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Israel Electric Corp.

Investor

Presentation

Business update as of 03/31/2017

June 2017

Disclaimer

The Company is a public company, with all it entails, and this information provided to you, all or part of it, may constitute “Inside Information” in

accordance with Israel’s Securities Law, 1968, and making use of this information (including, but not only, by way of carrying out a transaction in a

security of IEC, and/or delivering this information, or an opinion regarding a security of IEC, to any third party who may use this information for

purposes of such transaction) may constitute a criminal offence pursuant to that Law.

Please treat this information as CONFIDENTIAL and do not disclose, publish or deliver all or any part of this information, directly or indirectly, to any

third party, except for your employees, officers and any person acting for you or on your behalf, strictly on a “need to know” basis, and only after you

have notified the person receiving any of this information that the information is confidential and that making use of this information may constitute a

criminal offence as specified above

This Presentation does not constitute or form part of and should not be construed as an offer to sell or issue, or the solicitation of an offer to buy or

acquire, securities of the Company. This Presentation is solely for informational purposes. The information contained in this presentation regarding

the Company's operations is concise and presented for convenience purposes only. To get a complete picture of the Company's operations, please

refer to the reports of the Company to the Israeli Securities authority and the Tel-Aviv Stock Exchange.

This presentation includes forward-looking information, as per its definition in the Securities Law, 1968, including forecasts and other information

whose realization is uncertain and depends on factors that are not under the control of the Company. These factors are based, among other things,

on data that is in the possession of the Company as of this date, internal estimates and expectations of the Company regarding trends in the

Company's fields of activity and regarding the implementation of the company's plans. The Company's forecast and expectations included in this

presentation may not be realized, in whole or in part, or may be realized in a different manner than expected, inter alia due to factors that some of

them are not under the control of the Company, including changes in the market conditions and the Company's business environment, regulatory

changes, or the realization of any of the risk factors of the Company.

The information contained in this presentation is provided as of the date of this presentation. The Company is not under any obligation to

update the information in this presentation or to update the forward-looking statements contained in it.

Investor Relations 2

Executive Summary

3

Gas turbines

power stations

Power stations

400 kV lines

161 kV lines

Israel Electric Corp. at a Glance

Israel Power Grid Established in 1923, with over 90 years of operation, the Israel Electric Corporation Limited (“IEC”)

is the sole integrated electric utility company in Israel and generates, transmits, distributes and

supplies the vast majority of the electricity used in Israel

IEC is approximately 99.85% owned by The State of Israel

The Company had total assets of NIS 83.7 billion and 12,000 employees as of March 31, 2017

As of December 31, 2016, IEC serves 2.7 million residential customers, commercial, agricultural

and industrial customers spread throughout the State of Israel

Total electricity sales of 51,072 GWh for the year ended December 31, 2016

13.6GWInstalled capacity

17Power stations sites

Generation(1)

5,500kmHigh voltage

transmission grid

207Switching stationsand sub-stations

Transmission(1)

47,809kmMedium and low

voltage lines

2.7mnCustomers

Distribution(1)

3M-2017 Key Financials Credit Ratings

Revenues:

NIS 5.8 billion

EBITDA:

NIS 1.9 billion

EBIT:

NIS 0.8 billionIEC Global:

BBB- / Baa2

(S&P / Moody’s)

IEC Local:Aa2.il Stable / ilAAStable

Maalot S&P) /(Midroog

State of Israel:

A1 / A+ / A+ Stable(Moody’s / S&P / Fitch)

Source: IEC’s financial statements.1) As of December 31, 2016.

Denotes USD figures at USD/NIS average exchange rate of 3.73 for the period of 3M-2017.

Investor Relations

$1.6 $0.5 $0.2

4

Israel - a Modern Economy

Source: The Central Bureau of Statistics, Bank of Israel.1. 2016 GDP converted using yearly average USD/ILS exchange rate of 3.84.2. Credit rating refers to long-term foreign currency debt only.3. As published in “The Israel Economy: Recent Trends and Outlook” Report by the Ministry of Finance.

