Financial Reports March 2012

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TheIsraelElectricCorporationLtd.

FinancialReportsForTheThreeMonthsEndedMarch31,2012

FILESINDEXThefinancialreports,forthethreemonthsendedMarch31,2012,arepresentedinaprimaryorder.Eachchapterisnumberedseparatelybyitsinternalsequence.Section Description PageChapterA DescriptionoftheCompanysBusinessAffairs 2ChapterB BoardofDirectors'ReportontheStatusofthe

Company'sAffairs 21Supplement AdditionalReportRegardingtheEffectivenessof

theInternalControlOverFinancialReporting 73ChapterC ConsolidatedInterimFinancialStatements 76Annex1 ActuarialValuation 186


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BUSINESS

TheIsraelElectric

CorporationLtd.

Updated

Chapter

A

(DescriptionoftheCompany's

BusinessAffairs)

forthe2011AnnualReport

Forthe

Three

Months

Ended

March31,2012


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Prominent DisclaimerThisEnglishtranslationof the"UpdatedChapterA (Descriptionof

the Company'sBusinessAffairs) for the 2011AnnualReport" for

the threemonths endedMarch 31, 2012 ("English Translation") is

providedforinformationpurposesonly.

Intheeventofany conflictor inconsistencybetween the termsof

thisEnglishTranslationandtheoriginalversionpreparedinHebrew,

the Hebrew versionshall prevail andholders of the Notes should

refer to the Hebrew version for any and all financial or other

informationrelatingtotheCompany.

TheCompany

andits

Directors

make

no

representations

as

to

the

accuracy andreliability of the financial information in this English

Translation,savethattheCompanyand itsdirectorsrepresentthat

reasonablecarehasbeentakentocorrectlytranslateandreproduce

suchinformation,yetnotwithstanding theabove, the translationof

anytechnical

terms

are,

in

the absence

of

generally

agreed

equivalent terms in English, approximations toconvey the general

senseintendedintheHebrewversion.

TheCompany reservesthe right toeffectsuchamendments to this

EnglishTranslation

as

may

benecessary

to

remove

such

conflict

or

inconsistency.


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3

UpdatedChapterA(DescriptionoftheCompanys

BusinessAffairs)*fortheAnnualReportof2011(the

PeriodicReport)oftheIsraelElectricCorporationLtd.Updated

Chapter

"Description

of

the

Company's

Business

Affairs

for

the

periodic

report

of

the

Company

as

onDecember31,2011("ThePeriodicReport")1

As required by Regulation 39a to the Securities Regulations (Periodic and Immediate Reports), 1970, the

followingaredetailsofmaterialdevelopmentsintheCompany'sbusinessinthethreemonthsperiod,ended

onMarch31,2012andalsouptothepublicationdateofthereport,accordingtotheorderofthesectionsin

theChapterofDescriptionoftheCompany'sBusinessAffairsintheperiodicreport.Itshouldbenotedthatthe

termsinthischapterwillhavethesamemeaningaspresentedintheperiodicreport,unlessexplicitlystated

otherwiseinthisChapter:"ReportDate"May29,2012.

1. Section4.Distributionofdividends

Section4.3Theassignmentofprofitsfortheyears20042009

Inview

of

the

financial

status

and

cash

flow

of

the

Company,

the

Board

of

Directors

of

the

Company

has

decidednottodistributeadividendfortheprofitof2009,andonApril18,2010,theCompanyapplied

totheDirectoroftheCompaniesAuthority,inordertoinformtheCompaniesAuthorityofthedecision

oftheBoardnottodistributeadividendfortheprofitsof2009andtoobtainitsapproval.OnMay23,

2012, the Director of the Companies Authority informed the Company that the examination of the

appropriationoftheprofitsfor2009wouldbemadewithattentionto,interalia,thefinancingneedsof

theCompany,from itsownsourcesandfromdebtraising,requiredforcompliancewiththeprovisions

oftheElectricitySectorLawanditsamendments,includingconcerningpreparationforimplementation

of thestructuralchange in theelectricitysectorand implementationof thedevelopmentplansof the

electricitysector.Inviewofthis,theDirectoroftheCompaniesAuthoritystatedinhisletterthatin2012

theCompaniesAuthoritydidnot intend todemand adistributionofadividendby theCompany for

2009.

2. Section6.ThegeneralenvironmentandtheimpactofexternalfactorsontheCompanysoperations

2.1 Section6.8PrevailingweatherconditionsinIsrael

ReviewsconductedbytheCompanyasonthereportdateandexercisesconducted inthe lastyearto

rehearsactions forcontendingwithexpecteddemands forelectricity in thesummerof2012, indicate

that the available generation capacity of the Company is expected to exceed peak demands for

electricitybyaboutonepercent (1%)only. Italso shows that in the completeabsenceofgas supply,

and/or intheeventofa failure inoneofthegenerationunitsof theCompanyand/or intheeventof

extremeweather conditions thatwill increase thedemand forelectricity, in relation to theexpected

peakdemands,

the

available

generation

capacity

of

the

Company

may

be

lower

that

the

peak

demand

forelectricityandinsuchacase,theCompanywillnotbeabletosupplythefulldemandforelectricity

duringpeakhoursandwillhavetoinitiatepowercutstoconsumers,fortimeperiodsthatmayextend

overseveralhoursinextremecases.

TheCompanyismakingpreparations,jointlywithteamsoftheMinistryofEnergyandWater,tocontend

with the expected severe crisis in the electricity sectorduring the summerof 2012. In addition, the

CompanyaddressedtheMinistryofEnergyandWater,attheendofMarch2012,requestingthat the

MinisterofEnergyandWaterwillexercisehislegalauthorityandwillannounce,withtheapprovalofthe

Government,an"emergency"intheelectricitysectorandalsodeterminedirectives,whichwillapplyto

theoperationof theelectricity sector inan "emergency" (including thegrantingofpermission tocut

powersupply

to

consumers

for

periods

of

time

and

according

to

predetermined

priorities),

in

amanner

thatwillenabletheCompanytoact inan"emergency"withoutviolatingthedirectivesofthe law,the

1AspublishedonMarch31,2012(Ref.No.201201088842)andamendedonApril1,2012(Ref.No.201201088872)


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4

licenses by force of which it operates, and its contractual liabilities to financing parties. See also

ImmediateReportonApril18,2012(Ref.No.201201104157).

TheopinionoftheState,asstated intheresponsetotheCompany isthatsection58oftheElectricity

SectorLawdoesnotenableproclamationofastateofemergencywhereotherregulationprocessescan

beimplementedtofulfilltheurgentneedsoftheCompany.

Theresolution

of

the

Government

of

Israel

on

May

13,

2012,

(No.

4623)

requires

different

Ministers

and

otherrelatedpartiestoconductreviewsoftestsonstepsforcontendingwiththeexpectedshortageof

electricity in the summerof2012, toenable,as faraspossible, regular supplyofelectricity to Israeli

citizens,whilemaintainingthesurvivabilityoftheelectricitysystem.

TheMinisterofEnergyandWaterwasrequiredtoinitiatepublicinformationcampaignsontheshortage

of electricity, the need to save electricity and divert demand to offpeak hours, for the purpose of

decreasing the demand for electricity in the summer of 2012 and ensure public awareness to this

subject.TheMinisterwasalso required to instruct the vital service supplier toact to implement this

resolutionandalsoact toconnectsolarenergyelectricitygeneration facilities immediately, toenable

electricitysupplyfromtheseunitsinthesummerof2012.

TheGovernmentalso instructedtheMinisterofEnvironmentalProtectiontoacttoremove limitations

onthenumberofhoursdefinedbyhisMinistryontheoperationofdifferentelectricitygenerationunits,

includingReading,withbackup fuelduring the shortage innaturalgas,aspartof thepreparations to

contendwiththeshortage(accordingtotheresolutionoftheGovernment,thisperiodstartsonJune1,

2012andendsonOctober31,2012).

TheDirectoroftheMinistryofDefensewasinstructedtoexaminetheoperationofgeneratorsduringa

shortage inelectricityandtheMinisterofthe Interiorwas instructedtoacttoconductthediscussions

required in the National Planning and Building Board, to provide leniency in building portable gas

turbinesassoonaspossible.

Asof

the

date

of

the

Prospectus,

the

Company

is

carrying

out

public

information

actions

concerning

electricity conservation (for example, advancing the decision of the Electricity Authority to grant a

discount to electricity consumers that save electricity in the summer period compared to their

consumption in theparallelperiod theyearbefore). Inaddition,asatthedateof theprospectus,the

Companyhasnot yet receivedany instruction from theMinister requiring it to connect solarenergy

electricitygenerationfacilitiesimmediately,asmentionedinthesaidresolutionoftheGovernment.

TheinformationonthepreparationsoftheCompanyconcerningtheexpectedelectricityshortagesover

thesummerof2012isforwardlookinginformationasdefinedintheSecuritiesLaw.Suchinformationis

basedonfuturedata,whosematerializationisnotcertainandisnotunderthecontroloftheCompany,

butis

based,

inter

alia,

on

the

forecasts

for

electricity

demand

for

the

upcoming

summer,

which

naturally

areuncertain.Theseestimatesmayfailtomaterializeormaymaterializepartiallyordifferentlyfromthe

manner expected, among other things, due to changes in the demandfor electricity, changes in the

positionoftheGovernment,theMinisters,theregulatorsandsupervisorsoftheactivityoftheCompany

ortheapplicablelaw,noneofwhichisunderthecontroloftheCompany.


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5

3. TheGenerationSegment

3.1 Section7.1.3.2:ElectricityRate

3.1.1 AnnualUpdate

Tobeaddedattheendoftheparagraph:

Subsequently,initsdecisiononMarch22,20122,onspreadingtheincreaseinelectricityratesoverthe

years20122014,theElectricityAuthoritynotedthatontheannualupdatedatefor2012,itwillupdate

therecognizedcostforthegenerationsegment,includingfuelscosts.Differencesthatwillbecreated

betweentherecognizedcostontheannualupdatedatein2012andtherecognizedcostaccordingtothisdecision,willbeexpressedintheannualupdatefor2012.InadditiontheElectricityAuthoritywill

also review thegas incentive formulaand theCompany'sclaimon the increased fuelscostsderiving

from assumptions of the ElectricityAuthorityon power stationsmaintenance dates.Moreover, the

annualupdate for2012,scheduled forAprilwillbepostponeduntil the required informationwillbe

providedbytheCompanyandtherequiredcostsauditwillbeconducted.TheCompanyappliedtothe

ElectricityAuthorityonMarch29,2012,witharequest toobtaindetailsofany information thatwas

requiredbytheElectricityAuthorityforthepurposeofexecutingthisannualupdate.Asatthedateof

theprospectus,thecommentsoftheElectricityAuthorityhavenotyetbeenreceived.

