Israel Electric Corporation Ltd

Israel Electric Corporation Ltd. Monitoring Report | March 2021

This credit rating report is a translation of a report that was written in Hebrew for a debt issued in

Israel. The binding version is the one in the origin language.

Contacts:

Moty Citrin Team Leader, Lead Rating Analyst [email protected]

Uri Hermoni Senior Analyst, Secondary Rating Analyst [email protected]

Yishai Trieger, Vice President Head of Rating Activity Head of Structured, Project and Infrastructure Finance [email protected]

mailto:[email protected]



MIDROOG

2 10.03.2021 Israel Electric Corporation Ltd. – Monitoring Report

Israel Electric Corporation Ltd.

Issuer Rating Aa1.il Outlook: Stable

Series Rating Aa1.il Outlook: Stable

Midroog upgrades the issuer rating of Israel Electric Corporation Ltd. (hereinafter: "IEC" or the "Company") from

Aa2.il to Aa1.il and changes the outlook from positive to stable. Additionally, Midroog upgrades the rating of

bonds (Series 2022, 2029, 26, 27, 29, 30 and 31) issued by the Company from Aa2.il to Aa1.il and changes the

outlook from positive to stable. The rating upgrade stems from the Company's progress and success in

implementing the reform in the electricity sector and the company restructuring plan, following the completion

of the sale of the Alon Tavor and Ramat Hovav power plants, continuing operational efficiency measures and a

steady reduction in the financial debt, all of which are expected to lead to an improvement in IEC's business and

financial profile.

The outstanding Debentures which have been rated by Midroog:

Debenture series

ISIN Rating Outlook Maturity

EL LINKED 2022-I IL0060001299 Aa1.il Stable 18.01.2023

LINKED 2029-I IL0060001869 Aa1.il Stable 07.05.2029

ELECTRIC CO B26 IL0060002024 Aa1.il Stable 12.10.2023





Summary of Rating Rationale

The rating takes into account the following factors, among others: (1) IEC is a government related company with

a monopolistic standing and integrated activity along the value chain of the Israeli electricity sector, and it holds

an essential service provider license; (2) The Company's great importance to the functioning of Israel's electricity

sector, reflected, inter alia, in the State's support for the Company's operations over the years; (3) The

restructuring reform that is being implemented in the electricity sector in general, and in the Company in

particular1 (the "Reform"), enabling the creation of a highly transparent and more stable regulatory environment

over the long term; (4) Significant progress in the implementation of the Reform, including, among other things,

the sale of the Alon Tavor and Ramat Hovav power plants, as well as the early retirement of a substantial number

of permanent employees as part of the efficiency program (967 permanent employees took early retirement as of

September 30, 2020, out of a total of 1,803 employees that are expected to retire in the framework of the Reform),

along with progress in the separation of the system management function; (5) The completion, on December 3,

2020, of the transaction for the sale of the Ramat Hovav power plant in consideration of NIS 4.25 billion; (6) In

accordance with the reform plan, the start of construction by the Company of two combined-cycle facilities (with

a total capacity of 1,200 MW), for the subsidiary Netiv Haor Orot Rabin Ltd. (the "Subsidiary"), replacing coal units

1-4 in the Orot Rabin power plant in Hadera; (7) The completion, at the beginning of December 2020, of the

transfer of the Planning and Development of Technology Division and the Statistics and Market Research

Department to the Systems Management Company; (8) The electricity tariffs, which are determined by the

1 Government Decision No. 3859: "Reform in the Electricity Sector, Structural Changes in the Israel Electric Corporation and Amendment of Government Decision," June 3, 2018.