Israel Public Debt to GDP(3)

Israel Rating History(2)

Inflation Environment

0

1

2

3

2002 2004 2006 2008 2010 2012 2014 2016

Moody's S&P Fitch

Nov 2016

Fitch upgrade

Israel to A+

Nov 2007

S&P upgrade

Israel to A

Apr 2008

Moody’s upgrade

Israel to A1

Sep 2011

S&P upgrade

Israel to A+

Feb 2008

Fitch upgrade

Israel to A

Baa1 / BBB+

A3 / A-

A2 / A

A1 / A+

Aa3 / AA-

74.7

72.9

75.1

71.369.9

68.567.6 67.1

64.9

62.1

60

65

70

75

80

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(% of GDP)

Area 22,072 km2

Population 8.6 million

GDP (2016)(1) USD 281 billion

GDP per Capita (2016)(1) USD 32,560

Avg. GDP Growth (2008–2016) 3.5%

Unemployment (January 2017) 4.8 %

Foreign Currency LT Debt Ratings A1 / A+ / A+ Stable

3.8% 3.9%

2.7%

2.2%

1.6% 1.8%

(0.2%)

(1%)

(0.2%)

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016

(YoY Inflation %)

1%–3%

Government

Inflation Target

1.8%

Average inflation in

the last decade

Investor Relations

Key Figures

5

Essential

Service Provider

Owned by the

State of Israel

Robust Growth in

Electricity Demand

Regulated Tariff

Efficiency and

Reliability

Financial

Robustness

Natural Gas

Fuel

Independence

IEC is an essential service provider

to Israel and the sole vertically

integrated in the electricity chain

Approximately

99.85% owned by the

State of Israel

(A+/A1/A+) Strong electricity

demand growth in the

Israeli market, driven by

a robust economy

Tariff is based on costs and

return on equity

Set by the Electricity

Authority.

Continuous improvement of efficiency and

reliability

IEC has over 90 years of experience in

developing and managing the electricity

sector in Israel

Rated investment grade by both S&P

(BBB-) and Moody’s (Baa2)

IEC total liquidity (1) of NIS5.7bn in

2016

Natural gas from Tamar and

other significant natural gas

discoveries in Israel pave the

way towards fuel independence

Key Investment Highlights

Investor Relations

1. Liquidity includes cash and equivalents, short term investments and available credit facilities.

6

Key Strategic Targets

Investor Relations

Ensure reliable supply of electricity

Maintain sufficient electricity reserve

Supply of Electricity to the State of Israel

Maintain the financial robustness of IEC

Keep a sufficient liquidity cushion

Maintain long average maturity by continuing to issue

long term debt

Financial Strength

Diversify fuel mix while maintaining an efficient cost

structure and minimizing environmental impact

Focus on natural gas and coal as two main fuel sources

Fuel Diversification

7

Operational Overview

8

Source: IEC’s financial statements.Denotes USD figures at USD/NIS average exchange rate of 3.58, 3.89, 3.84, 3.87 and 3.73 for the period of 2014A, 2015A ,2016A, 3M-2016 and 3M-2017, respectively.

Historical Performance

Comparison of Key Metrics

2006 2016 % Change

Population 7.1 8.6 21.1%

Number of Customers (mn) 2.4 2.7 12.5 %

Electricity Sales (GWh) 46,175 51,072 10.6%

National Peak Demand (MW) 9,450 12,624 33.6%

IEC Installed Capacity (MW) 10,487 13,617 29.8 %

18.1

20.321.3

22.7

26.3

20.4 20.5

25.4

28.327.7

25.2

23.1 22.7

5.4 5.8

0

5

10

15

20

25

30

35

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 3M2016

3M2017

NISbn

$1.4

$5.9

$1.6

IEC Revenues

IEC continues to provide Israel’s energy requirements as the sole integrated electric utility in Israel

Investor Relations

$7.0

$5.9

IFRSPrepared According to Government Companies Regulations

9

Israel Generation Capacity and Demand

Generation Capacity and Demand

Source: IEC’s Annual financial statements

11,297 11,649 11,664

12,769 12,759 13,248 13,483 13,617 13,617 13,617

174 228

278 518

516

734

1,956

2,980 3,060

359

596

754 917

11,368

11,823 11,892

13,047 13,277

13,764

14,576

16,169

17,351 17,594

10,070 10,200 10,280

11,530

11,110

11,890 11,640

11,335

12,905 12,624

8,000

10,000

12,000

14,000

16,000

18,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(MW)

Installed Generating Capacity Gas Fired IPPs Renewable Energy IPPs National Peak Demand


2,000

4,000

6,000

8,000

10,000

12,000

14,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

(MW)

Demand for Electricity

Historical National Peak Demand Trends

Source: IEC’s financial statements.

Multiplied by 3.3 in 26 years

Investor Relations

The demand for

electricity in Israel is

growing at a fast and

steady pace

Demand is driven

by both population

growth and the

increase in

electricity use

per household

The demand

forecast, which

serves for long-term

planning of the

generation system,

assumes an

average annual

increase of 2.8% in

peak demand in the

years 2015 to 2030

11

The Electricity Chain (1)

Source: IEC’s financial statements.1) As of December 31, 2016.2) 49 substations are privately owned.