3.1.2 Cashflowbridgingmeasures

Asstatedintheannualreport,theElectricityAuthorityshallacttoformanoutlineforthereleaseofup

toNIS

600

million

out

of

the

existing

money

balance

in

the

special

purpose

account

for

the

Emergency

Plan for the use of the Company, subject to various conditions that have been prescribed in the

decision.

In thiscontext,onMay24, theElectricityAuthority released theamountofNIS600million from the

balanceinthespecialpurposeaccountforstageBoftheemergencyplan.

3.1.3 Specialpurposeaccountforfuels:

Inaccordancewith thedecision,auniquemechanismwillbeestablished formanaging the surcharge

moneyforthefuelcostasstatedintheresolution.

TheCompanyforwardedtotheElectricityAuthorityonApril18,2012adetailedresponseonthisissue,

dealingmainlywitharequestthattheElectricityAuthoritypublishanupdateddecisiononthesubject

wherebythefuelpurchasecontrolmechanismbebasedonpostfactumcontrolandreportingandthat

themoneyisnotmanagedinaspecialpurposeaccount.Thisisbecauseacontrolmethoddifferingfrom

thiswouldmakemajordifficulties foroperating the fuelpurchasesystemandmaycause failuresand

impaired reliability of electricity. As at the date of the prospectus, the response of the Electricity

Authorityhasnotyetbeenreceived.

3.2 Section7.4PrivateElectricityProducers

3.2.1 Section7.4.3.3:Descriptionof theprivateelectricityproducers indifferentstagesofconstructionand

businessdealingsoftheCompanywiththem:

(a)Sub

section

(c):

On

May

31,

2012,

the

Company

signed

agreements

with

two

co

generation

producers RamatNegev Energy (124megawatts output) and Ashdod Energy (55megawatts

energy).To thebestof the knowledgeof theCompany, theexpectedoperation timeof these

producersis2014.

(b) In addition, the Company is currently conducting negotiations with Dalia Power Energies Ltd.

(outputof870megawatts).

(c) FollowingthedeclarationofAshalimSunP.V.Ltd.asthewinnerofthetenderpublishedbutthe

StateofIsrael,theCompanyexpectstosignacontractwithit.

3.3 DieselOil

Asonthedateofthereport,estimateddiscount,derivingfromreducedpurchasetaxondieseloilfor

January April2012,withrespecttopurchasingabout1.7milliontonsofdieseloil,aspurchasedand

willbepurchasedbytheCompanyin2012,amountstoapproximatelyNIS1.5billion.

2DecisionNo.1inMeeting367onMarch22,2012,onthesubjectof"SpreadingtheIncreaseinElectricityRatesoverthe

years20122014inaPeriodofShortageofNaturalGasSupplytotheEnergySectorinIsrael.


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6

3.4 Section7.10.10.2(a)Agreementwith"YamThetis"Group

FromOctober2011,thedailyandhourlyextractionratefromMariBreservedecreasedgradually,due

tothedepletionofthefieldandthecollapseofsomeoftheextractionfields.Asaresult,theCompany

isrequiredtoconsumeincreasingquantitiesofliquidfuels.SeeImmediateReportoftheCompanyon

May9,2012 (Ref.No.201201122016)and ImmediateReportonMay15,2012 (Ref.No.201201

125748),presentedasareference.

3.5 Section7.10.10.2(b)NaturalGasPurchaseTransactionfromEMG

InApril22,2012,theCompanyreceivedanannouncementfromE.M.G.,whichsuppliednaturalgasto

the Company, stating that the Egyptian Government gas companies Egyptian Natural Gas Holding

Company (EGAS) and Egyptian General Petroleum Corporation (EGPC), which are the natural gas

supplierstoE.M.G.,notifiedE.M.G.thatthenaturalgassupplyagreementwithE.M.G.iscancelled.On

May10,2012,theCompanyreceivedanotherannouncementfromEMG,statingtheEMGcontinuesto

reviewthesituationandislookingforalternativesuppliersofnaturalgas.

In theopinionof theCompany, thisevent isnotexpected tohaveamaterialnegative impacton the

financialconditionoftheCompanyand/oritscashflow,beyondthosereportedbytheCompanytodate,

sincethegassupplyfromEgyptformorethanayearwasonlypartialand irregular,dueamongother

reasonstoaseriesofexplosions inthenaturalgaspipefromEgyptto Israel.See ImmediateReportof

theCompany

on

April

23,

2012

(Ref.

No.

2012

01

106680),

Immediate

Report

on

May

9,

2012

(Ref.

No.

20120122016)andalsoImmediatereportonMay15,2012(Ref.No.201201125748).

TheCompanyiscurrentlyintheprocessofaninternationalarbitrationagainstE.M.G.andtheEgyptian

Governmentgascompanies,claimingcompensation for theheavydamages incurredby theCompany

andsubsequentdamagesarisingfromthecontinuedviolationsoftheagreementstosupplynaturalgas

enteredbetweentheCompanyandtheseentities.

TheCompany,jointlywith its international legaladvisors, isstudying the implicationsof theunilateral

cancellation of the agreement between E.M.G. and Egyptian Government gas companies on the

internationalarbitrationprocessitconductsagainstthesecompanies.Asonthedateofthisreport,the

Companywasnot notified that the agreementbetween the Company and EMG for thepurchaseof

natural gas is cancelled.Fordetailsand implications for theCompany seeNote8b2 to the financial

statementsforthethreemonthsendingonMarch31,2012.

3.6 Section7.10.10.2(c)AgreementtoPurchaseGasfrom"Tamar"Field

(a)TamarField

InMarch2012,theCompanysignedanagreementwiththeholdersoftheTamarlicenserights(inthis

section:theSellers),wherebytheCompanyhasundertakentopurchasenaturalgas,intheminimal

total volume of approximately 42.5 billion cubicmeters (BCM) of natural gas, and to amaximum

volumeofapproximately78BCM(hereinafter:theAgreement).

TheCompanywasgivenanoption,exercisableuntilApril2,2013,to increasethecontractualquantity

supplied in theagreementperiod toa totalmaximumvolumeofapproximately99BCMwithout the

purchase price being updated and without committing to purchasing the entire quantity, the gas

consumptionbeinginaccordancewiththemechanismprescribedintheagreement(inthissection:the

Option).The

realization

of

the

Option

is

subject

to

receipt

of

certain

regulatory

approvals

by

the

Sellers.

Inaddition,theSellershavearighttocanceltheOptionpriortoitsexerciseinthecaseofpricecontrols

asdefinedintheAgreementresultinginadecreaseofthepurchaseprice.

WithintheframeworkoftheAgreement,theSellersstatetheirintenttocommencethesupplyofgasto

theCompanyonJuly1,2013,andundertaketocompletetheconstructionoftheinfrastructuretoallow

forgassupplybynolaterthanOctober1,2013.IfnonaturalgasissuppliedfromtheTamarreservoirby

January 1, 2014 (in this section: the Effective Date), the Sellerswill pay the Company, from the

EffectiveDate,agreedcompensationof525thousanddollars(assolerelief)foreachdayofdelayinthe

supplyofthegas,subjecttotheirliabilitylimitsaspertheAgreement,uptoalimitof95milliondollars,

and for thedeferral in the gas supplynot arising from forcemajeure (as this term isdefined in the

Agreement).If

within

six

(6)

months

of

the

Effective

Date

the

gas

is

not

supplied,

and

in

the

absence

of

anagreementbetweenthepartiesconcerninganarrangementthatwillallowthegastobesupplied,the

CompanyhasarighttocanceltheAgreementbyadvancenoticeofsixty(60)days.


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7

The gasprice in theAgreementhasbeen set according to a formula that contains abaseprice and

linkagethatisbasedmainlyontheAmericanconsumerpriceindex3.Thebasepricefor2011wassetto

$5.042 per heat unit (MMbtu)4,whichwill be linked in each of the years 2012 to 2019 to theU.S.

ConsumerPriceIndexplus1%(andless1%forthesubsequentyears).

TheAgreementincludesatakeorpaymechanismwherebytheCompanyiscommittedtopayingforthe

rightto

purchase

aminimal

quantity

of

natural

gas,

even

ifnot

used,

at

avolume

of

3.5

billion

cubic

metersperyear in the first five (5)yearsand thereafter2.5billioncubicmetersperyear,and in the

periodoftheOption,totheextentimplemented,afterasecondsupplypipeisbuilt,theannualquantity

shallexceed5billioncubicmetersperyear (subjecttoadjustments inaccordancewith thevolumeof

thesaleofgasoftheTamarPartnershipandthemagnitudeofelectricitygenerationbytheCompany).

Inaddition, theAgreementestablishes two (2)datesatwhicheachpartymaydemand, in thecaseof

believingthatthepurchasepricedoesnotproperlyreflectthepriceofthepurchaseofgasintheIsraeli

market,adjustmentofthepurchaseprice(pricereopener)asfollows:eight(8)yearsafterthedateof

the commencement of the running of gas from the Tamar Reserve, the partieswill discuss (at the

requestof eitherparty)adjustmentof thepurchasepriceat a rateofup to25percent (increaseor

decrease);

eleven

(11)

years

after

the

date

of

commencing

the

pumping

of

gas

from

the

Tamar

Reserve,

the partieswill discuss (at the request of either) the adjustment of the purchase price by up to 10

percent(increaseordecrease).Ifthereisnoagreementontherateofthepurchasepriceadjustmentas

setforth,theissuewillbesettledinanarbitrationproceedingthatwillbeconductedinaccordancewith

therulesoftheIsraelArbitrationInstituteifthedisputedamountislowerthantheamountsetforthin

the Agreement, or alternatively, in accordancewith the rules of the London Court of International

ArbitrationifthedisputedamountexceedstheamountsetforthintheAgreement.Suchanarbitration

proceedingshallbeconsideredasaninternationalarbitrationproceedingforthepurposeofIsraelilaw,

English law,U.S. lawsand theNewYorkConvention for theRecognitionandEnforcementofForeign

ArbitralAwards.