MIDROOG


Electricity Authority, generally cover the Company's costs, but there are at times disagreements between the

regulators and the Company over the extent of recognized costs, and there may also be timing differences in the

reimbursement of the Company's costs; (9) The electricity tariffs embody lower returns than customary for the

industry; (10) Adequate diversification of the production means and the fuel mix, which relies largely on coal and

natural gas-based production; (11) The start of commercial production from the Leviathan reservoir at the end of

2019, while commercial operation of the Karish reservoir is expected to begin, in our estimation, by 2022. Multiple

reservoirs allow for higher operational flexibility in the supply of natural gas; (12) Continued reduction in the

financial debt and improvement in the leverage ratio, along with lower financial costs. As of September 30, 2020,

the Company's gross financial debt amounted to NIS 37.3 billion, compared with NIS 42.7 billion for the same

period the year before, resulting in a significant improvement in the debt-to-cap ratio, which stood at 52.0% as of

September 30, 2020, compared with 58.6% for the year-before period; (13) Erosion in the debt coverage ratio and

interest rate coverage ratio until 2022, due to the sale of the power plants in the framework of the Reform, along

with significant capital expenditures. However, beginning in 2022, a significant improvement is projected in the

debt coverage and interest rate coverage ratios. In the nine months ended September 30, 2020, the Company

generated FFO of NIS 4.4 billion, compared with NIS 4.8 billion in the same period the year before (prior to the

sale of the Alon Tavor power plant); (14) Adherence to a clearly defined financial policy that includes, inter alia, a

minimum liquidity reserve, unused confirmed bank credit facilities, diversification of financing sources and

adequate access to finance. As of September 30, 2020, the Company's liquidity reserves totaled NIS 1.9 billion.

Likewise, the Company has available confirmed credit facilities for substantial amounts from several banks; (15)

IEC's support by the State and the interdependence between the Company and the State are key considerations

in determining the rating; (16) The spread of the coronavirus, which could lower demand for electricity in the short

term, with electricity consumption expected to recover in the short to medium term.

Midroog's base case scenario assumes, inter alia, that the Company will continue to implement the reform plan,

with continued implementation expected to further significantly impact the Company's operations and to enable

a highly transparent and more stable regulatory environment over the long term, improving the Company's

financial robustness and economic efficiency, and helping to reduce its debt and high leverage. In our estimation,

until 2022, prior to the commercial operation of the two combined-cycle facilities (with a total capacity of 1,200

MW), there will be a gradual deterioration in the cash flow metrics, due to the sale of the Alon Tavor and Ramat

Hovav power plants along with the capital expenditures required for the construction of the two combined-cycle

facilities. However, following the commercial operation of these facilities in 2022-2023, a gradual, significant

improvement is foreseen in these metrics. Specifically, until 2022, the FFO-to-debt ratio and the interest rate

coverage ratio are expected to decline gradually to a range of 10%-13.5% and 3.9-4.3, respectively; however,

following the commercial operation of the two combined-cycle facilities in 2022-2023, the FFO-to-debt ratio and

the interest rate coverage ratio are expected to improve gradually to a range of 13.5%-18.0% and 5.5-7.1,

respectively. Capital expenditures are expected to be in the range of NIS 5.0-6.0 billion until 2022, and thereafter

to stabilize in the range of NIS 4.0-5.0 billion. The gross financial debt is expected to be in the range of NIS 36-38

billion until 2023, while the debt-to-cap leverage ratio is projected to continue improving gradually in the next two

years, standing at 48%-52%. Simultaneously with the reduction in the leverage level, financial expenses on the

debt are also expected to contract in the coming years. In our estimation, the ratio of sources to uses will be in

the range of 1.4-1.5 in 2020 (following the sale of the Ramat Hovav power station), declining to a range of 1.15-

1.25 beginning in 2021, due, among other reasons, to an increasing burden of payments until 2024. At the same

time, we assume that the Company will continue to adhere to its declared policy and the board of directors'

decision, including as regards maintaining minimum liquidity of NIS 3.0 billion.

MIDROOG


In addition to the foregoing, Midroog considers IEC's very high dependence on and support by the State as key

considerations in determining the rating. We consider the Company and the State to have a very strong

relationship, although there is not always a complete identity of interests between them. Nevertheless, in our

opinion, there has been an improvement in the relationship between the Electricity Authority (formerly the Public

Utilities (Electricity) Authority) (the "Electricity Authority") and the Company, in terms of transparency and

cooperation between the parties, especially in light of the approval of the Reform, which creates a highly

transparent and more stable regulatory environment over the long term. Midroog believes that the approval of

the Reform and the parties' willingness to advance and implement it are evidence of the continued strengthening

of the relationship and cooperation between the Company and the regulators.