GenerationDistribution Transmission

2.7Million

customers

20,277 kmlow voltage

lines

27,532 kmhigh voltage

lines

196Substations(2)

5,500 kmHigh and extra-

high voltage lines

11Switching stations

63Generation

Units

17Power

stations

The Generation Segment

2016 IEC Generation Facilities

17Power stations

sites

13,617Megawatts of

generation

Fuel Mix by Electricity Generated


Orot Rabin

7 units / 2,605MW

Rothenberg

6 units / 2,290MW

Eshkol

7 units / 1,693 MW

Haifa

6 units / 1,110MW

Gezer

6 units / 1,336MW

Hagit

4 units / 1,394MW

- Mainly powered by coal

- Mainly powered by gas

2016 Key Power Generation Sites

Coal49.6%

Fuel oil0.1%

Natural gas

49.9%

Diesel oil0.4%

Gas turbines

power stations

Power stations

2016

Coal45.5%

Fuel oil0.1%

Natural gas

53.4%

Diesel oil1.0%

3M-2017

Investor Relations

Number

of Units

Installed

Capacity (MW)

Coal powered units 10 4,840

Combined cycle gas turbines 14 5,081

Industrial gas turbines 15 1,570

Gas converted units 8 1,622

Jet gas turbines 16 504

Total generation 63 13,617

13

The Transmission and Distribution Segments

Total Electricity Consumption by Customer Type

Transformation

System

11Switching stations

Power Lines

147Substations

Transmission

49Private substations

760km400 kV lines

4,650km161 kV lines

91km115 kV lines

Distribution

Capacity

47,809kmMedium and low

voltage lines

49,447Distribution

Transformers

2.7mnCustomers

Distribution

Source: IEC’s 2016 Annual Financial Statements.

Households 36%

Industrial18%

Public, commercial

and bulk40%

Water pumping

4%

Agriculture2%

(kWh)

Investor Relations

Diversified Customer Base

14

Fuel Expenses

Source: IEC’s financial statements1) Excluding changes in fuel cost regulatory asset.2) Revenues include sale of purchased electricity from IPPs.

Denotes USD figures at USD/NIS average exchange rate of 3.58, 3.89, 3.84, 3.87 and 3.73 for the period of 2014A, 2015A ,2016A, 3M-2016 and 3M-2017, respectively.

IEC Fuel Expenses Development

4.9 4.4 4.9

6.9 5.6 5.0

6.7 7.0

4.8 4.0 3.6

2.7

0.7 0.8

1.0 1.3

1.4

1.8

2.4 2.9

2.8 1.6 4.7

3.8 4.3 4.5

1.0 1.2

1.5 1.4 0.8

1.0

0.3 0.2

0.7 3.1 0.3

0.1 0.1

0.0

2.2 2.9

4.5

4.4

1.3 1.3

3.1

8.3

1.3

0.1 0.2

0.1

9.6 9.9

11.7

14.1

9.5 9.4

13.3

20.1

11.1

8.0 8.4

7.5

1.7 2.1

47.6% 46.6%

51.6% 53.4%

46.7% 45.9%

52.4%

70.9%

40.2%

31.9%

36.6% 33.0% 32.2%

36.8%

-40%

-20%

0%

20%

40%

60%

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 3M-2016 3M-2017

(NIS, bn)

Coal Nat Gas Fuel Oil Diesel as % of revenues

$2.2 $2.2

$2.0

$0.6$0.4

(2)

(1)

(1)

IEC’s fuel expenses have decreased due to the availability

of natural gas from Tamar and as a result of coal prices decreased

IFRSPrepared according to Government Companies Regulations

(1)

Investor Relations

Tamar online:

Return to

normal operations

Gas shortage:

Expenses more than

doubled in two years

15

Coal Prices

Source: World Bank Commodity Price Data (Pink Sheet), May 2017.IEC’s coal sources are more limited Due to environmental constraints.1. Calculated as average price of Australia, Colombia and South Africa Coal.

Coal Prices Development (International)

Investor Relations

40

50

60

70

80

90

100

110

120

130

140

150

($/t)

Coal, Average

(1)

16

Israeli Electricity Sector

17

The Israeli Electricity Sector

Investor Relations

Nearly 100% by IEC

99.85% Government

owned

Expected to reach

74% of total

generating capacity

by the end of 2017. By

the end of 2018 -68.4%

Expected to reach

26% of total

generating capacity

by the end of 2017. By

the end of 2018 -31.6%

(23% as of December

31, 2016)

Generation, Transmission and Distribution

Main Regulators Fuel Suppliers

The Electricity Authority

Government Companies Authority (GCA)

Ministry of National Infrastructures, Energy and Water Resources

Ministry of Finance

Ministry of Interior

Ministry of Environmental Protection

Natural Gas – Currently the Tamar Reservoir. More reservoirs have

been already discovered

Liquid Natural Gas - Imported from international suppliers

Coal - Imported from international suppliers

IPPs


IEC reached 2.7 million customers

(as of December 31, 2016)