TheAgreementisvaliduntilfifteen(15)yearsfromthedateofcommencementofsupplyofgasoruntil

the full contractual supplyquantity,whichever isearlier. Ifuntil theendof the thirteenth (13th) year

fromthedayofsigningtheAgreement,theCompany informstheSellersthat itexpectsthat itwillnot

beabletoconsumethefullcontractualquantityduringthefifteen(15)yearperiod,thentheAgreement

shall be extended until the earlier of two years more after the fifteen (15) year period and the

consumptionoftheentirecontractualquantity.

ThepartieswillbeallowedtoconcludetheAgreementincertaincircumstances(liquidation,insolvency,

assignmentof rights to creditors, appointmentofa receiver, etc.),by advancewrittennoticeofone

hundredtwenty(120)days.

The Agreement requires the approval of the Electricity Authority, the Antitrust Commissioner, the

Companies

Authority,

and

if

necessary,

the

Government.

Asatthedateoftheprospectus,thesaidapprovalshavenotyetbeenreceived.Totheextentthatthe

approvalsarenotreceivedbySeptember30,2012,theCompanyhastherighttocanceltheAgreement.

Inaddition, in accordancewith theprovisionsof theAgreement, if theseapprovalsarenot received

withinfortyfive(45)daysofthedateofsigningtheAgreement(i.e.,byApril29,2012),thepartieswill

discuss,withinseven(7)daysofthistime,thechancesofreceivingtheapprovals,andsoonafterthat

discussion,theSellerswillbeallowedtoannouncethecancellationoftheAgreement.Asatthedateof

theprospectus,thepartieshavenotdiscussedtheissueofreceiptoftheapprovals.

OnApril19,2012,theCompanyfiledanapplicationforexemptionfromabindingarrangementforthe

AgreementwiththeAntitrustAuthority.Asofthedateof theProspectus,theCompany isnegotiating

3 U.S.ConsumerPriceIndexforallUrbanConsumers(CPIU)

4 1BCM=36,000,000MBbtu


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8

withtheAntitrustAuthorityconcerningtheamendmentofcertainconditionsintheAgreementinorder

toreceiveitsapprovalfortheexemption.

OnMay 21, 2012, the ElectricityAuthority published a proposal for a decision for a hearing on the

matteroftheprinciplesforrecognitionofthecostsofpurchasinggasconcerningtheAgreement(inthis

sectiontheDecisionProposal).TheDecisionProposalisopenforpubliccommentuntilJune4,20125

In

the

Decision

Proposal,

the

Electricity

Authority

states,

inter

alia,

that

it

will

consider

recognizing

the

gaspurchasecostsoftheCompanyrelativetotheAgreement, inaccordancewithandsubjecttothe

following6

(A) TheElectricityAuthoritywill recognize thegaspurchase costs, linked to theU.S.ConsumerPrice

Index, less themechanismbywhichanadditionalpercentwillbeaddedeachyearuntil2019and

thereaftertherewillbeadeductionof1percenteachyear(thePlusMinusOneMechanism).

(B) The Electricity Authority will consider not recognizing the costs derived from the Plus Minus

Mechanism, and asks for the response of the Company to an alternative mechanism that will

expressasignificantreduction in thecostsof theAgreement,basedonareduction in theoption

pricelinkageintheAgreementtoaminimallevel.

(C)The

Electricity

Authority

will

recognize

the

costs

of

the

Option

in

an

agreement

subject

to

the

OptionbeingamendedinsofarasthecommitmentoftheCompanytopurchasegaspursuanttothe

Optionwillnot last longer than theexpecteddateofentryofanaturalgas supplier thatwillbe

determinedwith the Antitrust Commissioner. In addition, the Companywill be given a right of

choiceforanotherrenewaloftheOptionontheconditionthatitannouncesthistothegassupplier

bynolaterthan2016oratsomeothertimeasarrangedwiththeAntitrustCommissioner.

(D) The Electricity Authority is asking for the response of the Company concerning the parameters

appearing in the Agreement concerning the decision to open the price for adjustment of the

openings tomarketpricesandconsidering the financingof theTamarPartnershipand the factof

nonapplicationoftheopeningtothelinkagemechanism.TheElectricityAuthorityfurtherstatesin

theDecision

Proposal

that

it

will

consider

establishing

an

economic

mechanism

for

incentives

for

theCompanytoacttoreducethegaspriceatthetimeofthefirstandsecondpriceopening.

As at the date of the Prospectus, the Company is studying the Decision Proposal. It is the

expectationof theCompany that the ElectricityAuthority,will recognize allof the gaspurchase

costs regarding theAgreement. In theabsenceof sucha full recognition, theCompanydoesnot

intendtorealizetheagreement.

FordetailsseeNote8b1tothefinancialstatementsforthethreemonthsendingonMarch31,2012.

3.7 Section7.13.2.4:Directiveswithrespecttotheuseofnaturalgas

Theneed forusingbackup fuel inanumberofpowerstationsof theCompany increasedsignificantly

from2011

due,

inter

alia,

to

the

shortage

in

the

supply

of

natural

gas

from

Egypt.

Accordingly,

from

time

to time, individual temporary approvals are issued by theMinistry for Environmental Protection for

usingbackupfuel.

DuetothecontinuedshortageofnaturalgasandtheapplicationoftheCompanyontheissue,inApril

2012 the Director General of the Ministry for environmental protection established the current

procedureforuseofbackupfuelatthetimeofafaultorshortage inthesupplyofnaturalgastothe

electricitysystem.Themannerofoperationofthegenerationunitsbythesystemmanagementunitof

theCompanyisconducted,interalia,inaccordancewiththisprocedure.

Within the frameworkof theGovernmentsdecisionofMay13,20127, theGovernmentdecided, in

5ThefulltextoftheDecisionProposalmaybeinspectedonthewebsiteoftheElectricityAuthority:

http://pua.gov.il/Sip_storage/FILES/4/2324.pdf6TheDecisionProposalalsorelatestotheprinciplesforrecognitionofcostsrelativetoagreementsbetweentheTamar

Partnershipandprivateelectricityproducers.7 Seehttp://www.pmo.gov.il/PMO/Secretarial/Govmes/2012/05/govmes130512.htm;Decision150oftheGovernmentof

May13,2012.
http://pua.gov.il/Sip_storage/FILES/4/2324.pdfhttp://www.pmo.gov.il/PMO/Secretarial/Govmes/2012/05/govmes130512.htmhttp://www.pmo.gov.il/PMO/Secretarial/Govmes/2012/05/govmes130512.htmhttp://pua.gov.il/Sip_storage/FILES/4/2324.pdf


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9

viewoftheexpectedshortageofelectricityinthesummerof2012,interalia,todirecttheMinisterfor

EnvironmentalProtectiontoacttotheextentrequiredbyJuly1,2012,toallowforexaminationofthe

installationandoperationofportablegasturbineswithanoutputexceeding20megawatts,tobeused

inbackupformat,andtoremovetheperiodofpreparationfortheshortageandsubjecttostipulations

prescribedinthedecision,therestrictionsinthenumberofhoursprescribedbyhisMinistryconcerning

theoperationofelectricitygenerationunitsbybackupfuelduringashortageofnaturalgas.Forfurther

informationontheGovernmentdecisionofMay13,2012,seeSection29.3.11intheDescriptionofthe

Company'sBusinessAffairsfortheyearendedonDecember31,2012.

3.8 Section7.13.2.8Airborneemissionsofcoaldustflyash

InMarch2012,theMinistryforEnvironmentalProtectionsenttheCompanyadditionalconditionstothe

businesslicenseoftheOrotRabinPowerStationwithrespecttothepreventionofdiffuseemissionsof

coal dust and fly ash from the power station,which prescribes various instructionswith respect to

operationalandmaintenanceactionsthattheCompanymusttakeinalloftheactivitysegmentsofthe

coalandflyashsystemstoreduceandpreventdustemissions.

The Company is holding discussions with the Ministry for Environmental Protection concerning a

requesttoexplaintheadditionalconditionsandisactingtoimplementthem

3.9 Section7.13.10.2:ReadingPowerStation

Within a Government decision of May 13, 20128, the Government directed the Minister for

environmental protection to act to remove the restrictions that were prescribed by his Ministry

concerningtheoperationofthevariousgenerationunits,includingReading,usingbackupfuel,duringa

shortage of natural gas in the period of preparation for a shortage as defined in theGovernment

decision(datedJune1,2012toDecember31,2012),aslongastheelectricitygenerationunitsoperate

in accordancewith the order of operation set by theMinistry for Environmental Protection (after

consulting the Ministry of Energy and Water) with the aim of minimizing the exposure of the

populationtoairpollutioncausedbyincreaseduseofbackupfuel,andremovingtherestrictionsonthe

permittednumberofhoursofoperationforthebackupunitsanddieselgeneratorsduringashortage.

3.10Section

7.13.10.9(b):

Miscellaneous

In April 2012, the Environmental Protection Law (Emissions and Transfers to the Environment

Obligation of Reporting and Register) 2012 was published, imposing a reporting duty concerning

emissionsand transfersofpollutantsandwaste to theenvironment.This is,amongother things, for

creatinganemissionregister,whichwillbemadeavailableforpublicinspection.Theemissionregister

willbemadeoutandmanagedby theMinistry forEnvironmentalProtection.Asof thedateof the

Prospectus, the Company is studying the law and its practical and financial consequences for its

operations.

8GovernmentResolutionnumber4623:takingofstepsforcopingwiththeexpectedshortageinelectricity,ofMay13,

2012.


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4. Section8:TheTransmissionandTransformationSegment

4.1 Section8.1.3.2:Thefutureelectricitychargeratesinthetransmissionanddistributionsegments

Within the frameworkoftheplannedraisingofthechargerate9by8.9percent,which tookeffecton

April 1, 2012, following adecisionof theElectricityAuthorityofMarch 22,2012,on the spread of

increaseofelectricitychargeratesfor20122014inaperiodofproblemsinthesupplyofnaturalgasto

theenergysector in Israel,anadvancepaymentof1.2percenthasbeen included for recognitionof

costs of the distribution and transmission segment. The advance payment (addition to the cost

recognized inthetransmissionanddistributionsegmentsfor2012) isapproximatelyNIS240million in

chargeratebasisquantities(soldquantitiesof2006)basedonthefollowingdistribution:

NIS 60million in the transmission segment,NIS 80million in thedistribution segment andNIS 100

million inthe lowvoltagedistributionsegment,relativetotherecognizedcost inthe lastchargerate

update.

