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The Israel Electric Corporation Ltd. October, 2010.

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Presentation on theme: "The Israel Electric Corporation Ltd. October, 2010."— Presentation transcript:

1 The Israel Electric Corporation Ltd. October, 2010

2 Disclaimer “This document has been prepared solely for use at an institutional investors’ conference call (this document and the related conference call being referred to together as this “Presentation”). By receiving and reading this document, or by participating in the related conference call, you agree to be bound by the following limitations. 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 Israel Electric Company Limited (the “Company”). It is solely for information purposes and is not an invitation or inducement to enter into any investment activity. In addition, it has no regard to the specific investment objectives, financial situation, or particular needs of any recipient in any jurisdiction. No part of this Presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. This Presentation has not been prepared for use in connection with any possible offering of securities to be offered by the Company. Any purchase of securities of the Company should be made solely on the basis of information contained in an offering circular and any supplemental offering circular to be distributed in respect of every future offering. The information contained in this Presentation has not been independently verified. No representation, warranty or undertaking, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions contained herein. It should not be treated as giving investment advice nor should it be regarded by recipients as a substitute for the exercise of their own judgment. The Company shall have no liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this Presentation or its contents or otherwise arising in connection with the Presentation. This Presentation is only for persons having professional experience in matters relating to investments. This Presentation is made to and directed only at (i) to qualified institutional buyers (as defined in Rule 144A under the Securities Act (“Rule 144A”)) (“QIBs”) in the United States in reliance on Rule 144A, or (ii) outside the United States, in reliance on Regulation S. This Presentation and its contents are confidential and must not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other person. Failure to comply with this restriction may constitute a violation of applicable securities laws. If you have received this document and you are not the intended recipient you must return it immediately to the Company. This Presentation does not constitute a recommendation regarding the securities of the Company. This Presentation includes forward-looking statements, including statements regarding the Company’s expectations and projections for future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project”, “plan”, “intend” and “may” and similar words or expressions identify forward-looking statements. In addition, all statements other than statements of historical facts included in this Presentation are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results or performance of the Company to differ materially from those expressed or implied by such forward- looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which the Company will operate in the future. Reliance should not be placed on these forward-looking statements. The Company expressly disclaims any obligation or undertaking to release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company’s expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based. The Company expressly disclaims any obligation or undertaking to update any forward-looking statements contained herein. The information and opinions contained in this document are provided as at the date of this Presentation and are subject to change without notice and the Company is not under any obligation to update or keep current the information contained in the Presentation. Furthermore, you should consult with your own legal, regulatory, tax, business, investment, financial and accounting advisers to the extent that you deem it necessary, and make your own investment, hedging and trading decisions (including decisions regarding the suitability of an investment in securities issued by the Company) based upon your own judgment and advice from such advisers as you deem necessary and not upon any view expressed in this Presentation.” 2

3 Contents 1. The Israel Electric Corporation Overview 2. Operating Environment 3. Financial Overview 4. Key Investment Highlights 5. Appendices – Summarized Financial Statements 3

4 1. The Israel Electric Corporation Overview 4

5 The Israel Electric Corporation Ltd. The Israel Electric Corporation (IEC) was established in % owned by the state of Israel Generates, transmits and distributes substantially all the electricity in the State of Israel The largest infrastructure company in Israel with the one of the largest turnovers in the Israel’s economy. Thermal Power Plant Gas Turbine H Customer Breakdown By Electricity Sales IEC’s Operating Statistics 2009H Capacity (MW)11,66412,014 Peak Demand (MW)9,90010,700 Electricity Sales (GWh)48,94723,757 Population (Millions) Customers (Millions)2.5 5

6 IEC’s Organization Structure Executive Vice President Human Resources Board of Directors Legend President & C.E.O Executive/ Senior Vice President VP Division/ District Unit Department * Senior Vice President, Generation & Transmission serves as Executive Vice President. 6

7 Strong Government Ties and Corporate Governance Tariff Regulation (Electricity Authority) 99.85% State of Israel Ownership Appointment of Board Members Ownership of the Coal Company Strategic Importance to Economy Committed to Securing Reliable Electricity Supplies As a 99.85% State owned company, certain actions of the Company require the approval of the Government, the Government Companies Authority (GCA), the Ministry of National Infrastructures or the Ministry of Finance IEC is subject to an audit by Israel’s State Controller IEC is obliged to nominate at least three directors possessing professional accounting and financial skills IEC has adopted IFRS (starting Q1 2008) in accordance with the provisions of the GCA regulations 7