Transmission and DistributionGeneration Customers

18

Rates Regulation Principles

The electricity rates are determined by the Electricity Authority (EA) in accordance with the following :

Charge Rates are examined every two

weeks by the EA based on the

publication of fuels costs and CPI index

An update will occur given a

change in the recognized cost of

the input basket of at least 3.5%,

provided that 4 months have

passed since the last update

Once a year the EA ought to carry out an annual

rates update of the recognized costs which among

others include:

Recognized assets

Depreciation

Recognized return rate on equity and interest on

foreign capital

Fuel mix

Compensation for delays in updating the rates

The EA may decide not to recognize certain costs

that it considers as not necessary

The recognized fuels mix for a certain year is

calculated twice – once at the beginning of the

year on the basis of forecasts and a second

time at the beginning of the following year on

the basis on the actual demand curve

The difference between the fuel mix in

retrospect (ex post) and forecasted one is

refunded to the consumers or to the Company

Fuel baskets are the major component of the

IEC’s costs, and the main element of the rates

Investor Relations

Principle of cost,

Reflects the cost of particular

service, No cross subsidies+ Fair rate of return on equity

for each segment +Reduction coefficient –

percent of reduction in rate

calculation mechanism

(temporarily suspended)

Electricity Rates

Ongoing Updates Annual Updates Fuel Mix

Rates Structure

Source: IEC’s Financial Statements, Electricity Authority's decision No. 2 (1110) - Annual Update 2106 electricity tariff - Decision concludes consumers of electricity tariffs IEC

In accordance with the Electricity Sector Law, the electricity rates are to be updated from time to time according to a formula determined by EA.

19

Rates Regulation Principles – Cont’d

Source: IEC’s financial statements, World Bank Commodity Price Data (Pink Sheet), May 2017.1. Calculated as average price of Australia, Colombia and South Africa Coal.

Tariff vs. Coal Price Development

Investor Relations

40

45

50

55

60

40

60

80

100

120

140

160

($/t)

Coal Average General Tariff Household Tariff

Israeli Agora (ILS/100)

(1)

Latest Rates UpdateRate Base for System Management Services (System Costs)

On August 2015 the EA published a resolution on management services rate

System Management Services are the costs of services provided by IEC to the

entire electricity sector and are required in order to maintain proper operations

of the electricity system, including backup services, administration costs and

redundancy costs

Prior to the EA resolution, IEC customers carried the total system costs, while

subsiding the IPP’s consumers. The resolution should lead to an equitable

distribution of these costs among all electricity consumers and eliminate the

cross-subsidy existed between IEC’s customers and private producers

As part of the regular rates update on December 2016, the average tariff was

increased by 4.63%

The aforementioned increase is consisted of:

An increase of 1.6% due to power capacity growth in the electricity sector

in relation to the previous year

An increase of 1.6% due the private producers debt repayment to IEC

consumers with respect to the system costs

An additional increase due to a rise in the international coal prices and

additional system costs included in the rates

20

Reform Outlines discussed in recent years

21

Notes:For additional details regarding the structural change see the IEC’s 2013-2016 Annual Financial Statements and the Investor presentation appendices (slide “Reform outlines discussed in recent years - Detailed”).

1) It is clarified that insofar as the mentioned 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, as well as

regulating issues requiring negotiations under the law with the employees’ union. As of the date of the report, the parties are holding discussions but an agreed upon outline of the structural change has not yet

been agreed upon.

Based on the discussions with government officials. one of the goals of

the outline of the aforementioned structural change, shall be, inter alia, to improve the financial stability of the Company

Investor Relations

Gov’ team led

by Deputy Finance Minister Yitzhak Cohen

Appointmentof a Steering Team for the execution of a reform in

the electricity sector and

the Company

Steering Team publishes draft

recommendations

The Ministers Decision to

start a process to

formulate the government’

s position and to renew negotiations

for implementati

on of the reform in the

electricity sector

Several discussions at the labor

court & meetings were held

between the parties

during the past months, within which it was agreed

to appoint dedicated teams to

promote the structural change.

o Yogevletter a summary

of the final

offer to

restructure

o Other

correspond

ence

o negotiation

s reached

an impasse

2016Sep.

2014

July

2013

2012March

2014

Nov.

2015

The main State’s outline points

are as follows: selling all the gas-

operated power stations, which

will be sold in two stages. The

coal powered stations will not be

sold and will be held by the

Company through a subsidiary.

The system management

segment will remain with the

Company. The Company will

remain a natural monopoly in the

transmission and distribution

segment. The supply segment

will open incrementally to

competition. Steps will be taken

to improve the Company

financial strength. Required

changes in work relations will be

taken in the Company(1)

Dec.