The addition shall be valid until a new charge rate basis is determined for the transmission and

distributionsegments.

In addition, it has been determined that the effective date of the new charge rate basis for the

transmissionand

distribution

segments

is

April

1,

2012.

Inaddition,amechanism foraccountreckoninghasbeenestablished for therecognizedcostsfor the

transmissionanddistribution segments.Within it, theElectricityAuthority states that the recognized

costs for the transmission and distribution segments, including the addition in accordancewith this

decision, shall remainwithoutadepreciation coefficientuntilanewbasis is set for these segments.

Differences thatwill formbetween the recognized costat the timeof setting thenewbasisand the

recognizedcostsshallbeconsideredascompensationforthedelayintheupdate.

The Company applied to the Electricity Authority onMarch 14, 2012,with a request to discuss a

number of subjects relating to setting a new charge rate basis for the transmission segment. A

documentforahearinghasnotyetbeenpublishedandthisapplicationhasnotyetbeenrespondedto

4.2 Section8.5:Fixedassets,landandfacilities

As at the date of the report, the Company isworking on a lease deal concerning a land tract of

approximately40,000squaremetersfortheAyalon(Ganot)switchingstationandtheconstructionof

theswitchingstationhascommenced.ThedealwasapprovedbythemanagementoftheILAandinthe

institutesof theCompanyand lease feeshavebeenpaid for it.Asat thedateof the report,a lease

contractfortheareahasyettobesigned

4.3 Section8.9 EnvironmentalNuisancesandManagementMeansthereof

Regarding theEnvironmentalProtection Law (EmissionsandTransfer to theEnvironmentReporting

andRegistrationDuties)2012,publishedinApril2012, seesection3.10above.

4.4 Section9.7.4 Forecastsfor investmentsthatwillberequiredfortheexecutionoftheDevelopment

Planofthedistributionsegment

During2012,someoftheclasspermitsfortheconstructionandoperationofelectricityfacilitiesthat

were issuedbytheMinistryforEnvironmentalProtectionpursuanttotheNonIonizingRadiationLaw

aredue toexpire.TheCompany is in theprocessofgettingpermits forcontinuing tooperate these

facilities.TheconditionsrequiredbytheMinistryforthepermitsandtheirconsequencesarenotyet

known.

9 Decision1ofthemeetingoftheElectricityAuthoritydatedMarch22,2012.


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5. Section14:Humancapital

5.1 Section14.4MaterialChangesintheRosterofSeniorPositionHolders

5.1.1 OnJanuary12,2012,Ms.SaritGiladiDor,theCompany'sspokeswomanannouncedherwishto

endhertermofservice.OnApril10,2012,Ms.SaritGiladiDorendedhertermofservice.

5.1.2 OnMarch1,2012,Mr.AvrahamNatanannouncedhiswishtoendhistermasadirector inthe

CompanyfromApril10,2012.SeedetailsofthecircumstancesoftheresignationofMr.Avraham

fromtheCompany'sBoardofDirectorsintheimmediatereportonMarch1,2012,Ref.No.2012

01057762,presentedasareference.5.1.3.Mr. Moshe Bachar, will end his term as Deputy CEO and Deputy CEO Generation and

Transmission,onMay31,2012.Mr.YaakovHainwillreplacehiminthispositionofasDeputyCEO

fromJune1,2012.

5.2 Section14.6.5:SalaryDeviations

OnFebruary20,2012,aletterwassenttotheCompanyfromtheCommissionerofWagesonthematter

of apparent wage overruns, concerning payment of increased compensation to special agreement

employees (as stated in Section14.6.9 in theReporton theCompany'sBusinessAffairs for the year

ended on December 31, 2012).OnMarch 25, 2012, the Company forwarded its comments on the

mattertotheCommissionerofWages,dealingmainlywith:thecomponentofincreasedcompensation

forspecialagreementemployeeshasbeenpracticedintheCompanyfordecades,predatingpassingof

theBudgetFoundationsLaw;thispaymentisvestedinalistofcollectiveagreementsthatweresigned

decades ago; in the view of the Company, information on this matter was brought forth for the

informationoftheCompaniesAuthority.

Inaddition,onMarch22,2012,theCommissionerstatedthatheintendedtoholdahearingproceeding

on thematterofpaymentof the following components: (1)Globalovertimeaspartof theeffective

salaryforpensiontothemembersofthemanagementratedatrankB;(2)paymentofovertimeother

thanaccordingtoactualexecutionforexternalworkers10

(3)paymentsofperdiemandmealsthatare

paid toemployeesof theCompany; (4)paymentofcommandwageadditionforCompanyemployees

andpensioners11.TheCompanyhasbeengivenfortyfive(45)daysforpresentingitspleasonthisissue,

including the argument and thejustification for payment of each of these wage components. The

CompanywasgivenanextensiontoJune1,2012,tosubmititsresponse.

5.3 Section14.6.7:TrustAccountforNonBudgetaryComponents

OnApril2,2012, the laborunionand the LaborFederation fileda leave toappealwith theNational

LaborCourt,whichorderedthefilingofresponsestothemotionandastayofexecutionofthedecision

of theRegionalCourtuntil givingadecision to the contrary.After the filingof the responses to the

motion,onApril30,2012,theNationalCourtdismissedtheleavetoappeal.Initsdecision,theNational

Court cited the rule whereby in general, an appellate instance does not intervene in temporary

proceedings in which the factual deliberations are at the prima facie level only, as opposed to

deliberationsin

the

verdict

at

the

end

of

the

principal

proceeding.

A

hearing

of

the

principal

proceeding

intheRegionalCourtissetforJune5,2012.

FollowingthedecisionoftheNationalCourt,onMay8,2012,theCompanyappliedtotheTrusteeand

asked it to transfer the amountofNIS 50million from the TrustAccount to theCentralAllowance

ProvidentFundonMay31,2012,and latermore requestswillbe forwarded for transferringmoney

from the Trust Account to the Fund.OnMay 23, 2012, Counsel for the Trustee stated that he is

studying the application of the Company on thematter, aswell as that of the labor union,which

expressedanobjectiontothetransferofthemoney,andwouldforwardhispositiononthematteras

soonaspossible.Inhisletter,CounselfortheTrusteeassertedthattherewasaprimafaciepossibility

10AnexternalworkerisanemployeeemployedusuallyoutsidethefacilitiesoftheCompany.

11Acommandadditionisapayincreasewhoserateisdeterminedinaccordancewiththecommanddefinitionofeach

employeeas

follows:

(1)

vocational

group

2.5

percent;

(2)

section

heads

and

their

deputies,

group

leaders

and

their

equivalents5.5percent;(3)largesectionleaders,foremenandtheirequivalents6.5percent;(4)deputydepartment

managers,seniorsectionleaders,seniorforemenandtheirequivalents,specialdutiesandseniorexpertswhohavebeen

twoyearsatpeakrank 18percent;(5)standarddepartmentmanagersatpeakrank21percent;(6)seniordepartment

managers23.5percent;(7)deputydepartmentmanagers/departmentmanagersandVPs26percent


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12

ofapplyingtothecompetentCourtinaccordancewiththeTrusteeshipLaw,1979,fortherightsofeach

ofthepartiestobeestablished,andtheTrusteewouldexaminethisoptionasapossiblesolution.

OnMarch26,2012,theCompanyreceivedadocumentcontainingrecommendationsoftheRegulator

Team.ThepositionoftheRegulatorTeamisthatdepositsthattheCompanymadeforcomponentsfor

firstgenerationemployees thatarenotcomponentsenumerated inAppendixAofthe 96agreement

that preceded March 4, 1996, and any deposit for components for second generation and third

generation employees and deposits for components, are deposits for which depositing is not

mandatory.

The Conclusions chapter in the recommendations document of the Regulator Team stated that the

Companyshoulddoeverythingnecessary,includingbeforetheTrusteeorthebeneficiaries,andbylaw,

toreleasemoneywhosedepositingintheTrustAccountwasnotmandated,adecisionoftheBoardof

DirectorsoftheCompanyofMarch22,2012toreleaseNIS600millionconstituted, intheviewofthe

regulatorteam,afirststepfortheexecutionoftheforegoing.This isdue, interalia,tothefactthat

thereisandhasbeennoroomtodepositforafreeelectricityelement,becausethisisarightthatis

granted in kindwithin the activity of the Company.However, the regulator team believes that the

arrangementthatwasshownbytheCompany,furthertothedecisionoftheboardonMarch31,2011,

contravenes the principles stated in the recommendations. Therefore, theBoard ofDirectors of the

Company must discuss these conclusions and continue to make the appropriate decisions and act

accordingly concerning the balance of themoney in the trust account, in order to implement the

principlesabove.Thus,theregulatorteambelievesthattheCompanymustconsideractingatthefirst

stageimmediatelytoimplementtheprovisionsoftheTrustAgreement,inamannerthatwillmakeuse

of the TrustAccountMoney for its purpose in accordancewith the TrustAgreement.Among other

things, theCompanymustexaminemaking immediateuseof themoney inoneormoreof theways

prescribedintheTrustAgreementconcerningtheuseoftheTrustMoney.Concretely,itistheposition

of the team that the Companymust consider exercising its authority that is prescribed in the Trust

Agreementtogive instructionstotheTrusteetoreceiverefundsfromtheTrustAccountforpayments

thatit

has

made

from

its

coffer.

It has also been determined that the Company should again consider, as the former of the Trust

Agreement,allofthemeasuresthatareavailableto it, including inaccordancewiththetruststatues,

forinterpretingtheTrustAgreementoradaptingittothearrangementstowhichitiscommittedandno

morethanthat.

TheCompanyisstudyingthemeaningoftherecommendationsoftheRegulatorTeamonthisissueand

in April 2012 applied to the Regulator team to receive the legal expert opinion on which the

recommendationoftheteamrelies.