8 2. Operating Environment 8

9 Capacity Expansions and Electricity Sales Continuing Reliability of the Electricity Supply is Crucial to Israel's Growth Annual Electricity Demand 1960 – 2014E¹ CAGR of 3.6% for the period IEC Installed Capacity Growth 1960 – 2014E 2 GWH MW 1 According to base scenario. 2 Installed capacity for years as in 5 year forecast prepared on September Not including the IPP’s that generate for their own consumption. 2013E E 9

10 Improved Reliability of Supply The index of minutes of non-supply decreased in the last 21 years by 86%

11 Operational efficiency (Cumulative change rates) Increase/decrease in % 11

12 Capex Program IEC ’ s investment plan will accumulate to $5.6 billion by 2015 (Billions of USD as of June 30, 2010) Note: Currency conversion based on the exchange rate of NIS3.875 = US$1 as of June 30, Cumulative Investment Program Total of 2,006 MW (out of which 639 MW to be financed by IEC) of new generation capacity Average annual investment of $ 1.1 billion (or the equivalent in other currency) 45% for generation projects 26% for distribution systems 16% for transmission 13% for miscellaneous Average annual capital raising forecast of $ 0.8 billion (or the equivalent in other currency) 474 MW 386 MW 516 MW Total Generation Capacity Coming Online (MW) Billions of USD MW – MW Emergency Plan Capacity Only (MW) MW 12 2,006 MW MW Total 1 All numbers derived from the 5 year preliminary forecast prepared on September Total generation capacity increased as a result of the emergency plan including 2009 (120 MW X 2) and 2010 (788 MW) will reach 1,765 MW. 3 The assumption is that the financing of the second phase of the Emergency Plan and Project D will not be carried out by IEC. – – –

13 Financial Sources to Finance the Development Plan for the Years (Billions of USD as of June 30, 2010) 6.3 Internal resources (4.7) Debt repayment 1.5 Internal resources after debt repayment 3.8 External resources 5.3 Total Total Note: Currency conversion based on the exchange rate of NIS3.875 = US$1 as of June 30, All numbers derived from the 5 year preliminary forecast prepared on September

14 Operational Excellence: Emergency Plan The Ministry of National Infrastructures approved an Emergency Plan to accelerate the development of the generation segment The Emergency Plan scheduled for operation by 2013 is intended to increase the Company’s generation capacity by 1,765 MW until 2013 Account for a considerable delay in incorporation of Independent Power Producers ("IPPs") Aggregate estimated cost: ¹NIS 9.2 billion NIS 3.6 billion is for the first phase² of Emergency Plan. Financing the first phase: NIS 2 billion are collected via the electricity tariff, during the years NIS 0.9 billion ( € 185 million) of the aggregate estimated cost will be financed by consortiums of banks’ loan. The outstanding investment will be financed by reducing or postponing other investments NIS 5.6 billion is for the second phase of Emergency Plan. Financing for the second phase should not be carried out by IEC. OverviewFinancing of the Emergency Plan 1. Including CCGT Alon Tavor 260 MW (2012) MW (2013). 2. The first phase is planned to be completed by the end of Currency conversion based on the exchange rate of NIS = EUR 1 as of June 30, 2010.

15 Fuel Diversification: From Coal to Natural Gas IEC uses natural gas as part of its fuel mix since February 2004 The increased use of natural gas is driven by the need to diversify IEC’s fuel mix, increase its generation capacity, as well as to maintain a low cost structure and limited pollution level Generation Mix by Fuel Type E IEC plans to significantly increase its use of natural gas during the coming years Recently a new natural gas reservoir with almost 200 BCM (billion cubic meters) has been discovered off shore Israel (Tamar). An additional natural gas reservoir has been discovered recently off shore Israel (Leviathan) with potential of 400 to 500 BCM (probability of 50%). The Implications of the recent gas fields discoveries on IEC’s generation and transmission segments are being studied