Factors that could lead to a rating upgrade

• Significant, ongoing improvement in the Company's leverage and coverage ratios.

Factors that could lead to a rating downgrade

• An adverse change in the State's support for the Company, including as regards recognition of its expenses

and investments in the tariff.

• Deterioration in the Company's financial robustness, including an increase in the leverage ratio and decline in

the coverage ratios.

• Failure to maintain an adequate liquidity level for the rating, considering the expected scope of activities and

burden of payments.

• Significant, ongoing deterioration in the Company's financial results.

• Difficulty in raising funding and/or a significant increase in funding costs.

Israel Electric Corporation Ltd. – Key Financial Indicators (NIS in millions)

30.09.20 30.09.19 31.12.19 31.12.18 31.12.17

Revenue 18,518 19,122 24,660 23,584 23,370

Income from operating activities2 3,033 2,857 3,782 2,391 2,417

Income (loss) before regulatory deferral accounts

2,326 832 3,237 (354) 773

Income (loss) for the period and movements in regulatory deferral accounts, net of tax

1,814 1,449 1,816 4,070 4,740

FFO3 4,364 4,751 6,253 4,567 4,807

Capex 3,035 2,633 3,476 3,051 2,901

Financial debt (gross)4 37,283 42,893 42,196 44,008 48,058

Liquidity reserves 1,925 2,352 3,617 3,283 3,701

Debt/cap 52.0% 58.6% 57.9% 59.0% 64.2%

2 Excluding other income and expenses, the results of the reform agreement and expenses for retirement liabilities. 3 Including adjustments of deposits into pension plans of the Company's employees. 4 Including adjustments of lease liabilities, interest expenses payable and provisions for the evacuation and rehabilitation of sites.

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Detailed Rating Considerations

The Company plays a highly important role in the proper functioning of the electricity sector

IEC is a government related company with a monopolistic standing along the value chain of the Israeli electricity

sector (generation, transmission, and distribution). The Company constitutes a natural monopoly in the

transmission and distribution segments and holds an essential service provider license. However, the Company's

market share in the generation segment is expected to continue decreasing in the coming years, due to the entry

of PEPs into the national generation market, along with the reform in the electricity sector in general, and in the

IEC in particular, which requires the Company to sell approximately one third of its generation capacity as part of

the implementation of the Reform (amounting to 4,500 MW), as detailed below. According to data of the

Electricity Authority, as of 2019 the Company's installed generation capacity stood at 72% of the total installed

market capacity, compared with 77% in 2018 and 79% in 2017. However, according to the Company's data, in 2019

its installed generation capacity stood at 67% of the total installed market capacity, compared with 74% in 2018.5

According to estimates of the Electricity Authority, at the end of 2020, the Company's installed generation capacity

is expected to stand at 62% of the total installed market capacity, following the sale of the Ramat Hovav power

station. Likewise, in 2019 the Company produced 66% of the total electricity generation in the market, compared

with 69% in 2018 and 71% in 2017. According to Electricity Authority estimates, at the end of 2020, the Company's

market share in the generation segment will stand at 57%, following the sale of the Ramat Hovav power plant.6

Additionally, in accordance with the reform plan, the supply segment will be opened to competition gradually over

the short term, such that in the high-voltage, extra-high-voltage and ultra-high-voltage consumer segment IEC will

remain the default supplier and will not be allowed to compete (with the matter to be reviewed at the end of five

years from the Reform date), while in the low-voltage segment the Company will be permitted to compete only

when its market share has fallen below 60%, according to a regulatory arrangement that will be established.