2016

Financial Overview

22

1.8

2.8 2.62.2

3.93.5

1.9 1.7 1.7

0.3 0.4

0.7

0.6 0.6

0.6

0.8

0.7

0.7 0.8 0.5

0.1 0.2

0.7

0.8 1.1 1.2

1.4

0.9

0.9 1.2 1.3

0.3 0.3

3.1

4.3 4.3 3.9

6.2

5.1

3.5 3.7 3.5

0.8 1.0

0

2

4

6

2008 2009 2010 2011 2012 2013 2014 2015 2016 3M2016

3M2017

NISbn

Generation segment Transmission segment Distribution segment

$0.3

Financial Highlights

Revenues EBITDA(1)(2)(3)

Historical Investments (CapEx) Net Debt/EBITDA(4)

26.4

20.4 20.5

25.428.3 27.7

25.223.1 22.7

5.4 5.8

0

10

20

30

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 3M2016

3M2017

NISbn

$1.4

$1.6

7.97.2 7.5

3.9

1.6

9.810.8

7.27.6

2.2 1.9

0

3

6

9

12

2008 2009 2010 2011 2012 2013 2014 2015 2016 3M2016

3M2017

NISbn

-New IAS 1919Old IAS-

$0.5

Source: IEC’s Financial Statements.1) EBITDA is calculated as profit from Current Operations plus D&A; 2) 2011-2013 EBITDA are adjusted for changes in regulatory assets; 3) 2012 EBITDA is adjusted to one time expense related to purchasing power adjustment of pension funds; 4) Net debt is calculated as total financial debt minus cash ,cash equivalents & short term investments; 5) 2011 debt number is not adjusted to new IAS 19 ; 6) In annualized terms, calculation based on LTM EBITDA.

Denotes USD figures at USD/NIS average exchange rate of 3.89, 3.84, 3.87 and 3.73 for the period of 2015A ,2016A, 3M-2016 and 3M-2017, respectively.

– New IAS 19– Old IAS 19

0.9x 0.9x 0.2x

0.3x

0.8x0.6x

0.2x0.2x 0.2x

6.1x 6.3x 5.9x

11.6x

5.1x4.3x

6.2x5.7x 5.8x

0

3

6

9

12

15

2008 2009 2010 2011 2012 2013 2014 2015 2016 3M-2017

Net Debt/EBITDA ex.Gov State guaranteed

(5)

32.1x

Investor Relations

$6.0$5.9

$1.9 $2.0

$1.0$0.9

IFRSPrepared According to Government Companies RegulationsIFRSPrepared According to Government Companies Regulations

IFRSPrepared According to Government Companies Regulations IFRSPrepared According to Government Companies Regulations

23

$0.6

$0.2

(6)

Historical Cash Flow

Source: IEC’s Financial Statements.1.Investment activities excluding repayment (or deposits) of bank deposits. Total cash from investment activities figures as reported for 2015A, 2016A , 3M-2016 and 3M-2017 are NIS(0.87)bn, NIS(2.76)bn,

NIS(0.02)bn and NIS(0.97)bn, respectively; 2) Total liquidity includes cash and cash equivalents, short term investments and available credit facilities.Denotes USD figures at USD/NIS average exchange rate of 3.89, 3.84, 3.87 and 3.73 for the period of 2015A ,2016A, 3M-2016 and 3M-2017, respectively.

(1.1)

5.8

10.4

7.66.5

2.0 2.2

(5.1)(4.5)

(4.0)(3.1)

(2.2)

(0.2)(1.0)

8.4

(1.6)

(3.4)

(8.7)

(2.7)

(0.8)(1.6)

4.2 3.9

7.9

4.3

5.7

(14)

(9)

(4)

1

6

11

2012 2013 2014 2015 2016 3M-2016 3M-2017

NIS bn

Operating activities Investment activities, net Financing activities Total Liquidity

$2.0

$1.7

$0.5

($0.6)

$(0.1)

($0.7)

($0.2)

($0.6)

($0.3)

($0.4)

Generating sufficient cash flow from operations enabling IEC to decrease financial debt

Investor Relations

(2)(1)

IFRSPrepared According to Government Companies Regulations

($0.8)

($2.2)

24

48,588

43,33442,905

45,575

51,824

49,958

46,869

44,580

43,228

42,333

40,000

45,000

50,000

55,000

60,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 3M-2017

(ILS, mn)

$11.5

$11.3 $11.3

Net Debt Over Time

Source: IEC’s financial statements.Note: Net debt is calculated as total financial debt minus cash ,cash equivalents and short term investments.

Denotes USD figures at USD/NIS average exchange rate of 3.89, 3.84 and 3.73 for the period of 2015A ,2016A,and 3M-2017, respectively.