5.4 Section14.6.9:Specialagreementemployees

TheCompany

has

750

special

agreement

employees

(as

of

the

salary

data

of

December

2011)

an

employeewho ishiredforanonpermanentposition,forperformingadefinedtaskthatlastsforaset

period, such as: the construction of power stations or substations. Such an employee is entitled, in

accordancewith the collective agreement, to the rights as set forth in the Employment Ruleswith

respecttopermanentemployees,excepttherighttoabudgetarypensionandtoanenergyallowance.

Thecompensation thatwillbepaid tospecialagreementemployees,at the timeof their termination

shallbeenlargedasfollows:forthefirsttwoyearsofwork,compensationat200percentforeachyear

ofemployment,andforthethirdyearonward,compensationat300percentforeachyear.OnFebruary

20, 201212, a letter was sent to the Company from the Senior Deputy (Enforcement) to the

Commissioner of Wages whereby the enlarged compensation arrangement ostensibly contravened

Section29(A)oftheBudgetFoundationsLaw.TheCompanyandthelaborunionweregiven30daysto

12AletterfromthewageandemploymentagreementsdivisionoftheMinistryofFinanceofFebruary20,2012,concerning

apparentwageoverrunsatIsraelElectricCorporation.


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13

raise contentions inwriting, before the decision of the Commissioner ofWages on thematter. The

Company forwarded its comment on the matter to the Commissioner of Wages, within which it

discussedthenormativesourceswherebythespecialagreementemployeesarepaidcompensation.As

ofthedateoftheProspectus,noresponsehasyetbeenreceivedtothecommentsoftheCompany.

5.5 Section14.11:LabourDisputes

OnMarch

25,

2012,

the

employees

of

the

Company

started

to

take

various

partial

sanctions,

in

accordancewiththedirectionofthe laborunion,duetothedecisionoftheBoardofDirectorsofthe

CompanyofMarch22,2012tooperatetowithdrawActuarialSurplus fromtheTrustAccount.These

sanctionsstoppedinaccordancewithadecisionoftheRegionalLaborCourtinHaifaonMarch27,2012,

afterIsraelElectricCorporationfiledapetitionforgivinganorderthatwouldpreventthesanctionson

thepreviousday.OnMarch29,2012, theargueddecisionof theRegional LaborCourtwashanded

down,wherebytheemployeesoftheCompanyhadtoabstainfromsanctions,whereastheCompany

wasallowed inaccordancewiththedecisionoftheBoardofDirectorswithrespecttothetransferof

theactuarialsurplustothecentralallowanceprovidentfund.Thatday,thelaborunionandtheLabor

FederationfiledanurgentpetitiontotheRegionalLaborCourt inHaifatodelaytheexecutionofthe

decisiononthematterofthetransferoftheactuarialsurplus,untiladecisiononthe leavetoappeal

thattheyintendedtofiletotheNationalCourt.OnMarch30,2012,theRegionalLaborCourtinHaifa

orderedthe

delay

of

execution

of

the

decision

with

respect

to

the

possibility

to

transfer

the

actuarial

surplus,untilApril1,2012at1:00p.m.OnApril2,2012,thelaborunionandtheLaborFederationfiled

a leavetoappealwiththeNationalLaborCourt,whichorderedthefilingofresponsestothemotion

andastayofexecutionof thedecisionof theRegionalCourtuntilgivingadecision to thecontrary.

After the filingof the responses to themotion,onApril30,2012, theNationalCourtdismissed the

leavetoappeal.AhearingoftheprincipalproceedingintheRegionalCourtissetforJune5,2012.

6. DescriptionofCompany'sBusinessMattersRelatedtotheOperationoftheWholeCompany

6.1 Section15.1:Fixedassets,landandfacilities

It is thepositionofthe IsraelLandAdministrationthat inaccordancewith thedecisionof IsraelLand

AdministrationCouncil1136, the landareas thatwereallocatedby the IsraelLandAdministration to

the

Company

for

public

purposes,

but

which

are

effectively

unused

or

are

not

being

used

for

the

allocatedpurposes,shouldreturntothepossessionoftheIsraelLandAdministrationsubjecttoandin

accordance with the conditions stated in the said decision. Based on various considerations, the

CompanybelievesthatthisdecisiondoesnotapplytothelandthatwasleasedtoitbytheIsraelLand

Administration,basedontherecognitionofthemanagementoftheAdministrationthattheCompany

hasaneedtoregulatesitesforelectricitywithnationwidecoverageinadvance.However,evenifthis

decisionwerenot toapplyto the landallocatedto theCompanywitha tenderexemption,asofthe

dateoftheProspectus,theCompanyismakinguseofallofthelandareasthathavebeenallocatedto

it by the Israel LandAdministration, except a few tractswhose usage date in accordancewith the

developmentplan isnot yetdue,and forwhich there is future zoning fordevelopmentanduse. In

addition,inaccordancewiththesaiddecision,eveniftheCompanyisrequiredtoreturnlandthathas

not been used to the Israel Land Administration, the return to the Israel Land Administrationwill

require paying the Company consideration for the return, as prescribed on thismatter in the said

decision.

6.2 Section19Financing

On February 10, 2012, the Company issued debentures, distributed by Barclays Capital and USB

InvestmentBankto institutionalbuyers inandoutsidetheU.S.A, inatotalamountofU.S.$0.5billion,

nominalvalue,outofacomprehensiveplan(GMTN)forissuingdebenturesinatotalamountofupto$

2billion,nominal value. For furtherdetails, seeNotes 7 c to the Financial Statements for the three

monthsendedonMarch31,2012andsection19.4totheDescriptionoftheCompanysBusinessAffairs

fortheyearendedonDecember31,2011.

OnApril5,2012,theCompanyconcludedabidforaprivateplacementofdebentures(nonnegotiable)

unlinkedtotheCPI,oftheNIS2013Electricityseries.ThenominalvalueofthisofferingamountedtoNIS

1.5billion,

at

astated

interest

of

3.03%.

The

principal

of

the

debentures

will

be

repaid

in

one

payment,

onApril10,2013.FordetailsseeNote35ptothefinancialstatementsforthethreemonthsendedon

March31,2012.


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6.3 Section19.8CreditRating

OnApril5,2012, the international ratingcompanyStandardandPoor'sand the local ratingcompany

MaalotS&P'sannouncedthattheincludedtheinternationalcreditratingoftheCompany,BB+andthe

localcreditratingoftheCompany,ilAA inthenegativeCreditWatchlist.

OnMarch27,2012,thelocalratingCompany,Midroog("Midroog")announcedthatitratestheprivate

placementseries,guaranteedbyastateguarantee,intheamountofuptoNIS1.5billionofferedbythe

CompanyonApril5,2012atAaa.

OnMay24,2012,Midroogannounced: (1) that the ratingof series22and2022 remainsatAa3andchanges the rating outlook from steady to negative; (2) the rating of theNIS 2013 Electricity series

remaimsatAaa; (3)arating ofAaa to theotherseries thatareguaranteedby theState ("TheOther

GuaranteedSeries"),intheamountofuptoapproximatelyNIS3billion,whichtheCompanyintendsto

offeruptomidJuly2012,inapublicofferingbasedonaprospectus.

6.4 Section22.1LicensesoftheCompany

In Amendment 10 to the Electricity Sector Law, the generation license of the Company have been

extendedtoJanuary1,2013.TheCompanybelievesthattheextensionappliestoallofitslicenses.The

ElectricityAuthority states that theextensiondoesnotapply to thenewgeneration licenses thatare

validuntilApril15,2012. In theviewof theElectricityAuthority, theauthorityofextensionof these

licensesis

granted

to

it.

In

April

2012,

the

Electricity

Authority

and

the

Minister

extended

the

new

generationlicensesoftheCompanytoJanuary1,2013.

SeeNote1b1tothefinancialstatementsforthethreemonthsendedonMarch31,2012.

6.5 Section22.1ElectricityRate

Seedetailsof the rateupdates inNote3 to the financial statements for the threemonthsendedon

March31,2012.

6.6 Section22.5.2.2.FinancialStatementsofGovernmentCompanies

Section33AoftheGovernmentCompaniesLawstatesthatinadditiontotheprovisionsofanystatute,

theMinisterofFinancemayprescribe,afterconsultationwiththeMinisterofJustice,andwithrespect

toapubliccompanyafterconsultationwiththeSecuritiesAuthority,atthesuggestionoftheCompanies

Authority, rules for making out Financial Statements of a government company for which he has

determinedthatitprovidesanessentialservicetothepublic.

In accordance with this instruction, the Government Companies Regulations (Rules for Preparing

Financial Statements of Israel Electric Corporation Ltd.) (Provisional Order), 2004, have been

promulgatedwhereby theFinancialStatementsof theCompanyaremadeoutaccording to themand

also in accordancewith the Securities Regulations (Annual Financial Statements) 2010, although the

company isapublicone.SeeNote2AtothefinancialStatementsforfurther information.OnMay22,

2012, theMinisterof Finance extended the validityof theprovisionsof theGovernmentCompanies

Regulations (Rules for Preparing Financial Statements of Israel Electric Corporation Ltd.) (Provisional

Order),2004,

and

the

amendments

thereto,

until

December

31,

2014,

and

as

of

January

1,

2015,

the

Company is to implement in full the international financialreportingstandards (IFRS).SeeNotes2A

and2EfordetailsontheexpectedtransitionoftheCompanytoreporting inaccordancewiththe IFRS

rules.

TheseregulationsstatethatthefinancialstatementsoftheCompanyaretobecompletedinaccordance

withtheIFRS,subjecttotwoexceptions:

(1) TheCompanywillcompileitsfinancialstatementsadjustedtothechangesinthegeneralpurchasing

power of the shekel (in accordancewith the rules prescribed inManifestoNo. 36 including the

provisions prescribed in Manifestos nos. 40, 50 and 56 of the Institute of Certified Public

AccountantsinIsrael).

(2) TheCompanyisaregulatedcompanyandthereforecompilesitsfinancialstatementsinaccordance

with the rules of the U.S. Financial Accounting Standards Board (FASB), as enumerated in the

standardChapterRE6inregardtoregulatedactivitiesintheconsolidatedversionofthestandardsof


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theboardsetforth,includingamendments,clarificationsoradditionstotheserulesastheyarefrom

timetotime.

In the letterof theDirectorof theCompaniesAuthority to theMinisterofFinance inMay2012, the

Directorof theCompaniesAuthoritystates, interalia, that thepositionof theCompaniesAuthority is

thatfromJanuary1,2015,theCompanywillhavetoapplyfullytheinternationalaccountingstandards.