Progress in the implementation of the reform plan in the electricity sector, along with the Company

restructuring plan

The reform in the electricity sector is progressing in line with the targets and milestones that were set. The Reform

includes, inter alia, scaling back the IEC's monopolistic power in the generation segment, and refocusing it on the

network segment, while maintaining IEC's role as the holder of an essential service provider license, with IEC, as

an outcome, to constitute a natural monopoly in the transmission and distribution segments. As part of the

implementation of the reform plan, on December 3, 2019, the transaction for the sale of the Alon Tavor power

plant was completed for a consideration of NIS 1.87 billion,7 in addition to which, on December 3, 2020, the

transaction for the sale of the Ramat Hovav power plant was completed for a consideration of NIS 4.25 billion.8 In

accordance with the reform plan, the Company is continuing to promote the sale of its power plants, in which

framework it published a prequalification process for the sale of 50% of the Hagit power plant, with the deadline

for delivery of possession being June 3, 2022. Accordingly, the Company, at the request of the Energy Ministry, is

examining the possibility of advancing the timetables. Thus, IEC is expected to advance the sale of the Hagit power

plant ahead of the Reading power plant, while in the coming years it is also expected to sell the Reading and Eshkol

power plants. Meanwhile, in accordance with the Reform, 161 permanent employees took early retirement as of

September 30, 2020, out of 200 planned retirements in 2020, compared with early retirement of 347 employees

5 In this connection, the Company notes that the difference mainly stems from the method of calculating the installed capacity of the PEPs, with an emphasis on renewable energies. 6 For further details see: Electricity Sector Report for 2019. 7 For further details, see Company report dated December 3, 2019. 8 For further details, see Company reports dated June 25, 2020 and December 3, 2020.

https://www.gov.il/he/departments/general/dochmeshek

https://maya.tase.co.il/reports/details/1266744/2/0


https://mayafiles.tase.co.il/RHtm/1336001-1337000/H1336975.htm

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in 2019 and 459 employees in 2018 – 967 employees in the aggregate, out of a total of 1,803 employees expected

to retire as part of the efficiency program. Additionally, during the years 2021-2023, 200 employees are expected

to go on early retirement each year. Further, as reported by the Company on December 1, 2020, the separation

of the system management function from IEC is being carried out gradually and is expected to be completed in

the second half of 2021. We note in this connection that on December 1, 2020, the Company reported the

completion of the transfer of the activity of the Planning and Development of Technology Division and of part of

the activity of the Statistics and Market Research Department to the Systems Management Company.9 Also, on

December 30, 2020, the Company reported for the first time the distribution of a dividend of NIS 200 million,

which was contingent on receiving the government's commitment to transfer the dividend receipts to the System

Management Company.10

Midroog considers the implementation of the reform plan and the IEC restructuring to present a major challenge

both for the national economy and for the Company. The implementation of the Reform is expected to have a

significant impact on the Company's operations and to lead to the creation of a highly transparent and more stable

regulatory environment over the long term, while improving the Company's financial robustness and operational

flexibility. The recent significant progress made in the implementation of the reform plan and restructuring of the

Company are a positive indication of the ability and commitment to meeting this challenge.

Continued reduction of the Company's market share in the generation segment, alongside the Energy

Ministry's policy for phasing out coal consumption

One of the key elements of the Reform includes the sale, by 2023, of 19 generation units at five different sites:

Alon Tavor, Ramat Hovav, Reading, Hagit (in part) and Eshkol, with a total capacity of 4,500 MW, representing one

third of the Company's generation capacity. In the period leading up to the report, progress continued to be made

in the sale of the power plants in accordance with the Reform. Thus, besides completing the sale of the Alon Tavor

and Ramat Hovav power plants, IEC is promoting the sale (in part) of the Hagit power plant, as detailed above.

Furthermore, in keeping with the reform plan, the Company has begun the construction of two combined-cycle

facilities (with a total capacity of 1,200 MW) for the Subsidiary, replacing coal units 1-4 in the Orot Rabin power

plant in Hadera (total capacity 1,440 MW), while, pursuant to a decision of the Energy Ministry, the Company will

continue to maintain the generation units in accordance with directives of the Electricity Authority. Following

completion of the construction of the combined-cycle facilities, the Company's market share in the generation

segment (together with the two combined-cycle facilities that are being constructed for the Subsidiary, as

aforesaid) is expected to be in the range of 40%-45% of the total installed market capacity in 2025, compared with

a market share of 72% in 2019 according to data of the Electricity Authority (while according to the Company's

data, its installed generation capacity in 2019 stood at 67%). It is worth noting in this connection that

implementation of the policy for phasing out electricity generation by coal is expected to continue, and that on

the instructions of the Energy Minister, after examining all the relevant considerations, the timeframes for

converting the coal power plants in Hadera and Ashkelon to natural gas can be shortened to the end of 2025, in

which year the era of coal generation in Israel may end.11

Midroog estimates, on the one hand, that the sale of one third of the Company's current generation capabilities

could help it continue reducing its debt and high leverage, while simultaneously creating a source of funding for

its investment plan (including the construction of two new combined-cycle facilities), while, on the other hand,

