarding the compromise agreement signed between the Company and Siemens and Siemens Israel Ltd., see section above. Ofer Bloch Chief Executive Officer Yiftah Ron-Tal Chairman of the Board of Directors Date of Approval: November 24,

13 The Israel Electric Corporation Ltd. Chapter B Board of Directors Report on the Status of the Company's Affairs For the Nine and Three Months Ended September 30, 2016

14 Prominent Disclaimer This English translation of the "Company's Board of Directors' Report on the Status of the Company's Affairs" for the nine months ended September 30, 2016 ("English Translation") is provided for informational 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, 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

15 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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 nine and three months ended on September 30, 2016, ("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"). The Report of the Board of Directors for the period was prepared under the assumption that the reader of the Report is in possession of the Periodic Report of December 31, 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 January 1, 2017, as of the date of the signing of this report. The Company also deals in the construction of infrastructures required for these activities. The operations of the Company include three main areas: electricity generation, transmission and transformation as well as its distribution, 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 fulfillment of the instructions specified in the licenses (which in certain cases require the approval of the Minister). 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 September 30, 2016 (hereinafter: Financial Statements ), as well as Note 1 to the Financial Statements of December 31, 2015 (hereinafter: Annual Financial Statements ). b) Condensed Review of the Changes in the Business Environment during the Reporting Period 1) For details regarding material legislated provisions applicable to the Company in the field of environmental protection, including details regarding the emission reduction project, see Note 1.g. to the Financial Statements. 2) For details regarding the decision of the National Court of Labor, see Note 10 c.2) to the Financial Statements. 3) For details regarding a letter from the Antitrust Authority, within which it was claimed that the Director of the Antitrust Authority is considering determining that the Company abused its status as a monopoly in the transmission of electricity and its distribution, and that the Director is considering imposing a financial fine on a number of office holders of the Company, see Note 1.h. to the Financial Statements. 4) For details regarding issues and repayment of debentures and loans during the report period and after the balance sheet date, see Note 7.a. to the Financial Statements. 5) For details regarding rate updates and decisions of the Electricity Authority during the report period see Note 3 to the Financial Statements. 3

16 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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) 6) For details of a signed compromise agreement with respect to the bribery from the Siemens Company affair, see Note 10.b.1)b)(3) to the Financial Statements. 7) For details of the labor courts judgments and decisions of the Board of Directors, with respect to the decision of the Commissioner of Wages regarding wage irregularities in the Company and the labor dispute which was declared concerning the continued employment of temporary workers in the Company, see Notes 5.g and 10.c. to the financial statements. 8) For details of the court case hearings with respect to the electricity restrictions on the East Jerusalem District Electricity Company and the Palestinian Authority, and the agreement of principles which was formulated to resolve the Palestinian electricity debt and regulating the Palestinian electricity sector which was signed on September 13, 2016, see Note 4.b. to the financial statements. 9) For details regarding the ratification and update of the credit rating of the Company, see Note 7.b. to the financial statements. 10) For details regarding the amendment to the agreement to purchase natural gas by the Company from the Tamar partnership which was signed on September 1, 2016, see Note 10.a. to the Financial Statements. c) Main financial targets The long term targets are presented below (not including the effect of the structural change): 1) Financial net debt ratio to EBITDA: the target is 6.5 in practice, as of September 30, 2016, the ratio is approximately 5.1 (the ratio is based on the real net financial debt of the Company as of September 30, 2016, which is NIS 42,167 million and on EBITDA which is calculated to the result of the last four quarters, in the amount of NIS 8,245 million). 2) Total debt ratio to total balance sheet will gradually decrease to 81% (as of September 30, 2016, the ratio stands at approximately 79%). 3) Maintaining the 'BBB-' international rating (for details of the Company s credit rating see Note 7 b to the Financial Statements). 4) Cash balance and short term investments will not be less than NIS 2.2 billion. (In accordance with the decision of the Board of Directors that the excess fuels inventory value and/or unused secured credit lines for a period exceeding one year up to a value of NIS 800 million constitutes completion of the safety cushion in the amount of at least NIS 3 billion). As of the date of signing the financial statements, the Company is meeting the objective. 5) According to the five-year financial plan, the target is decreasing real net financial debt by NIS 0.5 billion per year. In practice, there is a decrease in the aforesaid net debt in 2015 of approximately NIS 2.3 billion, and in the reporting period, there is a decrease in the aforesaid net debt of approximately NIS 2.4 billion. 4

17 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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 September 30, 2016 and December 31, 2015 are as follows: September 30, 2016 December 31, 2015 NIS in millions Increase (decrease) Percent % Note No. CURRENT ASSETS Cash and cash equivalents... 5,684 2,524 3, % a)1) Short term investments (19) (5%) Trade receivables for sales of electricity... 4,654 4, % a)2) Accounts receivable (108) (15%) a)3) Inventory fuel (110) (13%) a)4 Inventory stores (1) (1%) 12,193 8,762 3,431 39% NON-CURRENT ASSETS Inventory - fuel... 1,101 1,124 (23) (2%) a)4) Long-term receivables ,659 (889) (54%) b) Investment in associate (3) (4%) Assets with respect to post-employment benefits: c) Surplus pension plan assets over pension liability... 5,817 5, % Funds in trust... 1,645 1,921 (276) (14%) 7,462 7, % Fixed assets, net: d) Fixed assets in use, net... 53,991 55,636 (1,645) (3%) Fixed assets under construction... 7,337 6, % 61,328 62,442 (1,114) (2%) Intangible assets, net... 1,280 1,295 (15) (1%) 84,205 82,563 1,642 2% Debit balances of regulatory deferral accounts 1, % g) Total assets and debit balances of regulatory deferral accounts... 85,913 83,400 2,513 3% 5

18 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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 September 30, 2016 and December 31, 2015 are as follows: (continued) September 30, 2016 NIS in millions December Increase 31, 2015 (decrease) Percent % CURRENT LIABILITIES Credit from banks and other credit providers... 5,294 2,756 2,538 92% e)1) Trade payables... 1,830 1, % Accounts payable and accruals... 1,778 1,877 (99) (5%) Customer advances, net of work in progress (69) (14%) Provisions (139) (19%) e)2) 9,916 7,608 2,308 30% NON CURRENT LIABILITIES f) Debentures... 34,056 34,923 (867) (2%) Liabilities to banks... 4,338 5,248 (910) (17%) Liabilities with respect to other postemployment benefits... 2,792 2, % Provision for refunding amounts to consumers.. 2,836 2, % Deferred taxes, net... 5,793 5, % Debentures to the State of Israel... 2,511 2,511-0% Liability to the State of Israel... 2,259 2,591 (332) (13%) Other liabilities (97) (13%) 55,244 57,307 (2,063) (4%) CAPITAL Share capital % Capital reserves (17) (2%) Capital reserve remeasurement (260) (96%) Retained earnings... 16,399 14,712 1,687 11% 18,104 16,694 1,410 8% Total liabilities and capital... 83,264 81,609 1,655 2% Credit balances of regulatory deferral accounts... 2,649 1, % g) Total liabilities, capital and credit balances of regulatory deferral accounts... 85,913 83,400 2,513 3% Note No. 6

19 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 2. Financial Position (continued) The following are explanations of the financial data of the Company, as detailed in the tables above, to September 30, 2016 compared to December 31, 2015 at Company level (for information of the sectorial reporting or segments of operation of the Company see Notes 12 and 13 to the Financial Statements). a) Current Assets 1) Cash and Cash Equivalents For details of the increase in cash balance see section a.5.a) below in the subject of liquidity for the reporting period. 2) Customers The increase in the customers balance mainly derives from the higher revenues characterizing the third quarter due to the seasonality factor, offset by the decrease in the debt of the Palestinian Authority and the East Jerusalem Electricity Company. For additional details of developments in customers balance including various customers throughout the Palestinian Authority and the East Jerusalem Electricity Company see Note 4 to the Financial Statements. 3) Accounts Receivable The decrease mainly derives from a change in current maturities of hedging transactions in the reporting period, partly offset by the increase in prepaid expenses primarily with respect to insurance, municipal taxes and employee benefits. 4) Fuel Inventory The decrease in fuel inventory (current and non-current) mainly derives from a decrease in the coal inventory in light of implementation of the order of the Minister to reduce generation using coal by 15% in relation to the volume of generation using coal in 2015 (see Note 1.g to the Annual Financial Statements), which is partially offset due to an increase in the price of coal. The fuel inventory presented in current assets reflects the Company s forecast for use of fuels for the period of October 2016 September 2017, as well as the crude inventory which is intended for sale in this period. The balance of the fuel inventory, which according to the Company s forecast will serve it beyond the said period, as well as the crude inventory intended for sale beyond this period, is presented in the non-current assets item. b) Long-term Receivables: The major decrease derives from the repayment of the Palestinian debt pursuant to the formulated agreement of principles (see Note 4.b. to the Financial Statements), and due to the decision to close the designated account for investment in the transmission and distribution segments (see Note 3.i. to the Financial Statements), so that the funds accrued in it were transferred for the benefit of the operating activities, and additionally there was a decrease in the fair value balance of the long-term hedge transactions and the debt of the Gas Pipeline Company with respect to the gas pipeline project. c) Assets with Respect to Benefits after Termination of Employment: 1) During the report period, an increase occurred in the item of excess pension plan assets over the actuarial liability due mainly to an increase in the plan assets following the effects of the return on the plan assets (pension fund and compensation) which was partially offset by an increase in the actuarial liability mainly deriving from a decrease in the capitalization interest rate and from implementation of the decision of the Supervisor of Wages at the Ministry of Finance according to the ruling of the Haifa Regional Court. 2) During the report period, NIS 326 million was transferred to the Company from the trust account pursuant to the order of the District Court. For further details see Note 5 to the financial statements. 7

20 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 2. Financial Position (continued) d) Investments in Fixed Assets Total new investments in fixed assets during the reporting period amounted to NIS 2,506 million, compared with NIS 2,774 million in the same period last year. A decrease of approximately NIS 268 million and a rate of approximately 10%. Company investments in Fixed Assets in the Report Period were as follows: For the nine months ended on September 30, September 30, In NIS millions Power stations, CCGTs, structures... 1,054 1,042 Sub-stations and high voltage lines Switching stations and ultra-high 400 Kilowatt voltage lines Distribution grids and meters Inventory stores Joint property and others Total... 2,506 2,774 For additional details see Note 14 n. to the Financial Statements. e) Current Liabilities 1) Credit from Banking Corporations and Other Credit Providers The increase mainly derives from transfer of debentures to current maturities due to the repayment expected during the first nine months of ) Provisions The decrease in provisions mainly derives from a reduction in the provision existing with respect to depreciation claims by virtue of the Planning and Building Law in light of a decisive assessor s decision in the matter. For details see Note 10 b. 7) to the Financial Statements. f) Non-Current Liabilities: 1) Long Term Financial Liabilities The long term financial liabilities of the Company include debentures, liabilities to banking corporations, hedge transactions, debentures to the State of Israel and liabilities to the State of Israel, amounting to NIS 43,164 million (as of December 31, 2015, NIS 45,273 million). For details of the composition of the financial liabilities of the Company, see section a.5.b) below. For details of issues and material repayments see Note 7. a. to the Financial Statements. For details of the currency exposure, see linkage basis report in section b.2 below. 2) Liabilities with respect to other post-employment benefits During the report period, an increase occurred in the item of liability with respect to other postemployment benefits deriving from a decrease in the capitalization interest rate. 8

21 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 2. Financial Position (continued) g) Regulatory deferral accounts balances On October 13, 2016, the Electricity Authority published, for a public hearing, a decision proposal regarding the 2016 annual update. For details with respect to its impact on regulatory deferral accounts balances of September 30, 2016, see Note 3.a. to the Financial Statements. For details regarding regulatory deferral accounts balances and the changes in them during the report period see Note 6 to the Financial Statements. (a) Compliance with conditions for implementation of IFRS 14 (see Note 2.y to the Annual Financial Statements): Every period, the Company examines the status of the electricity sector in Israel and the determinations of the regulator, in order to determine if it is continuing to comply with the standard s conditions of application. (b) The Company is complying with the conditions for implementation of the standard. For additional details see section a.2.h in the Report of the Board of Directors for the year ended on December 31, IFRS 14 presents changes to some of the previous accounting principles for the balances of regulatory deferral accounts, which are primarily related to the presentation of these accounts. Following are explanations pertaining to the major changes in balances of regulatory deferral accounts compared to December 31, 2015: 1) Transition of approximately NIS 1,616 million from credit balance to debit balance of regulatory deferral account, due to non-consecutive update of the rate s fuels component. 2) A decrease of approximately NIS 332 million in the credit balance of regulatory deferral account, with respect to consumer participation in financing Emergency Plan Stage B. 3) Transition of approximately NIS 1,207 million from debit balance to credit balance of regulatory deferral account, with respect to a gap between the update dates of the actual rate and the theoretical rate (without the fuels component). 4) An increase of approximately NIS 489 million in the credit balance of regulatory deferral account with respect to purchase of electricity from private electricity producers and photo-voltaic installations. 5) A decrease of approximately NIS 124 million in the debit balance of regulatory deferral account with respect to social rate for needy populations. 6) A decrease of approximately NIS 93 million in the debit balance of regulatory deferral account with respect to erosion of the Company liabilities in foreign currency which are transferred to electricity consumers. 7) Transition of approximately NIS 76 million from debit balance to credit balance of regulatory deferral account with respect to arrangements to manage the load. 8) An increase of approximately NIS 20 million in the debit balance of regulatory deferral account with respect to recognition of investments reduced in the past. 9) An increase of approximately NIS 19 million in the debit balance of regulatory deferral account with respect to deemed interest. 9

22 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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: a) Statements of Operations and Other Comprehensive Income in Millions NIS: Statements of Operations For the nine months ending on Change Explanatory September 30, 2016 September 30, 2015 Paragraph In NIS In NIS In NIS millions % millions % millions % No. Revenues... 17, % 17, % (327) (2%) b) Cost of operating the electricity system... 13,348 76% 13,785 77% (437) (3%) c) Profit from operating the electricity system... 4,164 24% 4,054 23% 110 3% Sales and marketing expenses % 691 4% (32) (5%) Administrative and general expenses % 573 3% (4) (1%) Expenses (income) from liabilities to pensioners... (327) (2%) 515 3% (842) (163%) f)2) Profit from current operations... 3,263 19% 2,275 13% % Financial expenses... 1,466 8% 1,512 8% (46) (3%) e) Profit before income tax... 1,797 10% 763 4% 1, % Tax on income % 203 1% (86) (42%) Profit after income tax... 1,680 10% 560 3% 1, % Company share in loss due to included company... (3) 0% (7) 0% 4 (57%) Profit before regulatory deferral accounts... 1,677 10% 553 3% 1, % Transactions in balances of regulatory deferral accounts, net of tax % (297) (2%) 307 (103%) Profit for the period... 1,687 10% 256 1% 1, % Consolidated Reports of Other Comprehensive Income (Loss): Re-measurements of a defined benefit plan, net of tax... (260) (1%) 158 1% (418) (265%) f)6) Hedge accounting cash flow, net of tax... (17) 0% 10 0% (27) (270%) Other Comprehensive profit (loss) for the period (277) (2%) 168 1% (445) (265%) Comprehensive Income for the period... 1,410 8% 424 2% % 10

23 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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 The total revenues for the reporting period are NIS 17,512 million compared to NIS 17,839 million for the corresponding period the previous year. The decrease of approximately 2 % derives mainly from: 1) Revenues from the sale of electricity for the reporting period amounted to approximately NIS 17,275 million, compared to approximately NIS 17,653 million for the corresponding period the previous year. This consists of an approximately NIS 378 million decrease in revenues from electricity sales, a decrease of approximately 2 %, deriving mainly from a decrease in the electricity rate and changes in the consumption distribution. 2) Miscellaneous revenues in the report period amounted to approximately NIS 237 million compared to approximately NIS 186 million in the same period the previous year. An increase of approximately NIS 51 million. Peak electricity demand - The peak in electricity demand during the period of the report was in January, reaching a level of 12,624 MW including 9,844 MW produced by the Company and approximately 2,779 MW produced by private and independent producers. The IEC s standard available capacity at that time reached 11,226 MW. The peak in electricity demand during the comparative period last year was in January, reaching a level of 12,905 MW, including 10,065 MW produced by the IEC and approximately 2,840 MW produced by private and independent producers. The IEC s standard available capacity at that time reached 10,941 MW. 11

24 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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) c) Cost of Operating the Electricity System The cost of operating the electricity system in the reported period amounted to approximately NIS 13,348 million, as compared to approximately NIS 13,785 million in the corresponding period last year, a decrease of NIS 437 million (approximately 3%), mainly deriving from: 1) Fuels consumption cost The cost of fuels consumed in the reporting period amounted to a sum of approximately NIS 5,526 million, compared to approximately NIS 6,576 million for the corresponding period the previous year, a decrease of approximately NIS 1,050 million, which constitutes a decrease of approximately 16%. The change to the cost of fuels consumption derives mainly from a decrease in the price of fuels and use of a cheaper fuels mix. Following are details of the changes in NIS millions for the nine months ended on September 30, 2016 Fuel Type Change in Consumption Change in Prices Total Crude (10) 27 Coal... (408) (426) (834) Diesel oil... (230) 17 (213) Natural gas (48) 13 Liquid gas - LNG (360) 10 Total... (170) (827) (997) Crude impairment (53) Total changes including impairment (1,050) 2) Electricity acquisitions During the report period there was an increase of approximately NIS 583 million in electricity acquisitions as compared to the corresponding period last year mainly deriving from the entry of private electricity producers and an increase in the number of photo-voltaic producers. 3) Payroll expenses For further details of the decrease in payroll expenses with respect to pension supplements see section a.3.f)3) below. d) Depreciation and Amortization Following are details of depreciation and amortization expenses presented in the profit and loss statement in the reporting period and in the corresponding period the previous year: The nine months ended September Depreciation and Amortization Expenses In NIS millions Difference Change in % Electricity system operation... 3,308 3, % Sales and marketing % Administrative and general (2) (2%) Total depreciation expenses... 3,509 3, % 12

25 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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 nine months ending September 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 revaluation at a rate of 3.69% offset partially by NIS/Japanese Yen differences at a rate of approximately 14.79% during the report period... (563) 47 (610) Revaluation of hedging transactions resulting from changes in the period of the exchange rates (93) 608 Revaluation of hedging transactions resulting from changes in the period of the Consumer Price Index... 5 (29) 34 Revaluation of hedge transactions to their fair value mainly deriving from the changes of the capitalization interest rates and the credit risk which occurred during the report period... (35) 86 (121) Linkage differentials due to index linked financial liabilities which did not change in the report compared to a decrease of 0.2% in the same period the previous year... (3) (67) 64 Income due to exchange rate differences and linkage differences and revaluation of hedge transactions... (81) (56) (25) B. Interest and Other Expenses Interest expenses... 1,740 1,861 (121) Other financing expenses (income) (10) 34 Total interest and other expenses:... 1,764 1,851 (87) C. Loss from early redemption of debentures Loss from early redemption Total financing expenses before capitalization... 1,765 1,795 (30) D. Capitalization of credit costs Financing expenses which were capitalized on projects under construction Total financing expenses... 1,466 1,512 (46) 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 carried out by the Company in foreign currency against linked NIS in substance replaced the foreign currency liabilities with fixed interest CPI linked NIS liabilities. According to the provisions of IAS 39, the Company is measuring its financial liabilities at amortized cost while using the effective interest method. On the other hand, the hedging transactions of these liabilities are measured at fair value through profit and loss. The gap between the measurement methods creates accounting exposure for the Company that might be affected by the changes that occurred in various market factors. 13

26 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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 (continued): The credit risk of the parties to the transaction and relevant interest to capital curves are used when valuing the hedging transactions to their fair value. Accordingly, changes in these factors cause significant changes in the fair value between the measured periods. As a result, an accounting and not a cash flow entry was recorded in the reporting period, of an income of approximately NIS 35 million, compared to an expense of approximately NIS 86 million in the same period the previous year. This entry in the Profit and Loss Statement of the Company derives, as stated, from the accounting gap between the different measurement methods and does not constitute a cash flow expense. Presently the Company policy in managing its market risks is according to the financial exposure and not the accounting exposure. However, the Company has started implementing hedge accounting for new hedge transactions according to the provisions of the standard in order to minimize the above mentioned accounting exposure. For details see Note 11 to the Financial Statements and Note 27.h to the Annual Financial Statements. f) Additional Business Results during the Reporting Period: 1) The EBITDA (earnings before interest, taxes, depreciation and amortization) during the reporting period was NIS 6,772 million compared to NIS 5,679 million in the same period the previous year. 2) A decrease in liabilities to pensioners in the amount of approximately NIS 842 million, in comparison to the same period last year, mainly deriving from a non-recurring income of approximately NIS 260 million during the report period as a result of implementation of the decision of the Director of Wages at the Ministry of Finance according to the judgment of the Haifa Regional Court. This compared to a non-recurring expense of approximately NIS 561 million in the same period in the previous year due to a retirement plan for 440 employees last year. For details see Note 5 to the Financial Statements. 3) A decrease in payroll expenses with respect to pension supplements for active employees of NIS 95 million in comparison to the same period last year, mainly deriving from non-recurring income of approximately NIS 83 million, as a result of the implementation of the decision of the Commissioner of Wages in accordance with the judgment of the Regional Court in Haifa. For details, see Note 5.g. to the financial statements. 4) On October 13, 2016, the Electricity Authority published for a public hearing a decision proposal regarding the 2016 annual update. For details of its impact on the Company s results in the report period and the regulatory deferral account balances as of September 30, 2016, see Note 3.a. to the Financial Statements. 5) For details regarding the impact of the change in company tax rate on the Company s result during the report period see Note 8 to the Financial Statements. 6) The changes in other comprehensive profit (loss) with respect to re-measurements of a defined benefit plan of approximately NIS 418 million (loss) after the effect of tax, in comparison to the same period last year, deriving mainly from a change in the capitalization interest rate used to calculate the actuarial liability. 7) At the date of signature of the financial statement, the installed production capacity of private producers is approximately 17% of the total installed market capacity. The entry of private producers with significant output affects and is expected to continue to affect the Company's volume of revenue. During the periods of September 30, 2016, and September 30, 2015 the actual electricity production of private producers was approximately 28% and 21%, respectively, of the total market production. For details of the Company's agreements with private producers as of December 31, See Note 35a. 4) to the Annual Financial Statements. 14

27 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 4. Comparison and Analysis of Operating Results for the Quarter Compared to the Corresponding Quarter in the Previous Year: a) Statements of Operations and Other Comprehensive Income in Millions NIS: Statements of Operations For the three months ending on Change Explanatory September 30, 2016 September 30, 2015 Paragraph In NIS In NIS In NIS millions % millions % millions % No. Revenues... 7, % 7, % (140) (2%) b) Cost of operating the electricity system... 4,867 69% 5,214 72% (347) (7%) c) Profit from operating the electricity system... 2,185 31% 1,978 28% % Sales and marketing expenses % 214 3% 7 3% Administrative and general expenses % 170 2% 39 23% Income from liabilities to pensioners... (32) 0% (17) 0% (15) 88% Profit from current operations... 1,787 25% 1,611 22% % Financial expenses % 403 6% 92 23% e) Profit before income tax... 1,292 18% 1,208 17% 84 7% Tax on income % 320 4% 3 1% Profit after income tax % % 81 9% Company share in loss due to included company... (1) 0% (5) 0% 4 (80%) Profit before regulatory deferral accounts % % 85 10% Transactions in balances of regulatory deferral accounts, net of tax % 159 2% (16) (10%) Profit for the period... 1,111 16% 1,042 14% 69 7% Consolidated Reports of Other Comprehensive Income (Loss): Remeasurements of a defined benefit plan, net of tax... (46) (1%) (328) (5%) 282 (86%) f)2) Hedge accounting cash flow, net of tax... (45) (1%) 7 0% (52) (743%) Other Comprehensive loss for the period (91) (1%) (321) (4%) 230 (72%) Comprehensive Income (loss) for the period... 1,020 14% % % 15

28 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 4. Comparison and Analysis of Operating Results for the Quarter Compared to the Corresponding Quarter in the Previous Year (continued) b) Revenues The total revenues for the quarter are NIS 7,052 million compared to NIS 7,192 million for the corresponding quarter the previous year. The decrease of approximately 2 % derives mainly from: 1) Revenues from the sale of electricity for the quarter amounted to approximately NIS 7,004 million, compared to approximately NIS 7,133 million for the corresponding quarter the previous year. The decrease of approximately NIS 129 million in revenues from electricity sales represents a decrease of approximately 2 %. 2) Miscellaneous revenues in the report period amounted to approximately NIS 48 million compared to approximately NIS 59 million in the same period in the previous year. A decrease of approximately NIS 11 million. Peak electricity demand - The peak in electricity demand during the quarter of the report was in August, reaching a level of 12,202 MW including 8,939 MW produced by the Company and approximately 3,263 MW produced by private and independent producers. The IEC s standard available capacity at that time reached 11,136 MW. The peak in electricity demand during the comparative quarter last year was in September, reaching a level of 12,905 MW, including 10,065 MW produced by the IEC and approximately 2,840 MW produced by private and independent producers. The IEC s standard available capacity at that time reached 10,941 MW. 16

29 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 4. Comparison and Analysis of Operating Results for the Quarter Compared to the Corresponding Quarter in the Previous Year (continued) c) Cost of Operating the Electricity System The cost of operating the electricity system in the quarter amounted to approximately NIS 4,867 million, as compared to approximately NIS 5,214 million in the corresponding quarter last year, a decrease of approximately NIS 347 million (approximately 6.6%). 1) Fuels consumption cost The cost of fuels consumed in the quarter amounted to a sum of approximately NIS 2,117 million, compared to approximately NIS 2,629 million for the corresponding quarter the previous year, a decrease of approximately NIS 512 million, which constitutes a decrease of approximately 19%. The change in the cost of fuels consumption derives mainly from a decrease in the price of fuels and from the use of a cheaper fuels mix. Following are details of the changes in NIS millions for the three months ended on September 30, 2016 Fuel Type Change in Consumption Change in Prices Total Crude... (16) 6 (10) Coal... (55) (118) (173) Diesel oil... (238) 8 (230) Natural gas... (56) (9) (65) Liquid gas - LNG (153) (30) Total... (242) (266) (508) Crude impairment (4) Total changes including impairment (512) d) Depreciation and Amortization Following are details of depreciation and amortization expenses presented in the profit and loss statement: The three months ended September Depreciation and Amortization Expenses In NIS millions Difference Change in % Electricity system operation... 1,193 1, % Sales and marketing % Administrative and general % Total depreciation expenses... 1,262 1, % 17