Inaddition,

it

was

clarified

that

the

Companies

Authority

tends

towards

the

view

that

in

accordance

with

theregulations,thereisnoroomforconductinganexaminationorreductioninthedecreaseinvalueof

fixedassets inaccordancewith internationalstandards IAS36,astheCompanyhasstartedtodosince

thefinancialstatements in2010,butassetforth intheU.S.standardsforregulatedcompaniesofthe

type of the Company, including in FAS 144 (ASC 360 in the new codification) combined with U.S.

regulation for regulated companies inaccordancewith these regulations. It isnoted that there isno

internationalregulationwithintheIFRSforregulatedcompaniesofthetypeoftheCompany,andonthe

otherhand,theU.S.regulationthatwasappliedtotheCompanywithintheregulationsrefers,interalia,

assetforthabove,toFAS144.Itwasfurtherstatedthattheessenceofcalculationdirectlythroughfixed

assetsrelies,inacompanyofthetypeoftheCompany,onthechargeratesoftheCompany,whichare

setbyregulation,thussettingtheeconomicvalueof itsassets.TheCompaniesAuthority isexamining

with,inter

alia,

relevant

entities

of

the

State,

the

options

for

implementing

its

professional

position

set

forthabovewithintheGovernmentCompaniesRegulations(RulesforPreparingFinancialStatementsof

Israel Electric Corporation Ltd.) (Provisional Order), 2004, including through their amendment, if

required.

SeealsoNote2a1tothefinancialstatementsforthethreemonthsendedonMarch31,2012.

6.7 Section22.8PlanningandBuilding

InaccordancewiththePlanningandConstructionLaw,alandrightsholderisallowedtosubmitagainst

thelocalcommitteetowhosejurisdictionanoutlineplanappliesaclaimforcompensationfordecrease

invalueofthe landasaresultoftheapprovaloftheplan.Forcertainoutlineplans,theCompanyhas

undertaken to indemnify the local committees in whose jurisdiction these plans apply to the full

amountsthat

the

committees

would

have

to

pay

to

the

affected

landowners,

subject

to

and

in

accordancewiththeprovisions inthetextofthe indemnificationstatement(exceptoneplan inwhich

theburdenofcompensationwillbesharedamongtheinstitutionalbodiesinvolvedintheplan).Appeals

havebeensubmittedagainstthelocalcommitteestotherelevantappellatecommitteesthatdealwith

decrease invalue. Inaccordancewith theprovisionsof the indemnificationstatements, theCompany

wasenrolledintheappealsasapartythatmightbeharmedbytheiracceptance(seealsoNote24B.8.

to the Financial Statements for the year ended on December 31, 2012). In the statements of

indemnificationthemselves,orintheindemnificationclausesintheplan,noamountsareindicated,but

rathertheindemnification is100percentoranotherrateoutoftheamountoftheclaim(appeal)that

hasbeenfiledagainstthe localcommittee.Thetotalclaimsarestipulated intheFinancialStatements

andareupdated from time to time. For theirpart in the claims, adecisionwas givenbyadeciding

appraiser,andonMay6,2012,anagreementwas signedbetween the institutionalentities thatare

involvedintheplan,whichistoregulatethedistributionofpaymentsuntiladecisionastothemanner

ofdistributionbetweentheparties.

6.8 Section24.1.2.1(c) Pendingproceedings

OnJuly12,2007,theCompanyfiledanadministrativepetitiontotheDistrictCourtinHaifa,convening

asacourtforadministrativeaffairs,againstmunicipaltaxassessmentsthatwereissuedtotheCompany

in the years 20042007, for approximately 1,000 transformation stations and 8 substations

(AdministrativePetition(HaifaAdministrative)4239/07)asstipulatedbelow:

Withrespecttothetransformationstations

(a) In 2004, a municipal tax assessment based on best judgment was issued, which was applied

retroactivelyfortheperiodfrom1997inthetotalofNIS93,187.516.


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(b) In2005,amunicipaltaxassessmentwasissuedbasedontherosterofassetsthatwashandedover

tothemunicipalcouncilbytheCompanythatwasappliedretroactivelyfortheperiodfrom1998in

thetotalofNIS29,476,572.

(c) In2007municipaltaxassessmentswere issuedthatwereappliedretroactivelyforaperiodfrom

2001.Theseareprobablyoverlappingassessments, inviewof theyearsandassets towhichthey

wereapplied.

However,

this

was

not

stated

explicitly

at

any

stage

by

the

municipal

council.

Withrespecttothesubstations

(a) In2001amunicipaltaxassessmentwasissuedfortheZamirsubstation,foraperiodfrom2000in

thetotalofNIS1,446,458.

(b) In2003 threemunicipal taxassessmentswere issued for theBikurimsubstation(approximately

NIS 10,000), the Gan Yovel substation (approximately NIS 13,000) and the Pal Yam substation

(approximatelyNIS910,000).

(c) In2004amunicipaltaxassessmentwas issuedfortheAdmiraltysubstation,fortheperiodfrom

2003,totalingatNIS1,722,015.

(d) In 2005, amunicipal tax assessmentwas issued to theMakah substation, retroactively for the

periodfrom2000,inthetotalofNIS11,721,781.

Therefore,inaccordancewiththatwhichhasbeensetforthabove,onJuly12,2007,apetitionwasfiled

onthepartoftheCompanyagainstallofthemunicipaltaxassessmentslistedabove.OnNovember11,

2007,themunicipalcouncilfiledastatementofresponseonwhichbehalf,followingwhichtheresponse

of theCompanywas later given.OnNovember 18,2007, an earlyhearingof thepetitionwasheld,

followingwhich theparties filedpreliminarypetitions forgivingadditionaldetails, forexaminationof

affiantsandsoon,forwhichnodecisionhasyetbeengiven.

Thepartiesare inaproceedingofnegotiations for thepurposesofacompromise forconcluding the

disputes

between

them

outside

the

court.

In

the

last

discussion

that

was

held

in

this

case

on

December

11,2011,thepartiesweregivena lastextensionbytheCourttoreachacompromise,untilMarch29,

2012.Itwasdeterminedthattheywouldreachaconsensusthatwouldobviatethehearingthroughto

thistime.ThepartiesmustfiletheirmainpleasbyJune2012.Withtheconsentoftheparties,thetime

forconductingthenegotiationswasextendeduntilearlyJune2012,basedonthewishtoconcludethe

negotiations.Totheextentthatthepartiesdonotreachaconsensusthatwillobviatethehearing,the

partiesmustfiletheirmainargumentsbyearlyJune2012.

InthenegotiationmeetingheldonMay3,2012,principleswereformedforacompromisesettlement.

There is stilla smallmonetarygapbetween theparties,which thepartieshope tobridgeduring the

upcomingweeks.Withtheconsentoftheparties,thetimeforholdingnegotiationswasextendeduntil

30daysafterthedateofthenegotiationmeeting,basedontheaimofconcludingthenegotiations.

TheCompanyhasformedinthefinancialstatementsaprovisionofapproximatelyNIS21millionforthe

municipaltaxratesthataretheobjectofthepetition.

See Note 24 of the Financial Statements for the year ended on December 1, 2011, for further

informationonthismatter.

6.9 Section26.3:Informationonbusinessenterprising

InthemonthofFebruary2010,theMinisterofCommunicationsgrantedtheCompanyatriallicensein

theareaofthesupplyofcommunicationsinfrastructureservicesonopticfibersforaperiodofayear.

ThetrialwasconductedinKiryatShemona,withtheparticipationof150households,andwasasuccess.

Thislicense

has

been

extended

for

an

additional

period

of

one

year

until

the

end

of

March

2013


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17

6.10 Section28 EventormatterexceedingtheordinarybusinessaffairsoftheCompany

6.10.1TheCompanyforwardedtotheElectricityAuthorityonApril18,2012aletterincludedetailscomments

on the issueof themanagementandsupervisionof thespecialpurpose fuelaccount,dealingmainly

witharequestoftheElectricityAuthoritytopublishanupdateddecisiononthesubjectwherebythe

fuelpurchasesupervisionmechanismistobebasedonpostfactumcontrolandreporting,andthatthe

moneynotbemanagedinthespecialpurposeaccount.Asofthedateoftheprospectus,theCompany

isnegotiatingwiththeElectricityAuthorityonthismatter.

6.10.2On March 29, 2012, the Audit Committee and the Board of Directors of the Company approved

preparations and executionof aprivate issueofnonnegotiabledebentures in Israel thatwouldbe

securedbytheguaranteeoftheState(thePrivateIssue")andpreparationsandexecutionoftakingof

a loanthat issecuredbyaStateguaranteefrombanks in Israelandabroad (theLoan), includinga

transactionwith theStatebywayofanagreement forextendingaguarantee to secure thePrivate

IssueortheLoan,asrelevant, inatotalamount(fortheprivate issueand/orthe loantogether)that

will not exceedNIS 1.5 billion, subject to the required regulatory approvals.On April 5, 2012, the

Company executed a private issue of debentures of the electricity shekel 2012 series, to a total

amountofNIS1.5billion.Fordetails,see ImmediateReportofApril5,2012(referenceno.:201201

097548).

6.10.3On

May

28,

2012,

aletter

was

received

at

the

Company

from

the

Director

General

of

the

Ministry

of

Finance,on thematterof implementationof theoutlineof thecash flowsolution for theCompany.

Pursuant to this letter, further to the discussions that were held between the Company and

representativesoftheMinistryofFinanceonthematterofthecashflowproblemthattheCompany

hasinviewoftheseverecrisisinthesupplyofnaturalgas,theStateagainconfirmsthataguaranteeor

otherfinancingsolutionswouldbegivenforthecumulativecashflowdeficitoftheCompanystemming

fromthesurplusfuelcostfortheCompany,andinaccordancewiththecashflowneedsresultingfrom

thepurchaseofthesefuels.Inaccordancewiththisprinciple,theGovernmentwillacttoextendastate

guaranteeofNIS3billionforraisingdebenturesinapublicissuebyprospectus,subjecttotheapproval

oftheFinanceCommitteeoftheKnesset.Itwasfurtherstatedthatinadditiontothatwhichhasbeen

set forth, theGovernmentwouldextend financingsolutions inaccordancewith theprinciplesof the

outlineabove,toavolumeofNIS1.1billion, inaccordancewiththecashflowneedsoftheCompany

forfinancing

the

cost

of

the

surplus

fuel

purchase

and

taking

into

account

the

required

safety

net.