Investor Relations

Prepared According to Government Companies Regulations IFRS

Old IAS 19 New IAS 19

25

Fixed93.1%

Floating6.9%

Consolidated Debt Breakdown

Source: IEC’s financial filings, IEC.1. Includes NIS 2.5bn of perpetual bonds as of March 2017.

Annual Debt Maturities as of March 31, 2017 (Principal in NIS billions)

3.7

7.3

2.92.0

0.4

0.3

0.8

0.2

4.1

7.6

3.7

2.2

0

3

6

9

12

15

First year Second year Third year Fourth year Fifth year and thereafter

(NIS bn)

Local bonds, private bonds and non-bank loans Loans from local and foreign banks

Debt by Currency(1) Type of Instrument(1) Source of Debt(1)

NIS40.6%

Euro2.9%

USD50.7%

Other5.8%

State guaranteed

3.5%

Non-guaranteed

by state 96.5%

22.3

Interest Rate Exposure(1)

Investor Relations

ILS bonds 16.9%

Private bonds and non-bank

loans 76.8%

Israeli bank loans 1.3%

Non-Israeli bank loans

5.0%

26

Income Statement(NIS in millions)



(NIS in millions)

For the Year:

31/12/2016 31/03/2016 31/03/2017

Revenues 22,690 5,387 5,816

Cost of operating the electricity system

Fuels 7,496 1,735 2,141

Purchases of electricity 3,235 741 741

Operation of the generation system 4,214 978 1,008

Operation of the transmission distribution system and others 3,066 784 769

Total costs 18,011 4,238 4,659

Profit from operating the electricity system 4,679 1,149 1,157

Other Revenues, net (9) - -

Sales and marketing expenses 884 226 235

Administrative and general expenses 730 149 181

Expenses (income) from liabilities to pensioners 286 (286) (27)

EBIT 2,788 1,060 768

EBITDA 7,610 2,194 1,916

Financial expenses 2,277 218 274

Income before income tax 511 842 494

Taxes on income (658) (122) 123

Profit after income tax 1,169 964 371

Company's share of the loss of asociated company (26) (1) (5)

Income before movement in regulatory deferral accounts 1,143 963 366

Movement in regulatory deferral accounts balances, net of tax 38 (348) (50)

Profit for the period 1,181 615 316

Loss with respect to cash flow hedging, net of tax (85) 20 (29)

Remeasurement of a defined benefit plan, net of tax (240) (195) (433)

Other Comprehensive income for the period, net of tax (325) (175) (462)

Comprehensive income for the period 856 440 (146)

For The Three Months Ended:

Balance Sheet(NIS in millions)



(NIS in millions)

Assets 31/12/2016 31/03/2016 31/03/2017 Liabilities and Equity 31/12/2016 31/03/2016 31/03/2017

Current assets Current liabilities

Cash and cash equivalents 3,488 3,702 3,124 Credit from banks and other credit providers 4,876 4,589 4,683

Short term investments 960 188 929 Trade payables 1,722 1,520 1,893

Trade receivables for sales of electricity 4,155 3,780 4,134 Other current liabilities 1,637 1,692 1,585

Other current assets 803 554 710 Customer advances, net of work in progress 437 419 457

Inventory - fuel 1,031 684 934 Provisions 692 797 702

Inventory - stores 125 131 124 Total current liabilities 9,364 9,017 9,320

Total current assets 10,562 9,039 9,955

Non-current liabilities

Debentures 33,711 32,341 32,283

Non-current assets Liabilities to banks 4,562 5,530 5,356

Inventory - Fuel 882 1,017 916 Liabilities with respect to other benefits after employment 2,766 2,771 2,754

Long-term receivables 822 1,418 1,116 Provision for refunding amounts to consumers - 2,755 -

Investment in associate 57 80 52 Deferred taxes, net 5,002 5,482 4,965

Assets with respect to benefits after employment termination 7,602 7,187 7,093 Debentures and liability to the State of Israel 4,724 4,914 4,520

Fixed assets, net 61,032 62,023 60,826 Other liabilities 797 696 784

Intangible assets, net 1,279 1,294 1,254 Total non current liabilities 51,562 54,489 50,662

Total non-current assets 71,674 73,019 71,257 Equity 17,550 17,134 17,404

Debit balance of regulatory deferral accounts 2,098 713 2,471 Credit balance of regulatory deferral accounts 5,858 2,131 6,297

Total assets and debit balance of regulatory deferral

accounts84,334 82,771 83,683

Total liabilities, equity and credit balance of regulatory

deferral accounts84,334 82,771 83,683

Contacts

Thank youFor questions or additional information, please contact us:

Israel Electric Corp. Investor Relations: [email protected]

29

Appendices

30

Reform Outlines discussed in recent years - Detailed

On July 22, 2013, the Ministers appointed a Steering Team for the execution of a reform in the electricity sector and the Electric Company, headed by Mr. Uri Yogev, who is at present the

Director General of the Government Companies Authority (the “GCA”). On March 23, 2014, the draft of recommendations of the Steering Team was published for comments by the public until

May 11, 2014

On May 7, 2014, the Company presented the Steering Team with its initial reaction and position with regard to all the recommendations of the Steering Team. The Company’s comments are

focused on two major issues: the scope of the future development of the electricity sector (with emphasis on the generation segment) and ensuring long-term stable financial strength for the

Company.