30 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 4. Comparison and Analysis of Operating Results for the Quarter Compared to the Corresponding Quarter in the Previous Year (continued) e) Financial Expenses For the three months ending September 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 a revaluation of 2.29% and the NIS/Japanese Yen differences due to a revaluation of 0.53% in the quarter... (584) 1,166 (1,750) Revaluation of hedging transactions resulting from changes in the period of the exchange rates (931) 1,426 Revaluation of hedging transactions resulting from changes in the period of the Consumer Price Index Revaluation of hedge transactions to their fair value mainly deriving from the changes of the capitalization interest rates and the credit risk which occurred during the report period... (11) (466) 455 Linkage differentials due to index linked financial liabilities which decreased in the quarter at a rate of 0.4% compared to 0.3% in the same quarter of the previous year Expenses (income) due to exchange rate differences and linkage differences and revaluation of hedge transactions (133) 161 B. Interest and Other Expenses Interest expenses (19) Other financing expenses (income)... (11) 35 (46) Total interest and other expenses: (65) Total financing expenses before capitalization C. Capitalization of credit costs Financing expenses which were capitalized on projects under construction Total financing expenses 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 carried out by the Company in foreign currency against linked NIS in substance replaced the foreign currency liabilities with fixed interest CPI linked NIS liabilities. 18

31 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 4. Comparison and Analysis of Operating Results for the Quarter Compared to the Corresponding Quarter 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 quarter was NIS 3,049 million compared to NIS 2,752 million in the same quarter the previous year. 2) A decrease in other comprehensive loss with respect to re-measurements of a defined benefit plan of approximately NIS 282 million, in comparison to the corresponding quarter in the previous year after effect of tax, derived mainly from changes in the capitalization interest rate used to calculate the actuarial liability. 5. Liquidity for the Reporting Period a) General for the Reporting Period: The cash and cash equivalents balance as of September 30, 2016 is NIS 5,684 million, and as of December was NIS 2,524 million. In the reporting period, the cash flow of the Company amounted to a positive cash flow of approximately NIS 3,160 million as detailed below: 1) Cash Flow from Operating Activities: The cash flow from Operating Activities for the reporting period amounted to a positive flow of approximately NIS 5,940 million, compared to a positive flow of approximately NIS 5,313 million in the corresponding period last year, an increase in the cash flow from current operations of approximately NIS 627 million which derives from the increase in profit for the period. 2) Cash Flow for Investment Activities: Cash used for investment activities in the period reached a negative flow of approximately NIS 1,688 million, compared to a negative flow of approximately NIS 527 million in the corresponding period last year. The change in the cash flow from investment activity of approximately NIS 1,161 million derives mainly from repayment of deposits in banks which served for repayments of debentures and loans in the same period the previous year, offset by the funds transferred from the trust account (see section a.2.c.2 above). 3) Cash Flow from Financing Activity: Cash flow from financing activities in the report period amounted to a negative flow of approximately NIS 1,092 million, compared to a negative flow of approximately NIS 7,953 million in the corresponding period last year. A change in the cash flow from financing activity of approximately NIS 6,861 million derives mainly from the expansions of the debentures during the report period compared to large repayments of debentures and loans in the same period the previous year (for details see Note 7.a. to the Financial Statements). For additional details regarding the cash flow of the Company see the statement of cash flows of the Company in the Financial Statements. 19

32 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 5. 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. For details regarding raisings of funds and repayments during the report period see Note 7 to the Financial Statements. 2) Long Term Loans The balance of long-term financial liabilities of the Company on September 30, 2016 and December 31, 2015, is approximately NIS 43,164 million, and NIS 45,273 million, respectively, detailed as follows: As at September 30, 2016 As at December 31, 2015 Millions of NIS Liabilities in Index-Linked NIS Debentures to the public... 3,788 1,414 Private debentures 6,859 9,283 Debentures to the State of Israel... 2,511 2,511 Loans Total Linked NIS Liabilities... (1) 13,454 13,553 Non-linked NIS Liabilities Debentures to the public... 2, Private debentures Loans ,250 Total Non-Linked NIS... 3,206 2,344 Dollar Linked Liabilities Money raised from a private offering for the sale of debentures in the US... 2,687 2,790 Loans... (2) 3,573 3,971 Offering debentures to institutional investors in Europe and the US, listed for trade on the Singapore stock exchange... 18,414 19,120 Total Liabilities Linked to US Dollars... 24,674 25,881 Money raised from a private offering for the sale of debentures in Japan in Yen... 2,790 2,430 Loans in Euros... 1,478 1,639 Total... 45,602 45,847 Premiums, discount and deferred expenses Classification into current maturities (5,039) (2,431) Long term hedge transactions... 1,848 1,596 Unification of the Coal Company and financial lease classification (16) Total debentures, liabilities to banks, debentures to the State of Israel and long term liabilities to the State of Israel... 43,164 45,273 (1) Including loans and debentures guaranteed by the State of Israel totaling NIS 1,011 million as of September 30, 2016, and NIS 1,058 million as of December 31, (2) Including loans guaranteed by the State of Israel totaling NIS 502 million as of September 30, 2016, and NIS 551 million as of December 31,

33 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 a. Explanations of the Board of Directors on the Business Condition of the Company (continued) 5. Liquidity for the Reporting Period (continued) b) Financing Sources (continued) 2) Long-Term Loans (continued) Details of Loans Recorded in the Company's Books, Secured by a State Guarantee are as follows: Contract Details Source Currency Balance in NIS in Millions as of September 30, 2016 Weighted Interest* Date of final repayment Loan from Citi Bank $ June 17, 2025 Debenture series 25 NIS 1, July 9, 2017 Total 1,513 * Weighted interest, since the loan was received in several installments. The Interest includes a guarantee commission. 3) Average Long Term Credit as of September 30, 2016 The average credit for the reporting periods was approximately NIS 47,185 million and is mainly long term loans and debentures (including hedging transactions, deferred, premium/discount of debentures). 4) Suppliers and Customers Credit Days As of September 30 As of December Credit Credit Credit average average average (**) Days (**) Days (**) Trade payables , , ,707 Trade receivables with neutralization of past system cost debt, see Note 4.a.1 to the financial statements (*) , , ,096 Trade receivables excluding the debts of the Palestinian Authority and the East Jerusalem Electricity Company (see Note 4 to the Financial Statements)(*) , , ,662 (*) The credit days presented above represent the credit days from the invoice issue date until the payment date. (**) In NIS millions. 21

34 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 b. Details about the Exposure to Market Risks and their Management 1. No material changes occurred in this issue with respect to the disclosure provided on the subject in the report of the Board of Directors of December 31, Linkage Basis Report (continued) As on September 30, 2016 (in NIS million) Linkage to US$ Linkage to Euro Linkage to Japanese Yen Linkage to CPI * Unlinked Non-financial Total Assets Cash and cash equivalents ,470-5,684 Short term investments Trade receivables for sale of electricity ,654-4,654 Accounts receivable Inventory fuels Inventory stores Long term inventory fuels ,101 1,101 Long term receivables Investment in an included company Assets with respect to post-employment benefits ,462 7,462 Fixed assets, net ,328 61,328 Intangible assets, net ,280 1,280 Debit balances of regulatory deferral accounts ,708 1,708 Total ,408 74,063 85,913 * Including adjustments to fair value of hedge transactions (including with respect to credit risk). 22

35 b. Details about the Exposure to Market Risks and their Management (continued) 2. Linkage Basis Report (continued) THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 Liabilities Linkage to US$ Linkage to Euro Linkage to Japanese Yen As on September 30, 2016 (in NIS million) Linkage to CPI * Unlinked Non-financial Total Credit from banks and other credit providers... 2, , ,294 Trade payables ,393-1,830 Accounts payable and accruals ,132-1,778 Provisions Advances from work orders less works in progress Debentures, liabilities to banks and others... 20,058 1,079 2,771 9,970 2, ,205 Liabilities with respect to long term hedging transactions... (20,852) (73) (1,990) 20,053 4,710-1,848 Liability to the State of Israel... 2, ,259 Debentures to the State of Israel , ,511 Liabilities with respect to other post-employment benefits ,792 2,792 Provision for refunding amounts to consumers ,836 2,836 Deferred taxes, net ,793 5,793 Capital ,104 18,104 Credit balances of regulatory deferral accounts ,649 2,649 Total... 4,628 1, ,427 10,865 33,778 85,913 Total, Net... (3,643) (1,198) (807) (34,180) (457) 40,285 - Exposure cover through hedging mechanism recognized in the electricity rate **... 2, (3,093) Total, net... (1,390) (358) (807) (37,273) (457) 40,285 - * Including adjustments to fair value of hedge transactions (including with respect to credit risk). ** As of January 1, 2016, the Company recognizes regulatory deferral account with respect to CPI linkage differentials for the foreign capital component in the financing of the fixed assets (approximately NIS 37 billion). The periodic impact with respect to the hedging mechanism is through the transaction in the balances of regulatory deferral accounts (and not through financing expenses). For details of the hedging mechanism see Note 15.e to the Annual Financial Statements. 23

36 b. Details about the Exposure to Market Risks and their Management (continued) 2. Linkage Basis Report (continued) THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 Linkage to US$ Linkage to Euro Linkage to Japanese Yen As of December 31, 2015 (in NIS million) Linkage to CPI* Un-linked Non-financial Total Assets Cash and cash equivalents ,343-2,524 Short term investments Trade receivables for sale of electricity ,145-4,145 Accounts receivable Inventory- fuels Inventory stores Long term inventory fuels ,124 1,124 Long term receivables ,659 Investment in an included company Assets with respect to post-employment benefits ,207 7,207 Fixed assets, net ,442 62,442 Intangible assets, net ,295 1,295 Debit balances of regulatory deferral accounts, net of tax Total... 1, ,456 74,022 83,400 * Including adjustments to fair value of hedge transactions (including with respect to credit risk). 24

37 b. Details about the Exposure to Market Risks and their Management (continued) 2. Linkage Basis Report (continued) THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 Linkage to US$ Linkage to Euro Linkage to Japanese Yen As of December 31, 2015 (in NIS million) Linkage to CPI* Un-linked Non-financial Total Liabilities Short term debentures and credit from banks and other credit providers , ,756 Trade payables ,304-1,753 Accounts payable and accruals ,020-1,877 Provisions Advances from work orders less works in progress Debentures, liabilities to banks and others... 22,742 1,233 2,412 9,884 2, ,331 Long term currency exchange transactions... (20,344) (113) (1,928) 19,395 4,586-1,596 Liability to the State of Israel... 2, ,591 Debentures to the State of Israel , ,511 Liabilities with respect to post-employment benefits ,732 2,732 Provision for refunding amounts due to restatement of the financial statements ,758 2,758 Deferred taxes, net ,788 5,788 Shareholders Equity ,694 16,694 Credit balances of regulatory deferral accounts, net of tax ,791 1,791 Total... 6,475 1, ,864 9,505 31,555 83,400 Total, Net... (5,217) (1,284) (505) (33,412) (2,049) 42,467 - Exposure cover through hedging mechanism recognized in the electricity rate (**)... 2, (3,189) Total... (2,877) (435) (505) (36,601) (2,049) 42,467 - * Including adjustments to fair value of hedge transactions (including with respect to credit risk). ** Regarding the exposure to the CPI following the transition to IFRS see Note 3.d. to the Annual Financial Statements. The periodic impact with respect to the hedging mechanism is through the transaction in the balances of regulatory deferral accounts (and not through financing expenses). For details of the hedging mechanism see Note 15.e to the Annual Financial Statements. 25

38 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 b. Details about the Exposure to Market Risks and their Management (continued) 3. Risk according to Fair Value a) Risk according to Fair Value with respect to interest rates Loans bearing fixed interest rates expose the Company to fair value risk from interest rates. Interest rates sensitivity analysis: Sensitivity analysis is determined based on exposure to interest rates of derivative and non-derivative financial instruments as of the statement of financial position date. Sensitivity analysis of liabilities bearing variable interest is prepared under the assumption that the amount of the liability as of the statement of financial position date was repaid on the contractual repayment date. Sensitivity analysis was conducted according to the fair value of the financial instruments and not according to their book value. Sensitivity Analysis according to Fair Value as of September 30, 2016: (Profit) loss from increase in market factor Fair Value (Profit) loss from decrease in market factor Increase of 200 base Decrease of 200 base points* +10% +5% -5% -10% points* NIS in millions Financial liabilities Long term loans at fixed interest rate (209) (28) (14) 3, Long term loans at variable interest rate , Negotiable debentures (752) (97) (48) 6, Non-negotiable debentures (3,021) (533) (269) 35, ,738 Debentures to the State of Israel (922) (269) (141) 2, ,451 Swap transactions (see details below **) (233) ,625 (25) (58) 300 Forward transactions Total (5,137) (854) (431) 53, ,639 * The Company has chosen to state the size of the change in interest, for which stress tests for financial instruments sensitive to change in interest rate will be performed, at a rate of 200 base points (2%), after checking and not finding a higher daily absolute change of the interest rate during the ten years preceding the report, and after estimating that a change of 200 base points is a change that can occur in an acute but plausible scenario at the same interest. In an increase of 100 base points, the total decrease in the fair value financial instruments amounted to NIS 2,747 million, and in a decrease of 100 base points, the total increase in the fair value of financial instruments amounted to NIS 3,322 million. **Detailed sensitivity analysis of the swap transactions presented in the books at fair value. 26

39 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 b. Details about the Exposure to Market Risks and their Management (continued) 3. Risk according to Fair Value (continued) a) Risk according to Fair Value with respect to interest rates (continued) (Profit) loss from increase in market factor Fair Value (Profit) loss from decrease in market factor Change in interest % Increase of 200 base Decrease of 200 base points* +10% +5% -5% -10% points* NIS in millions Hedging transactions NIS (359) 4 2 1,903 (2) (5) 453 Linked NIS (1,681) (44) (18) 22, ,958 Dollar 1, (20,715) (52) (103) (1,761) Euro (74) - - (1) Yen (2,434) (5) (10) (349) Total (233) ,625 (25) (58)

40 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 b. Details about the Exposure to Market Risks and their Management (continued) 3. Risk according to Fair Value (continued) a) Risk according to Fair Value with respect to interest rates (continued) Sensitivity Analysis according to Fair Value as of December 31, 2015 (Profit) loss from increase in market factor Fair Value (Profit) loss from decrease in market factor Change in % Increase of 200 base Decrease of 200 base points* +10% +5% -5% -10% points* NIS in millions Financial liabilities Long term loans at fixed interest rate (245) (46) (23) 3, Long term loans at variable interest rate , Negotiable debentures (159) (17) (9) 2, Non-negotiable debentures (3,202) (673) (341) 38, ,870 Debentures to the State of Israel (1,230) (320) (167) 3, ,104 Swap transactions (see details below **) (209) ,219 (35) (79) 277 Forward transactions (75) Total (5,045) (961) (488) 52, ,085 8,716 * The Company has chosen to state the size of the change in interest, for which stress tests for financial instruments sensitive to change in interest rate will be performed, at a rate of 200 base points (2%), after checking and not finding a higher daily absolute change of the interest rate during the ten years preceding the report, and after estimating that a change of 200 base points is a change that can occur in an acute but plausible scenario at the same interest. In an increase of 100 base points, the total decrease in financial instruments will amount to NIS 2,732 million, and in a decrease of 100 base points, the total increase in financial instruments will amount to NIS 3,492 million. ** Detailed sensitivity analysis of swap transactions presented in the books at fair value. (Profit) loss from increase in market factor Fair Value (Profit) loss from decrease in market factor Change in interest % Increase of 200 base Decrease of 200 base points* +10% +5% -5% -10% points* NIS in millions Hedging transactions NIS (325) (20) (10) 1, Linked NIS (1,601) (30) (11) 21, ,859 Dollar 1, (19,977) (69) (139) (1,671) Euro (114) - 1 (2) Yen (2,294) (3) (7) (325) Total (209) ,219 (35) (79)

41 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 b. Details about the Exposure to Market Risks and their Management (continued) 3. Risk according to Fair Value (continued) b) Risk according to currency: 1) As of September 30, 2016 Loss (profit) from increase in market factor Fair value Loss (profit) from decrease in market factor Market factor: Dollar 10% 5% (5%) (10%) NIS in millions Financial assets: Cash and cash equivalents and short term investments (19) (10) (192) Short term and long term receivables (79) (40) (793) Financial liabilities: Payables (18) (36) Loans and debentures 2,848 1,424 28,483 (1,424) (2,848) Hedging transactions: * NIS - Dollar swap or NIS linked - Dollar swap (2,357) (1,179) (23,573) 1,179 2,357 Total ,284 (213) (429) * The fair value of the Dollar side alone of the hedging transactions appears in the sensitivity tests, the total fair value of hedging transactions against the Dollar is a liability of NIS 1,308 million (without the credit risk component). Loss (profit) from increase in market factor Fair value Loss (profit) from decrease in market factor Market factor: Euro 10% 5% (5%) (10%) NIS in millions Financial assets: Cash and cash equivalents (21) (11) (210) Financial liabilities: Payables (4) (8) Loans and debentures ,478 (74) (148) hedging transactions: * NIS linked - Euro swap (7) (4) (74) 4 7 Total ,272 (63) (128) * The fair value of the Euro side alone of the hedging transactions appears in the sensitivity tests, the total fair value of hedging transactions against the Euro is a liability of NIS 15 million (without the credit risk component). 29

42 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 b. Details about the Exposure to Market Risks and their Management (continued) 3. Risk according to Fair Value (continued) b) Risk according to currency (continued): 1) As of September 30, 2016 (continued) Loss (profit) from increase in market factor Fair value Loss (profit) from decrease in market factor Market factor: Yen 10% 5% (5%) (10%) NIS in millions Financial liabilities: Loans and debentures ,212 (161) (321) Hedging transactions: * NIS linked - Yen swap (243) (122) (2,434) Total (39) (78) * The fair value of the Yen side alone of the hedging transactions appears in the sensitivity tests, the total fair value of hedging transactions against the Yen is NIS 692 million (without the credit risk component). (a) The sensitivity analysis does not include the effect of the hedging on the rate, but part of the costs, with respect to exposure or linkage to foreign currency, are covered in the current electricity rate. (b) For information regarding the exposure of the financial instruments to foreign currency according to their book value see Note b.2 above - linkage base report. 2) As of December 31, 2015: Loss (profit) from increase in market factor Fair value Loss (profit) from decrease in market factor Market factor: Dollar 10% 5% (5%) (10%) NIS in millions Financial assets: Cash and cash equivalents (18) (9) (181) 9 18 Short term investments (20) (10) (195) Long and short term receivables (77) (39) (771) Financial liabilities: Payables (19) (39) Short term loans (9) (18) Loans and debentures 2,876 1,438 28,760 (1,438) (2,876) Swap transactions(*): NIS or NIS linked - Dollar swap (2,271) (1,136) (22,711) 1,136 2,271 Total ,469 (272) (547) * The fair value alone of the Dollar side of the hedge transactions is presented in the sensitivity tests. The total fair value of the hedge transactions against the Dollar is a liability of NIS 365 million (without the credit risk component). 30

43 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 b. Details about the Exposure to Market Risks and their Management (continued) 3. Risk according to Fair Value (continued) b) Risk according to currency (continued): 2) As of December 31, 2015: (continued) Loss (profit) from increase in market factor Fair value Loss (profit) from decrease in market factor Market factor: Euro 10% 5% (5%) (10%) NIS in millions Financial Assets: Cash and cash equivalents (21) (11) (212) Financial liabilities: Payables (3) (6) Loans and debentures ,639 (82) (164) Hedge transactions (*): NIS linked - Euro swap (11) (6) (113) 6 11 Total ,376 (68) (138) * The fair value alone of the Euro side of the hedge transactions is presented in the sensitivity tests. The total fair value of the hedge transactions against the Euro is a liability of NIS 21 million (without the credit risk component). Loss (profit) from increase in market factor Fair value Loss (profit) from decrease in market factor Market factor: Yen 10% 5% (5%) (10%) NIS in millions Financial liabilities: Loans and debentures ,567 (128) (257) Hedge transactions (*): NIS linked - Yen swap (229) (115) (2,294) Total (13) (28) * The fair value alone of the Yen side of the hedge transactions is presented in the sensitivity tests. The total fair value of the hedge transactions against the Yen is a liability of NIS 1,073 million (without the credit risk component). (a) Analyzing the sensitivity does not include the effect of the hedging for part of the costs with respect to exposure or linkage to foreign currency which is covered in the current electricity rate. (b) For information regarding the exposure of the financial instruments to foreign currency according to their book value see Note b.2. above - linkage base report. 31

44 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 b. Details about the Exposure to Market Risks and their Management (continued) 3. Risk according to Fair Value (continued) c) Risk with respect to commodity markets: 1) Sensitivity tests for the fair value of fuels inventory as of September 30, 2016: Change in price Change in price Fair value in NIS 20% 10% 5% millions (5%) (10%) (20%) Crude (9) (18) (35) Diesel oil (15) (30) (59) Coal (27) (54) (108) Liquid gas LNG (3) (6) (11) Total ,066 (54) (108) (213) 2) Sensitivity tests for the fair value of fuels inventory as of December 31, 2015: Change in price Change in price Fair value in NIS 20% 10% 5% millions (5%) (10%) (20%) Crude (6) (12) (23) Diesel oil (11) (22) (44) Coal (28) (56) (112) Liquid gas LNG (1) (2) (3) Total (46) (92) (182) Remarks: * The presented fair value is in forecasted pre-tax sale value. ** It is noted that the Company purchases fuels for its own use only and cannot sell fuels for commercial purposes (except in exceptional cases with special approval and for operating needs). 32

45 c. Aspects of Corporate Governance THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, Contributions The Company is prevented from making contributions in light of Companies Authority directives. 2. Directors possessing accounting and financial expertise On May 26, 2016, the Board of Directors determined the accounting and financial expertise of the director Ms. Orli Garti Seroussi, and thus the number of directors possessing accounting and financial expertise has risen to five, as required by the minimal number set by the Board of Directors of the Company. 3. Independent Directors On the subject of independent directors, there were no changes to the information included in the Board of Directors Report of December 31, The Internal Audit No material changes occurred relating to the disclosure provided with respect to the internal auditor in the report of the Board of Directors of the Company of December 31, Following are details regarding the activity of the internal auditor during the report period: During January - September 2016, 78 reports were distributed: 37 audit reports and 41 supervision reports. During this period, the Audit Committee of the Board of Directors held 8 discussions on the reports of the internal audit, February 18, 2016, March 24, 2016, April 7, 2016, May 19, 2016, June 30, 2016, August 4, 2016, August 18, 2016, and September 1, In February, 2016, the internal audit s 2015 annual report was submitted to the Company CEO, Audit Committee and the Board of Directors. The annual report, which summarizes the internal audit s activity for 2015, was discussed in February 2016 by the Audit Committee and the plenum of the Board of Directors. 5. Internal Enforcement Plan On October 15, 2015, the Companies Authority issued a circular with the criteria for examining applications to grant advance commitment to indemnify officeholders in government companies. The document includes the details, inter alia, of the criteria the Authority will consider when formulating its recommendation to ministers regarding the commitment to grant indemnification to officeholders, which also include adoption and implementation of an internal enforcement plan in government companies by the Company pursuant to that stated in the document. In its decision of March 29, 2016, the Board of Directors decided to adopt the recommendation of the Corporate Responsibility and Regulation Committee of March 17, 2016, and to approve a unified internal enforcement plan in the securities laws and companies and government companies laws, and to appoint the Company s Legal Counsel, Adv. Yael Nevo, as supervisor of its enforcement in the Company, as part of the unified plan for securities and government companies. It was further determined that a discussion will be held every quarter by the Corporate Responsibility Committee, on the subject of the enforcement plan in the Company, regarding government companies, and that the Board of Directors will hold a discussion every half year, together with a discussion regarding the enforcement plan for securities. The outline of the Company s enforcement plan for government companies was sent to the Companies Authority and its comments thereon are being reviewed and handled by the Company. For details regarding letters of undertaking to indemnify granted by the Company to directors and officeholders serving therein, see Note 34.f. to the Annual Financial Statements. 33

46 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 c. Aspects of Corporate Governance (continued) 6. Financial Statements Approval Process a) No material changes occurred on the subject of the financial statements approval process in respect of the disclosure provided in the Report of the Board of Directors of December 31, b) As part of the discussion on the subject of the Financial Statements at September 30, 2016, the Committee for Reviewing the Financial Statements held two meetings: The following attended the meeting held on November 17, 2016: Accountant Arie Rapoport, Chairman of the Committee, Accountant Raiek Abu Rish Member of the Committee, Adv. Arik Forer, 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 law firm of Herzog Fox Neeman, representatives of the Companies Authority, and the financial advisors of the Company. The following attended the meeting held on November 22, 2016: Accountant Arie Rapoport Chairman of the Committee, Accountant Raiek Abu Rish Member of the Committee, Adv. Arik Forer 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 law firm of Herzog Fox Neeman, representatives of the Companies Authority, and the financial advisors of the Company. c) 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 a reasonable time prior to the meeting of the Board of Directors. The Board of Directors determined that at least two business days is a reasonable period of time for the committee to deliver its recommendations, except in unusual circumstances, in which the committee s recommendation will be delivered to the Board of Directors in a shorter time period prior to the Board meeting and the Board of Directors will approve since this shall be deemed as a reasonable period of time in these circumstances. After receiving the committee's recommendations the Board of Directors discussed the Company's Financial Statements and significant issues related to financial reporting. The Company management presented 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 November 24, 2016 the Board of Directors approved the financial statements as of September 30, 2016 in accordance with the recommendation of the Committee. 34