It

wasalso stated that theCompanywouldact to thebestof itsability toextendadditional financing

sourceswiththecurrentactivityoftheCompany.


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18

7. Section29DiscussionofRiskFactors

7.1 ThetablebelowpresentstheriskfactorsoftheCompany,rated inaccordancewiththeestimateof

theCompany,bythedegreeofeffectthatthesemayhaveovertheoperationsoftheCompany13

Effect

High Medium Low

Significant

effecton

the

Company

Moderate

effecton

the

Company

Slight

effecton

the

Company

Classificationoftheriskfactor

inaccordancewiththe

GovernmentCompanies

AuthoritycircularofJune11,

2009

Macrorisks

(1) Regulation X Complianceandregulation

risks

(2) Security,geopoliticalandeconomic

situationinIsrael

X Strategicrisks

(3) Naturaldisasters(earthquake/

flood)

X Strategicrisks

(4) Fires X Strategicrisks(5) Marketrisks X Financialrisks

(6) Informationandinformation

securitysystems

X

Industryrisks

(1) Settingofelectricitychargerates X Complianceandregulation

risks

(2) Capitalraisingandfinancing X Financialrisks

(3) Shortageinnaturalgassupply X Strategicrisks

(4) TheElectricitySectorandlicensesof

the

Corporation

X Complianceandregulation

risks

(5) Environmentalprotection X Operationalrisks

(7) Humancapital Operationalrisks

(8) Technicalfailures X Operationalrisks

(9) Suppliers X Operationalrisks

(9) Healthandsafety X Operationalrisks

(10)Projectrisks X Operationalrisks

RisksuniquetotheCompany

(1)Liquidityrisks X Financialrisks

(2) Causesforcallingforimmediate

repaymentandcrossviolation

clausesin

existing

financing

agreementsoftheCompany

X Financialrisks

(3)Transitiontoreportinginaccordance

withtheIFRSrules


risks

(4)SubmissionofauditedFinancial

Statementstoprofitcenters


risks

(5)Competition X Strategicrisks

(6)Planningandexecutionof

DevelopmentPlaninthe

generation,transmissionand

transformationanddistribution

systems

X Strategicrisks

(7)Structural

change

X

Strategicrisks

13ThedegreeofeffectoftheriskfactorsandthedetailsoftheriskfactorsprovidedbelowwereexaminedbytheCompany

withouttakingintoaccountprotectiveactionsthatitisconductingtohedgetherisks.


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19

Effect

High Medium Low

Significant

effecton

the

Company

Moderate

effecton

the

Company

Slight

effecton

the

Company

Classificationoftheriskfactor

inaccordancewiththe

GovernmentCompanies

AuthoritycircularofJune11,

2009

(8)

Legal

X

Financial

risks

(9)Creditrisk X Financialrisks

(10)Laborrelations X Operationalrisks

(11)Liabilitiesforpensionfund X Financialrisks

(12)Planning,maintenanceandreserve

management

X Operationalrisks

(13)Failuresinthetransmissionarray X Operationalrisks

(14)Reputationrisks X Strategicrisks

7.2 AccountingandFinancialReporting

Pursuant toconductinga repeatreviewand followingconsultationwith theSecuritiesAuthority, the

Companybelieves

that

no

other

risk

exists,

which

derives

from

the

complexity

and

scope

of

the

Company'soperationand/ortheextentofcontrolofitsfinancialstatements,andthat,astheCompany

reportedinthepast,itisnotdifficulttoconsolidateanaccountingpolicy.

7.3 Section 29.3.2 Causes for calling for immediate repayment and cross violation clauses in existing

financingagreementsoftheCompany

Thefollowingriskfactorwillbeaddedtothissection:

Some of the financing agreements that the Company has executed include a clause for calling for

immediate repayment in the case of a material adverse change (MAC stipulation) as this event is

definedinanysuchagreement.Theenactmentofthestipulationissubjecttoatestofreasonablenessin

somecases,isdowntothediscretionofthelenderinsomeofthem,andthisdiscretionisalsosubjectto

reasonableness

in

some

of

the

agreements.

The

volume

of

the

financing

agreements

that

include

an

MAC stipulation totalsatapproximatelyNIS16,804millionandapproximatelyNIS17,115million, for

March31,2012andforthedateofthereport,respectively.

EliyahuGlickmanChiefExecutiveOfficer

Dr.ZivReichChairman,Committee

forReviewingtheFinancial

Statements

YiftahRonTalChairmanofthe

BoardofDirectors

DateofApproval:May29,2012

________________________________________________________________

* Updatedinaccordancewithregulation39a.oftheSecuritiesRegulations(PeriodicandImmediateReports)

1970.


21/246

TheIsraelElectricCorporationLtd.

ChapterB

BoardofDirectors'Reportonthe

StatusoftheCompany'sAffairs

FortheThreeMonthsEnded

March31,2012


22/246

2

Prominent Disclaimer

ThisEnglishtranslationofthe"Company'sBoardofDirectors'Report

on

the

Status

of

the

Company's

Affairs"

for

the

three

months

ended

March 31, 2012 ("English Translation") is provided for informational

purposesonly.

Inthe event of any conflict or inconsistency between the terms of

thisEnglishTranslationandtheoriginalversionprepared inHebrew,

the Hebrew versionshall prevail and holders of the Notes should

refer to the Hebrew version for any and all financial or other

informationrelatingtotheCompany.

The Company andits Directors make no representations as to the

accuracy andreliability of the financial information in this English

Translation, save that the Company and its Directors represent that

reasonablecarehasbeentakentocorrectlytranslateandreproduce

suchinformation, yet notwithstanding the above, the translation of

any technical terms are, in the absence of generally agreed

equivalent terms in English, approximations toconvey the general

senseintendedintheHebrewversion.

The Company reservesthe right to effect such amendments to this

English Translation as may benecessary to remove such conflict or

inconsistency.


23/246

THEISRAELELECTRICCORPORATIONLIMITED

BOARDOFDIRECTORS'REPORT

ONTHESTATUSOFTHECOMPANY'SAFFAIRS

FORTHETHREEMONTHSENDEDMARCH31,2012

3

TheBoardofDirectorsoftheIsraelElectricCorporation(theCompany")herebypresentstheDirectorsReport

onthestatusoftheCompany'saffairsforthethreemonthperiodendingMarch31,2012,("TheReportPeriod"

or"TheReportYear")accordingtothedirectivesoftheSecuritiesRegulations(PeriodicandImmediateReports)

1970("TheSecuritiesRegulations")andtheprovisionsofcircularsoftheGovernmentCompaniesAuthority

("The

Companies

Authority"),

including

the

"Financial

Statements

Circular

20115

1"

("Financial

Statements

Circular").

a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany

1. BriefDescriptionoftheCompanyanditsBusinessEnvironment

a) General

The Company acts as one combined and coordinated system that deals in supplying electricity to

consumers,startingfromtheelectricitygenerationstagethroughtransmission,distributionandsupplyof

and commerce in electricity, all in accordance with licenses granted to each type of activity, which are

effectiveuptoJanuary1,2013.TheCompanyalsodealsintheconstructionoftheinfrastructurerequired

for these activities. Company operations include three main fields: Generation, transmission and

transformationof

electricity

and

its

distribution.

The

Company

provides

electricity

to

most

of

the

States

consumers ofelectricity,andcustomerdistribution issuch that it is notdependentonanyofthem.The

Company is owned by the State of Israel which holds about 99.85% of its share capital, therefore the

Companyanditsoperationsaresubject,interalia,tothedirectivesoftheGovernmentCompaniesLaw

1975(theGovernmentCompaniesLaw).Asof March5,1996,theCompanyoperatesaccordingtothe

ElectricitySector Law1996 (theElectricitySectorLaw) and its regulations.TheElectricity SectorLaw

replaced the Electricity Concessions Order and the Public Utilities Authority Electricity (the Electricity

Authority") was founded according to this ordinance. The duties of the Electricity Authority are, among

others, to set electricity rates and define rate update processes, to award licenses and to supervise

fulfillmentofinstructionsspecifiedinthelicenses.ForadditionaldetailsontheElectricitySectorLaw,see

Note1btotheInterimFinancialStatementsinChapterCofthisreport(theInterimFinancialStatements).

b)

CondensedReview

of

the

Changes

In

the

Business

Environment

1)FordetailsonthechangesinthebusinessenvironmentoftheCompany,itscashandcashflowcondition,

seeNote1ftotheInterimFinancialStatements.

2)OnFebruary27,2012,theKnessetapprovedinthesecondandthirdcallthe"ChangeofUpdateMethodof

Budgetary Pension 2012" law, which completes and arranges the pensions agreement. For further

details,seeNote4etotheInterimFinancialStatements.

3)According to notices received from the natural gas reserve partnership of "Yam Thetis" project, the

capacity to extract gas from this reserve decreased considerably during October 2011, December 2011,

February2012andMay2012,andasoftheannouncementdatethenaturalgassupplydecreasedtoone

fifthofthemaximumcontractualquantity(SeeNote10itotheInterimFinancialStatements).

4)FordetailsonTamaragreement,seeNote8b1tothe InterimFinancialStatementsandsection1 inthe

DescriptionoftheCompanysBusinessAffairsinChapterAofthisreport.

5)OnApril 22, 2012,the Company receivedanannouncementfrom EMG,whichsuppliesnatural gas from

EgypttotheCompany,statingthattheEgyptianGovernmentGasCompanycanceleditsagreementforthe

saleofnaturalgaswithEMG.SeedetailsinNote8b2totheInterimFinancialStatements.


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4

a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued)

1. BriefDescriptionoftheCompanyanditsBusinessEnvironment(continued)

c) InformationRequiredinAccordancewiththeDirectivesoftheGovernmentCompaniesAuthority

1) TargetsandStrategy

For general details of the targets and strategy of the Company, including the strategic plan for

sustainable development of the Company, see section 10.19 in The Description of the Companys

Business Affairs in Chapter A of the financial statements for the year ended on December 31, 2011

("TheAnnualFinancialStatements").