16 Tariff Regulation Principles The average price per KWh sold is 10 USD cents as of February Rates are set by the Electricity Authority based on IEC’s current basket of costs structure together with a fair rate of return on capital less an efficiency factor Tariff is examined every two weeks by the PUA based on the publication of fuel prices and CPI Current tariffs updated on the occurrence of the earliest of three possible events: A change to the costs of at least 5.5% A change to the costs basket of at least 3.5% (provided that three months have elapsed from the last update); and When six months have elapsed from the last update Amortization factors per Kwh sold representing the expected efficiency and intended to reflect economies of scale at cumulative annual rates. Note: Tariff components for February 15, 2010 Source: IEC’s estimates. Key Elements of Tariff Basket of Costs The basket of costs used to determine the Tariff include: Fuel component – based on a cost pass-through basis Financing component – including currency hedging Operation and maintenance costs 16

17 Principles of the new tariff base for the generation segment for Fuel costs Fuel mix To define the fuel basket, the PUA made the following assumptions: Forced unavailability of generation units and maintenance schedules Normative operation dates of the generation units Operation regime of the generation units The fuel basket will be retroactively updated on the annual update for the period from January to December. 17

18 Principles of the new tariff base for the generation segment for Capital costs Return on equity 7.8%Generation 5.5%Transmission 6.2%Low and high voltage WeightFinancing basket 50%The NIS financing basket 36%Hedged financing basket 14% The NIS financing basket at higher interest rates 1/3 Equity 2/3 Foreign capital Financial leverage The hedged amount is approximately NIS 12.3 billion according to the determining basket of April This amount will be linked to the USD and the Euro at 75% and 25% rates, respectively. 18

19 Tariff update Current update The current update of the tariff will be performed as follows: When the total cost per KWH sold changes by more than 5.5%. If three months has elapsed since the last update and the total cost changes by at least 3.5%. Six months after the last update. Annual update In April of each year, the PUA carries out an annual update of the various components of the recognized costs: Financing rate of foreign capital Fuel mix. Compensation for delays in updating the tariff. Recognized assets Amount of the recognized capital for hedging. 19

20 Supply of Electricity to the State of Israel Ensuring reliable supply of electricity to its consumers, while maintaining sufficient electricity reserve, long- term profitability and financial stability of the Company by implementing an $ 5.6 billion investment program during Fuel Diversification Diversify fuel mix, while maintaining an efficient and effective cost structure while minimizing pollution levels Business growth drivers Leveraging the engineering and technological capabilities of the Company Entering business initiatives abroad Entering business initiatives in the field of renewable energy and other business developments (such as Smart Grid) Key Strategic Targets 20

21 Business growth drivers Technological Incubator The Israel Electric Corporation (IEC) established an internal venture unit (“Technological Incubator”) to provide a framework of investment and support services to develop, advance, and commercialize promising, innovative ideas. This unit will reach out to entrepreneurs, “innovators,” inventors, and others to submit ideas and proposals in energy field areas. The selected proposals will become very early stage business ventures operating within the Technological Incubator framework. They will receive financial support, access to Israel’s largest team of experts, and business development assistance for a predefined period of time in order to achieve commercial success. Cooperation with Projects Developers Abroad IEC is looking to expend it’s business by entering into partnerships The policy implementation includes: –Integral assistance to IPPs –Readiness for joint initiatives and investments –Participation in renewable and energy efficiency projects Transmission Services IEC is to submit to the Ministry of Communications a request for license, that would enable it to provide transmission services, optic access network (FTTH - fiber to the home), and mobile access network (RAN – radio (wireless) access network) The Ministry of Communication approved the pilot in which the IEC successfully connected 150 residential homes in city of Kiryat Shmona by FTTH. The IEC will seek to expend its business operations and revenues via new business growth drivers that will utilize IEC’s knowledge, expertise and innovations as follows: 21

22 Potential Reorganization Negotiations are taking place between IEC Management, IEC Workers Union, Israel Workers Union (Histadrut) and Government representatives. Negotiations are focused on two main issues: The reform of the Israeli Electricity Sector, i.e. IEC reorganization Increasing Company efficiency and management flexibility by implementing the “Compass Plan” (“Matzpen”) 22

23 3. Financial Overview 23

24 Financial Highlights Source: financial reports for the six months ended June 30, IFRS Financials according to GCA regulations; Currency conversion based on the exchange rate of NIS = US$ 1 as of June 30, Moody’s: Baa2 (Stable) / S&P: BBB- (Credit Watch Negative) Key Operating & Credit Statistics (Millions of USD as of June 30, 2010) Investment Grade Ratings 24

25 Relatively Low Rates of the Israeli Market Comparative Electricity Rates Source: Energy Information Administration U.S Cents/KWh (December 31,2007) 25