47 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 c. Aspects of Corporate Governance (continued) 7. The Link between Rewards to Senior Position Holders and Interested Parties in the Company and Their Contribution to the Company Further to the disclosure in section C.8 of the Board of Director s report of December 31, 2015, the compensation policy for 2016 was approved on March 10, 2016 by the Compensation Committee and on April 13, 2016 by the Board of Directors. It should be noted that the Company s Compensation Committee and Board of Directors, in their separate meetings of November 24, 2016, approved a retrospective update of one from among five Company goals for 2015, as it appears in the Company s 2015 compensation model. The goal which was updated deals with a maximum number of minutes of power supply failure and its update derives from the special circumstances which prevailed in 2015 and which were exogenous to the Company and not under its control, particularly the extreme and exceptional weather conditions prevailing in that year, which led to severe disruptions in the electricity supply and thus impacted the fulfillment of this goal. Following the amendment of this goal, as well as following a clarification by the Company s Compensation Committee and Board of Directors regarding the manner of calculating the grade with respect to the goal of operating profit, the Company will meet the annual grade which was set as a threshold for the Company to grant compensation based on goals in The maximum bonus the Company is permitted to grant to its office holders (who are not directors) with respect to 2015, is up to 3.2 salaries for one office holder as well as 0.25 salaries for up to 25% of the office holders and according to the decision of the CEO. It is clarified that paying the bonus is subject to the approval of the Companies Authority, which has not yet been received. 8. External Auditors of the Company Further to the disclosure in section C.9 of the Board of Directors' Report dated December 31, 2015, on June 21, 2016, the Company received the approval of the Companies Authority regarding the appointment and employment of Somekh Chaikin as the auditors of the Company and thereby this appointment has come into effect. 35

48 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 d. Instructions for Disclosure Related to the Financial Reporting of the Company 1. The Financial Reporting of the Company As of January 1, 2015, the Company fully implements international accounting principles. The Condensed Consolidated Interim Financial Statements as of September 30, 2016 were prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, and in accordance with the provisions of Chapter D of the Securities Regulations (Periodic and Immediate Reports) , and include additional information pursuant to the provisions of the Government Companies Authority (section 33.b. to the Government Companies Law). The Company consolidates 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, see Note 2 to the Annual Financial Statements and Note 2.e. to the 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 11 to the Financial Statements. 36

49 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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 d 4 of the Report of the Board of Directors as of December 31, b) The Company has a highly material valuation regarding actuarial liability with respect to benefits for employees in accordance with IAS 19. Identifying the evaluation subject Evaluation date: September 30, 2016 The value of the subject of the valuation determined in accordance with the evaluation Assessor identity and characteristics thereof Dependence on the actuary requester The valuation model used by the appraiser The assumptions under which the evaluation assessor made the valuation, in accordance with the evaluation model: The organ in the Company which decided on the agreement with the appraiser Actuarial obligation with respect to employee benefits in accordance with International Accounting Standard 19 (IAS 19) NIS 26,893 million The evaluation was performed by Alan Fefferman - Actuarial Services Ltd by 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. The actuary of the Company is not dependent on the work or the Company, 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. Discounted Cash Flow (hereinafter: DCF ) The real weighted interest rate inherent in the present value of the liability % A real update of salaries during the period of work - individual salary development model of active employees including a salary increase with respect to current salary agreements, a feasible amendment of the pension amounts following the termination of employment pension development model, from January 2012 the pensions are linked to the CPI, the actual linkage of pensions to the CPI began in January, 2013 (in accordance with the annual change in the CPI in 2012), and in the future pensioner and survivor mortality, including the updating of the mortality data, will be in accordance with the Ministry of Finance circular dated July 11, Other actuarial assumptions - see actuary opinions in Appendix A. Head of Accounting and Finance Division 37

50 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 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 there are no warning signs, detailed in Regulation 10 (b) (14) (a) of the Securities Regulations, which apply to the Company. The Company has operating cash flow for the report period amounting to approximately NIS 5,940 million, balance of cash as of September 30, 2016 amounting to NIS 5,684 million, and the Company has positive working capital as of September 30, 2016 in the amount of approximately NIS 2,277 million. For details regarding the decision of the Board of Directors pertaining to the safety cushion see section a.1.c)4). 5. Evaluations of the Effectiveness of Internal Controls and Disclosure Controls over the Financial Statement: No material changes have taken place in Evaluations of the Effectiveness of Internal Controls and Disclosure Controls over financial reporting compared to that detailed in the Board of Directors report as of December 31,

51 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 e. Dedicated Disclosure to Debentures Holders - Details of Debentures of the Group Traded in Israel Following are details regarding the debentures as of September 30, 2016, as required by the eighth supplement to the Securities Regulations: No material changes occurred during the reporting period in the details of the debentures as detailed in section e of the Report of the Board of Directors of December 31, 2015 and as required by the eighth supplement to the Securities Regulations, except for the following information: Debenture series Series 25 Series 26 Series 27 Nominal value as of September 30, 2016 (NIS) 1,000,000,000 2,259,398,000 2,777,023,000 Revaluated nominal value in accordance with linkage conditions for 1,010,879,392 2,259,398,000 2,777,023,000 September 30, 2016 (NIS) Accumulated interest as of September 30, 2016 (NIS) 2,729,374 50,610,515 49,893,847 Stock exchange value on September 30, 2016 (NIS) 1,018,500,000 2,604,182,135 3,193,576,450 Rating ilaa (Ma alot S&P) ilaa (Ma alot S&P) Aaa.il (Midroog) Aa2.il (Midroog) Aa2.il (Midroog) Existence of liabilities deriving from terms of the debentures (series 25, 26 and 27) 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. For details regarding the expansion of the debentures (series 26) and debentures (series 27) during the report period see Note 7.a. to the Financial Statements. 39

52 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 f. Miscellaneous 1. Environmental Plan, Environmental Hazards and Management thereof For details regarding environmental hazards and their management, particularly pertaining to emission permits received in September 2016 for the Company s coal powered power stations, pursuant to the Clean Air Law, see Note 1.g. to the Financial Statements. 2. Dividend Distribution and Appropriation of Income See details on this subject in Section 4 of Chapter A - Report of Description of the Company's Business 2015, and in Note 26 to the Annual Financial Statements. 3. Taxation For details see Note 8 to the Financial Statements, and Note 22 to the Annual Financial Statements. 4. Legal Proceedings and Labor Disputes See Note 10.b. and 10.c. to the Financial Statements. 5. Agreements including Agreements Requiring Government Approval For details of the contractual engagements of the Company see Note 10.a. to the Financial Statements. 6. Limitations and Supervision on Activities of the Company See Sections 7.11, 8.9, 9.11, and 21 in the report Chapter A- Description of the Company's Business Affairs for 2015, and sections and 6.5 of Chapter A - Update of Description of the Company's Business of September 30, Transactions of the Company with Related Parties and Interest Holders, Including Indemnification Letters For details see Note 34 to the Annual Financial Statements. 8. Discussion of Risk Factors For details see Section 28 in Chapter A of the Report of Description of the Company's Business Affairs for The State Comptroller s Report For details of the State Comptroller s report see section in Chapter A - Report of Description of the Business Affairs of the Corporation for

53 THE ISRAEL ELECTRIC CORPORATION LIMITED BOARD OF DIRECTORS' REPORT ON THE STATUS OF THE COMPANY'S AFFAIRS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 The Board of Directors and Management wish to express their appreciation to the Company s employees and its managers. Ofer Bloch Chief Executive Officer Yiftah Ron-Tal Chairman of the Board of Directors Date of Approval: November 24,

54 The Israel Electric Corporation Ltd. Supplement Additional Report Regarding the Effectiveness of the Internal Control Over Financial Reporting For the Nine and Three Months Ended September 30, 2016

55 Prominent Disclaimer This English translation of the Additional Report Regarding the Effectiveness of the Internal Control Over Financial Reporting for the nine months ended September 30, 2016 ("English Translation") is provided for information purposes only. In the event of any conflict or inconsistency between the terms of this English Translation and the original version prepared in Hebrew, the Hebrew version shall prevail and holders of the Notes should refer to the Hebrew version for any and all financial information relating to the Company. The Company, its Directors and its Auditors make no representations as to the accuracy and reliability of the financial information in this English Translation, save that the Company and its Directors represent that reasonable care has been taken to correctly translate and reproduce such information, yet notwithstanding the above, the translation of any technical terms are, in the absence of generally agreed equivalent terms in English, approximations to convey the general sense intended in the Hebrew version. The Company reserves the right to effect such amendments to this English Translation as may be necessary to remove such conflict or inconsistency.

56 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 nine month period, ended on September 30, 2016, 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 Senior Vice-President of Finances and Economics November 24, 2016 Ofer Bloch Chief Executive Officer Yiftah Ron-Tal Chairman of the Board of Directors

57 The Israel Electric Corporation Ltd. Chapter C Condensed Consolidated Interim Financial Statements (Unaudited) For the Nine and Three Months Ended September 30, 2016

58 Prominent Disclaimer This English translation of the Condensed Consolidated Interim Financial Statements for the nine and three months ended September 30, 2016 ("English Translation") is provided for information purposes only. In the event of any conflict or inconsistency between the terms of this English Translation and the original version prepared in Hebrew, the Hebrew version shall prevail and holders of the Notes should refer to the Hebrew version for any and all financial information relating to the Company. The Company, its Directors and its Auditors make no representations as to the accuracy and reliability of the financial information in this English Translation, save that the Company and its Directors represent that reasonable care has been taken to correctly translate and reproduce such information, yet notwithstanding the above, the translation of any technical terms are, in the absence of generally agreed equivalent terms in English, approximations to convey the general sense intended in the Hebrew version. The Company reserves the right to effect such amendments to this English Translation as may be necessary to remove such conflict or inconsistency.

59 TABLE OF CONTENTS PAGE CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION... 9 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF PROFIT (LOSS) AND OTHER COMPREHENSIVE INCOME (LOSS) CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOW NOTE 1 - GENERAL NOTE 2 - REPORTING RULES AND ACCOUNTING POLICIES NOTE 3 - THE ELECTRICITY RATE NOTE 4 - TRADE RECEIVABLES FOR SALES OF ELECTRICITY NOTE 5 - POST EMPLOYMENT EMPLOYEE BENEFITS NOTE 6 - BALANCE OF REGULATORY DEFERRAL ACCOUNTS NOTE 7 - DEBENTURES AND LIABILITIES TO BANKS NOTE 8 - DEFERRED TAXES NOTE 9 - REVENUES NOTE 10 - AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES, LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY NOTE 11 - FINANCIAL INSTRUMENTS NOTE 12 - SEGMENTAL REPORTING NOTE 13 - ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION NOTE 14 - ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY... 76

60

61

62 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 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 nine months and three months ended September 30, 2016 ("the reports"). 2. To the best of my knowledge and after reviewing the reports, they do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the reports. 3. To the best of my knowledge and after reviewing the reports, the Financial Statements and other financial information included in the Directors Report fairly present, in all material respects, the financial condition, results of operations, changes in equity and cash flows of the Company as of, and for, the periods presented in the reports. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Company. Accordingly, we have designed such disclosure controls and procedures, or had established under our charge such disclosure controls and procedures, designed to ensure that material information relating to the Company is made known to us by others in the Company particularly during the period in which the reports were prepared. 5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's Board of Directors, based on our most recent evaluation: a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information. b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting. There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to any law. November 24, 2016 Avi Doitchman Senior Vice-President of Finance and Economics 6

63 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, Ofer Bloch, 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 nine months and three months ended September 30, 2016 ("the reports"). 2. To the best of my knowledge and after reviewing the reports, they do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the reports. 3. To the best of my knowledge and after reviewing the reports, the Financial Statements and other financial information included in the Directors Report fairly present, in all material respects, the financial condition, results of operations, changes in equity and cash flows of the Company as of, and for, the periods presented in the reports. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Company. Accordingly, we have designed such disclosure controls and procedures, or had established under our charge such disclosure controls and procedures, designed to ensure that material information relating to the Company is made known to us by others in the Company particularly during the period in which the reports were prepared. 5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's Board of Directors, based on our most recent evaluation: a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information. b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting. There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to any law. November 24, 2016 Ofer Bloch Chief Executive Officer 7

64 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, 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 nine months and three months ended September 30, 2016 ("the reports"). 2. To the best of my knowledge and after reviewing the reports, they do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the reports. 3. To the best of my knowledge and after reviewing the reports, the Financial Statements and other financial information included in the Directors Report fairly present, in all material respects, the financial condition, results of operations, changes in equity and cash flows of the Company as of, and for, the periods presented in the reports. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Company. Accordingly, we have designed such disclosure controls and procedures, or had established under our charge such disclosure controls and procedures, designed to ensure that material information relating to the Company is made known to us by others in the Company particularly during the period in which the reports were prepared. 5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's Board of Directors, based on our most recent evaluation: a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information. b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting. There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to any law. November 24, 2016 Yiftah Ron-Tal Chairman of the Board of Directors 8

65 CURRENT ASSETS THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF FINANCIAL POSITION (NEW ISRAELI SHEKELS, IN MILLIONS) As of As of September 30 December 31 Note Unaudited Audited Cash and cash equivalents... 5,684 1,337 2,524 Short term investments Trade receivables for sales of electricity ,654 5,145 4,145 Other current assets Inventory - fuel Inventory - stores Total current assets... 12,193 9,247 8,762 NON-CURRENT ASSETS Inventory - fuel... 1,101 1,230 1,124 Long-term receivables ,734 1,659 Investment in associate Assets with respect to benefits after 5 employment termination: Excess pension plan assets over pension liability... 5,817 4,992 5,286 Funds in trust... 1,645 1,908 1,921 7,462 6,900 7,207 Fixed assets, net Fixed assets in use, net... 53,991 56,062 55,636 Fixed assets under construction... 7,337 6,677 6,806 61,328 62,739 62,442 Intangible assets, net... 1,280 1,263 1,295 Total non-current assets... 72,012 73,945 73,801 Total assets... 84,205 83,192 82,563 Debit balances of regulatory deferral accounts ,708 1, Total assets and debit balance of regulatory deferral accounts... 85,913 84,560 83,400 The accompanying notes are an integral part of the Financial Statements. 9

66 CURRENT LIABILITIES THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF FINANCIAL POSITION (NEW ISRAELI SHEKELS, IN MILLIONS) As of As of September 30 December 31 Note Unaudited Audited Credit from banks and other credit providers... 5,294 2,819 2,756 Trade payables... 1,830 2,108 1,753 Other current liabilities... 1,778 1,637 1,877 Customer advances, net of work in progress Provisions Total current liabilities... 9,916 7,790 7,608 NON CURRENT LIABILITIES Debentures ,056 35,175 34,923 Liabilities to banks ,338 5,355 5,248 Liabilities with respect to other benefits after employment termination ,792 2,795 2,732 Provision for refunding amounts to consumers... 2,836 2,740 2,758 Deferred taxes, net ,793 5,811 5,788 Debentures to the State of Israel... 2,511 2,529 2,511 Liability to the State of Israel... 2,259 2,691 2,591 Other liabilities Total non-current liabilities... 55,244 57,735 57,307 Total liabilities... 65,160 65,525 64,915 EQUITY Share capital Capital reserves Capital re-measurement reserve Retained earnings... 16,399 14,745 14,712 Total equity... 18,104 16,777 16,694 Total liabilities and equity... 83,264 82,302 81,609 Credit balances of regulatory deferral accounts ,649 2,258 1,791 Total liabilities, equity and credit balance of regulatory deferral accounts... 85,913 84,560 83,400 The accompanying notes are an integral part of the Financial Statements. Mr. Avi Doitchman Senior Vice-President of Finance and Economics Mr. Ofer Bloch Chief Executive Officer Yiftah Ron-Tal Chairman of the Board of Directors Date of approval of the Financial Statements: November 24,

67 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF PROFIT (LOSS) AND OTHER COMPREHENSIVE INCOME (LOSS) (NEW ISRAELI SHEKELS, IN MILLIONS) For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December 31 Note Unaudited Audited Consolidated Statements of Profit (Loss): Revenues ,512 17,839 7,052 7,192 23,058 Cost of operating the electricity system: Fuels... 5,526 6,576 2,117 2,629 8,440 Purchases of electricity... 2,491 1, ,653 Operation of the generation system... 3,093 2,961 1, ,042 Operation of the transmission and distribution system... 2,238 2, ,151 13,348 13,785 4,867 5,214 18,286 Profit from operating the electricity system.. 4,164 4,054 2,185 1,978 4,772 Sales and marketing expenses Administrative and general expenses Expenses (income) for liabilities to pensioners... (327) 515 (32) (17) , ,198 Profit from current operations... 3,263 2,275 1,787 1,611 2,574 Financing expenses, net... 1,466 1, ,778 Profit before income taxes... 1, ,292 1, Taxes on income: Other deferred taxes Revenues from adjustment of deferred taxes balances due to change of tax rate... 8 (332) Profit after income tax... 1, Company s share of the loss of associated company... (3) (7) (1) (5) (12) Income before transaction in balances of regulatory deferral accounts... 1, Movement in regulatory deferral accounts balances, net of tax (297) (344) Profit for the period... 1, ,111 1, Consolidated Statements of Other Comprehensive Income (Loss): Amounts that will be attributed in the future to the Statement of Profit (Loss): Profit (loss) with respect to cash flow hedging, net of tax... (17) 10 (45) 7 (13) Amounts that will not be attributed in the future to the Statement of Profit (Loss): Re-measurement of a defined benefit plan, 5 l, 8 net of tax... (260) 158 (46) (328) 131 Other comprehensive income (loss)for the period, net of tax (277) 168 (91) (321) 118 Comprehensive income for the period... 1, , The accompanying notes are an integral part of the Financial Statements. 11

68 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF CHANGES IN EQUITY (NEW ISRAELI SHEKELS, IN MILLIONS) Paid-up share capital For the Nine Months ended on September 30, 2016 Capital reserves Capital re-measurement reserves Retained earnings Total Unaudited Balance as of January 1, ,712 16,694 Profit for the period ,687 1,687 Other comprehensive loss for the period... - (17) (260) - (277) Balance as of September 30, ,399 18,104 Paid-up share capital For the Nine Months ended on September 30, 2015 Capital reserves Capital re-measurement reserves Retained earnings Total Unaudited Balance as of January 1, ,489 16,353 Profit for the period Other comprehensive income for the period Balance as of September 30, ,745 16,777 Paid-up share capital For the Three Months ended on September 30, 2016 Capital reserves Capital re-measurement reserves Retained earnings Total Unaudited Balance as of July 1, ,288 17,084 Profit for the period ,111 1,111 Other comprehensive income (loss) for the period... - (45) (46) - (91) Balance as of September 30, ,399 18,104 Paid-up share capital For the Three Months ended on September 30, 2015 Capital reserves Capital re-measurement reserves Retained earnings Total Unaudited Balance as of July 1, ,703 16,056 Profit for the period ,042 1,042 Other comprehensive income (loss) for the period (328) - (321) Balance as of September 30, ,745 16,777 Paid-up share capital For the year ended on December 31, 2015 Capital reserves Capital re-measurement reserves Retained earnings Total Audited Balance as of January 1, ,489 16,353 Profit for the year Other comprehensive income (loss) for the year... - (13) Balance as of December 31, ,712 16,694 For details regarding assignment of profits and the dividend distribution policy see Note 26 to the Annual Financial Statements. The accompanying notes are an integral part of the Financial Statements. 12

69 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF CASH FLOW (NEW ISRAELI SHEKELS, IN MILLIONS) Cash flow from operating activities: For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December Unaudited Audited Profit before regulatory deferral accounts according to the statement of profit and loss... 1, Adjustments required to present cash flow from operating activities - Annex A... 4,263 4,760 1, ,057 Net cash provided by operating activities... 5,940 5,313 2,545 1,621 7,624 Cash flow for investment activities: Investment in fixed assets and intangible assets... (2,236) (2,387) (724) (836) (3,364) Proceeds from sale of fixed assets Trust funds withdrawals (see Note 5 k) Long-term receivables, net Change in bank deposits, net... (5) 1,605 (220) (87) 2,172 Net cash used in investing activities... (1,688) (527) (791) (802) (913) Cash flow for financing activities: Issuance of long-term debentures... 4, , Other long-term loans received , ,082 Repayment of long-term debentures... (2,984) (4,400) (1,499) (2,100) (4,430) Repayment of other long-term loans... (1,094) (2,993) (689) (194) (3,202) Proceeds (payment) from settlement of derivatives (239) (37) (107) (245) Change of short-term credit from banks, net... (67) (153) (13) 115 (196) Interest and commissions paid, net... (1,896) (2,117) (628) (692) (2,616) Net cash (used in financing activities) derived from financing activities... (1,092) (7,953) 440 (2,965) (8,691) Increase (decrease) in cash and cash equivalents... 3,160 (3,167) 2,194 (2,146) (1,980) Balance of cash and cash equivalents at the beginning of the period... 2,524 4,504 3,490 3,483 4,504 Balance of cash and cash equivalents at the end of the period... 5,684 1,337 5,684 1,337 2,524 Additional information about cash flow deriving from income tax payments: The accompanying notes are an integral part of the Financial Statements. 13

70 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF CASH FLOW (NEW ISRAELI SHEKELS, IN MILLIONS) ANNEX A - ADJUSTMENTS REQUIRED TO PRESENT CASH FLOW FROM OPERATING ACTIVITIES For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December Unaudited Audited Income and expenses not affecting cash flow: Loss from investment in an associate Depreciation and amortization... 3,612 3,473 1,301 1,185 4,716 Changes in deferred taxes, net Changes in liabilities with respect to employee benefits, net... (313) (14) Financing expenses recognized in statement of profit and loss... 1,466 1, ,778 Revaluation of debts collectible Capital loss on sale of fixed assets ,972 5,212 2,135 2,011 7,202 Changes in assets and liabilities: Changes in trade receivables for sales of electricity (including those presented in long-term receivables)... (9) (599) (249) (1,326) 401 Changes in other current assets (including long-term receivables)... (92) (140) (12) Changes in inventory (including noncurrent inventory) (6) Deposits in funds less payments to pensioners... (628) (962) (139) (577) (1,429) Changes in customer advances for work ordered, net of work in progress... (170) 55 (137) (2) 8 Changes in trade payables (including long term) (134) 292 (167) Changes in payables and credit balances and provisions... (121) (9) 335 (709) (452) (558) (1,273) (145) 4,263 4,760 1, ,057 The accompanying notes are an integral part of the Financial Statements. 14

71 NOTE 1:- GENERAL THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) 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 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 ) These condensed statements should be read in context with the Annual Financial Statements of the Company as of December 31, 2015, and for the year ended on that same date, and their accompanying Notes (hereinafter: the Annual Financial Statements ). b. The Electricity Sector Law 1) General For details of the provisions of the Electricity Sector Law, 1996 (hereinafter: the Electricity Sector Law ) and the relevant regulations, and details of the Electricity Authority s powers and duty, inter alia, pursuant to the amendment of the Electricity Law as detailed below, see Note 1.b.1) to the Annual Financial Statements. In this context it should be noted that on January 1, 2016, the amendment of the Electricity Law entered into effect (hereinafter: the Amendment to the Law ), within which a new authority, named the Electricity Authority, was established at the Ministry of National Infrastructures, Energy and Water, instead of the Public Utilities Authority - Electricity and the Electricity Administration at the Ministry of National infrastructures, Energy and Water. According to the aforesaid, in this report, the term Electricity Authority should be construed while paying attention to the dates it relates to - if it is about information relating to dates prior to January 1, 2016, it means the Public Utilities Authority - Electricity; and if it is about information relating to dates as of January 1, 2016 onward, it means the Electricity Authority which was established within the aforesaid Amendment to the Electricity Sector Law. 2) Presenting Separate Financial Statements as Required by the Implementation of the Electricity Sector Law For details of the provisions of the Electricity Sector Law, the relevant regulations, and the licenses of the Company, regarding the Company s duty to submit financial statements according to profit centers, see Note 1.b.2) to the Annual Financial Statements. 3) Reporting Costs of Electricity System Management Services (hereinafter: System Management ) as a Separate Segment Regarding the decisions of the Electricity Authority on the subject, see Note 3 e. to the Annual Financial Statements. 15

72 NOTE 1:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) GENERAL (continued) 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. Following are the main subjects affected by material decisions of the Government during the reporting period. 1) National Outline Plan - Tel Aviv Redding power station On March 7, 2016, the Ministerial Committee for Planning, Construction, Land and Housing reached a decision regarding approval of a National Outline Plan (hereinafter: NPO 3/a/10) - The Tel Aviv Redding power station, and on May 24, 2016, the approval of NPO 3/a/10 was published in the Official Gazette. The NPO regulates the areas of the Redding power station and determines its operation with natural gas as principal fuel and liquefied gas for times of necessity and emergency, with a production capacity of 428 megawatts. The plan determines the areas for the power station, the generation facilities and the service for its operation until January 1, The power station is supposed to stop operation at the end of this period. With the approval of the National Council, it is possible to postpone the shutdown date by five years - until The approval of the NPO may have material economic implications for the Company, inter alia: Financial expenses regarding, inter alia, alternative construction, clearing and duty to execute building conservation. Land value impairment and land expropriation; it is not known if the Company will be compensated for it. Additional environmental costs. The Company implements appropriate provisions in its financial statements with respect to the site s evacuation and preservation. 2) On April 10, 2016, a National Outline Plan was determined to implement goals for reduction of emissions and greenhouse gases and energy efficiency. For additional details regarding Government decisions pertaining to the electricity sector and the Company s operation see Note 1.c 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, 1975 (hereinafter: the Government Companies Law ) and the relevant regulations, as well as additional provisions applying to the Company as a Government Company, see Note 1.d to the Annual Financial Statements. For additional information required according to the directives of the Government Companies Authority, see Notes 13 and 14 below. 16

73 NOTE 1:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) GENERAL (continued) 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 dividing the activities among several separate entities ("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 January 1, On April 19, 2016 approval was received from the Minister of Infrastructures, Energy and Water (hereinafter: "The Minister") to extend the new generation licenses until January 1, 2017 (dated February 21, 2016). On October 9, 2016, the Company applied to the Ministers, requesting an order extending the Company s licenses by an additional year, until January 1, During November 2015, the ministers assigned the Director General of the Ministry of National Infrastructures, Energy and Water and the Director General of the Ministry of Finance with the task of starting a process to formulate the government s position and to renew negotiations and talks for implementation of the reform in the electricity sector, with the participation of the relevant government entities, the Company and the employees representatives. Several meetings were held between the parties during the past months, within which it was agreed to appoint dedicated teams to promote the structural change. During the discussion the available methods of carrying out the restructuring are being examined, among them the outline within which the Company will reduce its operation in the generation segment by selling all the gas-operated power stations, which will be sold in several stages over several years - as will be formulated within the outline (as part of the outline discussed by the parties, the coal-operated power stations will not be sold and will be held by the Company through a subsidiary). It is clarified that insofar as the outline for the structural change will be implemented, it will be done subject to completion of the discussions and receipt of approvals and consents required, and also requires regulating issues requiring negotiations under the law with the employees union. As of the date of the report, the parties are holding advanced discussions but an agreed upon outline of the structural change has not yet been formulated. The outline undergoing examination has not yet been discussed and/or approved by all the relevant entities. Regulatory approvals will be required in order to implement the structural change, if and insofar as will be implemented, and executing changes in the relevant laws and executing other additional actions which have not been adopted as of the date of the report may also be required. As of the date of the report, there is uncertainty if and when the outline will be implemented, and whether the outline undergoing examination, or other structural changes, will eventually be implemented. It should be noted the Company also believes, based on discussions with government officials that one of the goals of the outline of the aforementioned structural change, shall be, inter alia, to improve the financial stability of the Company. For further details of the structural change and the decisions and proceedings at the Labor Court in the matter, see Note 10 c below and Notes 1e., 1f. and 35c. to the Annual Financial Statements. 17