On September 8, 2014, the Company received a copy of a letter sent by the Director General of the GCA, addressed to the Chairman of the New National Labor Federation, entitled

"Government's position regarding Israel Electric Corporation Ltd.". The letter contained a summary of the final proposal for the structural reform, which is acceptable by the Minister of Finance

and Minister of National Infrastructure, Energy and Water Resources. The proposal includes, inter alia, the restructuring plan and its impact on workers' rights (the “Yogev Letter”)(1).

On September 11, 2014, a copy of the letter of Mr. Uri Yogev and Mr. Kobi Amsalem, the Director of Wages Department of the Ministry of Finance, addressed to the Chairman of the New

National Labor Federation, regarding the “Position of the State regarding the Israel Electric Company Ltd. as of September 8, 2014”, was sent to the Company.

During November 2015, the ministers assigned the Director General of the Ministry of Energy 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. A hearing was held at the National Court of Labor on January 14, 2016, at which the parties reached a consent, under which the outline of the reform in the

Company will be promoted by April 30, 2016, and at the same time intensive negotiations will be conducted between the parties, during which they will discuss all the issues related to

implementation of the reform and its implications on the working conditions of the employees and their occupational security. The negotiations will be held under the auspices of the Court.

A hearing was held on May 2, 2016 at the National Court of Labor, within which the parties notified the court that they have decided to conduct intensive negotiations regarding the reform and

the employees’ rights. At the parties’ request, the continuing negotiations between the parties will be accompanied by the court.

On June 13, 2016, the parties notified the Court of Labor of ongoing dialogue between the parties and seek to set a date for another reminder discussion. As stated, date has yet been set.

During the discussion, the available methods of carrying out the restructuring were examined. As part of this, in December 2016, the State's representatives presented the State's outline to the

Company and the employees' union, whose main points are as follows: (a) The Company will reduce its operation in the generation segment by selling all the gas-operated power stations, which

will be sold in two stages: In the short-term (namely within four years) – four Company generation sites will be sold. In the medium-term (namely within eight years) – the remainder of the

Company's gas stations will be sold. (b) The coal powered stations will not be sold and will be held by the Company through a subsidiary. (c) The system management segment will remain with

the Company. (d) The Company will remain a natural monopoly in the transmission and distribution segment and will execute investments in these segments. The supply segment will open

incrementally to competition. The Company will remain the default supplier in the supply segment. (e) The Company will maintain audited profit centers for each segment. (f) Steps to improve

financial strength: (1) sale of power stations as aforesaid, and decreasing the financial debt while providing a safety net in the rate for the sale process; (2) a plan to increase efficiency in the

Company by an agreed upon retirement plan. In total, it was estimated that within the plan to increase efficiency and reducing tasks approximately 1,750 permanent employees will retire, and

following the reform, approximately 450 more permanent employees will retire, and in addition, several hundred employees will transfer to the power stations that will be sold; (3) adjustment of

the rate recognition of the wages to the situation existing in the Company and linking the rate to the streamlining plan that will be agreed upon. (g) Required changes in work relations in the

Company.

The Company regards the implementation of the structural change as a milestone in establishing and reinforcing the financial strength of the Company. However, in the opinion of the Board of

Directors and the Management of the Company, the Electricity Sector Law, in its current version, does not deal with all of the issues that the Structural Change causes to the Company, and does

not regulate in detail the manner of its execution, as well as the ways to establish and reinforce the financial strength of the Company. In the opinion of the Company, a real structural change in

the Company is vital to its ability to fulfill the functions that are imposed upon it by the Electricity Sector Law and it intends to continue to operate, to the extent possible, to advance a structural

change in the real outline, with the consent of the Employees' union and the relevant State entities.

Notes:• For additional details regarding the structural change see the IEC’s 2013-2016 Annual Financial Statements.. 1) As of the date of the report, the draft of recommendations of the Steering Team did not mature into a final report, and as of this date the assets arrangement is not advanced in an outline included within the draft of recommendations of the

Steering Team or the letters received by the Company as aforesaid.