9 For further details, see Company report dated December 1, 2020. 10 For further details, see Company report dated December 30, 2020. 11 Ministry of Energy: The end of the coal era in Israel has been reset for 2025 – the timetable for converting coal power plants to natural gas in Israel will be shortened.


https://maya.tase.co.il/reports/details/1342747

https://www.gov.il/he/departments/news/ng_131119

https://www.gov.il/he/departments/news/ng_131119

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the sale is expected to adversely affect its revenue and profitability from the generation segment, which, as of

2019, accounted for 59.7% of the Company's revenues and 56% of its EBITDA. At the same time, we note that at

the end of 2019, the Leviathan reservoir began commercial production, and that the commercial operation of the

Karish reservoir will begin, in our estimation, by 2022. The commercial operation of additional natural gas

reservoirs, besides the Tamar reservoir – which previously was the only gas supplier, except for limited amounts

of liquid natural gas from the marine buoy – allows the Company higher operational flexibility in the supply of

natural gas and operation of the generation segment.

Continued reduction in the financial debt and improvement in the leverage ratio, alongside lower

financial costs

The Company's gross financial debt amounted to NIS 37.3 billion in the third quarter of 2020, compared with NIS

42.7 billion in the same period the year before and NIS 44.0 billion in 2018. We note in this connection that the

implementation of the reform plan, with emphasis on the sale of the Alon Tavor and Ramat Hovav power stations,

along with the asset arrangement executed between the Company, the State, the Israel Land Authority and the

Tel Aviv Municipality, contributed greatly to lowering the Company's financial debt and significantly reduced its

financial costs. As an outcome, there was a significant improvement in the debt-to-cap ratio, which as of

September 30, 2020 stood at 52.0%, compared with 58.6% in the same period the year before. Under Midroog's

base case scenario, the gross financial debt is expected to be in the range of NIS 36-38 billion until 2023, with the

debt-to-cap ratio projected to continue improving gradually over the next two years, standing at 48%-52%.

Simultaneously with the reduction in the leverage ratio, the financial costs on the debt are also expected to

decrease.

Deterioration in the debt coverage and interest rate ratios until 2022, due to the sale of the power

plants in the framework of the Reform, along with significant capital expenditures; however,

beginning in 2022, a significant improvement is projected in the debt coverage and interest rate ratios

The disposal of assets alongside the capital expenditures required for the construction of the two combined-cycle

facilities (with a total of 1,200 MW) for the Subsidiary, as aforesaid, are expected to adversely affect the Company's

coverage ratios in the short term. However, following the commercial operation of the two combined-cycle

facilities (expected in 2022-2023), the coverage ratios are projected to improve significantly, both with respect to

debt coverage and with respect to interest rate coverage. Capital expenditures (Capex) are expected to be in the

range of NIS 5.0-6.0 billion until 2022, and thereafter to stabilize in the range of NIS 4.0-5.0 billion. In the nine

months ended September 30, 2020, the Company generated FFO of NIS 4.4 billion, compared with NIS 4.8 billion

in the same period the year before (prior to the sale of the Alon Tavor power plant). In our estimation, until 2022,

the FFO-to-gross-financial-debt ratio and the interest rate coverage ratio are expected to decline gradually to a

range of 10%-13.5% and 3.9-4.3, respectively (compared with 14.8% and 4.9, respectively, in 2019), due to the

sale of the Alon Tavor and Ramat Hovav power stations, these being, in our view, slow coverage ratios for the

rating level. However, following the commercial operation of the two combined-cycle facilities in 2022-2023, the

FFO-to-debt ratio and the interest rate coverage ratio are expected to improve gradually to a range of 13.5%-

18.0% and 5.5-7.1, respectively.