74 NOTE 1:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) 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). Further to Note 1f. to the Annual Financial Statements, as of the date of publication of the report, there are continued talks between the Company and State entities regarding the Assets Arrangement, but the parties have not yet reached consents and decisions have not been reached on the issue. The Company estimates that as of the date of this report, the assets arrangement does not have a material impact on the Company or its financial results or its financial position. However, the Company cannot estimate what the actual conclusion will be with regard to the assets arrangement, what its implications (if any) will be for the Company, and it has no certainty that a future implementation of the assets arrangement will not materially impact its financial position. For additional details, including with regard to the provisions of the Electricity Sector Law in this matter, the positions of the Company and the Government entities and the contacts held among them, see Note 1.f to the Annual Financial Statements. g. Environmental Protection Laws 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 1.g to the Annual Financial Statements. In addition, below are details of developments which occurred during the report period: 1) In April 2016, the Company received the application of the Minister of National Infrastructures, Energy and Water (hereinafter: the Minister ), under section 19 of the Electricity Sector Law, to submit an updated development plan. The Minister s application was submitted after consultation with the Electricity Authority in this matter and with the consent of the Minister of Finance. In the application, the Company was requested to submit for the Minister s approval an updated development plan regarding the cancellation of project D (for additional details see Note 35b.9)b) to the Annual Financial Statements) and to install emission reduction installations at the Orot Rabin units 1-4. As part of the examination, the Company was requested to examine additional alternatives, if any, to reduce the use of coal in these units (except for the alternatives for constructing CCGTs and conversion to gas). In particular, the Company was requested to refer to an alternative under which these units will be operated with the minimum required for the system s survivability and regular electricity supply as an alternative to installing scrubbers. The Company was further requested to include, in the plan to be submitted, as aforesaid, details regarding the expected costs for each of the alternatives including the assumptions for calculating the costs as aforesaid. The Company has delivered its proposal for updating the development plan to the Ministry of National Infrastructures, Energy and Water. The Minister held a press conference in August 2016, at which he announced his intention to order the transfer of the 1-4 coal powered units at the Orot Rabin site to conservation and the construction of stations powered by natural gas instead of them. Regarding units 1-4 at the Orot Rabin site, it was determined in the permit received in September 2016 that the Company will cease its operation no later than June 1, 2022 and will act to submit a plan for ceasing their operation and for their conservation. See Note 1.g.3) below. The Company has not yet received an official document from the Ministry of Infrastructures regarding the updated development plan. In the absence of a formal directive, the Company cannot reliably estimate the possible implications of the decision on the Company s financial position and its results, and has no certainty that implementing the Minister s directive in the future will not materially affect the Company s financial position. 2) In July 2016 the Company advised the Ministry of Environmental Protection that the required nitrogen oxide emission values had been achieved in Unit 5 in the Orot Rabin site on the date which had been agreed upon with the Ministry of Environmental Protection. 18

75 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 1:- GENERAL (continued) g. Environmental Protection Laws (continued) 3) In September 2016, emission permits pursuant to the Clean Air Law were received from the Ministry of Environmental Protection, inter alia for the Company s coal powered power stations, Orot Rabin and Rutenberg (hereinafter: the Emission Permits ). The Emission Permits regulate environmental and operating aspects of the coal powered power stations. Inter alia, the permits determine the obligation to continue to install emission reduction facilities in all the units at the Rutenberg site, and at units 5 and 6 at the Orot Rabin site, according to dates and milestones anchored in the permit. Obligations to report the Company s compliance with the milestones and taking steps to reduce and control the emission into the environment were also determined. Regarding units 1-4 at the Orot Rabin site, the permit determines that the Company will cease their operation no later than June 1, 2022, and will act to submit, by March 31, 2017, a plan for ceasing their operation and for their conservation. It was further determined in the permit that the Company must operate the generation units at the Orot Rabin and Rutenberg sites as little as possible in terms of operating and that it must always give priority to generating electricity with natural gas. This is until completion of the emission reduction project at the generation units or until reduction of the excess emissions, whichever is earlier. The Company estimates that operating the coal powered generation units as little as possible involves significant costs in view of the need for combustion of more expensive alternative fuels. Due to external circumstances beyond the control of the Company, related to financial difficulties encountered by a contractor in the project, and despite a series of immediate steps taken by the Company, delays arose in the works at the Orot Rabin site. In view of these delays, in November 2016, the Company submitted an application for an extension to the schedules set in the emission permit, pursuant to the mechanism set in the permit. Insofar as this application will not be accepted, the Company will examine its steps accordingly. The Company is studying the conditions of the emission permits and all the implications derived from them. 4) As part of a preliminary response by the State, a petition submitted to the High Court of Justice against the Minister of Environmental Protection, the Minister of National Infrastructures, Energy and Water, and the Minister of Finance, regarding their duty to enact regulations with respect to threshold values under the Non-Ionizing Radiation Law, the State announced that consents have been reached between the relevant Government ministries regarding the maximum exposure levels permitted in certain situations and the operation mechanism regarding regulation of exposure to an existing radiation source, the State requested a stay until November 2016, in order to continue formulation of the regulations and to update the High Court of Justice accordingly. To the best of the Company s knowledge, as of the date of publication of the financial statements, regulations have not yet been published. The Company is examining the consents between the relevant Government ministries and their implications insofar as they will be implemented in the regulations. 19

76 NOTE 1:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) GENERAL (continued) h. The Restrictive Trade Practices Law, 1988: 1) For details of a letter received by the Company from the Antitrust Authority (hereinafter: the Antitrust Authority ), in which it was claimed that the Company abused its status as a monopoly and damaged the service received by large business customers who transferred to purchase their electricity from private electricity producers, see Note 1 h 1) to the Annual Financial Statements. After an additional hearing, held in July 2016, the Authority applied to the Company, demanding to receive additional data. The Company is examining the demands. 2) Further to Note 1 h 2) to the Annual Financial Statements, regarding the Company s application to the General Director of the Antitrust Authority requesting him to cancel the declaration of the Company as a monopoly, or alternatively, to declare that the declaration of the Company as a monopoly will be changed and reduced so that it will be clarified that it does not apply to sale of electricity to large electricity consumers (high voltage). In March 2016, the Company received a reply rejecting the request of the Company due to the lack of resources to conduct an examination with respect to the cancellation or reduction of the monopoly declaration, together with a recommendation to re-submit the application in In response to the above, the Company filed an appeal in April 2016 in the Jerusalem District Court in its capacity as an Antitrust Court with regard to the declaration of the Company as a monopoly. On May 9, 2016 the Antitrust Authority filed a request for dismissal of the appeal filed by the Company. On July 10, 2016 a hearing was held in the presence of the parties, at which the court suggested that the parties wait for the formulation of the 2017 work plan of the Antitrust Authority, whereby if it includes an examination of the request of the Company specified above, the appeal will be rescinded and whereby, if it does not include the said examination, a final decision will be given on the request for dismissal. On July 21, 2016, the parties notified the Court that the proposal set forth above is acceptable. i. Definitions In a notice submitted by the Antitrust Authority to the court, the Antitrust Authority updated that the Authority s 2017 work plan will be formulated during the coming month of December, and the Authority accordingly requests to update the court on January 1, 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 associated 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. IFRS International Financial Reporting Standards which also include International Accounting Standards (IAS) and clarifications determined by the Committee for Interpretation of International Financial Reporting Standards (IFRIC) or by the Committee for Interpretations of International Accounting Standards (SIC) which preceded it. IAS International Accounting Standards 20

77 NOTE 2:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) REPORTING RULES AND ACCOUNTING POLICIES a. Declaration of Compliance with International Financial Reporting Standards: The Condensed Consolidated 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 the key factors for the uncertainty in estimates and the discretion in implementation of accounting policies identical to those detailed in Note 2 to the Annual Financial Statements and in section E below. b. Operating cycle period The Company s regular operating cycle period is 12 months. c. Non-Inclusion of a Separate Financial Statement in the Periodic Report The Company did not include separate financial information according to Regulation 9 c of the Securities Regulations, since this additional information is negligible for the reasonable investor for the purpose of comprehending the financial position, results of operations and cash flows of the corporation which may affect the making of financial decisions related to the corporation, which is not included already in the consolidated financial statements of the Company. The criteria implemented by the Company to determine the negligibility of the additional information were quantity and quality aspects. The Company fully holds the Coal Company. The Coal Company purchases the coal for the power stations of the Company and acts in practice as the "long arm" of the Company for purchasing coal for its power stations. All the sales of the Coal Company, except for a very negligible amount, are to the Company. d. New standards and interpretations which were published and are not in effect, and were not adopted by the Company by early adoption: 1) IFRS 15 - Revenue from contracts with customers, see Note 2.z.1) to the Annual Financial Statements. 2) IFRS 9 (2014) - Financial Instruments see Note 2.z.2) to the Annual Financial Statements. 3) IFRS 16 Leases, see note 2.z 3) to the Annual Financial Statements. e. Key Factors of Estimation Uncertainty and Discretions in Implementing Accounting Policies Further to Note 2aa. to the Annual Financial Statements, during the period of the State of Financial Position, an additional estimate was added with respect to: 1. Regulatory Deferral Accounts (IFRS-14) Regarding measurement of a regulatory asset of a forecasted fuels basket for 2016, in light of the uncertainty regarding its update in the 2017 annual update, particularly as regards recognition of the operating policy of the system management and the manner of implementation of the reduction of coal powered generation and emission permit, see Note 3a). 2. Benefits for Employees Regarding reimbursement of wage payments for the periods until and from October 10, 2013, the Company has examined the need to recognize the receivable asset, see Note 5 g. below. 3. Provision for Doubtful Debts Regarding the estimate of the provision for doubtful debts, following the signing of the agreement of principles to resolve the Palestinian electricity debt and in light of the preliminary stage in which the steps constituting a condition for continuing repayment of the debt have not yet been completed, see Note 4b.1). 21

78 NOTE 3:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) THE ELECTRICITY RATE 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. For additional details regarding the manner of determining the electricity charge rate, the rate update mechanism, the 2015 annual update and the rate base for the various operating segments of the Company and their update, the reporting duties applying to the Company in this context as well as additional details regarding the electricity rate, see Note 3 to the Annual Financial Statements. Following are the developments regarding the electricity rate as of the date of this report: a) Rate Update Mechanism - Further to Note 3.a. 2) to the Annual Financial Statements, on October 13, 2016, the Electricity Authority published for a public hearing a decision proposal regarding the 2016 annual update (hereinafter: the Hearing ). Following are the main impacts of the stated hearing: The average rate for the consumer will be reduced by 0.09% and the domestic rate will be reduced by 0.77% in relation to the current rate which entered into effect on September 13, Forecasted fuels basket for it is a forecasted basket which should be updated within the 2017 annual update. There is uncertainty regarding recognition of the operating policy of the system management including the manner of implementing the reduction in coal powered generation and the emission permit (see Note 2.e. above) fuels basket - the Authority recognized the fuels cost for 2015 which causes the Company losses from fuels. The Company intends to appeal the Authority s calculations in this issue and estimates, in view of past experience in similar cases, that these costs will be recognized. Payment with respect to exceeding the gas capacity - the Authority recognized the costs with respect to exceeding the capacity for the years Recognition of costs of conversion to gas in Haifa - the Authority recognized a (partial) costs supplement regarding the recognized cost of converting to gas at Redding with respect to the devaluation of the NIS against the EUR and the price increase of a working hour. Recognition of investments in operated power stations with respect to environmental requirements. System costs - there is an increase in backup costs, acquisition costs with respect to renewable energies, and administrative costs. Additionally, the Authority recognized the addition of income with respect to the administrative costs component for the period of June 2013 to December The Authority did not include the excessive costs, with respect to the Minister s directive pertaining to reduction of generation using coal, within system costs. The Company intends to appeal this. Compensation with respect to a delay in update for the generation segment for it was determined that the compensation will be spread over two years. The total impact of the additional recognition of the Company s costs following the stated hearing, up to September 30, 2016, is approximately NIS 371 million, in respect of which the Company recorded regulatory deferral assets in these financial statements. The Company has to submit its response by December 4, Additionally, the Company intends to appear for an oral hearing in front of the Authority s plenum on November 27, On these occasions, the Company will update the Authority regarding its objections in the matter of the Authority s decisions and calculations, particularly regarding the system rate and the recognized fuels basket. 22

79 NOTE 3:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) THE ELECTRICITY RATE (continued) b) The electricity rate in the transmission and distribution segments Further to Note 3 c. to the Financial Statements, it was determined that the parties will submit an updating notice to the Supreme Court sitting as the High Court of Justice (within a petition submitted by the Company against the Authority with respect to not determining a transmission and distribution rate), relating to the negotiations held between them, regarding the formulation of the rate base for the transmission and distribution grid segments, following previous notices that were delivered to the court in this matter. With the approval of the parties, on November 20, 2016, the Authority submitted an application to the Supreme Court, requesting to postpone the date for submitting the updated notice regarding the negotiations conducted with the Company to February 10, Additionally, on September 29, 2016, the Company delivered a letter to the Authority s professional team, requesting the Authority to cease reaching individual decisions which can harm the Company s part in the distribution segment, until the formulation of an obligatory policy, according to the policy which will be determined by the Minister, by virtue of his authority under section 57a of the Electricity Sector Law. Additionally, until this policy is formulated, the Authority was requested to stay individual decisions it reached in a number of specific issues, as well as providing permits which, in the Company s opinion, contradict the terms of regulation of the historical distributors of c) Emission reduction project at the coal fired power stations Further to Note 3 f. to the Annual Financial Statements, following the Company s applications and the filing of a legal petition, on March 10, 2016, the Authority published for a later hearing its decision of November 25, 2015, regarding recognition of costs of emission reduction installations at the Orot Rabin 5-6 and Rutenberg 1-4 generation units. According to the hearing, the Authority will recognize the costs of the emission reduction installations according to the budget prepared and approved by the Company as of Costs beyond 2013 will be examined separately. On April 17, 2016, the Company submitted its reaction to the hearing in engineering, operating, financial and legal aspects. Within its reaction, the Company expressed its objection to using the 2013 investments budget as a base and the Authority s decision regarding extension of lifetime of the coal units. As of the date of approval of the financial statements, a binding agreement in this issue has not yet been received. On August 24, 2016, it was published that the Minister of National Infrastructures, Energy and Water announced that he intends to issue an order to transfer the coal units 1-4 at the Orot Rabin site to conservation by June 2022 and to construct stations which will be operated by natural gas instead of them (See also Note 1.g. above). d) Electricity distribution and supply licenses Further to Note 3.k to the Annual Financial Statements, with respect to the petition submitted by the Company on September 24, 2015, against the Electricity Authority, Sha ar Hanegev Energy Supply and Tapugan Industries Ltd, the Court determined that a hearing of the petition will be held on January 26, e) Rate base for system management services (system costs) Further to Note 3 e. to the Annual Financial Statements in connection with the Electricity Authority s decision of August 10, 2015, regarding determination of system management services rate (system rates), on November 14, 2016, the Electricity Authority published a decision for amending its decision of August 2015, regarding rate for system management services, relating to the manner of debiting independent producers. Within the decision, it was determined that repaying the debt by the Company to the Company s consumers will be calculated according to marginal interest rates determined in the decision, which are lower than the interest borne by the Company. Additionally, the decision details the manner of debiting required from the system management for returning the debt based on the existing metering in the independent producer s installation or based on a normative calculation as set in the decision. Additionally, on October 5, 2016, the Electricity Authority s decision was published, regarding the rate base for the administrative costs of the system management activity. The rate determined in this decision will replace the temporary rate of the administrative costs which was determined in the decision of May 2013, and the recognition of the system management costs will be carried out by division into two periods: from June 2013 until the end of 2015, this will be based on full recognition while conducting cost control, and as of 2016 and until the end of the trial period of the system rates (2018 or separation of the system management from the Company, according to the earlier), the Company will have to provide detailed reports in order to receive recognition of the full system management costs. In future, the Authority intends to determine a normative rate for the administrative costs. 23

80 NOTE 3:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) THE ELECTRICITY RATE (continued) f) Pension costs Further to Note 3 j to the Annual Financial Statements, after receiving an extension from the court, the Authority submitted a response on October 6, 2016, noting that the Authority s professional team has prepared a professional document including recommendations for discussion by the Authority s plenum. This document is in its final formulation stages. Additionally, it is expected that a discussion by the Authority s plenum will also be conducted soon and no later than the first quarter of g) Recognition of the cost of extending the lease period of the gasification ship by the Company - Further to Note 3 l. to the Annual Financial Statements, on July 26, 2016, the Electricity Authority published a decision regarding final recognition approval for the cost of extending the lease period of the gasification ship from October 2017 for two additional years. h) Recognition of costs of non-availability of the maritime natural gas link - on July 26, 2016, the Electricity Authority published a decision regarding recognition of costs deriving from non-availability of the maritime link of natural gas from liquid. Within the decision, the Authority determined that it will recognize the surplus fuel costs with respect to nonavailability of the maritime link due to failure or maintenance. The surplus fuel costs will be calculated according to the normative values by the non-availability dates, less compensation payments which will paid to the Company by Gas Lines in accordance with approval of an addendum to the transmission agreement in the matter of the maritime buoy. On September 12, 2016, the Authority updated the aforesaid decision that the recognition of costs will be according to the updated version of the appendix to the gas transmission agreement which was signed on August 24, 2016 between the Company and the Gas Lines Company. i) Dedicated account for financing transmission and distribution projects - Further to the Authority s decision of July 2016, in which the Authority cancelled the obligation to deposit funds into the dedicated account, and the funds deposit and release mechanism, the Authority notes that it will act to close the account. On September 8, 2016, the dedicated account was closed. j) Changes and updates in consumption criteria - Following Note 3m. to the Annual Financial Statements, the Company s position is that a significant part of the decision cannot actually be carried out immediately without an adequate transition and implementation period. In view of this, the Company requested to postpone the decision s implementation until completion of the required computing preparations. On September 12, 2016, the Authority s decision was received, within which the date of entry into force of the services with respect to which the Authority was convinced that additional preparation was needed will be postponed to September 2017, for the purpose of completing the assimilation of a computing process. k) The Authority s decision regarding recognition of the increase in the diesel oil emergency inventory - The Ministerial Committee for Security decide to increase the electricity sector s emergency diesel oil inventory in stages, and to accordingly increase the transmission and storage infrastructure. Following the decision of the Ministerial Committee for Security Affairs, on November 14, 2016, the Electricity Authority published a decision regulating the issue of acquisition, maintenance, leasing, replenishing and sale of this inventory. The cost of the inventory recognized in the rate will be according to the rate of return recognized for the assets recognized in the system management rates. According to the decision, the costs with respect to the emergency inventory will be recognized in the rate as system costs. 24

81 NOTE 4:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) TRADE RECEIVABLES FOR SALES OF ELECTRICITY a. Composition As of As of September 30 December NIS in millions Unaudited Audited Open debts (1)... 4,262 4,444 4,037 Provision for doubtful debts... (553) (557) (550) Unrecognized income (2)... (707) (517) (590) 3,002 3,370 2,897 Income receivable (3)... 1,652 2,275 1,627 Total customer receivables with respect to electricity sales... 4,654 5,645 4,524 Stated in current assets... 4,654 5,145 4,145 Stated in non-current assets Stated in non-current liabilities (121) Total customer debt with respect to electricity sales... 4,654 5,645 4,524 (1) Also includes balance 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, offset by balances with respect to liability to return sums to the Company s consumers with respect to these rates (also see Note 3 e. to the Annual Financial Statements). (2) 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 2 p.1)b) to the Annual Financial Statements. (3) Income with respect to the relative part of the electricity invoices issued after the date of the Financial Statement, that according to an estimate relate to the reporting period. The last date for paying electricity bills without charging interest is between 11 to 14 days from the date of preparation of the bills according to the type of customer as detailed in the criteria of the Electric Authority. After this period, customers are debited with annual interest at a rate of approximately 8.1% with respect to the balance of their debt. According to the accounting policies, interest revenue with respect to arrears from electricity customers are recorded as financing income in the financing expenses, net, section, at the time of collection of the debt with respect to which they were accrued. On December 16, 2015, the Company received the decision of the Electricity Authority of November 25, 2015 (also see Note 3 m. to the Annual Financial Statements, regarding changes and updates to consumption criteria). On September 12, 2016, the Electricity Authority s decision was reached, within which the date of entry into force of services under consumption criteria is extended until September, 2017, for the Company s preparation and their implementation (also see Note 3 above). 25

82 NOTE 4:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) 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 September 30 December NIS in millions Issued invoices... 1,232 1,714 1,684 Receivables Total debt... 1,328 1,806 1,821 Less: Provision for doubtful debts previous periods... (378) (386) (386) Decrease in provision for doubtful debts in the period Income not recognized previous periods... (590) (281) (281) Income not recognized in the period... (117) (236) (309) Total debt with respect to sale of electricity Presented in current assets Presented in non-current assets Total debt with respect to sale of electricity 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 ). The agreement of principles was signed by the Minister of Finance, Coordinator of Government Activities in the Territories, and the Minister of Civil Affairs in the Palestinian Authority. A mechanism for repaying the debt of the East Jerusalem Electricity Company and the Palestinian Authority to the Company, with respect to electricity consumption, as of September 12, 2016, was determined within the agreement of principles. Additionally, it was agreed to formulate an outline to transfer the responsibility over the Palestinian electricity sector, in terms of commerce and operation, to a Palestinian body which will be established for this purpose. Approximately NIS million will be deducted from the debt sum, which reflects a certain decrease in the arrears interest rates and return of sums collected as certain components within the rate, and excessive collection. Pursuant to the agreement of principles, the debt balance as of the date of the agreement in the amount of approximately NIS 1,468 million) including with respect to interest accrued to that same date and which has not yet been recognized) will be repaid as follows: - NIS 572 million will be paid by the Palestinians within 5 days from the date on which they will receive from the Israeli Ministry of Finance tax funds which were defined in the agreement of principles. On September 30, 2016, the Company received an amount of approximately NIS 590 million as part of the implementation of the agreement of principles. - The balance will be paid in 48 equal installments (it is possible that some sums will be paid even earlier than the expected spread of payments, according to the terms set in the agreement of principles), commencing after completion of the commercial and operating process, as defined in the agreement of principles. Additionally, it was agreed in the agreement of principles that Israeli and Palestinian work teams will be established to formulate a commercial agreement and operating consents regarding the transfer of responsibility of managing the Palestinian electricity sector to a Palestinian body which will be established for this purpose. In this preliminary stage, and in view of the fact that the steps detailed above, which constitute a condition for continued repayment of the debt, have not yet been completed, the Company has not changed the provisions with respect to the abovementioned debt balance in the third quarter of

83 NOTE 4:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) TRADE RECEIVABLES FOR SALES OF ELECTRICITY (continued) b. Debts of the East Jerusalem Electricity Company and the Palestinian Authority (continued) 2) For details regarding the Company s action against the East Jerusalem Electricity Company, and the East Jerusalem Electricity Company s action against the Company, see Note 6.c to the Annual Financial Statements. 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) On April 6, 2016, the Company received the petition to the High Court of Justice by the East Jerusalem Electricity Company for interim order and order nisi against the Minister, the Electricity Authority and the Company. In the Petition, an order was requested to prevent the Company from executing restrictions in the electricity supply to the lines of the East Jerusalem Electricity Company, this after restriction were carried out for two days. On April 19, 2016, the High Court of Justice granted an interim injunction forbidding the Company to carry out restrictions until a decision is reached regarding the application for an interim order. The State s response, submitted on July 5, 2016, included, inter alia, the position of the State according to which the Company has, in the circumstances of the matter, authority to disconnect (or restrict) electricity supply to the East Jerusalem Electricity Company. After receiving the response of the parties, the Court ruled on July 16, 2016, according to which the petition will be set for a hearing not later that the end of the year, and that the interim injunction will remain in effect until another decision by the panel which will hear the case. A hearing has been scheduled for December The Company is examining the implications of the legal proceedings and sources for paying the debt and in accordance has included in the Financial Statements an appropriate provision. 27

84 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) POST EMPLOYMENT EMPLOYEE BENEFITS a. Excess of amounts of pension plan assets over the pension obligation As of As of September 30 December NIS in millions Unaudited Audited Fair value of plan assets (see section k.2) below)... 29,918 28,175 28,820 Present value of pension obligations (see section j.1) below)... (23,820) (22,835) (23,192) 6,098 5,340 5,628 Present value of pension obligations with respect to special agreements on early retirement (see section j.3) below)... (281) (348) (342) Excess of pension plan assets over pension obligations... 5,817 4,992 5,286 b. Funds in Trust As of As of September 30 December NIS in millions Unaudited Audited Fair value of funds in trust (see section l below)... 1,645 1,908 1,921 c. Liabilities with respect to other post-employment benefits Composition according to types of the other benefits: As of As of September 30 December NIS in millions Unaudited Audited Discounted electricity , V.A.T. and grossed up tax with respect to discounted electricity Retirement benefits... 1,097 1,044 1,089 Welfare Fund for pensioners insured in the budgetary pension Holiday gifts including grossed up tax Present value of obligation with respect to other postemployment benefits (see section j.2) below)... 2,792 2,795 2,732 28

85 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) 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 11.d 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 11 e. to the Annual Financial Statements. f. Collective Agreements and Consents The last signed wage agreement (the July 2013 agreement) exhausts the employees claims until December 31, On April 18, 2016, a collective agreement (wage agreement) was signed for the public service within which it was agreed, inter alia, on wage supplements at a cumulative rate of 7.5% for the period of January December 2017, which will be paid in 5 stages. It should be noted that about half of the abovementioned supplement will be paid as a percentage supplement and half will be paid differentially (as a uniform sum). On August 8, 2016, an additional collective agreement was signed for the public service, which updates the total rate of the supplements (from 7.5% to 7.75%) and changes the date of the payment stages. The impact of implementation of the stated agreement according to the Company s estimates regarding its implication on the Company s future wages agreements was included in the actuarial liability as of September 30, For additional details regarding the collective agreements, consents, and the early retirement operations carried out in 2015, see Note 11 f. to the Annual Financial Statements. 29