26 Financial Statistics RevenueTotal Assets Billions of USD as of June 30, 2010 Note: Currency conversion based on the exchange rate of NIS3.875 = US$1 as of June 30,

27 IEC Consolidated Debt Breakdown (as of September 30, 2010) Annual Debt Maturities (Principal in Millions of USD) Debt by CurrencyType of InstrumentInterest Rate Exposure Diversified debt portfolio per type of instrument Foreign currency exposure substantially mitigated by function of tariff structure and hedging transactions Note: Figures as of September 30, 2010; Currency conversion based on the exchange rate of NIS3.665 = US$1 as of September 30,

28 4. Key Investments Highlights 28

29 Key Investment Highlights of IEC Strategic role as the sole integrated electricity utility in Israel 99.85% State ownership with strong support Strong electricity demand growth Proven track record of managing growth and development plans IEC operates in a developed market: on May 2010 Israel joined OECD 1 MSCI Inc 2. upgraded Israel’s status to developed market 29 1 Organization for Economic Co-operation and Development. 2 A provider of investment decision support tools to investment institutions which products include indices and portfolio risk and performance analysis.

30 30 5. Appendices – Summarized Financial Statements

31 Balance Sheet ( Millions of USD as of June 30, 2010 ) Note: All numbers are adjusted to June 30, 2010 purchasing power and were derived from the financial statements for H The exchange rate used is NIS = US$ 1 as of June 30,

32 Income Statement (Millions of USD as of June 30, 2010) 32 Note: All numbers are adjusted to June 30, 2010 purchasing power and were derived from the financial statements for H The exchange rate used is NIS = US$ 1 as of June 30, 2010.

33 Cash Flow Statement (Millions of USD as of June 30, 2010) 33 Note: All numbers are adjusted to June 30, 2010 purchasing power and were derived from the financial statements for H The exchange rate used is NIS = US$ 1 as of June 30, 2010.

34 Disclaimer “This document has been prepared solely for use at an institutional investors’ conference call (this document and the related conference call being referred to together as this “Presentation”). By receiving and reading this document, or by participating in the related conference call, you agree to be bound by the following limitations. 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 Israel Electric Company Limited (the “Company”). It is solely for information purposes and is not an invitation or inducement to enter into any investment activity. In addition, it has no regard to the specific investment objectives, financial situation, or particular needs of any recipient in any jurisdiction. No part of this Presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. This Presentation has not been prepared for use in connection with any possible offering of securities to be offered by the Company. Any purchase of securities of the Company should be made solely on the basis of information contained in an offering circular and any supplemental offering circular to be distributed in respect of every future offering. The information contained in this Presentation has not been independently verified. No representation, warranty or undertaking, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions contained herein. It should not be treated as giving investment advice nor should it be regarded by recipients as a substitute for the exercise of their own judgment. The Company shall have no liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this Presentation or its contents or otherwise arising in connection with the Presentation. This Presentation is only for persons having professional experience in matters relating to investments. This Presentation is made to and directed only at (i) to qualified institutional buyers (as defined in Rule 144A under the Securities Act (“Rule 144A”)) (“QIBs”) in the United States in reliance on Rule 144A, or (ii) outside the United States, in reliance on Regulation S. This Presentation and its contents are confidential and must not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other person. Failure to comply with this restriction may constitute a violation of applicable securities laws. If you have received this document and you are not the intended recipient you must return it immediately to the Company. This Presentation does not constitute a recommendation regarding the securities of the Company. This Presentation includes forward-looking statements, including statements regarding the Company’s expectations and projections for future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project”, “plan”, “intend” and “may” and similar words or expressions identify forward-looking statements. In addition, all statements other than statements of historical facts included in this Presentation are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results or performance of the Company to differ materially from those expressed or implied by such forward- looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which the Company will operate in the future. Reliance should not be placed on these forward-looking statements. The Company expressly disclaims any obligation or undertaking to release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company’s expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based. The Company expressly disclaims any obligation or undertaking to update any forward-looking statements contained herein. The information and opinions contained in this document are provided as at the date of this Presentation and are subject to change without notice and the Company is not under any obligation to update or keep current the information contained in the Presentation. Furthermore, you should consult with your own legal, regulatory, tax, business, investment, financial and accounting advisers to the extent that you deem it necessary, and make your own investment, hedging and trading decisions (including decisions regarding the suitability of an investment in securities issued by the Company) based upon your own judgment and advice from such advisers as you deem necessary and not upon any view expressed in this Presentation.” 34


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