Maintaining an adequate liquidity level

As of September 30, 2020, the Company had liquidity reserves of NIS 1.9 billion, compared with NIS 2.4 billion in

the same period the year before. Additionally, the Company has confirmed credit facilities for significant amounts

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from several banks.12 The Company's cash balance reflects the board of directors' decision to maintain a liquidity

buffer of no less than NIS 3 billion, including a cash balance and short-term investments of no less than NIS 1.7

billion, with the balance to comprise unused, secured credit lines for a term of more than a year. The liquidity level

reflects consistent implementation of the board of directors' decision and financial policy. Additionally, in our

estimation, the ratio of sources to uses will be in the range of 1.4-1.5 in 2020 (following the sale of the Ramat

Hovav power station), declining to a range of 1.15-1.25 beginning in 2021, due, among other reasons, to an

increasing burden of payments until 2024. This ratio may change as a function of the consideration from the sale

of the Hagit site, in respect of which the deadline for delivery of possession is June 3, 2022. Accordingly, the

Company, at the request of the Energy Ministry, is examining the possibility of advancing the timetables.

IEC's support by the State and the interdependence between the State and the Company are key

considerations in determining the rating

Midroog considers the Company's support by the State and the interdependence between the Company and the

State to be very high, thus they constitute key considerations in determining the rating. This interdependence is

reflected, inter alia, in credit risks of a similar nature, including, among others, exposure to geopolitical crises,

reliance on the same income sources (encompassing the entire Israeli economy), and almost full ownership of IEC

by the State (99.85%). However, it should be noted that there is not always a complete identity of interests

between them. Our assessment of very high support by the State derives first and foremost from the Company's

critical importance to the national economy, as an essential service provider, as well as from a history of support

by the State, including the government's intervention during the fuel crisis (in 2012). Thus, any erosion in

Midroog's assessment regarding the State's support and the interdependence between the State and the

Company could result in a significant downgrade of the rating. In our estimation, there has been an improvement

in the relationship between the Electricity Authority and the Company in terms of transparency and cooperation

between the parties, especially in light of the approval of the Reform and its successful implementation by the

Company, enabling the creation of a highly transparent and more stable regulatory environment over the long

term. It is worth noting that in the Company's report on the effectiveness of internal control over financial

reporting, which was attached to the annual report for December 31, 2019, the internal control was found to be

ineffective due to a material weakness, with the Company having failed to implement effective controls to ensure

that the rights and benefits based on which payments for salary and pension are made, and for which actuarial

commitments are calculated, have been approved in accordance with the provisions of the law. Initial disclosure

of this material weakness was made in the report on the effectiveness of internal control over financial reporting

that was attached to the periodic report for 2009.13

The spread of the coronavirus could lower demand for electricity in the short term, however,

electricity consumption is expected to recover in the short to medium term

The outbreak of the coronavirus and its global spread have negatively impacted a wide range of economic

indicators and created great uncertainty in the market. Concerns over the spread of the virus, which was

recognized as a pandemic, led to the imposition of numerous restrictions in Israel, including closure of the

country's borders, and resulted in harm to international trade and a decline in economic activity. Following a

period in which morbidity and mortality rates rose dramatically, in recent weeks, we are witness to a drop in the

morbidity rate, in light of the size of the vaccinated population, which continues to grow. The financial harm

sustained by individuals and businesses, along with the concerns and uncertainties experienced by the public,

12 Said facilities are valid for a period of more than a year. 13 For further details see the Company's financial statements – board of directors' report concerning internal controls over financial reporting.

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could affect electricity consumption in the economy. In our estimation, a continued increase in the vaccination

rate will accelerate the recovery in demand for electricity, but recovery will also be affected by the level of

infection and the various restrictions that may be imposed by the government. Midroog will monitor

developments in this regard and update the base case scenario, if necessary,

Company Profile

The Israel Electric Corporation Ltd. is a government company (the State of Israel holds approximately 99.85% of

its shares14), engaging in the generation, transmission, distribution and supply of electricity, in electricity trading,15

and in the setup of the infrastructure required for these activities. The Company was incorporated in Israel in 1923,

and its activity is regulated and supervised under the Electricity Sector Law, which replaced the Electricity

Concessions Ordinance. Under the Electricity Sector Law, the Electricity Authority sets the electricity tariffs and

ways of adjusting them and determines the criteria according to which the Company is required to operate.