86 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) POST EMPLOYMENT EMPLOYEE BENEFITS (continued) g. Examinations by the Supervisor of Wages On October 10, 2013, the Company received a letter from the Supervisor of Wages, including decisions regarding wage deviations in the following issues: 1) Payment for overtime not according to actual performance the Supervisor of Wages instructs the Company to integrate external employees in accordance with the work requirements of the Company, and not to operate according to the Company Management s memorandum of 1990, under which a work day of external employees is 10 hours long. Overtime payment will only be paid subject to report of actual performance and subject to the existence of an arrangement that enables stricter supervision of the work hours of the external employees. He intends to bring his decision to the attention of the Board of Directors so that it will supervise their execution and the allocation of the additional hours of the external employees. 2) Board and lodging payments the Supervisor of Wages determines that Company payments for board and lodging deviate from that which is customary in the Civil Service, are contrary to section 29 of the Foundations of Budget Law and are therefore not valid. The Supervisor of Wages instructed the Company to adjust these payments to those customary in the Civil Service. The Supervisor of Wages intends to consider demanding return of payments from employees who received this benefit and were paid these payments in excess as of October 1, 2010, subject to the employees right to a hearing within 60 days. 3) Command increment the command increment is paid to various groups of employees of command level at different rates. According to the letter of the Supervisor of Wages, command increment should only be paid in accordance with a collective agreement of Additionally, according to the letter of the Supervisor of Wages, command increment is not to be paid to managers of deputy division/district manager level and upwards. The Supervisor of Wages intends to consider demanding a return of the payments paid to employees in excess as of October 1, 2010, and to pensioners as of October 1, 2011, subject to the employees and pensioners right to a hearing within 60 days. 4) Global pension overtime members of the management of the Company (at a level of division/district managers and upwards) receive wages structured as total pay, which are composed of a rank value and a global overtime value, and are not entitled to a separate payment for overtime. The Supervisor of Wages is instructing not to include the global overtime component in calculation of the pension determining salary of Company management members who were appointed after Additionally, the Supervisor of Wages instructs that as of the salary of October 2013, the global overtime will not be taken into account as a determining component of the pension salary, with all that it entails (including their inclusion as a basis for calculating salary components that are paid based on the pension salary) for anyone who is not of A rank (anyone appointed as a member of management after the A rank was blocked in 1996). The Supervisor of Wages intends to consider demanding a return of the payments paid to management members in excess as of October 1, 2010, and pensioned management members as of October 1, 2011, subject to the these employees and pensioners right to a hearing within 60 days. Additionally, the Supervisor of Wages announced his intention to conduct an examination of the terms of the wages, work and pension paid to the Company employees and pensioners. Within this the validity of the Company wage components will be examined. In the first stage of the inspection, the Supervisor of Wages will use the information that will be delivered/was delivered by the Company to the team of regulators that was established in order to increase coordination and more efficient supervision of the Company. Following the legal proceedings conducted in this matter, within which an additional hearing proceeding was held for the parties, the Director of Wages published an updated decision on December 11, On May 3, 2016, the Haifa Regional Court of Labor gave its ruling (hereinafter: the Ruling ), determining: (1) The decision of the Supervisor regarding wage deviations in the following components was without flaw: overtime payments to external employees; board and lodging payments; and command increment. As regards overtime payment to external employees, it was ruled that this issue has been exhausted with the introduction of the method of reporting and tracking work hours, such that the salary paid to external employees matches the reported work hours. 30

87 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued) g. Examinations by the Supervisor of Wages (continued) (2) Regarding payment of global pension overtime for management members, it was determined that the Supervisor s decision will only apply with regard to employees appointed as management members after October 10, 2013 (hereinafter: the Date of the Supervisor s Decision ), and the global pension overtime for management members appointed before the date of the Supervisor s decision will be according to an approval granted by the Companies Authority in 1977 (50 overtime hours a month, at a rate of 140% per hour). (3) The employees representatives have cause for economic strike against the Supervisor s decision, but they must receive approval for announcing a new labor dispute in this context by the National Labor Federation institutions, taking into account the ruling and its contents. (4) In order to allow the parties time to prepare for implementation of the ruling, including the possibility of submitting an appeal, it was determined that the Supervisor s decision will not be implemented and organizational steps will not be taken in this context for a period of thirty days from the date of the ruling. On May 5, 2016, the Company received the letter of the Supervisor of Wages and Labor Agreements, under which the Company has to immediately prepare for full implementation of his decision according to the ruling and as detailed in the letter. On May 9, 2016, the New National Labor Federation announced a labor dispute, a demand to sign a collective agreement which will immediately regulate employment terms and wages customary for dozens of years, while taking unilateral steps including the requirement of the Supervisor of Wages at the Ministry of Finance to reduce rights. On May 24, 2016, the Company submitted an appeal against the ruling. Additionally, the State also submitted an appeal against the ruling. In addition, on May 26, 2016, the employees union also submitted an appeal against the aforesaid ruling and an application for stay of execution. The provisions of the ruling and the letter of the Supervisor of Wages (hereinafter: the Supervisor ) affect: The pension liability - in light of the ruling, the Company reduced the actuarial liability as of March 31, 2016 by approximately NIS 390 million by way of a change in the terms of the pension plan against the wage cost and expenses with respect to liabilities to pensioners. Current payments to employees and pensioners - as required by the Supervisor of Wages, the Company is required to stop paying these payments. Reimbursement of payments for the period from October 10, 2013, the date of the Supervisor s letter, until the present - as required by the Supervisor, regarding active employees, the Company has to deduct these sums in 36 equal payments. Regarding pensioners, these sums should be deducted subject to the pensioner s right to appeal. Reimbursement of payments for the period from October 1, 2010, until October 10, Pursuant to the Supervisor s notification that he intends to consider demanding return of these sums from active employees and pensioners (and from pensioners as of October 1, 2011, and only regarding the command increment and global pension overtime for management members), and that any employee/pensioner so interested may apply to him and make his contentions regarding the return. With respect to the stated refunds of payments, the Company examined the need to recognize an asset to be received. The current position of the Company and its legal counsel, bearing in mind the appeal processes against the judgment, is that it is not possible to confirm that it is virtually certain that the employees and the pensioners will have to return the amounts paid to them, and therefore, the Company did not register an asset in respect of such refunds. However based on the Company s examination, the amounts to be refunded to the Company (hereinafter: the "Refunds") as stated in the letter of the Supervisor dated May 5, 2016, if they would be refunded for both active employees and pensioners, could possibly cumulatively amount to approximately NIS 650 million, approximately NIS 340 million of which would be for the period prior to October the date of receipt of the Supervisor s decision. On June 13, 2016, the National Court of Labor ruled with regard to stay of execution of the ruling. 31

88 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) POST EMPLOYMENT EMPLOYEE BENEFITS (continued) h. At present, the Company s management, the New National Labor Federation, and the employees union are conducting negotiations, with the involvement of representatives of the Director of Wages, regarding several issues, regarding which they have reached understandings, among them: a new wages agreement, consents which will make redundant the judicial decisions in the appeals, regarding the arrangement of the salary deviations which are the issue of the decisions of the Director of Wages and the legal proceeding thereof, and early retirements and granting tenure in Regarding the arrangement of salary deviations, the understandings include: a significant decrease of the return sums; a significant reduction of reducing the command increment rates the Company was required under the decision of the Director and the judgment, consents regarding reduction of 20 additional global pension hours for management members (see section g. above for the impacts recorded in the Company s statements); agreed reduction in per diem and subsistence allowance. The understandings include early retirement of approximately 350 permanent employees by the end of 2016 and granting tenure to 180 employees subject to terms which will be set in the agreement. The understandings, if formulated verbatim into a binding agreement, will affect the Company s results in the period in which the agreement will be signed. As of the date of the approval of the financial statements, the said understandings have not materialized into a binding agreement, and the Company has no knowledge whether the said understandings will materialize into a binding agreement, nor what the final terms of the binding agreement will be and whether they will be absolutely identical to the understandings that were reached to date. Additionally, as of the date of publication of these statements, the Company is of the opinion, based on the opinion of its legal advisors, that it has a valid liability to continue to pay all the salary components which are not included in the Supervisor s decision regarding wage deviations. i. The aforementioned reserve sections, with respect to post-employment employee benefits according to the calculations of the Company as of September 30, 2016, September 30, 2015 and December 31, 2015, amount to a total of NIS 26,893 million, NIS 25,978 and NIS 26,266 million respectively. 32

89 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) POST EMPLOYMENT EMPLOYEE BENEFITS (continued) j. Reserves 1) Changes in the present value of the obligation for pensions For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Present value of the obligation for pensions as of the beginning of the period... 23,192 23,352 24,042 22,643 23,352 Cost of interest ,110 Current service cost Past service cost - changes in the plan s terms due to decisions of the Supervisor of Wages of the Ministry of Finance and the ruling... (372) Benefits paid... (572) (582) (199) (207) (718) 23,277 23,819 24,187 22,786 24,038 Losses (gains) with respect to remeasurement: Actuarial losses (gains) deriving from changes in financial assumptions(*) (669) (333) 232 (583) Actuarial losses deriving from changes in demographical assumptions Impact of differences between the previous actuarial assumptions and that which occurred in practice (hereinafter: Adjustments based on past experience )... (222) (315) (34) (183) 423) 543 (984) (367) 49 (846) Present value of the obligation for pensions as of the end of the period... 23,820 22,835 23,820 22,835 23,192 (*) Mainly change in discount rate which served for calculating the liability. 33

90 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued) j. Reserves (continued) 2) Changes in the present value of the obligation for other post-employment benefits For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Present value of the obligation for other post-employment benefits as of the beginning of the period... 2,732 2,930 2,826 2,806 2,930 Cost of interest Current service cost Past service cost - changes in the plan s terms due to decisions of the Supervisor of Wages of the Ministry of Finance and the ruling... (11) Additional provision for the retirement of employees as part of a special retirement plan (see Section F above)... - (15) - - (15) Benefits paid... (89) (96) (24) (33) (122) 2,773 2,969 2,850 2,823 2,993 Losses (gains) with respect to remeasurement: Actuarial losses (gains) deriving from changes in financial assumptions (134) (28) (65) (263) Adjustments based on past experience... (47) (40) (30) (174) (58) (28) (261) Present value of the obligation for other post-employment benefits as of the end of the period... 2,792 2,795 2,792 2,795 2,732 34

91 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued) j. Reserves (continued) 3) Changes in present value of the obligation with respect to special agreements on early retirement For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Present value of the obligation as of the beginning of the period Cost of interest Past service cost - changes in the plan s terms due to decisions of the Supervisor of Wages of the Ministry of Finance and the ruling... (7) Additional provision with respect to employee retirement within Special Retirement Plan Benefits paid... (72) (51) (23) (27) (72) Actuarial losses (income) with respect to the obligation charged to the Profit and Loss... 7 (5) (5) (2) (15) Present value of the obligation as of the period end

92 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) POST EMPLOYMENT EMPLOYEE BENEFITS (continued) k. Funds 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 The fund was managed by the managing company accordingly. As of May 1, 2010, Infinity Administrating the Main Pension Fund Ltd. manages the fund. On September 1, 2016, the Engagements and Assets Committee of the Company s Board of Directors decided to approve an engagement with Halman-Aldubi IEC Gemel Ltd. as a company that will manage the Central Pension Fund as of January 1, b) According to the Financial Statements of the Fund, the actuarial liability as of September 30, 2016 is NIS 32,830 million and the debt of the Company on that date is approximately NIS 2,912 million. According to the Financial Statements of the Company, its actuarial liability for the pension obligations as of September 30, 2016 is NIS 24,101 million, and therefore there is surplus of NIS 5,817 million. For details regarding the nature of the difference and differences in calculating 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 11 k. 1 c)-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 11 k. 1)f) to the Annual Financial Statements. d) The Company deposited in the pension fund NIS 566 million during the nine months ended on September 30, e) The Fund presents the value of its assets at fair value according to international financial standard principles (IFRS). f) According to the forecast of the Company, based on the articles in effect (starting from March 31, 2014), the expected transfers to the fund from the statement of financial position date until the end of 2016 will amount to approximately NIS 239 million. 36

93 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 5:- POST EMPLOYMENT EMPLOYEE BENEFITS (continued) k. Funds (continued) 2) Changes in the fair value of the assets of the plan For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Fair value of plan assets as of the beginning of the period... 28,820 27,739 30,101 28,076 27,739 Interest income on plan assets... 1, ,327 Deposits ,280 Benefits paid... (631) (588) (217) (211) (761) Gains (losses) with respect to remeasurements of plan assets: Actual yield on plan assets net of income from interest on plan assets (784) (462) (545) (765) Fair value of plan assets as of the period end... 29,918 28,175 29,918 28,175 28,820 3) Yield on the plan s assets For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Interest income on plan assets... 1, ,327 Gains (losses) with respect to remeasurements of plan assets (784) (462) (545) (765) Actual yield on plan assets... 1, (116) (211)

94 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) POST EMPLOYMENT EMPLOYEE BENEFITS (continued) l. Funds in Trust 1) Funds in trust are designated to cover actuarial liabilities to employees and liabilities related to the termination of employer/employee relationships and are invested in Government and corporate bonds. For further details see Note 12 to the Annual Financial Statements. Transferring funds from the trust account On March 2, 2016, the District Court ordered the transfer of NIS 280 million from the trust account to the Company and in accordance with the instruction of the District Court, the Company executed an updated calculation for the actuarial surplus in the trust account. Accordingly, on April 14, 2016, a balance of approximately NIS 6.4 million was transferred from the trust account to the Company. Additionally, the Company received current refunds from the trust account with respect to the months of February-July 2016, in the amount of approximately NIS 40 million. 2) Changes in fair value of funds in trust designated to cover actuarial liabilities (assets according to section 116 A in IAS 19): For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Fair value of funds in trust as of the beginning of the period... 1,921 1,909 1,723 1,895 1,909 Interest income from funds in trust Transfer of actuarial surplus to the Company (according to the District Court s ruling) and current refunds from the trust account... (326) - (40) - - Gains (losses) with respect to remeasurement: Actual yield net of income from interest on plan assets... (10) (69) (57) (10) (79) Fair value of funds in trust as of the period end... 1,645 1,908 1,645 1,908 1,921 3) Yield of funds in trust: For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Interest income from funds in trust Gains (losses) with respect to remeasurement of funds in trust... (10) (69) (57) (10) (79) Actual yield on funds in trust (1) (38)

95 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) POST EMPLOYMENT EMPLOYEE BENEFITS (continued) m. Capital Reserves With Respect to Re-measurements of Actuarial Profit (Loss), net, Which Were Not Attributed to Fixed Assets (Before Tax Effect) For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Balance as of the beginning of the period Profit (loss) from re-measurements *... (354) 215 (63) (446) 179 Balance as of the end of the period * Less reserve administration fees. n. Amounts Presented in Cost of Salaries and in Expenses with respect to Liabilities to Pensioners and in fixed assets For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December NIS in millions Unaudited Unaudited Audited Current service cost after deducting employees participation in the pension plan Cost of interest ,249 Interest revenues (*)... (1,086) (1,055) (365) (357) (1,418) Changes in the plan s terms due to decisions of the Supervisor of Wages of the Ministry of Finance and the ruling... (390) Costs due to early retirement (2) Total cost recognized in salaries cost and expenses with respect to liabilities to pensioners... (306) (*) With respect to the plan s assets and funds in trust o. Re-measurements that were capitalized to assets cost (fixed assets): For the Nine Months ended September 30 For the Three Months ended September 30 For the Year ended December (NIS thousands) Unaudited Unaudited Audited Increase (decrease) in fixed assets (76) (66) 39

96 NOTE 5:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) POST EMPLOYMENT EMPLOYEE BENEFITS (continued) p. Main Actuarial Assumptions Applied to the Actuarial Liability and Plan Assets For the nine months ended on September 30 For the year ended on December Unaudited Audited Weighted annual real interest rate grossed in the present value of the obligation at the end of the period* 2.66% 2.75% 2.85% Nominal rate of return used to calculate the interest cost 4.78% 4.77% 4.77% Anticipated annual nominal rate of return grossed in the fair value of plan assets 4.78% 4.77% 4.77% Average liability lifetime 16.5 years 16.5 years 16.2 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 11 p. to the Annual Financial Statements. q. Analysis of sensitivity of main actuarial assumptions as of September 30, 2016 (NIS millions): Actuarial assumptions Change % Increase in liability Change % Decrease in liability Rate of interest for capitalization (0.1) Future salary increase rate with respect to general salary agreements and cost of living increment less the CPI (real increase) (0.5) 628 Manner of determining the sensitivity the actuarial liability for each of the above mentioned actuarial assumptions was calculated once according to the base assumption (as appears in the Financial Statements) and once according to an adjusted assumption (according to a specific scenario), and the increase (decrease) was calculated with respect to the change of this assumption. r. The funds for pensions 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. 40

97 NOTE 6:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) BALANCE OF REGULATORY DEFERRAL ACCOUNTS a. For additional information regarding regulatory deferral accounts see Note 15 to the Annual Financial Statements. b. Details of the amounts and transactions in regulatory deferral accounts for the nine and three months ended on September 30, 2016 (before tax effects): NIS in millions Transactions for the nine months ended on September 30, 2016 Creation / Refund / recognition cancellation Unaudited Period remaining for refund / Balance cancellation As of Sept 30, 2016 Years Balance Debit balance of regulatory deferral As of January accounts 1, 2016 Audited With respect to the erosion of the Company's liabilities in foreign currency, passed on to the electricity consumers (80) (13) With respect to the gap between dates for actual updating rates and the theoretical rate (58) - - With respect to consecutive non-update of the rate s fuels component - 6 1,100 1, With respect to social rate (301) With respect to load management arrangements (14) - - With respect to not updating the electricity rate for the transmission and distribution segment With respect to deemed interest (1) With respect to recognition of investments that were reduced in the past (9) With respect to the gap between fixed payment component update dates(see section d below) Total ,708 Credit balance of regulatory deferral accounts With respect to the gap between dates for actual updating rates and the theoretical rate ,144 1, With respect to electricity purchases from private electricity producers and photovoltaic facilities With respect to load management arrangements... - (20) With respect to consecutive non-update of the fuel component in the rate (510) - - With respect to consumers participation in financing emergency plan stage B (354) Total... 1, ,649 Change Total debit (credit) balance of regulatory deferral accounts, net... (954) (941) (13) 41

98 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 6:- BALANCE OF REGULATORY DEFERRAL ACCOUNTS (continued) b. Details of the amounts and transactions in regulatory deferral accounts for the nine and three months ended on September 30, 2016 (before tax effects)(continued): Debit balance of regulatory deferral accounts Balance As of July 1, 2016 NIS in millions Transactions for the three months ended on September 30, 2016 Creation / Refund / recognition cancellation Unaudited Period remaining for refund / Balance cancellation As of Sept 30, 2016 Years With respect to the erosion of the Company's liabilities in foreign currency, passed on to the electricity consumers (64) (9) With respect to consecutive non-update of the rate s fuels component , With respect to social rate (115) With respect to not updating the electricity rate for the transmission and distribution segment With respect to deemed interest (1) s With respect to recognition of investments that were reduced in the past (3) With respect to the gap between fixed payment component update date(see section d below) Total... 1, ,708 Credit balance of regulatory deferral accounts With respect to the gap between dates for actual updating rates and the theoretical rate (209) 466 1, With respect to electricity purchases from private electricity producers and photovoltaic facilities With respect to load management arrangements (16) With respect to consumers participation in financing emergency plan stage B (130) Total... 2,246 (131) 534 2,649 Change Total debit (credit) balance of regulatory deferral accounts, net... (1,131) (941)

99 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 6:- BALANCE OF REGULATORY DEFERRAL ACCOUNTS (continued) c. Details of the amounts and transactions in regulatory deferral accounts assets for the nine and three months ended on September 30, 2015 (before tax effects): Debit balance of regulatory deferral accounts Balance As of January 1, 2015 NIS in millions Transactions for the nine months ended on September 30, 2015 Creation / recognition Refund / cancellation Period remaining for refund / Balance cancellation As of Sept 30, 2015 Years Audited Unaudited With respect to the erosion of the Company's liabilities in foreign currency, passed on to the electricity consumers (3) (77) With respect to the gap between dates for actual updating rates and the theoretical rate... 1,502 (128) (820) With respect to social rate (365) With respect to electricity purchases from private producers and photovoltaic facilities (162) (152) - - With respect to load management arrangements (128) With respect to not updating the electricity rate for the transmission and distribution segment With respect to deemed interest With respect to recognition of investments that were reduced in the past (54) Others (6) - - Total... 2, (1,602) 1,368 Credit balance of regulatory deferral accounts With respect to electricity purchases from private electricity producers and photo-voltaic installations With respect to consecutive non-update of the fuel component in the tariff... 2, (1,294) 1, With respect to consumers participation in financing emergency plan stage B... 1, (379) Total... 3, (1,673) 2,258 Change Total debit (credit) balance of regulatory deferral accounts, net... (486) (890) (404) 43

100 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 6:- BALANCE OF REGULATORY DEFERRAL ACCOUNTS (continued) c. Details of the amounts and transactions in regulatory deferral accounts assets for the nine and three months ended on September 30, 2015 (before tax effects): (continued) Debit balance of regulatory deferral accounts Balance As of July 1, 2015 NIS in millions Transactions for the three months ended on September 30, 2015 Creation / recognition Refund / cancellation Period remaining for refund / Balance cancellation As of Sept 30, 2015 Years Unaudited With respect to the erosion of the Company's liabilities in foreign currency, passed on to the electricity consumers (62) With respect to the gap between dates for actual updating rates and the theoretical rate... 1,246 (364) (328) With respect to social rate (154) With respect to electricity purchases from private producers and photovoltaic facilities and load management arrangements (51) With respect to not updating the electricity rate for the transmission and distribution segment With respect to deemed interest With respect to recognition of investments that were reduced in the past (1) Total... 1,957 7 (596) 1,368 Credit balance of regulatory deferral accounts With respect to electricity purchases from private electricity producers and photo-voltaic installations With respect to consecutive non-update of the fuel component... 1,918 (175) (695) 1, With respect to consumers participation in financing emergency plan stage B... 1, (152) Total... 3, (847) 2,258 Change Total debit (credit) balance of regulatory deferral accounts, net... (1,106) (890) 216 d. Asset with respect to the gap between the update dates of the fixed payment in the electricity rates - according to the Authority s decision proposal for a hearing regarding the 2016 annual update, the electricity rate will include a component of compensation with respect to non-consecutive update of the fixed payment. In view of this, the Company created in its books a regulatory asset of NIS 11 million in the amount of the sum accumulated with respect to non-consecutive update of the fixed payment in the electricity rates starting from 2013 until September 30, e. The rate of return used to calculate the balance of the regulatory deferral accounts as of September 30, 2016 is 3.83% (4.13% as of September 30, 2015). The rate of return was calculated by the Company in accordance with that specified in the base tariff. f. For details regarding the effect of the Electricity Authority s decision proposal regarding the 2016 annual update on regulatory deferral account balances as of September 30, 2016 see Note 3a) above. 44

101 NOTE 7:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) DEBENTURES AND LIABILITIES TO BANKS a. Issues and Substantial Payments: 1) Material Issues during the reporting period a) On February 22, 2016, the Company raised a sum of approximately NIS 1,510 million gross through expansion of negotiable debenture series 26 and 27 pursuant to a shelf prospectus published on November 26, 2015, as follows: - Series 26 (NIS) - in an amount of approximately NIS 572 million par value in consideration for a sum of approximately NIS 669 million (price of 117 Agorot to NIS 1 par value), at nominal interest of 4.8% (annual yield to maturity of 2.12%). The debenture principal will be repaid in 8 unequal annual payments: 3% on October 12 of each of the years 2016 to 2020, 25% on October 12, 2021, 30% on October 12, 2022, and 30% on October 12, Series 27 (CPI linked) - in an amount of approximately NIS 756 million par value in consideration for a sum of approximately NIS 841 million (price of Agorot to NIS 1 par value), at nominal interest of 3.85% (annual yield to maturity of 2.87%). The debenture principal will be repaid in 13 unequal annual payments: 1% on April 12 of each of the years 2017 to 2026, 20% on April 12, 2027, 35% on April 12, 2028, and 35% on April 12, b) On September 8, 2016, the Company raised a sum of an additional approximately NIS 3,309 million gross through expansion of negotiable debenture series 26 and 27 pursuant to a shelf prospectus published on November 26, 2015, as follows: - Series 26 (NIS) - in an amount of approximately NIS 1,250 million par value in consideration for a sum of approximately NIS 1,444 million (price of Agorot to NIS 1 par value), at nominal interest of 4.8% (annual yield to maturity of 2.19%). The debenture principal will be repaid in 8 unequal annual payments: 3% on October 12 of each of the years 2016 to 2020, 25% on October 12, 2021, 30% on October 12, 2022, and 30% on October 12, Series 27 (CPI linked) - in an amount of approximately NIS 1,617 million par value in consideration for a sum of approximately NIS 1,865 million (price of Agorot to NIS 1 par value), at nominal interest of 3.85% (annual yield to maturity of 2.44%). The debenture principal will be repaid in 13 unequal annual payments: 1% on April 12 of each of the years 2017 to 2026, 20% on April 12, 2027, 35% on April 12, 2028, and 35% on April 12, ) Material payments during the reporting period a) On February 17, 2016, the Company executed buyback in a total amount of approximately NIS 1,556 million of debentures series L and M traded on the Retzef Institutional system of the Tel Aviv Stock Exchange as follows: - A total of approximately NIS 768 million par value at a price of from debentures series L. - A total of approximately NIS 461 million par value at a price of from debentures series M. With respect to the buyback of debentures series L and M, an accounting loss was created for the Company from this prepayment in the amount of approximately NIS 82 million before tax effect. b) On August 18, 2016, private (non-negotiable) debentures of Series K, which were issued to institutional entities in 2005, were fully repaid in the amount of approximately NIS 1,240 million par value (a total of approximately NIS 1,500 million including linkage differentials). c) On September 15, 2016, the Company prepaid a loan from Bank Hapoalim in the amount of NIS 500 million out of the total amount of NIS 1 billion. 45