DetailsofthefinancialtargetsoftheCompanyarepresentedbelow:

1) ReducingtheRatiooftheFinancialLeverageoftheCompanytotheLeverageRatioRecognizedin

theElectricityRate:

TheElectricityAuthorityhasdeterminedanormativefinancial leverageratio(forthefinancingof

assets without assets under construction) between equity and external capital of 1:2 (for the

purposeof

the

rate,

the

Electricity

Authority

refers

to

deferred

taxes

as

being

part

of

equity

in

the

transmissionanddistributionsegments).Theratiothat isreflected intheFinancialStatementsas

of March 31, 2012 is 1:2.49. The distribution of the cumulative dividends from the Company's

earnings for the years 2004 2009, in the amount of NIS 3.85 billion, may change this ratio to

1:3.06.

2) AttainTheRateofReturnonEquityasRecognizedintheElectricityRate:

The annual rate of return on equity, as recognized in the rate by the Electricity Authority

(normativerateofreturn)is9.5%grossforthegenerationsegment,5.5%netforthetransmission

segmentand6.2%netforthehighandlowvoltagedistributionsegments.Asofthestatementof

financialpositiondate,theannualrateofreturnonequityamountsinannualtermsto:anegative

return of39.95% for the generation segment, a negative return of 11.55% for the transmission

segmentand

a

negative

return

of

50.59%

for

the

high

and

low

voltage

distribution

segment

(this

is

inaccordancewiththeCompany'sFinancialStatementsaccordingtothegeneration,transmission

anddistributionoperatingsegments,seeNote12totheInterimFinancialStatements).

3) Recognizecostsoftherestructuringinfutureelectricityrates.

4) FordetailedinformationonthedirectivesoftheGovernmentCompaniesAuthority,seealsoNote

11totheInterimFinancialStatements.

d) AssessmentoftheFinancialImpactoftheDifferencebetweenFinancialReportingPrinciplesasApplied

intheFinancialStatementsoftheCompanyandtheFinancialReportingStandardsasAppliedinIFRS

UndertheGovernmentCompaniesRegulationstheCompanyisrequiredtopresenttheestimatedimpact

of the implementation of the financial reporting rules in its Financial Statements as compared with

InternationalFinancialReportingStandards,assumingthatthetransitiondateisJanuary1,2007,asfollows:


25/246





5


1. BriefDescriptionoftheCompanyanditsBusinessEnvironment(continued)

d) AssessmentoftheFinancialImpactoftheDifferencebetweenFinancialReportingPrinciplesasApplied

in the Financial Statements of the Company and the Financial Reporting Standards as Applied in IFRS

(continued)

March31 December31

2012 2011 2011

Impactonshareholdersequity NISinmillions

EquitypreparedundertheRegulationsas

reportedintheFinancialStatementsasofMarch

31,2012 15,863 18,266 17,331

Impactofwritingoffregulatoryliabilities/assets (984) 3,678 455

Impactsdrivingfromfixedassets* (5,910) (5,849) (6,163)

Impactoftax** 1,571 364 1,275

EquityresultingfromimplementationofIFRS 10,540 16,459 12,898

Impactonnetincome

Netincome(loss)preparedundertheRegulations

asreportedintheFinancialStatementsasof

March31,2012 (1,468) 147 (788)

Differencesinreported,adjusteddepreciation 239 149 588

Impactofwritingoffregulatoryassets/liabilities (1,439) (198) (3,421)

Erosionofliabilitiesmainlythegapbetweenreal

interestandnominalinterest (132) (345) (1,171)

CancellingthedeductionforFAS90 (5) 13 (126)

Other 151 52 264

Impactoftax** 296 59 970

Netincome(loss)accordingtoIFRS (2,358) (123) (3,684)

* Impactsderivingfromfixedassets: linkagetoCPI,cancelledprovisionforassets impairment,gaps in

capitalizationoffinancingcostsandotherimpacts.

** Impactofthetax:inthefirstquarterof2012thetaxratewas25%,inthefirstquarterof201118%,

in201125%.

Thequantitativedatapresentedaboverepresentanassessmentandestimateonlyandparticularcaution

shouldbetakeninreferencetothisdatasincetheCompanymaintainsitsreportingsystemsaccordingto

theGovernmentCompaniesRegulations.

e)

ElectricityRate

Mechanism

1) Fordetailsontheelectricityrate,seeNote3totheInterimFinancialStatements.

2) TheCompanyandtheElectricityAuthoritydisagreeonseveralissues,inconsiderableamounts.Lackof

recognitionofcostsincurredbytheCompanyintheratebytheElectricityAuthority,causedandwill

continue to cause a significant decrease in the Company's revenues and to a lack of recognition of

some of its assets, which leads to losses and to substantial erosion in the Companys shareholders

equity. The Electricity Authority reached a decision on the majority of the subjects, and did not yet

make any decisions on the remaining subjects. The Company continues to address the Electricity

Authorityonthesesubjects,forthepurposeofreceivingratecoverageforthesaidcosts.

Fordetails,seesection22.2ofTheDescriptionoftheCompanysBusinessAffairsinChapterAofthe

AnnualFinancial

Statements

and

also

Note

3,

to

the

Interim

Financial

Statements.


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6


2. FinancialCondition

DataoftheCompany'sfinancialconditiononMarch31,2012andMarch31,2011areasfollows:

March31

NISinmillions

2012 2011 Increase

(decrease)

Percent

%

NoteNo.

CURRENTASSETS

Cashandcashequivalents .............................. 861 4,633 (3,772) (81%) a2a1

Shortterminvestments .................................. 715 667 48 7% a2a2

Tradereceivablesforsalesofelectricity ........... 4,137 3,143 994 32% a2a3

Othercurrentassets....................................... 722 489 233 48% a2a4

Inventoryfuels ............................................ 2,198 2,315 (117) (5%) a2a5

Inventory

stores ..........................................

124 131 (7) (5%)

Regulatoryassets,net .................................... 1,526 1,526 a2a6

10,283 11,378 (1,095) (10%)

NONCURRENTASSETS

Longtermreceivables................................... 1,426 1,122 304 27%

Assetswithrespecttobenefitsafter

employmenttermination:

Excesspensionplanassetsoverpensionliability 3,826 5,304 (1,478) (28%) a2b

Fundsintrust ................................................ 2,061 1,934 127 7%

5,887 7,238 (1,351) (19%)

Fixedassets,net

Fixedassetsinuse,net ................................... 57,329 57,420 (91)

Fixedassetsunderconstruction...................... 4,030 5,009 (979) (20%)

61,359 62,429 (1,070) (2%) a2c

Intangibleassets,net ..................................... 854 861 (7) (1%)

79,809 83,028 (3,219) (4%)


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7


2. FinancialCondition(continued)

March31

NISin

millions

2012 2011 Increase

(decrease)

Percent

%

NoteNo.

CURRENTLIABILITIES

Creditfrombanksandothercreditproviders .. 5,494 4,466 1,028 23% a2d)

Tradepayables.............................................. 2,201 1,633 568 35%

Othercurrentliabilities ................................... 1,475 1,374 101 7%

Regulatoryliabilities,net ................................ 769 (769)

Customeradvances,netofworkinprogress .... 463 490 (27) (6%)

Provisions ...................................................... 796 794 2

10,429 9,526 903 9%

NONCURRENTLIABILITIES

Debentures.................................................... 31,704 31,638 66 a2e)

Liabilitiestobanks............................................. 4,930 4,787 143 3%

Liabilitieswithrespecttootherbenefitsafter

employmenttermination...................................

2,680 2,554 126 5%

Regulatoryliabilities,net ................................... 523 3,470 (2,947) (85%)

Provisionforrefundingamountsarisingfrom

restatementoftheFinancialStatements..........

2,293 2,186 107 5%

Deferredtaxes,net ........................................... 5,033 4,176 857 21% a2f)

DebenturestotheStateofIsrael ........................ 2,453 2,458 (5)

Liabilitiesto

the

State

of

Israel ........................... 3,523

3,591

(68)

(2%)

Otherliabilities .............................................. 378 376 2 1%

53,517 55,236 (1,719) (3%)

SHAREHOLDERSEQUITY

Sharecapital .................................................. 1,103 1,103 a2g)

Capitalreserves ............................................. 1,000 1,000

Retainedearnings .......................................... 13,760 16,163 (2,403) (15%)

15,863 18,266 (2,403) (13%)

79,809 83,028 (3,219) (4%)

Thefollowing

are

explanations

of

the

financial

data

of

the

Company,

as

detailed

in

the

tables

above,

in

the

reportyear,comparedtothepreviousyearattheCompanylevelandaccordingtoactivitysegments(for

detailsonthesegmentalreportingoftheCompany,seeNote9totheInterimFinancialStatements.

a. CurrentAssets

1. CashandCashEquivalents

Fordetailsofthedecreaseincashandcashequivalents,seethedisclosureontheLiquidityofthe

Companyinsection4belowandalsoNote1ftotheInterimFinancialStatements.

2. ShortTermInvestments

The increase inshortterm investmentsarisesfromdeposits inaspecialaccountwithrespectto

financing stage B of the emergency plan. See details in Note 3 j2 to the Interim Financial

Statements.


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8


2. FinancialCondition(continued)

a) CurrentAssets(continued)

3. Tradereceivablesforsalesofelectricity

Theincrease

in

the

balance

of

trade

receivables

derives

from:

(a) Arateincreaseofabout15%,comparedtothesameperiodlastyear.

(b)Increasedelectricityconsumptionofabout10%(SeverwinterJanuaryMarch2012).

(c) IncreasedoutstandingbalanceofthePalestinianAuthorityandEastJerusalemElectricity.

4. OtherCurrentAssets

The increase in the balance of other current assets in long term debts derives mainly from

increased balances arising from swap transactions following the devaluations and reduced

interestcurves,comparedtothebalancesinthepreviousyear.

5. Inventory Fuels

Fordetailsonthechangesinfuelsinventory,seesection3(c)(3)below.

6. RegulatoryAssets/Liabilities

Fordetailsofandchanges intheregulatoryassets/liabilitiesduringthereportperiodseeNote5

totheInterimFinancialStatements.

Detailedcurrentassetsaccordingtoelectricitychainsegmentsareasfollows:

Generation Segment Current assets for the generation segment as of March 31, 2012

amounted to approximately NIS 7,588 million, deriving mainly from trade receivables due to

thesaleofelectricityamountingtoapproximatelyNIS3,437million(thissection

Financial Reports March 2012

Documents

Transcript of Financial Reports March 2012