Additionally, the Electricity Authority issues conditional and permanent licenses for electricity generation,

distribution and supply to all electricity producers, and supervises them based on the criteria established by it. The

Company is a monopoly in Israel's electricity market, producing, transmitting, distributing and supplying the bulk

of electricity consumed in Israel. The Company is subject to a regulatory framework, which has been maintained

through the Electricity Authority, under the Electricity Sector Law, 1996, for over 20 years.

Rating History

Related Reports

Rating of the Israel Electric Corporation Ltd.

Rating of Regulated Electricity and Natural Gas Companies – Methodology Report, July 2020

Rating of Government-Related Issuer (GRI) – Methodology Report, July 2018

Financial Statement Adjustments and Presentation of Main Financial Measures in Corporate Rating

Table of Relationships and Holdings

Midroog Rating Scales and Definitions

The reports are published on the Midroog website at www.midroog.co.il

14 The Company estimates that the rest of its shares are held by the public, and it is not possible to identity some of their holders. 15 We note that the electricity trading activity is expected to be transferred to the System Management Company.

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General Information

Date of rating report: March 10, 2021

Date of last revision of the rating: May 24, 2020

Date of first publication of the rating: July 14, 2010

Rating commissioned by: Israel Electric Corporation Ltd.

Rating paid for by: Israel Electric Corporation Ltd.

Information from the Issuer

Midroog relies in its ratings inter alia on information received from competent personnel at the issuer.

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Long-Term Rating Scale

Aaa.il Issuers or issues rated Aaa.il are those that, in Midroog judgment, have highest creditworthiness

relative to other local issuers.

Aa.il Issuers or issues rated Aa.il are those that, in Midroog judgment, have very strong creditworthiness


A.il Issuers or issues rated A.il are those that, in Midroog judgment, have relatively high creditworthiness


Baa.il Issuers or issues rated Baa.il are those that, in Midroog judgment, have relatively moderate credit

risk relative to other local issuers, and could involve certain speculative characteristics.

Ba.il Issuers or issues rated Ba.il are those that, in Midroog judgment, have relatively weak

creditworthiness relative to other local issuers, and involve speculative characteristics.

B.il Issuers or issues rated B.il are those that, in Midroog judgment, have relatively very weak

creditworthiness relative to other local issuers, and involve significant speculative characteristics.

Caa.il Issuers or issues rated Caa.il are those that, in Midroog judgment, have extremely weak

creditworthiness relative to other local issuers, and involve very significant speculative

characteristics.

Ca.il Issuers or issues rated Ca.il are those that, in Midroog judgment, have extremely weak

creditworthiness and very near default, with some prospect of recovery of principal and interest.

C.il Issuers or issues rated C are those that, in Midroog judgment, have the weakest creditworthiness

and are usually in a situation of default, with little prospect of recovery of principal and interest.

Note: Midroog appends numeric modifiers 1, 2, and 3 to each rating category from Aa.il to Caa.il. The modifier '1' indicates that the obligation ranks in the higher end of its rating category, which is denoted by letters. The modifier '2' indicates that it ranks in the middle of its rating category and the modifier '3' indicates that the obligation ranks in the lower end of that category, denoted by letters.

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Ratings and/or publications issued by Midroog are or contain Midroog’s subjective opinions about the relative future credit risk of entities, credit

obligations, debts and/or debt-like financial instruments, that apply on the date of their publication, and as long as Midroog has not changed the rating

or withdrawn it. Midroog's publications may contain assessments based on quantitative models of credit risks, as well as related opinions. Ratings and

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Midroog defines credit risk as the risk that an entity may fail to meet its contractual financial obligations on schedule and the estimated financial loss in

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Israel Electric Corporation Ltd