102 NOTE 7:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) DEBENTURES AND LIABILITIES TO BANKS (continued) a. Issues and Substantial Payments: (continued) 3) Material payments after the statement of financial position date a) On October 13, 2016, negotiable debentures of Series 26, which were issued by the Company on the Tel Aviv Stock Exchange pursuant to a shelf prospectus published on November 26, 2015, were partially repaid in an amount of approximately NIS 68 million. b) On October 15, 2016, the Company prepaid all the balance of the loan from Bank Hapoalim in the amount of NIS 500 million (see section 2.c. above). c) On November 24, 2016, the Company s Board of Directors approved a partial buyback of the debenture series which were issued abroad on January 17, 2008 in the amount of USD 250 million par value. The buyback is expected to be executed by the end of November 2016, in an amount of USD 85.3 million par value at a net price of USD for each USD 100 par value. b. Credit Rating On July 21, 2016, the international rating company Standard & Poor s and the local rating company S&P Ma alot published rating follow-up reports regarding the Company, in which they kept the international and local issuer s rating of the Company unchanged, a rating of BBB- with a stable outlook, and a rating of ilaa with a stable outlook, respectively. On July 28, 2016, the Moody s rating company announced that it has raised the rating of the Company s debt secured by foreign currency to a rating of Baa2 with a stable outlook. On September 4, 2016, Midroog Company Ltd. raised the rating of the series which are not guaranteed by the State to a rating of Aa2.il with a stable outlook and kept the rating of the series with a State guarantee unchanged at a rating of Aaa.il with a stable outlook. c. 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 20 e. to the Annual Financial Statements. To the best of the knowledge of the Company, at the time these financial statements were signed, none of the lenders with whom the Company entered agreements have a reason to demand immediate repayment of the Company's debt to them, including the subject of fulfilling the MAC provisions. d. State Guarantee The balance of the State guarantee that was provided to various financial institutions for loans and debentures raised by the Company amounts to approximately NIS 1,513 million as on September 30,

103 NOTE 8:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) DEFERRED TAXES The Income Tax Ordinance Amendment Law was published in the beginning of January 2016, and it determines that the companies tax rate will be reduced to 25% (instead of 26.5%). The new companies tax rate applies to income derived or accrued as of January 1, As a result of the aforesaid legislation, a decrease occurred in the Company s deferred taxes liabilities as of September 30, 2016, in the amount of approximately NIS 337 million. Out of this sum, approximately NIS 332 million were charged as revenue to the statement of income for the nine months ended on September 30, A sum of approximately NIS 5 million was charged as profit to the other comprehensive profit of that period. NOTE 9:- REVENUES a. Seasonality 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. Scope of sales arising from private producers: For the Nine months ended For the Three months ended For the Year ended September 30 September 30 December Unaudited Unaudited Audited Total scope of electricity sales by the Company (in millions of kwh) (*)... 38,726 38,645 15,006 15,231 50,601 Scope of electricity sales of the Company deriving from electricity purchases from private producers (in millions of kwh)... 5,145 2,848 1,841 1,522 4,311 Their value of the total electricity sales of the Company (in %)... 13% 7% 12% 10% 9% (*) Without infrastructure services which are mainly electricity transmission and distribution services provided for private electricity producers. 47

104 NOTE 10:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES, LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY a. Agreements 1) Agreement on 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") (hereinafter: the Agreement ). With respect to exercising the first option and the agreements of the Company with the Tamar Partnership regarding the date of coming into effect, see Note 35A. 1 to the Annual Financial Statements. On April 20, 2016, the Antitrust Authority s notice was received, notifying the Company that the Antitrust Authority is currently examining whether exercising the option through construction of compressing installations indeed enables increase in gas capacity and does not impair the natural gas supply capacity, including as regards the maximum capacity which could have been supplied and the gas supply dates. On June 28, 2016, the Company received a demand for data from the Antitrust Authority regarding the Tamar Agreement, exercising the first option, and the TOP issue. The Company delivered documents to the Authority, as required in the demand for data, and meetings have been held with the Authority and the Tamar Partners regarding this matter, after which the said amendment to the agreement was signed and amendment of the option dates within it was approved by the Antitrust Authority. On September 1, 2016, an amendment to the agreement was signed by the parties to the agreement (hereinafter: the Amendment to the Agreement ). The major points of the amendment to the agreement are entry into force of the first option in January 2017 and bringing forward the entry into force of the second option from 2020 to January 2019, so that the first option period will only be two years. The amendment of the option dates in the agreement was approved by the Antitrust Authority and subject to the consent of the financing banks of the Tamar partners. As of the date of publication of the Financial Statements of September 30, 2016, the consent of the financing banks of the Tamar partners has been received. For additional details regarding the agreement, applications to the Antitrust Authority, decisions of the Audit Committee and the Board of Directors in this matter, TOP mechanism, sale of surplus gas and regulating the use of the gas pipeline capacity, see Note 35 a. 1) to the Annual Financial Statements. Following that stated in Note 35 a. 1) i) to the Annual Financial Statements, the Company is examining, currently and before the publication of the Company s financial statement for each quarter, 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 directive of the Minister of National Infrastructures, Energy and Water of January 2016, the amendment to the agreement, and the emission permits of September 2016 (see Note 1.g. above), the Company estimates that it does not expect to advance payment with respect to gas in the foreseeable future. 48

105 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 10:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY (continued) a. Agreements (continued) 2) The Company s Contractual Engagements with Private Producers For details of the Company s contractual engagements with private producers as of December 31, 2015 see Note 35 a. 4) to the Annual Financial Statements. The entry of private producers with significant output influences and is expected to continue to influence the volume of the Company s sales. 3) Further to Note 35a. 2) with respect to L.N.G. agreements, on July 26, 2016, the Electricity Authority assembly approved the agreement to extend the period of the agreement for the purpose of leasing an L.M.G. carrier. 4) For details of the agreement with the Palestinian Energy Authority to establish substations and the agreements of its subsidiary, see Note 35a. 3) and 5) to the Annual Financial Statements respectively. b. Contingent Claims and Liabilities 1) Claims requested to be recognized as class actions As of the date of the report, 2 class actions are pending against the Company (of which one relates to two applications to approve submission of a class action which were consolidated), in a claimed financial sum of approximately NIS 11 billion and 24 million. Additionally, 8 applications to approve submission of class actions are pending against the Company (of which three deal with the same matter or similar matters and are heard by the same panel, and one constitutes an expansion of one of the approved class actions), in a claimed total financial sum of approximately NIS 6.4 billion (including one application to approve in which it is claimed that its financial scope is tens of millions of NIS, and one in which no sum has been specified). Additionally, an application to serve third party notice is pending against the Company with regard to an application to approve a class action in the amount of approximately NIS 13 million. Furthermore, an appeal has been filed on the decision to reject a request to certify a class action in the amount of NIS 9 billion. There are also additional actions pending against the Company. For details regarding the actions see Note 35 to the Annual Financial Statements. Based on the opinion of its legal advisors, it is more likely than not that the claims will be rejected, or it is not possible to evaluate the odds of the requests being approved, therefore, the Company has not made any provision in its financial statements with respect to the above mentioned applications to approve submission of class actions and class actions, except for one class action with respect to which a negligible provision has been recorded. a) New claims with respect to the Annual Financial Statements: (1) On March 30, 2016, an application to approve a class action against the Company was submitted to the Central Region - District Court (Lod) (hereinafter: the Application to Approve ), in the amount of approximately NIS 56 million. The application to approve deals with the petitioner s argument that the Company breached its duty pursuant to the Electricity Authority s decision (which was anchored in the Electricity Authority s book of criteria), under which it should have compensated all the low voltage consumers of the Company, who were disconnected from electricity for 24 continuous hours in a single event, or during 48 hours accumulated throughout a calendar year, and all the high voltage consumers, who were disconnected from electricity for 20 continuous hours in a single event, or during 40 hours accumulated throughout a calendar year - regardless of the Company s responsibility for the disconnection of electricity, the steps it took to prevent the disconnection, and also without need to prove the damage caused to the group members (it should be noted that approximately NIS 52 million of the class action are attributed to non-payment with respect to electricity supply disruption during the stormy weather which prevailed at the end of October 2015). 49

106 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 10:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY (continued) b. Contingent Claims and Liabilities (continued) 1) Claims requested to be recognized as class actions (continued) a) New claims with respect to the Annual Financial Statements: (continued) In accordance with the Company s application, on July 13, 2016, the court transferred the hearing of this application to approve to the panel of judges hearing the preliminary applications as aforesaid in Note 35.b.1)j) to the Annual Financial Statements. On October 9, 2016, a pretrial hearing was held, at which it was determined that the petitioner has to give its answer of whether it agrees to strike off the application without order for costs, by November 15, On November 10, 2016, a notice was received on behalf of the applicant, under which the application to approve the action as a class action will be stricken off without an order for costs and this proceeding has thus come to its end. (2) On May 19, 2016, an application to approve a class action against the Company was submitted (hereinafter: the Application ). In the application, the applicant is requesting to represent all the respondent s customers, at present and in the seven years prior to the submission of the application to approve the action as a class action, for whom the respondent supplied electricity and who did not execute selfmeasurement of the meter on the date of change in the electricity prices. The applicant s main claim is, in essence, that the Company does not publish the change in the electricity consumption rates for its customers, as required, before the date of change in the rates, and does not even publish, as required, the possibility to self-measure on the date of the rate change. Thus the Company is ostensibly causing damage to the consumers, as the debiting is executed on the basis of a relative calculation and not an accurate calculation. The applicant further claims that the Company is violating its duty to install smart meters which will transfer the electricity consumption data from the meter to the Company, in real time, and will thus enable an accurate reading. The applicant further claims that the electricity bill misleads the consumers, since it is not noted in the electricity consumption graph, appearing in the bill, that consumption in a certain month was calculated on the basis of an estimate - and not according to the actual reading of the meter. The applicant does not specify the accumulated action sum. At this early stage of the proceeding, the legal advisors of the Company estimate that it is more likely than not that the application to approve will be dismissed. Nonetheless, it is remarked that prima facie, some of the arguments raised in the application to approve are largely similar to arguments raised in the application to approve submitted in the past against the Company and which was dismissed on April 2, 2015 (see Note 35.b.1)d) to the Annual Financial Statements). (3) On May 18, 2016, the Company was served with an application to allow to submit a third party notice against it (hereinafter: the Application to Submit a Notice ) submitted by the local council of Majdal Shams (hereinafter: the Council ) as part of a proceeding of an application to approve a class action of approximately NIS 13 million, which was submitted against the Council (hereinafter: the Application to Approve ). The application to submit a notice was also submitted against the Electricity Authority and the Ministry of the Interior. Within the application to submit a notice, the Council requested to send a third party notice to the Company, claiming that if the applicant s claim in the application to approve, that the Council is unlawfully distributing electricity to its residents and that is has been collecting illegal electricity rates for many years, will be accepted, and if the Council will be obligated to pay any sums to the plaintiff and members of the group, it is entitled to indemnification from the third parties which include the Company. According to the Court s ruling, the Company submitted its response to the application to submit notice, including a response to the application to approve itself. A pretrial hearing has been scheduled for December 5, At this preliminary stage, the legal advisors of the Company believe that it is more likely than not that the application to submit a notice to a third party will be rejected. 50

107 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 10:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY (continued) b. Contingent Claims and Liabilities (continued) 1) Claims requested to be recognized as class actions (continued) b) Updates during the report period: (1) Pursuant to Note 35.b.1)a) to the Annual Financial Statements regarding collection of the special supplement in the electricity rate during the years , the date of the appeal has been scheduled for April 6, 2017, the Company s legal advisors updated their estimate regarding the prospects of the appeal that was submitted against the aforesaid ruling and determined that it is more likely than not that the appeal will be dismissed. (2) Pursuant to Note 35.b.1)e) to the Annual Financial Statements on the subject of damages claimed related to alleged delays in the delivery of electricity bills, a ruling was received on March 27, 2016, within which the application to approve was dismissed, without order for costs. The applicants did not submit an appeal against the ruling, according to the date set in the ruling, and thus this proceeding has ended. (3) Pursuant to Note 35.b.1)f) to the Annual Financial Statements regarding the Company s engagements during with the Siemens Company in agreements to purchase combined cycle gas turbines (CCGT) and auxiliary services, on May 16, 2016, the court instructed the parties to update it with regard to the status of the proceedings in the application for leave to appeal mentioned in section 2) a) (1) below, as the proceedings in the application for this approval are suspended until there is a decision on the above appeal. The case is set for an internal reminder on January 1, The Company s legal advisors are of the opinion that the Company has good defense arguments to dismiss the application to approve and it is more likely than not that the application to approve will be dismissed. In addition, further to the claim of the Company referred to in Note 35 b. 1) f) to the Annual Financial Statements filed by the Company on March 24, 2013 against Siemens, Dan Cohen and others, it should be noted that following the mediation proceeding held between the Company and Siemens in an attempt to settle the dispute outside the court, they signed a settlement agreement in October 2016, which was approved by the court on November 13, Within the settlement agreement, Siemens agreed and committed to pay the Company a comprehensive sum of NIS 90 million, to remove the Company s action against the Siemens companies with respect to bribery payments which were given, by the Siemens Company, to elements in the Company with respect to agreements between the Company and Siemens companies to purchase five gas turbines and related services for the Company s power stations and in a transaction to purchase the DMS system. The effect of the above mentioned agreement has not yet been reflected in the Company s financial statements for the third quarter of 2016 as it was reached after the statement of financial position date. The settlement agreement preserved, inter alia, the Company s right to continue its action against any other element which received bribe from the Siemens companies with respect to the aforesaid agreements. (4) Pursuant to Note 35.b.1)g) to the Annual Financial Statements regarding the global cartel in the GIS array market (Gas Integrated Switchgear - hereinafter: GIS ) during , in which the Cartel Companies took part, and within which the Cartel Companies coordinated a tender which was published by the Company to purchase scores of GIS arrays, a pretrial hearing was held on November 9, 2016, within which the Court ruled that the Company will submit affidavits of testimony by March 16, A pretrial hearing has been scheduled for March 26, The Company s legal advisors are of the opinion that the Company has good defense arguments to dismiss the application to approve and it is more likely than not that the application to approve will be dismissed. In addition, as of the date of the statement of financial position, there is a claim of the Company with respect to GIS orders against the companies that provided such orders. For further details, see Note 35b.5)a) to the Annual Financial Statements. 51

108 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 10:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY (continued) b. Contingent Claims and Liabilities (continued) 1) Claims requested to be recognized as class actions (continued) b) Updates during the report period: (continued) (5) Pursuant to Note 35.b.1)i) to the Annual Financial Statements regarding the very long period of time to wait at the 103 call center, which according to the appellants claim exceeds the time permitted as set in the Consumer Protection (Providing Telephone Service) Regulations, 2012, on November 3, 2016, an agreed upon application was submitted to abandon the application to approve the action as a class action, and on November 10, 2016, a ruling was granted approving the abandonment. The stated proceeding thus came to an end. (6) Pursuant to Note 35.b.1)j) to the Annual Financial Statements regarding the alleged damages which were caused by the disruptions of the electricity supply which occurred during the stormy weather which occurred during in October, 2015, on April 10, 2016, the consolidated application was submitted, dealing with damage caused to approximately 215,000 households. Simultaneously with the submission of the consolidated application, on April 10, 2016, an amended application was submitted, regarding the business owners, in an amount estimated by them at tens of millions of NIS. On October 9, 2016, a first pretrial hearing was held at the Lod District Court of the Central District. During the hearing, dates for submission were set in the various applications submitted by the parties regarding attachment of documents to applications and document disclosure in the proceeding. An additional pretrial hearing has been scheduled for April 23, The external legal advisors of the Company estimate, according to information and data known as of the date of this financial statement, that it is more likely than not that the applications to approve will be dismissed. It should be noted that, as stated, this is only a preliminary estimate in view of the preliminary stage of the proceeding. (7) Pursuant to Note 35.b.1)k) to the Annual Financial Statements regarding the plaintiffs alleged entitlement to pay the Electric Company with respect to the electricity consumed by them, concentrated sale rate, as it is defined in the criteria, on April 19, 2016, the court ruled, following the Company s application, that the proceeding of the application to approve will be delayed until a peremptory ruling is rendered in the proceeding described in section 5) below, and that the applicants will be permitted to renew the hearing of the application to approve within 90 days from the date a peremptory ruling is rendered. At this preliminary stage the external legal advisors are unable to estimate the prospects of the application to approve to be accepted or the prospects of the action itself. However, noting the fact that the application to approve raises issues similar to those lying at the base of the group action - see the estimate detailed in section 5) below. (8) Pursuant to Note 35.b.1)l) to the Annual Financial Statements regarding the claim for compensation with respect to non-payment of arrears interest by the Comptroller General for customers credit balance, on September 13, 2016, an agreed upon application to abandon the application to approve the action as a class action was submitted. The legal advisors of the Company estimate that it is more likely than not that the application to abandon will be approved. 52

109 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 10:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY (continued) b. Contingent Claims and Liabilities (continued) 2) Claims that have been recognized as class actions as of the date of these Financial Statements a) Updates during the report period: (1) Following Note 35.b.2)a)(1) and (2) to the Annual Financial Statements regarding the claim of collecting illegal salary payments, ostensibly, through the electricity bill, on May 1, 2016, the applicants submitted an application to dismiss the application for leave to appeal submitted by the Company in the case or, alternatively, an application to give instructions regarding the continued clarification of the application for leave to appeal, in view of the fact that the Electricity Authority had not yet completed, by the end of April, 2016, the handling of recognition of the pension costs in the rate. The Company and the State submitted responses to this application. On October 6, 2016, an updating notice was submitted on behalf of the Attorney General, within which it was clarified that all the demands, claims and disputes arising with respect to the pension component in the rate should be examined, and that it is possible to estimate that a hearing regarding this issue will be held at the Electricity Authority s plenum no later than the first quarter of On November 9, 2016, the Supreme Court ordered that the case will be returned to a hearing at the District Court, and scheduled a hearing for the application for leave to appeal for December 21, Despite the decision of approval, the legal advisors of the Company are of the opinion that the Company s arguments for dismissing the consolidated application, as well as its arguments for the application for leave to appeal, are good arguments, and that it is more likely than not that the application for leave to appeal will be accepted, and the action will be dismissed at the end of the day. Regarding the additional application, which is entirely dependent on the application to approve, if the application to approve will be dismissed, then the additional application will also be dismissed. (2) Following Note 35.b.2)b) to the Annual Financial Statements regarding the claim of a breach of the obligation to provide free telephone service for responding to public calls regarding failures, faults in goods or faults in services, within the mediation proceeding, the parties reached a settlement agreement which was submitted for approval by the court on October 30, The legal advisors of the Company estimate that it is more likely than not that the application to approve the settlement agreement will be approved, and the Company is not expected to bear the expenses with respect to this claim, beyond a negligible amount that is attributed in its books as a provision. 3) Derivative Claims For details regarding legal proceedings in this matter see Note 35 b. 4) to the Annual Financial Statements. 4) E.M.G For details of an agreement into which the Company entered for the supply of natural gas from Egypt and arbitration proceedings which the Company conducted with respect to disruptions in the supply of natural gas and the arbitrators award received in these proceedings, see Note 35 b. 5) b) to the Annual Financial Statements. The Company is acting to collect the amounts to which it is entitled under the arbitration award. However, as of the date of the approval of the financial statements, the Company is unable to estimate the prospects for collecting the amount awarded in its favor in the arbitration. 53

110 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 10:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY (continued) b. Contingent Claims and Liabilities (continued) 5) Claim on the Subject of a Collective Sale Rate For details of a claim submitted against the Company with regard to a rate paid by collective settlements to the Company, see Note 35 b. 6) to the Annual Financial Statements. As of the date of the statement of financial position, the estimate of the Company s legal advisors remains that the Company has good defense arguments and that it is more likely than not that it will be dismissed. 6) Claims for Payment of Municipal Taxes As of the date of the statement of financial position, there are demands against the Company for municipal taxes in amounts exceeding the relevant provision that was recorded in the Financial Statements by about NIS 132 million. These demands derive from the changes in classification of lands held by the Company, the demand to increase the areas being billed and the demand with respect to municipal tax rates. The Company estimates, based in part on the opinion of its legal advisors, that it is more likely than not that the Company will not l be required to pay these amounts, for which the Company did not make a provision in its Financial Statements. 7) The Planning and Building Law Pursuant to Note 35.b.8) to the Financial Statements, in June 2016, the District Court gave its ruling, under which the administrative appeal submitted by some of the plaintiffs will be dismissed, and the decision of the determining assessor regarding these actions will remain unchanged. An application for leave to appeal the stated decision of the District Court was submitted to the Supreme Court. In view of the District Court s decision on the one hand and the application for leave to appeal on the other hand, the amounts of the provisions in the financial statements with respect to these actions were reduced. Additionally, in view of a determining assessor s decision received in September 2016 with respect to additional actions in similar issues, the amounts of the provisions in the financial statements with respect to these actions were also reduced. As of the statement of financial position date, there are pending actions or other legal processes against the Company of approximately NIS 630 million in excess of the provisions recorded in the Company s financial statements. 8) Other Contingent Liabilities a) The Israel Lands Administration For details of the discussions of the Company with the Israel Lands Administration regarding lease fees in respect of certain real estate assets, see Note 35 b.9) a) to the Annual Financial Statements. b) Project D Further to Note 35 b.9)b) to the Annual Financial Statements with respect to Project D, in April, 2016, an application was received from the Minister of National Infrastructures, Energy and Water, under which the Company is required to prepare an updated development plan which includes cancellation of Project D. The Company is acting in accordance with this instruction. In November, 2016, the recommendation of the Electricity Authority to cancel Project D in the Company s development plan was delivered to the Minister of National Infrastructures, Energy and Water. 54

111 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 10:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY (continued) b. Contingent Claims and Liabilities (continued) 8) Other Contingent Liabilities (continued) c) Fees, Betterment Levies and Others (1) Alon Tavor For details regarding assessments of betterment levies at the Alon Tavor power stations see Note 35 b. 9) c)1) to the Annual Financial Statements. The pretrial hearing of the administrative appeal regarding Alon Tavor, which was submitted by the planning and construction committee, was held in September On November 16, 2016, the judgment of the Nazareth District Court was received, accepting the request of the Yizraelim Local Planning and Building Committee and instructing that the administrative appeal submitted by it against the decision of the appeals committee to cancel the demand of payment of betterment levy with respect to the Alon Tavor power station in the amount of NIS 680 million be struck off. The significance of the judgment is that the decision of the appeals committee, cancelling the demand for payment, is conclusive and final. (2) Tzafit For details regarding assessments of betterment levies at the Tzafit power stations see Note 35 b. 9) c)2) to the Annual Financial Statements. On June 9, 2016, the appeals committee decided to dismiss one of the Electric Company s preliminary arguments, and determined that the local committee is authorized in principle to charge a betterment levy by virtue of a national outline plan with detailed provisions by virtue of which building licenses can be issued. In October 2016, the decision of the appeals committee was received, which determines cancellation of the demand for payment of betterment levy on the basis of a claim of delay, and on the grounds of the betterment levy not meeting the initial burden of proving the betterment. In November 2016, the local planning and building committee submitted an administrative appeal against the above mentioned decision of the appeals committee. As of the date of the report the legal advisors of the Company do not have the ability to evaluate the exposure. However, the Company believes that in the event that at the end of the day the Company is required to pay any amounts in respect of this levy, these funds will be part of the fixed asset expenses of the Company, and they are expected to be recognized in the electricity rate by the Electricity Authority. (3) Others As of the statement of financial position date, the Company has demands with respect to fees and other levies in amounts exceeding the provision existing in the financial statements by approximately NIS 158 million. There is provision in the books with respect to some of the demands and in the opinion of the legal advisors of the Company with respect to the rest of the demands, as of the date of the approval of the financial statements the Company does not have the ability to estimate the exposure to these demands. d) Forced Capacity in the Gas Transmission Agreement Pursuant to the notice of the Gas Lines Company, due to repeated deviations in 2015 from the ordered transmission capacity and according to the provisions of the transmission agreement, there is an additional compelled capacity increase as of March 2015, which it claims creates an additional liability for the Company. The significance of this added capacity is an additional financial cost of NIS 62 million above the accepted charges. This is in addition to a liability of NIS 17 million with respect to deviation from capacity increase, for which the Company has made an appropriate provision. A hearing on the transmission agreement was held on June 29, 2016, at the offices of the Gas Authority, and as of the date of the approval of the financial statements the parties are continuing the discussions to settle the dispute. 55

112 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 10:- AGREEMENTS, CLAIMS, CONTINGENT LIABILITIES AND LABOR DISPUTES AND INVESTMENT IN AN ASSOCIATE COMPANY (continued) b. Contingent Claims and Liabilities (continued) 9) Guarantees Regarding guarantees provided by the Company, see Note 27 e. to the Annual Financial Statements. c. Labor disputes 1) For details of the labor dispute with respect to salary deviations see Note 5.g above. 2) For details of the labor dispute with respect to the advancement of the reform outline see Note 35 c.7) to the Annual Financial Statements. It should also be noted as of the date of approval of the financial statements, the negotiations between the parties are continuing with regard to the matters related to the implementation of the reform and its impact on the working conditions of the employees and their job security, while providing reports and conducting discussions, from time to time, as part of the legal proceeding taking place in this respect in the National Labor Court. 3) A labor dispute regarding non-granting of tenure - following a labor dispute regarding organizational changes and large scale plans for increasing economic efficiency, including dismissals, early retirement of thousands of employees and large scale cutback in the number of positions (see Note 35.c.14) to the Annual Financial Statements. On July 28, 2016, the employees union began to take sanctions which were expressed by halting the work of the Company s temporary employees, halting the work required to publish the financial statements on time and disrupting additional Company activities. The sanctions were announced following the Company s decision not to continue to extend the employment of temporary employees whose temporary employment period had ended. The Company s decision was reached due to absence of possibility to grant tenure at this time, in light of the employees union refusal to take obligatory steps to increase efficiency at the same time. On July 31, 2016, the Company applied to the Haifa Regional Court of Labor, requesting temporary relief to stop the sanctions. The Regional Court instructed the employees to return to regular work and delayed the entry into effect of the employment termination of the temporary employees. In a hearing held on August 1, 2016 at the Haifa Regional Court of Labor, the court determined that the parties will conduct intensive discussions regarding the Company s desire to execute early retirement for permanent employees (including the terms of their retirement) and regarding the number of temporary employees who will receive tenure. In the court s decision of October 26, 2016, it was determined that the parties will inform how they wish to proceed in the case by December 1, The injunction given on July 31, 2016 will remain in effect until another decision is given. 4) For details of additional labor disputes in the Company, see Note 35 c. 6), 8), 9), 10), 11), 12), 13), to the Annual Financial Statements. d. Investment in Associate Company At the end of September, 2016, the Company and the associate company I.B.C Israel Broadband Company (2013) Ltd (hereinafter: IBC ) signed an agreement to postpone payments until 2017 of approximately NIS 50 million. For additional details of an investment executed by the Company in IBC, see Note 10 b. to the Annual Financial Statements. 56