Government and IEC Cooperated to Bridge the Natural Gas Shortage

The Government and the Electricity Authority acknowledged the short-term liquidity shortfall caused by the natural

gas shortage in 2011/12 and together with IEC planned and executed a series of temporary support measures to

help bridge the gap

Delayed

Deposits to

Designated

Account

Gradual Tariff

IncreaseRegulatory

Changes to

Fuel Mix

Government

Guarantees

for Local

Debt

Natural Gas

Shortage

• Disruptions to the

natural gas supply

from Egypt

• Expedited depletion of

the Yam Tethys

reserve

• As a result, IEC

shifted to more

expensive back-up

liquid fuels

Long-Term

Solution

• Sufficient supply of

natural gas (Tamar

online since March

2013 and LNG

terminal)

• Higher costs of

alternative fuels were

ultimately be reflected

in the tariff

Temporary

Diesel Oil

Purchase Tax

Reduction

2011 2014Short-Term

Liquidity Shortage

Return to Normal

Operations

Government Support


Tariff Comparison to OECD Countries

The electricity rate in Israel is lower than most of OECD peers

Source: Eurostat, Electricity prices for domestic consumers – bi-annual data, as of 05/05/2017. Israel rate is based on the last Tariff update (12/19/16) and converted EUR/NIS exchange rate of 3.96 as of 05/05/2017.

Average national price in Euro per kWh without taxes for medium size household consumers (consumption band DC with annual consumption between 2,500 and 5,000 kWh).

Average Price per KWh(1)

Investor Relations

18.818.2 18.0

14.814.2

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33

Current Electricity Sector Law

The Electricity Sector Law, enacted in 1996 and setting forth a regulatory framework for the electricity sector reform, has been

amended several times

The Company believes that the Electricity Sector Law enables a gradual process through which IEC will be restructured as a holding

company and its activities will be separated into several majority owned subsidiaries holding generation and distribution licenses and

one subsidiary holding a transmission license

IEC’s View of the Electricity Sector Law

System Management

(State owned)

Government

of Israel

Generation

(privatization of

at least 49%(

Transmission

(decision by

the ministers 11/15/17)

Distribution

(privatization of

at least 49%)

Services

(partially limited)


IFRS Implementation

Following are the main gaps between the Government Companies Regulations which were implemented until 2014 and the IFRS, which has

been applied on IEC since January 1, 2014:

Asset Impairment – According to the Government Companies regulations (SFAS 90 rules), IEC tests a provision for impairment of assets

which completed recently and in addition, implements the provisions of IAS 36, separately. According to IFRS, when testing asset

impairment there is no differentiation between assets which completed recently and other assets. According to the last tariff update, IEC

reversed part of the impairment it executed which were implemented under SFAS 90 rules.

Investments in Operational Power Stations (including Renovations) – The Electricity Authority determined that the cost of investments in

operational power stations which includes significant renovations will not be recognized as an additional fixed asset but as an operational

expense. Under the IFRS, the investment cost in operational power stations is capitalized to the cost of fixed assets.

Capitalization of Financing Costs and Return of Capital – According to the Government Companies regulations (RE 6 rules), IEC capitalizes

financial and credit expenses and return to capital, which are recognized as part of the tariff, to the cost of under construction asset.

According to IAS 23 it is possible to capitalize financial costs that can be attributed directly to an asset under construction, in case it

constitutes a qualifying asset. However, it’s not possible to capitalize the return to capital component to such an asset.

Preparing Adjusted Financial Statements – According to the Government Companies regulations, IEC applies the provisions of Opinion N.36

with regard to the preparation of Financial Statements adjusted by changes to the exchange rates purchasing power of the Israeli currency.

According to IFRS, the financial statements may not be prepared under those provisions, except under conditions of Hyperinflation. Because

of the “Deemed cost” mitigation set in IFRS 1, prior to the transition to IFRS, the fixed assets balance was adjusted with respect to changes

in the exchange purchasing power rate.

Regulatory Assets / Liabilities – According to the Government Companies regulations (RE 6 rules), any net change in Regulatory Assets or

liabilities is presented as a decrease in income or decrease in operating/financing costs. According to IFRS, any net change is presented as

a separate item under the statement of comprehensive income. In addition, the Regulatory Assets is recognized as deferred accounts and

will be presented as separate items under separate balance category.

Cash Flow Statement – According to the Government Companies regulations, paid interest is classified under current operations in the cash

flow statement. According to IFRS, paid interest shall be classified under financing activity (while received interest remains as investment

activity).

Main Gaps between the Government Companies Regulations and IFRS(1)

Investor Relations

Source: IEC’s financial statements.1. This summary is intended for information purposes only. For a full disclosure please read p.176-177 on the notes section of IEC’s 2014 annual report, note 36.

35

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