113 NOTE 11:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) FINANCIAL INSTRUMENTS a. Financial Instruments Measured by Fair Value for Disclosure Purposes Only: Financial liabilities Book value Fair Value As of December 31 As of September 30 As of December 31 As of September (in NIS millions) Unaudited Audited Unaudited Audited Debentures and long term loans (including current maturities and payable interest) Long term loans at fixed interest (2)... 2,920 3,357 3,254 3,357 3,814 3,662 Long term loans at variable interest... 3,143 3,984 3,840 3,257 4,009 3,977 Negotiable debentures (in Israel) (1)... 6,718 1,940 1,931 6,816 1,993 2,002 Fixed interest non-negotiable debentures (in Israel and abroad) (3)... 30,807 34,503 34,370 34,713 37,948 37,616 Variable interest non-negotiable debentures (in Israel and abroad) Debentures for the State of Israel (2)... 2,543 2,561 2,539 2,957 2,972 3,515 The carrying amount of financial assets and financial liabilities of certain assets, including cash and cash equivalents, trade receivables, short-term and long-term debtors, short-term investments, deposits, derivatives, short-term loans and credit, trade and other payables, match or are close to their fair value. (1) The fair value is based on prices quoted in an active market as of the date of the Statement of Financial Position. (2) The fair value was determined on the basis of the market interest rates as of the date of the Statement of Financial Position (the fair value of the long term loan received bears fixed interest based on the calculation of the present value of the cash flow according to the acceptable interest rate for a similar loan with similar characteristics). (3) The fair value is based on individual prices quoted by Fair Spread Ltd. for non-negotiable debentures in Israel as on the Statement of Financial Position date, and on individual prices calculated according to the non-negotiable liabilities revaluation method specified in Note 27 to the Annual Financial Statements for non-negotiable debentures. 57

114 NOTE 11:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) FINANCIAL INSTRUMENTS (continued) b. Hierarchy of Financial Instruments Measured by 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: Level 2: Level 3: Quoted (unadjusted) prices of assets and financial liabilities in active markets. Data that is not quoted prices that are included in level 1, that are observed directly (i.e. prices) or indirectly (data derived from prices), regarding assets and financial liabilities. Data regarding financial assets and financial liabilities that are not based on observed market data. The hedge transactions, classified at level 2, are calculated according to fair value based on forecasted interest curves. As of September As of September 30, , 2015 Level 2 NIS in millions Unaudited As of December 31, 2015 Audited Financial assets Swap transactions designated to hedge cash flow transactions Other swap and forward transactions Financial liabilities Swap transactions designated to hedge cash flow transactions... (274) (37) (74) Other swap and forward transactions (1,632) (1,611) (1,588) Total liabilities with respect to hedging transactions, net (1,687) (1,068) (1,144) 58

115 NOTE 12:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) SEGMENTAL REPORTING a. General The Company implements International Financial Reporting Standard 8 (hereinafter: "IFRS 8") from January 1, b. Detailed Reportable Operation Segments The operations of the Company are comprised of three 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, including purchase of electricity from private producers. Derives its revenues according to its share in the electricity rate, as determined by the regulator (Electricity Authority). Transmission Segment - includes the transmission and transformation system of ultra-high, long distance electricity, including the management of the electricity system. Generates its revenues according to its share in the electricity rate, as determined by the Electricity Authority. Distribution Segment includes the electricity grids system and the transformation stations which supply the electricity to the end consumers, except a limited number of customer that purchase high voltage electricity directly from the transmission systems, as well as the customers service and collection system of the Company, the segment generates its revenues according to its share in the electricity rate, as determined by the Electricity Authority. c. Income and Results according to Operational Segments Segmental revenues are calculated on the basis of the electricity rate for the segment, published by the Electricity Authority, multiplied by the sold quantity (kw/h) of that segment. Segmental expenses that can be specifically identified are charged directly to the appropriate items. In addition, certain indirect expenses are recorded according to an allocation, which serves as a reasonable estimate for attributing these expenses, while adjusting to the electricity rate base. The CODM (Company CEO) receives the operational results of each segment up to the yearly profit (loss) level for the period. See detailed information in Note 39 to the Annual Financial Statements. Generation segment For the Nine Months ended September 30, 2016 Transmission Distribution segment segment NIS in millions Unaudited Total Company Revenues... 11,856 2,879 2,777 17,512 Operating income from ordinary operations... 1, ,263 Income before income tax... 1, ,797 Income before transactions in balances of regulatory deferral accounts ,677 Transactions in balances of regulatory deferral accounts, net of tax... (47) 122 (65) 10 Income for the period ,687 Additional Details Depreciation and amortization... 1, ,509 Financing expenses, net ,466 59

116 NOTE 12:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) SEGMENTAL REPORTING (continued) c. Income and Results according to Operational Segments (continued) Generation segment For the Three Months ended September 30, 2016 Transmission Distribution segment segment NIS in millions Unaudited Total Company Revenues... 4,801 1,171 1,080 7,052 Operating income from ordinary operations... 1, ,787 Income before income tax ,292 Income before transactions in balances of regulatory deferral accounts Transactions in balances of regulatory deferral accounts, net of tax... (7) 178 (28) 143 Income for the period ,111 Additional Details Depreciation and amortization ,262 Financing expenses, net Generation segment For the Nine Months ended September 30, 2015 Transmission Distribution segment segment NIS in millions Unaudited Total Company Revenues(*)... 12,295 2,887 2,657 17,839 Operating income from ordinary operations... 1, ,275 Income (loss) before income tax (350) 763 Income (loss) prior to transactions in balances of regulatory deferral accounts (263) 553 Transactions in balances of regulatory deferral accounts, net of tax... *(110) *(154) (33) (297) Income (loss) for the period... *273 *279 (296) 256 Additional Details Depreciation and amortization... 1, ,003 3,404 Financing expenses, net ,512 (*) Amendment made to a non-material error 60

117 NOTE 12:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) SEGMENTAL REPORTING (continued) c. Income and Results according to Operational Segments (continued) Generation segment For the Three Months ended September 30, 2015 Transmission Distribution segment segment NIS in millions Unaudited Total Company Revenues... 4,876 1,256 1,060 7,192 Operating income from ordinary operations ,611 Income before income tax ,208 Income for the period prior to transactions in balances of regulatory deferral accounts Transactions in balances of regulatory deferral accounts, net of tax... *82 * Income for the period... *470 * ,042 Additional Details Depreciation and amortization ,141 Financing expenses, net Generation segment For the Year ended December 31, 2015 Transmission Distribution segment segment NIS in millions Audited Total Company Revenues... 15,879 3,697 3,482 23,058 Operating income from ordinary operations... 1,272 1, ,574 Profit (Loss) before income tax (365) 796 Profit (Loss) before transactions in balances of regulatory deferral accounts (277) 567 Transactions in balances of regulatory deferral accounts, net of tax * (104) * (196) (44) (344) Profit (loss) for the year * 247 * 297 (321) 223 Additional Details Depreciation and amortization... 2, ,333 4,578 Financing expenses, net ,778 * A correction of a non-material error was executed 61

118 NOTE 12:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) 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 period include investments in fixed assets and exclude intangible assets, financial instruments and deferred taxes assets. The CODM also receives data of the total liabilities of the Company, divided into the three segments. Generation segment As of September 30, 2016 Transmission Distribution segment segment NIS in millions Unaudited Total Company Assets... 43,210 16,426 26,277 85,913 Investments in the period... 1, ,506 Liabilities and credit balances of regulatory deferral accounts... 35,451 12,433 19,925 67,809 Generation segment As of September 30, 2015 Transmission Distribution segment segment NIS in millions Unaudited Total Company Assets... *43,043 *16,494 25,023 84,560 Investments in the period... 1, ,774 Liabilities and credit balances of regulatory deferral accounts... 35,723 12,695 19,365 67,783 Generation segment As of December 31, 2015 Transmission Distribution segment segment NIS in millions Unaudited Total Company Assets... * 41,774 * 16,318 25,308 83,400 Investments in the year... 1, ,225 3,657 Liabilities and credit balances of regulatory deferral accounts... 34,558 12,516 19,632 66,706 * A correction of a non-material error was executed 62

119 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION 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 required 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 nine months ended September 30, 2016: Total Company Generation Transmission segment segment NIS in millions Distribution segment Required revenues... 16,270 11,180 2,481 2,609 Adjustment for segment revenues... 1, Revenues from electricity... 17,275 11,751 2,870 2,654 Other revenues Total revenues... 17,512 11,856 2,879 2,777 Cost for operating the electricity system... 13,348 10,044 1,997 1,307 Income from operating the electricity system... 4,164 1, ,470 Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners... (327) (169) (26) (132) Income from current operations... 3,263 1, Financial expenses... 1, Income before income taxes... 1,797 1, Income taxes Income after income tax... 1, Company s share of the loss of an associate company... (3) - - (3) Income for the period before regulatory deferral accounts... 1, Movements in regulatory deferral accounts balances, net of tax (47) 122 (65) Profit for the period... 1,

120 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) b. Details of the generation sites Statement of operations for the nine months ended September 30, 2016: Total generation segment PEP and others Rutenberg Orot Rabin Haifa Reading Eshkol Gezer Hagit Alon Tavor NIS in millions Required revenues... 11,180 1,425 2,084 1, , , Adjustment for segment revenues Revenues from electricity... 11,751 1,425 2,206 1, , , Other revenues Total revenues... 11,856 1,425 2,217 1, , , Cost for operating the electricity system... 10,044 1,422 1,755 1, , Income from operating the electricity system... 1, Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners... (169) - (37) (44) (13) (10) (24) (9) (12) (5) (8) (5) (2) Income from current operations... 1, Financial expenses Income before income taxes... 1, Income taxes Income after income taxes Company s share of the loss of an associate company Income for the period before regulatory deferral accounts Movements in regulatory deferral accounts balances, net of tax... (47) - (12) (12) (3) (2) (5) (1) (2) (1) (1) (1) (7) Loss for the period Ramat Hovav Zafit Other gas turbines 64

121 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND (Continued) c. Details of the distribution sites Statement of operations for the nine months ended September 30, 2016 Total distribution segment Northern District Haifa Jerusalem District District NIS in millions Dan District Southern District Required revenues... 2, Adjustment for segment revenues Revenues from electricity... 2, Other revenues Total revenues... 2, Cost for operating the electricity system... 1, Income from operating the electricity system... 1, Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners... (132) (28) (17) (17) (24) (46) Income from current operations Financial expenses Income before income taxes Income taxes Income after income tax Company s share of the loss of an associate company... (3) (1) - - (1) (1) Income for the period before regulatory deferral accounts Movements in regulatory deferral accounts balances, net of tax... (65) (14) (7) (8) (12) (24) Income for the period

122 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) d. Statement of Financial Position as of September 30, 2016: Total Company Generation Transmission segment segment NIS in millions Distribution segment Current assets... 12,193 6,923 2,193 3,077 Long-term receivables... 9,404 5, ,145 Fixed assets, net... 61,328 28,838 13,323 19,167 Intangible assets, net... 1, Debit balances of regulatory deferral accounts... 1,708 1, ,913 43,210 16,426 26,277 Current liabilities... 9,916 4,959 1,467 3,490 Non-current liabilities... 55,244 28,199 10,730 16,315 Capital... 18,104 7,759 3,993 6,352 Credit balances of regulatory deferral accounts... 2,649 2, ,913 43,210 16,426 26,277 66

123 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) e. Details of the generation segment Statement of Financial Position as of September 30, 2016: Total generation segment PEP and others Rutenberg Orot Rabin Haifa Reading Eshkol Gezer Hagit Alon Tavor NIS in millions Ramat Hovav Zafit Other gas turbines Current assets... 6, ,486 1, Long-term receivables... 5, ,055 1, Fixed assets, net... 28, ,030 6,059 2, ,582 2,628 2, , Intangible assets, net Debit balances of regulatory deferral accounts... 1, ,210 1,081 11,019 8,845 3, ,196 3,659 3,807 1,407 2,225 1,444 1,130 Current liabilities... 4, ,329 1, Non-current liabilities... 28, ,176 5,926 2, ,650 2,400 2, , Capital... 7, ,945 1, Credit balances of regulatory deferral accounts... 2, ,210 1,081 11,019 8,845 3, ,196 3,659 3,807 1,407 2,225 1,444 1,130 67

124 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) f. Details of the distribution segment Statement of Financial Position as of September 30, 2016: Total distribution segment Northern District Haifa Jerusalem District District NIS in millions Dan District Southern District Current assets... 3, ,120 Long-term receivables... 3, ,089 Fixed assets, net... 19,167 4,063 2,018 2,503 3,513 7,070 Intangible assets, net Debit balances of regulatory deferral accounts ,277 5,552 2,856 3,427 4,846 9,596 Current liabilities... 3, ,291 Non-current liabilities... 16,315 3,445 1,799 2,119 3,028 5,924 Capital... 6,352 1, ,171 2,337 Credit balances of regulatory deferral accounts ,277 5,552 2,856 3,427 4,846 9,596 68

125 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) g. Statement of operations for the nine months ended September 30, 2015: Total Company Generation Transmission segment segment NIS in millions Distribution segment Required revenues... 17,793 12,273 2,414 3,106 Adjustment for segment revenues... (140) (35) 467 (572) Revenues from electricity... 17,653 12,238 2,881 2,534 Other revenues Total revenues... 17,839 12,295 2,887 2,657 Cost for operating the electricity system... 13,785 10,563 1,838 1,384 Profit from operating the electricity system... 4,054 1,732 1,049 1,273 Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners, net , ,127 Profit from current operations... 2,275 1, Financial expenses... 1, Profit (loss) before income taxes (350) Income taxes (93) Profit (loss) after income taxes (257) Company s share of the loss of associated companies, net... (7) - (1) (6) Profit (loss) for the period before regulatory deferral accounts (263) Movement in regulatory deferral accounts balances, net of tax... (297) *(110) *(154) (33) Profit (loss) for the period *273 *279 (296) (*) Correction of non-material error 69

126 THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) NOTE 13:- ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) h. Statement of operations for the nine months ended September 30, 2015: Total generation segment PEP and others Rutenberg Orot Rabin Haifa Reading Eshkol Gezer Hagit Alon Tavor NIS in millions Required revenues... 12,273 1,031 2,677 2, ,102 1,014 1, Adjustment for segment revenues. (35) - (8) (8) (3) (2) (3) (3) (3) (2) (2) (1) - Revenues from electricity... 12,238 1,031 2,669 2, ,099 1,011 1, Other revenues Total revenues... 12,295 1,031 2,682 2, ,107 1,014 1, Cost for operating the electricity system... 10,563 1,028 2,228 1, Profit from operating the electricity system... 1, Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners, net Profit from current operations... 1, Financial expenses Profit before income taxes Income taxes Profit after income taxes Company s share of the loss of associated companies, net Profit before regulatory deferral accounts Movement in regulatory deferral accounts balances, net of tax(*)... (110) - (26) (28) (7) (7) (12) (3) (4) (3) (3) (2) (15) Profit (loss) for the period(*) (3) (6) (*) Correction of non-material error Ramat Hovav Zafit Other gas turbines 70

127 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) i. Details of the distribution sites statement of operations for the nine months ended September 30, 2015 Total distribution segment Northern District Haifa Jerusalem District District NIS in millions Dan District Southern District Required revenues... 3, ,103 Adjustment for segment revenues... (572) (117) (69) (72) (111) (203) Revenues from electricity... 2, Other revenues Total revenues... 2, Cost for operating the electricity system... 1, Profit from operating the electricity system... 1, Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners, net , Profit from current operations Financial expenses Loss before income taxes... (350) (70) (44) (43) (70) (123) Income taxes... (93) (19) (12) (12) (18) (32) Loss after income taxes... (257) (51) (32) (31) (52) (91) Company s share of the loss of associated companies, net... (6) (1) (1) (1) (1) (2) Loss before regulatory deferral accounts... (263) (52) (33) (32) (53) (93) Movement in regulatory deferral accounts balances, net of tax... (33) (7) (4) (4) (6) (12) Loss for the period... (296) (59) (37) (36) (59) (105) 71

128 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) j. Statement of operations for the year ended December 31, 2015: Total Company Generation Transmission segment segment NIS in millions Distribution segment Required revenues... 23,483 16,169 3,230 4,084 Adjustment for segment revenues... (639) (356) 457 (740) Revenues from electricity... 22,844 15,813 3,687 3,344 Other revenues Total revenues... 23,058 15,879 3,697 3,482 Cost for operating the electricity system... 18,286 13,994 2,439 1,853 Income from operating the electricity system... 4,772 1,885 1,258 1,629 Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners , ,408 Income from current operations... 2,574 1,272 1, Financial expenses... 1, Income (loss) before income taxes (365) Income taxes (99) Income (loss) after income tax (266) Company s share of the loss of an associate company... (12) - (1) (11) Income (loss) for the period before regulatory deferral accounts (277) Movements in regulatory deferral accounts balances, net of tax... (344) * (104) * (196) (44) Income (loss) for the period * 247 * 297 (321) (*) Correction of non-material error 72

129 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) k. Details of the generation sites statement of operations for the year ended December 31, 2015: Total generation segment PEP and others Rutenberg Orot Rabin Haifa Reading Eshkol Gezer Hagit Alon Tavor NIS in millions Required revenues... 16,169 1,514 3,440 2,866 1, ,477 1,310 1, Adjustment for segment revenues... (356) - (83) (70) (29) (14) (36) (32) (37) (18) (21) (13) (3) Revenues from electricity... 15,813 1,514 3,357 2,796 1, ,441 1,278 1, Other revenues Total revenues... 15,879 1,514 3,371 2,810 1, ,450 1,283 1, Cost for operating the electricity system... 13,994 1,510 2,864 2,496 1, ,251 1,076 1, Income from operating the electricity system... 1, Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners Income from current operations... 1, Financial expenses Income before income taxes Income taxes Income after income taxes Company s share of the loss of an associate company Income for the period before regulatory deferral accounts Movements in regulatory deferral accounts balances, net of tax (*)... (104) - (25) (27) (6) (6) (11) (3) (4) (3) (3) (2) (14) Income (loss) for the period (*) (6) Ramat Hovav Zafit Other gas turbines (*) Correction of non-material error 73

130 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) l. Details of the statement of income in the distribution segment for the year ended December 31, 2015 Total distribution segment Northern District Haifa Jerusalem District District NIS in millions Dan District Southern District Required revenues... 4, ,430 Adjustment for segment revenues... (740) (152) (89) (98) (142) (259) Revenues from electricity... 3, ,171 Other revenues Total revenues... 3, ,209 Cost for operating the electricity system... 1, Income from operating the electricity system... 1, Sales and marketing expenses Administrative and general expenses Expenses from liabilities to pensioners , Income from current operations Financial expenses Loss before income taxes... (365) (71) (49) (51) (70) (124) Income taxes... (99) (19) (13) (14) (19) (34) Loss after income tax... (266) (52) (36) (37) (51) (90) Company s share of the loss of an associate company... (11) (2) (1) (1) (3) (4) Loss for the period before regulatory deferral accounts... (277) (54) (37) (38) (54) (94) Movements in regulatory deferral accounts balances, net of tax... (44) (9) (5) (6) (8) (16) Loss for the period... (321) (63) (42) (44) (62) (110) 74

131 NOTE 13:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED IN ACCORDANCE WITH THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY REGARDING THE ALLOCATION OF STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION ITEMS ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (Continued) For additional details see Note 3.b and c to the Annual Financial Statements. m. Principles of attribution to segments Revenues due to the effect of the letter from the Commissioner for Wages (see also note 5g above) are charged according to the allocation of wage expenses ratio in the electricity chain in the reporting period. For further information on the main principles of allocation to the various segments see Note 39l to the Annual Financial Statements. 75

132 NOTE 14:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY a. For information about allocating the statement of profit and loss and comprehensive income items according to the generation transmission and distribution segments, see Note 39 to the Annual Financial Statements. b. Regarding disclosure about reports on internal controls, see Note 40 b to the Annual Financial Statements. 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 for which it believes there is a material gap between their fair value and their carrying amount in the Financial Statements, which are not recorded at their full amounts 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 Rogozin land), where the book value is higher than the fair value of the land. 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. 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 the controls over the 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 the internal controls over the financial reports 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 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 a decision by the Commissioner of Wages regarding salary exceptions in the Company of October 10, 2013, a legal proceeding was conducted regarding four salary components in the Company and on May 3, 2016 a ruling was given, approving most of the determinations of the Supervisor of Wages in this matter. The parties submitted an appeal against the judgment. At present, the parties are holding negotiations in order to reach consents which will make the judicial decision redundant. For additional details see Note 5g and 10c above. 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 of September 17, The information required above was not included in the Financial Statements. In a letter to the then Director of the Government Companies Authority dated January 10, 2007, the Company's CEO states that back in 1998, the Company stated that it was preparing to collect the extensive amounts of material required. Furthermore, in 1998, a list of the Company's assets was transferred to the Ministry of Finance as of the date of the expiration of the concession and since then and, to date, the list of added assets is immaterial in relation to total assets and is irrelevant with relation to the assets arrangement prescribed by the Electricity Sector Law. The former CEO also mentioned that in meetings held with the Government Companies Authority and representatives of the Company's Management in negotiations regarding the structural change, the representatives of the employees' organization announced that they would not allow giving out information to the State or transferring any documents in connection with the Company's assets, etc. In recent years, a focused and continuous process is conducted for gathering and coordinating all the information of all the Company s assets and arranging them in all that relates to book of assets, registering rights, management and regulation. The Company has 320 major sites and a book of secondary sites which is being completed at present. 76

133 NOTE 14:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued) h. Regarding the disclosure of the implications of the Law to Promote Competition and Reduce Centralization, 2013 hereinafter: the Centralization Law ), see Note 40 g. 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 10 a 2) above. 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 for the period ended September 30, 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 Infinity 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 40 k. to the Annual Financial Statements. 77

134 NOTE 14:- THE ISRAEL ELECTRIC CORPORATION LIMITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2016 (NEW ISRAELI SHEKELS) ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY (continued) COST n. (1) Composition and changes in 2016 Balance on January 1, 2016 Classification Deduction Net addition (*) Balance on September 30, 2016 ACCUMULATED DEPRECIATION Balance on January 1, 2016 Classification Deduction Addition Balance on September 30, 2016 Depreciated balance On September 30, 2016 (NIS in millions) Audited Unaudited Audited Unaudited FIXED ASSETS IN USE Power plants (including land, buildings and machinery)... 72, (16) ,555 49,956 - (13) 1,605 51,548 21,007 Sub-stations... 13, (5) ,861 8,481 - (5) 333 8,809 5,052 Overloading control center (1) (1) Telecommunications... 1, ,837 1, , Switching stations... 6, ,642 3, ,074 2, KV voltage lines 2, (33) 2,295 1, , High voltage transmission lines... 6, (23) (79) 6,439 3,403 (5) (16) 101 3,483 2,956 Distribution networks... 37, (97) ,792 20,033 - (70) ,722 17,070 Meters... 1,922 9 (21) 42 1,952 1,433 - (19) 71 1, Land, office buildings... 3, (5) 16 3,592 1, (4) 72 2,064 1,528 Office equipment and tools... 1, ,664 1, , Computers... 1, ,611 1, , Motor vehicles (80) (77) Mobile mechanical equipment (27) (27) Emergency equipment Bulk carrier Other projects Spare parts for power plants and substations... 1,448 (25) , (24) Total fixed assets in use , (275) 1, ,501 97, (256) 3, ,510 53,991 FIXED ASSETS UNDER CONSTRUCTION Power plants, buildings and other installations... 4,477 (11) (63) 833 5, ,232 Sub-stations High voltage lines (3) (4) Switching stations (2) KV voltage lines Payments on account of equipment (61) Other investments 755 (392) (5) ) 61( Materials and payments on account of materials designated for investments in fixed assets (273) (10) Total fixed assets under construction... 6,877 (726) (83) 1,329 7, ) 11 ( ,337 Total fixed assets ,750 - (358) 2, ,898 97,308 - (256) 3, ,570 61,328 (*) Less receipts from development work orders 78

135 ANNEX 1 Actuarial Liabilities of the Israel Electric Corporation At September 30, 2016

136 Alan Fefferman Actuarial Services Ltd. November 24, 2016 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 September 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 Appendix F Details regarding benefits 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, We agree that this report be published with the Company's financial statements. On May 26, 2016, the Company also granted us a letter of indemnity in respect of the services that we are providing o 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.

137 Alan Fefferman Actuarial Services Ltd. 1.3 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 Company, etc. The actuarial results appropriate for any other purpose may differ materially from the results reported in this document. 1.4 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. 1.5 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. 1.6 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 and future salary increases. According to the most recent actuarial valuation of the Fund (as of September 30, 2016), liabilities were higher than those calculated in this valuation, and there were no surplus assets. 1.7 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. 1.8 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. 1.9 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 three 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 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,

138 Alan Fefferman Actuarial Services Ltd Definitions: "salary" pensionable salary "pension plan" the set of benefits provided by the Fund "date of valuation" September 30, 2016 "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 October 10, 2016 that is attached to this report as Appendix F. The information in this 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 see Appendix F): 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 salary 1, shift work, home service, Arava additions, convalescence pay (onetwelfth of the annual amount), 13 th salary (one-twelfth of annual salary) 14 th 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

139 Alan Fefferman Actuarial Services Ltd. service 2 or after retirement (including employees who died after disability retirement); retirement grant for service exceeding 35 years, and to survivors upon the death of the 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) Regarding generation C employees, the benefits consist of: supplementary severance pay at the rate of 2.33% of regular salary (including 13 th salary) for each year of service. In addition, in respect of 14 th 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) 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 a 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 (see section 7.2 of Appendix F, 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 To the extent that there exists an arrangement with an insurer, the valuation also recognizes a margin for the cost of insurance benefits. 4

140 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 December previous to that). 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 below. 3.3 Benefits are attributed to periods of employment, as follows: Benefit Post-employment pension (including disability pension) and social welfare activities Reduction of electricity costs (including VAT) and holiday gifts for pensioners, grossed up to cover the cost of taxes Death in service survivors' pension Severance pay upon termination of employment without entitlement to pension, and "up to 35 years" grant Grant for service exceeding 35 years Grant for unutilized sick leave Grant for disability retirement 20-year grant Supplementary severance pay for non-permanent employees (employed under special agreement) Benefit Accrual Percentage as at the Date of Valuation Based on the benefit formula in the pension plan, including the pension percent per year of service and 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 employees). Until the age and service criteria are met, the benefit accrual percentage is based on the ratio of the number of years of past service to the number of years of past and future service until the date that the criteria will be met. The benefit is always fully accrued. Based on eligibility on the valuation date. Eligibility is accrued based on accrued service. For the "up to 35 years of employment" grant, there is a 35-year accumulation maximum. Accrual begins upon reaching 35 years of service. According to the number of unutilized sick leave days as of the valuation date. Based on the number of years of past service, up to a maximum of 30 years. Based on the ratio of accrued service to 20 years. (There is no liability in respect of employees with over 20 years of service, as they would have already received the grant). The benefit accrual percentage is based on the ratio of the number of years of past service to the number of years of past and future service until the end of the 5

141 Alan Fefferman Actuarial Services Ltd. Social welfare fund Life insurance benefits maximum period allowed for this type of 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 of years of past and future service until 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 of years of past and future service until the average retirement age of For post-employment benefits 5, 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 was 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 4.78%; that is, the uniform discount rate inherent in the defined benefit obligation as at December 31, The current service cost presented in this report has been reduced in respect of employees' contributions. That is, a net service cost is presented. 3.9 The value of assets presented in Appendix A was provided to us by the Company and was not checked by me Termination benefits 6 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 As the term is defined in IAS 19 6

142 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 October 6, 2016 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 instructions 7 : 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 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 The Company informed us that according to the position of the Superintendent of Salaries in the Ministry of Finance and a Labor Court Ruling of May 5, 2016, there exist irregularities in the "managerial increment" component of salary, as well as in the "global overtime" component of salary for management employees. We adjusted those salary components according to a list of affected employees and pensioners and according to updated data for employees and pensioners (that had already been provided by the Company for previous actuarial valuations as at March 31, 2016 and June 30, 2016). 4.3 Below is a summary of the data mentioned above: Before the adjustments mentioned in section 4.2 above Average age Average service (years) Group Number Monthly salary/pension in NIS Defined benefit pension plan * Employees 6, ,820, Pensioners former employees 4,167 54,271, Pensioners survivors (including children) 1,919 13,945, Generation C** Employees 2,195 19,191, Pensioners former employees 24 3, Pensioners survivors (including 11 1, children) Employees under special agreements (non-permanent employees) *** Employees 550 3,060, The manner and rates of adjustment, were stipulated in the Company's instructions, and were not determined or checked by us. 7

143 Alan Fefferman Actuarial Services Ltd. After the adjustments mentioned in section 4.2 above Average age Average service (years) Group Number Monthly salary/pension in NIS Defined benefit pension plan * Employees 6, ,272, Pensioners former employees 4,181 53,273, Pensioners survivors (including children) 1,919 13,807, Generation C** Employees 2,194 19,255, Pensioners former employees 25 3, Pensioners survivors (including 11 1, children) Employees under special agreements (non-permanent employees) *** Employees 550 3,075, * 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, including regular salary 8, shift work, home service, Arava addition, convalescence pay, 13 th salary (one-twelfth of the annual amount), 14 th salary (one-twelfth of the annual amount) and value of holiday gifts (grossed up for tax). The amounts of the 13 th and 14 th salaries were calculated by dividing the regular salary by 12 in respect of all those qualifying based on service data. ** 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, 13 th salary (one-twelfth of the annual amount) and grossed up value of holiday gifts. The amount of the 13 th 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 Received data regarding assets, payments and contributions (in nominal terms), include all of the following: Data item NIS '000 Assets as at the valuation date Balance of plan assets for post-employment benefits 29,917, Balance of assets according to paragraph 116A of IAS 19 1,645,011 8 includes combined salary, management increment, service addition, personal addition, continual education addition and physical effort addition. 8

144 Alan Fefferman Actuarial Services Ltd. Payments during the reporting period Increased severance pay to employees under special agreements 10, Supplemented severance pay (2.33%) to generation C employees "20-year grant" 2, Termination benefits for paid benefits by the Fund, and for benefits not paid by the Fund (electricity discount, holiday gifts) 73,275 Termination benefits for paid benefits by the fund 70, Grant for unutilized sick leave 20, Post-employment benefits (excluding termination benefits) 659, "up to 35 years" grant 7, Electricity discount and holiday gifts 31, Withdrawals from plan assets for payment of benefits 631, Withdrawals from trust assets for payment of benefits 325,932 Contributions during the reporting period Company's contributions to plan assets or assets according to paragraph 116A of IAS , Employees' contributions to plan assets or assets according to Section 116A of IAS 19 19, 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, mostly in consultations with the Company's previous actuary, 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. 5.1 Financial assumptions Inflation rate the difference between the nominal spot interest rate (on nonindexed, 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 CPIindexed 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 16.5 years, and stands at 1.68%. 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. 9

145 Alan Fefferman Actuarial Services Ltd. From a technical perspective, the cash flows that I 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 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 September 30, 2016, 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 The interest cost and expected return on plan assets and trust assets for the reporting period were based on an interest rate of 4.78%, 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), and according to general salary and cost-of-living agreements (as described in paragraph ), without the possibility of creating new ranks or other changes to employment terms and to the existing system of salary increases and increases in rank 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: The annual increase in respect of general salary and cost-of-living allowance agreements will be as follows: In respect of the years : A cumulative increase of NIS per month for each employee, and a further nominal increase of 3.75%. These increases are based on collectively bargained (framework) agreements that were signed on April 18, 2016 and on August 8, 2016, according to which the average salary increase would amount to 7.75%, while as a default option one half of the increase would be provided in the form of a uniform shekel amount. In respect of the period starting in year 2018: the annual salary increase will be at the rate of the annual increase in 10

146 Alan Fefferman Actuarial Services Ltd. CPI, less 0.5% (that is, a 0.5% 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) 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 % 1.27% % 1.27% % 1.27% % 1.27% % 1.27% % 1.65% % 0.91% Over % 0.76% For employees who at the valuation date are not entitled to continuing-education-payment A and/or continuing-educationpayment B, the annual rate of eligibility is as follows: Age Eligible for payment A Eligible for payment B Until % 3.5% % 1.5% % 0.8% Over % 0.4% 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 According to labor agreements, the value of holiday gifts (grossedup 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 15.64% (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. 11

147 Alan Fefferman Actuarial Services Ltd 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 and the variable rate per kilowatt-hour before VAT is NIS ), 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. Assumptions regarding electricity consumption in kilowatt-hours vary according to the age of the pensioner, and according to the type of pensioner: (a) old-age or disability pensioners, (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. The reduction in the cost of electricity in respect of pensioners who do not utilize the benefit, varies according to the age of the pensioner, and according to the type of pensioner: (a) old-age or disability pensioners, (b) recipients of survivors pensions (widows and orphans) 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 level of full or part-time employment also applied in the past and will also apply in the future 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 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 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 1.19%, which is the rate by which the CPI index declined since the previous pension adjustment in January 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. 12

148 Alan Fefferman Actuarial Services Ltd. 5.3 Mortality and Disability rates See Appendix E below regarding changes made in the past to the mortality assumptions Life Expectancy Improvement (decline in mortality rates) The mortality assumption is a significant assumptions for the valuation of the actuarial liability. Life expectancy changes because of changes in medical practice and lifestyles. The actuarial assumptions take into account a continuing increase in life expectancy for the future. The mortality rates detailed below are correct as at December 31, The assumed rate of decline in mortality rates (leading to extended life expectancy) after December 31, 2008, is according to Pension Circular 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 ("Pension Circular 2013").. It should be emphasized that there is a great deal of uncertainty regarding this assumption, and that an alternative assumption may be just as reasonable (please see section 8.4 below) Pensioner mortality tables In the year 2015, a study was made of mortality experience among employees and pensioners of the Company during the years , in relation to the mortality tables published in Pension Circular 2013 ("the study"). On the basis of the study, the Company adopted the tables published in Pension Circular 2013, with adjustments that bring into account mortality experience of the Company, such that more weight is given to Company mortality experience (and less weight to Pension Circular 2013) to the extent that Company mortality experience is more credible statistically. For 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 Below is a sample of the remaining life expectancy of pensioners, based on this assumption combined with the assumed future improvements in life expectancy. Age and year Male Female 67 at the end of at the end of at the end of Mortality Tables for Survivors In accordance with the study described above, the mortality assumption for survivors is: 13

149 Alan Fefferman Actuarial Services Ltd. 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, and from age 55 to age 67, according to table P3 of Pension Circular Mortality Tables for Active Employees In accordance with the study described above, the mortality assumption for employees is: 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% Mortality Tables for Disabled Pensioners In accordance with the study described above, the mortality assumption for disabled pensioners is: for males starting at age 67, according to table P3 of Pension Circular 2013 increased by 21%; below age 67, a mortality rate of 17% in the first year after disability retirement, and 1.6% in each year thereafter. for females starting at age 67, according to table P3 of Pension Circular 2013 increased by 15%; below age 67, a mortality rate of 17% in the first year after disability retirement, and 1.6% in each year thereafter Disability Incidence From Table P8 of Pension Circular Recovery from Disability None. 5.4 Retirement Age, Termination of Employment and Early Retirement As stated in section 5, these assumptions were determined by the Company It is assumed that normal retirement will occur at the mandatory retirement age of 67 for both men and women. Employees over age 67 are assumed to retire immediately Termination of Employment (prior to normal retirement age), for Generation C Employees: The assumed rates of termination of employment, both voluntary and involuntary, by age and sex, are detailed in the table below: 14

150 Alan Fefferman Actuarial Services Ltd. Rates of Voluntary Termination (without benefit entitlements) Rates of Involuntary Termination (After age 60 and 10 years of service, entitled to all benefits described in paragraph Below age 60, entitled only to supplementary severance pay at the rate of 2.33% of salary per year of service) Age Women and Men Women Men up to % 0.24% 0.24% % 0.40% % 0.40% % 0.87% % 0.87% % 0.87% % 1.73% % 2.56% It is also assumed that termination rates are zero for employees with 20 or more years of service, Terminations and Early Retirement (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 terminations benefits and other early retirements, so that it is very difficult to set the 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 rate assumption was determined by the Company on the basis of experience during the years not including retirements under special early retirement programs. (The current assumption was first adopted for the valuation as at December 31, 2013). The early retirement rate assumption, by age and sex, is detailed in the table below: 15

151 Alan Fefferman Actuarial Services Ltd. Early retirement rates Employees Covered by the Defined Benefit Pension Plan Age Female Male Age Female Male Up to % 0.00% % 0.15% % 0.08% % 0.15% % 0.08% % 0.23% % 0.08% % 0.23% % 0.08% % 0.23% % 0.08% % 0.23% % 0.13% % 0.23% % 0.13% % 0.23% % 0.13% % 0.23% % 0.13% % 1.74% % 0.13% % 1.74% % 0.15% % 1.74% % 0.15% % 3.46% % 0.15% % 5.11% Termination of Employment for Non-Permanent Employees Under Special Agreements: Assumed rates of termination with eligibility for benefits included in this valuation, by service, are detailed in the following table: Service Rates of Involuntary Termination (eligible for benefits) 16 Rates of Voluntary Termination (not eligible for benefits) 0 3.0% 0.0% 1 1.5% 0.0% % 0.0% * For non-permanent employees under special agreements, in addition to these rates, it is assumed that their employment will be terminated at the end of the maximum working period based on the special agreements, which is a period of 5 years, and that they will receive enhanced severance pay. 5.5 The Probability of Being Married and Age Differences Between Spouses The probability of being married: For males, marriage rates are according to Table P10 of Pension Circular For females, up to age 68 marriage rates are according to Table P9 of Pension Circular (the predecessor of circular ), and starting at age 68 marriage rates are according to Table P10 of Pension Circular It is assumed that widows will not remarry; that is, it is assumed that the payment of widows pensions will not stop because of remarriage. Age differences between spouses: The age difference between a male employee or pensioner and his spouse the male is assumed to be older than his spouse by 3.2 years up to age 67; starting at age 67, the age difference increases linearly until it reaches 8.7 years for a male pensioner aged 110.

152 Alan Fefferman Actuarial Services Ltd. The age difference between a female employee or pensioner and her spouse the female is assumed to be younger than her spouse by 3.0 years. 5.6 Orphans The number of children and their ages are determined according to Table P11 of Pension Circular Utilization of Sick Leave Days (for calculating the grant for unused sick leave) It is assumed that every employee's utilization rate 9 in the future will be equal to his average utilization rate in the past. 5.8 It is assumed that all non-permanent employees under special agreements will receive increased severance pay. 5.9 Future Company expenditures for the administration of the pension plan were not taken into account 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 13 th and 14 th 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 workrelated 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 gross-up taxes); o gifts for children of pensioners or survivors, who are serving in the Israel 9 number of sick-leave-days actually taken, divided by the number of sick-leave-days to which the employee was entitled 17

153 Alan Fefferman Actuarial Services Ltd. 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; 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 2016, 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. 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 This change reduced the liability as at June 30, 2016 by approximately NIS 2 million. In the third quarter of 2016, 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. In the third quarter of 2016, 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. In the third quarter of 2016, 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 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. 18

154 Alan Fefferman Actuarial Services Ltd. 7. Valuation Results The values of liabilities (in million NIS) as at September 30, 2016, without offsetting the value of 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 pays for non-permanent employees under special agreement: Active employees 15,102.6 Pensioners and survivors 11,468.7 Total 26, Liability in respect of special agreements for early retirement in respect of the past: Pensioners and survivors Liability for 20 year grant: Active employees Liability for enhanced severance pay for non-permanent employees under special agreement in respect of the past: Active employees 16.4 In Appendix A, additional information is provided for financial statement disclosure, as required by IAS 19 19

155 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 4,752 million (17.7%). b) If the discount rate should fall by 0.1%, the liability would increase by NIS 425 million. c) If the discount rate should increase by 0.1%, the liability would decrease by NIS 415 million. 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 indexlinked 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 The assumption of general salary increases (in respect of salary and cost-of-living allowance agreements) considerably affects future cash flows. The assumption is (as described in section above): In respect of the years : a cumulative increase of NIS per month for each employee, and a further nominal increase of 3.75%. In respect of the period starting from 2018: an annual salary increase equal to the rate of change in the CPI less 0.5% per year. 20

156 Alan Fefferman Actuarial Services Ltd. 8.4 Life Expectancy Sensitivity analysis: a) If starting from year 2018, actual general salary increases (from salary and cost of living allowance agreements), were equal to the change in CPI (instead of the change in CPI minus 0.5% per year), then the liability would increase by approximately NIS 589 million (2.2%). b) If starting from September 30, 2016, actual general salary increases were higher than what is assumed by 0.5% per year, then the liability would increase by approximately NIS 668 million (2.5%). c) If starting from September 30, 2016, actual general salary increases were lower than what is assumed by 0.5% per year, then the liability would decrease by approximately NIS 628 million (-2.3%). 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: 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 1,812 million (6.7%). 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 1,229 million (4.6%). 8.5 Early Retirement As stated in paragraph 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: if actual early retirement rates are double the assumed rates (see paragraph above), then liabilities would increase by approximately NIS 266 million (1.0%). 21

157 Alan Fefferman Actuarial Services Ltd. Yours truly, Alan Fefferman, F.S.A., F.IL.A.A. 22

158 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" 10 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" 11, 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 30/09/ /09/ /12/15 Fair value of plan assets 29,918 28,175 28,820 Present value of the gross pension obligation (23,820) (22,835) (23,192) Subtotal 6,098 5,340 5,628 Liability for special, early retirement, pension agreements (281) (348) (342) Surplus pension assets 5,817 4,992 5, Funds in trust dedicated to the funding of employee benefits (paragraph 116A of IAS 19) Funds in trust dedicated to cover actuarial obligations (assets as per paragraph 116A) 30/09/ /09/ /12/15 1,645 1,908 1, Liability at the end of the period for other post-employment benefits Present value of obligations for other post-employment benefits (including liabilities for special retirement agreements) 30/09/ /09/ /12/15 2,790 2,793 2, As the term is defined in IAS Ditto 23

159 Alan Fefferman Actuarial Services Ltd. 4. Reconciliation of the Beginning and Closing Values of the Pension Defined Benefit Obligation 9 months ending months ending months ending months ending Year ending Present value of the obligation beginning of period 23,192 23,352 24,042 22,643 23,352 Interest cost ,110 Current service cost Change in the obligation in respect of plan changes (see Section 6) (372) Benefits paid (572) (582) (199) (207) (718) Losses (gains) on remeasurement: Actuarial losses (gains) from demographic assumption changes Actuarial losses (gains) from financial assumption changes (669) (333) 232 (583) Experience adjustments (222) (315) (34) (183) (423) Total actuarial losses (gains) on remeasurement 543 (984) (367) 49 (846) Present value of the obligation end of period 23,820 22,835 23,820 22,835 23, Reconciliation of the Beginning and Closing Values of the Defined Benefit Obligation for Other Post-Employment Benefits (including special early retirement agreements) 9 months ending months ending months ending months ending Year ending Present value of the obligation beginning of period 2,730 2,928 2,824 2,804 2,928 Interest cost Current service cost Reduction in grants due to their exchange for retirement grants under the special retirement program Cost of new retirements early retirement - ) 36( - - )36( Change in the obligation in respect of plan changes (see Section 6) (11) Benefits paid (89) (96) (24) (33) (122) Losses (gains) on remeasurement: Actuarial losses (gains) from demographic assumption changes Actuarial losses (gains) from financial assumption changes (134) (28) (65) (263) Experience adjustments (47) (40) ( 30) 37 2 Total actuarial losses (gains) on remeasurement 19 (174) ( 58) (28) (261) Present value of the obligation end of period 2,790 2,793 2,790 2,793 2,730

160 Alan Fefferman Actuarial Services Ltd. 6. Reconciliation of the Beginning and Closing Fair Value of Plan Assets 9 months ending months ending months ending months ending Year ending Fair value of plan assets beginning of period 28,820 27,739 30,101 28,076 27,739 Expected return on plan assets 1, ,327 Contributions including employee contributions ,280 Benefits paid (631) (588) (217) (211) (761) Gains (losses) on remeasurement: return on plan assets (excluding amounts included in interest income) 137 (784) (462) (545) (765) Fair value of plan assets end of period 29,918 28,175 29,918 28,175 28, Reconciliation of the Beginning and Closing Fair Value of Funds in Trust to Cover Actuarial Obligations (116A assets) 9 months ending months ending months ending months ending Year ending Fair value of trust assets beginning of period 1,921 1,909 1,723 1,895 1,909 Expected return on assets Company contributions (326) - (40) - - Gains (losses) on remeasurement: return on trust assets (excluding amounts included in expected return) (10) (69) (57) (10) (79) Fair value of trust assets end of period 1,645 1,908 1,645 1,908 1, Components of Costs for the Period for all Post-Employment Benefits 9 months ending months ending months ending months ending Year ending Current service cost Employee participation (20) (21) (7) (7) (27) Net current service cost Interest cost ,249 Changes in benefit provisions arising from decisions of the Superintendent of Salaries, Ministry of Finance (390) Expected return on plan assets (1,026) (987) (346) (334) (1,327) Expected return on trust assets (116A assets) (60) (68) (19) (23) (91) Total costs for the period (326)

161 Alan Fefferman Actuarial Services Ltd. 9. Actual return on plan assets 9 months ending months ending months ending months ending Year ending Expected return on plan assets 1, ,327 Remeasurement gains or losses 137 (784) (462) (545) (765) Actual return on plan assets 1, (116) (211) Actual Return on Assets Held in Trust to Cover Actuarial Obligations (104A assets) 9 months ending months ending months ending months ending Year ending Expected return on assets Remeasurement gains or losses (10) (69) (57) (10) (79) Actual return on assets 50 (1) (38) Obligation for Special Early Retirement Agreements (termination benefits) 30/09/ /09/ /12/2015 Obligation at end of period - pensions Obligation at end of period other benefits** Obligation at end of period total (**) These obligations are included in Tables 3 & 5 above. 12. Obligation for 20 year grant (other long-term employee benefits) 30/09/ /09/ /12/2015 Obligation at end of period

162 Alan Fefferman Actuarial Services Ltd. Appendix B forecasted benefit payments Below is a graph of the expected cash flows included in the valuation (including all benefits for all employees and pensioners), in real terms and in nominal terms (including the future expected influence of inflation). The payments are annual. EXPECTED PAYMENTS OF ACCRUED BENEFITS 2,000 1,800 1,600 Values in Real Terms Values in Nominal Terms (including the effect of inflation) 1,400 1,200 1, /10/ /10/ /10/ /10/ /10/ /10/ /10/

163 Alan Fefferman Actuarial Services Ltd. Appendix C additional detail regarding the financial assumptions (annual rates shown) Weighted average real discount rate used to compute liabilities at the end of the period * Expected inflation rate Nominal interest rate used to compute the interest cost on pension liabilities Nominal interest rate used to compute the interest cost on other post-employment liabilities Nominal interest rate used to compute the expected return on plan assets Nominal interest rate used to compute the expected return on trust assets (116A assets) % 2.58% 2.65% 2.86% 1.68% 1.71% 1.85% 1.78% 4.78% 4.78% 4.78% 4.77% 4.78% 4.78% 4.78% 4.77% 4.78% 4.78% 4.78% 4.77% 4.78% 4.78% 4.78% 4.77% * In practice the valuation was performed according to a vector of interest rates (a yield curve) which was determined by Mervach Hogen Ltd and which we received from the Company (see section 5.1.2). The above rate represents the vector of interest rates in consideration of the expected liability cashflow at each point in time. A valuation according to this constant interest rate leads to the same results as presented in this report. 28

164 Alan Fefferman Actuarial Services Ltd. Appendix D additional detail regarding the assumptions List of data files received from the Company: 1. "ong0916" 15,227 records data including all employees / retirees / survivors (permanent workers only). 2. "actuarpizuisug " records data including all non-permanent workers (special agreement). 15 "פורשי ספטמבר 2016 כולל דור ג' ".3 records. 4. "change072016", "change082016", "change092016", "change092016g" files that describe status changes of employees / retirees in the months July to September tax. data regarding electricity rates, rate of VAT and grossing up of "חשמל ספטמבר " tax. value of holiday gifts grossed-up for "שי ספטמבר "

165 Alan Fefferman Actuarial Services Ltd. Appendix E changes to the valuation that took effect in the 3 years prior to the current year Changes that took effect in the course of 2015 In the final 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. 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. 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, 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. In the fourth quarter of 2014, 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. In the fourth quarter of 2014, 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. 30

166 Alan Fefferman Actuarial Services Ltd. Changes that took effect in the course of 2013 The assumed increase in the electricity rate (which is required for calculating the liability in respect of the electricity discounts benefit) was updated in the valuation at June 30, 2013, according to the Company's expectations. The updated assumption is for the years 2013 to 2015 only. The impact of this update was a decrease in the liability of about NIS 3 million. Another update to the assumption for the years 2014 to 2015 according to the Company's expectations was made in the valuation at December 31, 2013, and its impact is a decrease in the liability of about NIS 10 million. During July 2013 a new salary agreement was signed, under which salaries would be increased by %. Likewise, for pensioners who retired between July 2012 and June 2013, the pension would be increased by a rate of between % and %, based on the retirement date. The agreement is in respect of the period July 2012 to December The increase according to the salary agreement, over and above the assumed increase of 0.5% that was taken into account in the valuation at June 30, 2013, increased the valuation liability at June 30, 2013, by about NIS 52 million. In the valuation at June 30, 2013, the amounts of life insurance were updated. This update increased the valuation liability by about NIS 13 million. In September 2013 we carried out an experience analysis of the electricity consumption among pensioners, from 2005 to Based on the analysis, we recommended to the Company to adopt an electricity consumption assumption based on age and pensioner group. The Company accepted our recommendation, and the assumption for the valuation at December 31, 2013 was set accordingly. This change to the electricity consumption assumption reduced the valuation liability by about NIS 81 million. During December 2013 we conducted an analysis of marriage rates and age differences between pensioners and their spouses. The Company accepted our recommendation and the assumption for the valuation at December 31, 2013 was set accordingly. The impact of the change in assumption was a decrease in the liability of about NIS 98 million. During January 2014 we conducted an update to the analysis of historical early retirements, excluding retirements within a special early retirement program (defined as terminations), based on data from 2002 to 2013, in order to make a recommendation for the early retirement rates assumption. The Company accepted our recommendation and the assumption for the valuation at December 31, 2013 was set accordingly. The impact of the change in assumption was a decrease in the liability of about NIS 78 million. 31

167 Appendix F Details of Benefits Date: October 10, 2016 Description of the Main Rights which Should be Taken into Consideration in Determining the Actuarial Obligation with respect to Benefits After Termination of Employment The Determining Salary Components for Calculating the Pension: 1. Normal Salary - including combined salary, service increment (up to a 40 year maximum), extra effort increment, continuing education payments, job classification increment, personal extra, cost of living allowance. Normal Salary Calculation Formula (will be paid to pensioners/survivors according to the pension rate): Normal salary = Extra Effort + Continuing Education + Personal Extra Command + (1.01) N x Increment +1 x Percentage Cost of Living +1 x Salary Allowance Grade Rate N number of years of service for calculating the service increment for payment Normal Salary Components: (a) The Combined Salary is according to accepted salary tables in the Company. The last salary agreement, signed on July 18, 2013, exhausts the employees claims regarding salary increments for the period until December 31, This agreement also determines a commitment to industrial peace regarding this issue until December 31, On May 9, 2016, the Chairman of the Trade Union Division of the New National Labor Federation announced a labor dispute regarding a requirement to sign a collective agreement which will immediately regulate the terms of employment and salary prevailing for decades and sign a salary agreement for the years 2013 onward. The combined salary of Management level members includes global payment for overtime. On May 3, 2016, the Haifa Regional Court of Labor gave its ruling, pertaining to the decision of the Supervisor of Wages of October 10, 2013 (and his updated decision of December 11, 2014), which instructed, inter alia, not to include the global overtime in the pension salary of members of the Company s management which were appointed after The Regional Court further ruled that the Supervisor s decision regarding this issue will only apply to employees appointed as management members after the date of the Supervisor s decision of October 10, 2013, and the global pension overtime for management members appointed before the date of the Supervisor s decision will be according to an approval granted in this matter by the Government Companies Authority in 1977 (i.e., payment of 50 global pension overtime per month, at a rate of 140% per hour). On June 13, 2013, the National Court of Labor decided to delay the aforesaid ruling. Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa,