final pricing supplement dated january 18, 2009) … · 2012. 11. 21. · credit suisse goldman,...

Level: 11 – From: 11 – Saturday, January 24, 2009 – 18:46 – eprint1 – 4080 Intro 01

FINAL PRICING SUPPLEMENT

(To Offering Circular dated April 23, 2008, as supplemented by the Offering Circular Supplementdated January 18, 2009)

U.S.$500,000,000THE ISRAEL ELECTRIC CORPORATION LIMITED

9.375% Notes due 2020

The Israel Electric Corporation Limited (the “Company” or “IEC”), a company organized under the laws of the Stateof Israel and 99.85% owned by the State of Israel, proposes to issue U.S.$500,000,000 aggregate principal amount of 9.375%Notes due 2020 (the “Notes”). The Notes will bear interest at the rate of 9.375% per year. Interest on the Notes is payable onJanuary 28 and July 28 of each year, beginning on July 28, 2009. The Notes will mature on January 28, 2020, and will be repaidat their principal amount. The Notes are redeemable prior to maturity, in whole or in part, at the Company’s option at aredemption price set forth under “Description of the Notes” in the Offering Circular or upon the occurrence of certain changesin Israeli tax law requiring the payment of additional amounts as described herein. In addition, in the event of a change ofcontrol or other specified events, holders of Notes (“Noteholders”, and each a “Noteholder”) may require the Company toredeem their Notes at redemption prices set forth under ‘‘Description of the Notes’’ in the Offering Circular.

The Notes will be general obligations of the Company and will be secured by a valid and enforceable perfected floatingcharge (the ‘‘Note Floating Charge’’) on the present and future assets of the Company that are charged under any other floatingcharge created by the Company, whether now existing or hereafter created. For a description of the floating charge, see“Description of the Notes—Note Floating Charge” in the Offering Circular. The Notes are not obligations of, or guaranteedby, the State of Israel.

If any other entity engages in or undertakes all or substantially all of the Company’s transmission business, such otherentity will be substituted for the Company as the issuer of the Notes and the Company shall provide an unconditional guaranteeof the Notes in accordance with the procedures set forth under “Description of the Notes – Substitution” in the OfferingCircular.

Approval has been obtained from the Singapore Exchange Securities Trading Limited (the “SGX-ST”) for the Programto be listed on the Official List of the SGX-ST. Approval-in-principle has been obtained from the SGX-ST for the Notes to belisted and quoted on the Official List of the SGX-ST. The SGX-ST assumes no responsibility for the correctness of any of thestatements made or opinions expressed or reports contained herein. Admission of the Notes to the Official List of the SGX-STand the above approval in-principle of the SGX-ST is not to be taken as an indication of the merits of the Company or any ofits subsidiaries or the Notes. The Notes will be listed and quoted on the Official List of SGX-ST and will be traded on theSGX-ST in a minimum board lot size of U.S.$200,000 for so long as any of the Notes are so listed.

1111111111111111

Investing in the Notes involves risks. See “Risk Factors” beginning on page S-26 of the Offering CircularSupplement and on page 21 of the accompanying Offering Circular.

The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended (the“Securities Act”). Subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to U.S.persons (as defined in Regulation S under the Securities Act (“Regulation S”)). The Notes may be offered for sale (i) toqualified institutional buyers (as defined in Rule 144A under the Securities Act (“Rule 144A”)) (‘‘QIBs’’) in the United Statesin reliance on Rule 144A or (ii) outside the United States, in reliance on Regulation S. See “Plan of Distribution.” The Notesare subject to restrictions on transfer. See “Transfer Restrictions” in the Offering Circular.

Offering Price: 99.158% of principal plus accrued interest if any from January 28, 2009

The managers referenced below expect to deliver the Notes on or about January 28, 2009, in book entry form onlythrough the facilities of DTC for the accounts of its participants, including Clearstream Banking, société anonyme andEuroclear Bank S.A./N.V., as operator of the Euroclear System.

Joint Book-Running ManagersCiti J.P. Morgan

Co-ManagersCredit Suisse Goldman, Sachs & Co.

Merrill Lynch & Co. Morgan Stanley

January 23, 2009

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SUMMARY OF TERMS

The following is a summary of the principal terms of the Notes to be issued by the Companypursuant to its U.S.$2,000,000,000 Global Medium-Term Note Program. This summary supplements thedescription of, and incorporates by reference the terms of, the Notes contained in the Offering Circulardated April 23, 2008, as supplemented by the Offering Circular Supplement, dated January 18, 2009,and should be read in connection therewith. Capitalized terms used herein and not otherwise definedhave the meaning ascribed to such terms in the Offering Circular Supplement and the accompanyingOffering Circular.

Issuer: The Israel Electric Corporation Limited

Issue: U.S.$500,000,000 of 9.375% Notes due 2020

Issue Date: January 28, 2009

Maturity Date: January 28, 2020

Rate of Interest: 9.375% per annum. Interest will be computed on the basis ofa 360-day year of twelve 30-day months.

Interest Payment Dates: January 28 and July 28 in each year, commencing July 28,2009

Issue Price: 99.158% of principal amount

Early Redemption Amount: The Notes will be redeemable upon the occurrence of certainchanges in Israeli tax law requiring the payment by theCompany of additional amounts in respect of the Notes asdescribed in the Offering Circular and upon an Event ofDefault, in each case at 100% of the principal amount of theNotes, together with interest accrued to the date ofredemption. See “Description of the Notes—Redemption —Early Redemption Amounts” in the Offering Circular.

The Notes will be subject to redemption at the option ofholders of the Notes following the occurrence of certainevents, including;

• if at the Relevant Time (as defined) the State of Israelis rated Investment Grade (as defined), the Notes arerated below Investment Grade and the Company hasnot used its best endeavors to obtain an InvestmentGrade rating of the Notes (taking into account therequirements of the Rating Agencies for the purposesof obtaining such rating and the timeframe required toobtain such rating);

• upon the Company’s failure to comply with theSubstitution (as defined below) provisions;

• the Company ceases at or after the Relevant Time toengage lawfully in the Transmission Business (as

Redemption at the Option of theNoteholders:

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defined) or the main business of the Company ceasesto be the Transmission Business;

• a Change of Control (as defined); or

• upon the occurrence of an event or circumstancewhich could reasonably be expected to have aMaterial Adverse Effect (as defined),

each a “Put Event”. If at any time while any Note remainsoutstanding, a Put Event occurs, then holders will have theoption to require the Company to redeem the relevant Notesat the principal amount outstanding of the Notes plus, incertain circumstances, Foregone Margin (as defined),together in any case with accrued interest to the put date. See“Description of the Notes—Redemption” in the OfferingCircular for definitions and additional detail.

Redemption at the Option of the Company: The Notes will be redeemable, in whole at any time or in partfrom time to time, at the Company’s option at a redemptionprice equal to the greater of:

(i) 100% of the principal amount of the Notes to be redeemedon that redemption date; and (ii) as determined by theQuotation Agent, the sum of the present values of theremaining scheduled payments of principal and interest onthe Notes being redeemed on that redemption date (notincluding any portion of such payments of interest accrued asof the date of redemption), discounted to the date ofredemption on a semi-annual basis (assuming a 360-day yearconsisting of twelve 30-day months) at the Treasury Rate (asdefined below), plus 50 basis points, plus, in each case,accrued and unpaid interest thereon to the date ofredemption. Notwithstanding the foregoing, installments ofinterest on Notes that are due and payable on interestpayment dates falling on or prior to a redemption date will bepayable on the interest payment date to the registered holdersas of the close of business on the relevant record dateaccording to the Notes and the Fiscal Agency Agreement.

“Comparable Treasury Issue” means the United StatesTreasury security selected by the Quotation Agent as havinga maturity comparable to the remaining term (as measuredfrom the date of redemption) of the Notes to be redeemedthat would be utilized, at the time of selection and inaccordance with customary financial practice, in pricing newissues of corporate debt securities of comparable maturity tothe remaining term of such Notes.

“Comparable Treasury Price” means, with respect to anyredemption date, (i) the average of four Reference TreasuryDealer Quotations for such redemption date, after excludingthe highest and lowest such Reference Treasury Dealer

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Quotations, or (ii) if the Quotation Agent obtains fewer thanfour such Reference Treasury Dealer Quotations, the averageof all such quotations, or (iii) if only one Reference TreasuryDealer Quotation is received, such quotation.

“Quotation Agent” means any Reference Treasury Dealerappointed by the Company.

“Reference Treasury Dealer” means (i) each of CitigroupGlobal Markets Inc. and J.P. Morgan Securities Inc. (or theirrespective affiliates that are Primary Treasury Dealers) andtheir respective successors; provided, however, that if any ofthe foregoing shall cease to be a primary U.S. Governmentsecurities dealer in New York City (a “Primary TreasuryDealer”), the Company will substitute therefor anotherPrimary Treasury Dealer, and (ii) any other two PrimaryTreasury Dealers selected by the Company.

“Reference Treasury Dealer Quotations” means, with respectto each Reference Treasury Dealer and any redemption date,the average, as determined by the Company, of the bid andasked prices for the Comparable Treasury Issue (expressed ineach case as a percentage of its principal amount) quoted inwriting to the Quotation Agent by such Reference TreasuryDealer at 5:00 p.m., New York City time, on the thirdbusiness day preceding such redemption date.

“Treasury Rate” means, with respect to any redemption date,the rate per annum equal to the semi-annual equivalent yieldto maturity of the Comparable Treasury Issue, assuming aprice for the Comparable Treasury Issue (expressed as apercentage of its principal amount) equal to the ComparableTreasury Price for such redemption date.

Notice of any redemption will be mailed at least 30 days butnot more than 60 days before the redemption date to eachregistered holder of the Notes to be redeemed by theCompany or by the Fiscal Agent on the Company’s behalf;provided that notice of redemption may be mailed more than60 days prior to a redemption date if the notice is issued inconnection with a defeasance of the Notes or a satisfactionand discharge of the Notes. Once notice of redemption ismailed, the Notes called for redemption will become due andpayable on the redemption date and at the applicableredemption price, plus accrued and unpaid interest to, butexcluding, the redemption date.

Unless the Company defaults in payment of the redemptionprice, on and after the redemption date, interest will cease toaccrue on the Notes or portions thereof called forredemption. On or before the redemption date, the Companywill deposit with a paying agent (or the Fiscal Agent) money

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sufficient to pay the redemption price of and accrued intereston the Notes to be redeemed on that date. If less than all ofthe Notes are to be redeemed, the Notes to be redeemed shallbe selected by lot by DTC, in the case of Notes representedby a global security, or by the Fiscal Agent by a method theFiscal Agent deems to be fair and appropriate, in the case ofNotes that are not represented by a global security.

Restrictive Covenants: The Notes will contain covenants applicable to the Company,including covenants that limit the ability to incur liens andtake actions that could impair the Note Floating Charge andcovenants that require the Company to provide periodicreports, maintain public ratings and conduct its business in alawful manner consistent with good industry practice. See“Description of the Notes—Certain Covenants” in theOffering Circular.

Substitution: The Company shall substitute for itself (a “Substitution”) anyother entity that at any time engages or undertakes or willengage in or undertake, all or substantially all of theTransmission Business (the “Substitute Obligor”) as issuer ofall of the Notes.

Upon the occurrence of a Substitution, the Company willunconditionally and irrevocably guarantee the due andpunctual payment of all sums payable by the SubstituteObligor in respect of the Notes (the “IEC Guarantee”). TheIEC Guarantee will constitute direct, general andunconditional obligations of the Company that will besecured by the Note Floating Charge. The assets subject tothe Note Floating Charge will not include the TransmissionBusiness assets or any other assets of the Substitute Obligor.The Note Floating Charge, will, however, attach to anyshares of, or other equity interests in, the Company’ssubsidiaries or other entities, if any. See “Description of theNotes—Note Floating Charge”, “Description of the Notes—Substitution” and “Taxation—Valid Status TaxConsiderations—Substitution of Obligor” in the OfferingCircular.

Form of Notes: The Notes will be represented by Registered Global Notesthat will be settled and cleared though DTC.

Denominations: U.S.$200,000 and integral multiples of U.S.$1,000 in excessthereof.

Stabilizing Agents: Citigroup Global Markets Inc. and J.P. Morgan SecuritiesLtd.

Series: Series 2

ISIN: US46507MAB81 (Restricted Global Note)

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US46507NAB64 (Regulation S Global Registered Note)

CUSIP: 46507MAB8 (Restricted Global Note)

46507NAB6 (Regulation S Global Registered Note)

Listing: Singapore Exchange Securities Trading Limited

CAPITALIZATION

The following table sets forth the consolidated capitalization, cash equivalents and short-term debt ofthe Company as of September 30, 2008 on an actual basis and as adjusted to reflect the issuance of the Notes.For further information, see the Interim Financial Statements contained in the Offering Circular Supplement.

As of September 30, 20081111233211112231111233211112

Actual Adjusted(1)1111233211112 1111233211112

(in millions (in millionsof adjusted (in of adjusted (inSeptember millions September millions

2008 of U.S. 2008 of U.S.NIS) Dollars)(3) NIS) Dollars)(3)

11112 11112 11112 11112

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 2,582 755 4,269 1,24811112 11112 11112 1111211112 11112 11112 11112

Short-term debt (current maturities of long-termdebt) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,626 1,060 3,626 1,060

11112 11112 11112 1111211112 11112 11112 11112

Long-term debt, net(2)

Debentures, netNotes offered hereby . . . . . . . . . . . . . . . . . . . . . . 1,687 493Outstanding debentures . . . . . . . . . . . . . . . . . . . . 28,396 8,300 28,396 8,300

Liabilities to banks . . . . . . . . . . . . . . . . . . . . . . . . . 9,697 2,835 9,697 2,835Other long term liabilities . . . . . . . . . . . . . . . . . . . . 2,033 594 2,033 594

11112 11112 11112 11112

Total long-term debt, net . . . . . . . . . . . . . . . . . . . . . 40,126 11,729 41,813 12,222Perpetual debentures . . . . . . . . . . . . . . . . . . . . . . . . 2,264 662 2,264 662

11112 11112 11112 11112

Total Long-term debt, net and perpetual debentures 42,390 12,391 44,077 12,884Shareholders’ equity

Paid up share capital . . . . . . . . . . . . . . . . . . . . . . . . 1,015 297 1,015 297Capital reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 919 268 919 268Dividend Provided . . . . . . . . . . . . . . . . . . . . . . . . . . 2,391 699 2,391 699Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 6,444 1,884 6,444 1,884

11112 11112 11112 11112

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . 10,769 3,148 10,769 3,14811112 11112 11112 11112

Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 53,159 15,539 54,846 16,03211112 11112 11112 1111211112 11112 11112 11112

(1) As adjusted to give effect to the issuance of U.S.$500 million aggregate principal amount (U.S.$493 million net of discounts andestimated transaction costs and fees) of Notes offered hereby (translated to NIS1.711 billion and NIS1.687 billion, respectively, basedon the Shekel/Dollar representative exchange rate of 3.421 as at September 30, 2008).

(2) On January 17, 2008, the Company issued $250 million aggregate principal amount of debentures. In March 2008, the Companyissued CPI-linked non-marketable debentures of the ‘‘2014 Linked Electric’’ series with an overall par value of approximately NIS170million for gross proceeds of approximately NIS181 million for a period of six years under standard interests for the Company’scapital raising rounds. On May 7, 2008, the Company issued U.S. $1 billion medium-term notes due 2019 pursuant to this Program.

(3) U.S. Dollar amounts have been translated at NIS3.421 to U.S.$1.00, the representative rate of exchange published by the Bank ofIsrael, for September 30, 2008.

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Level: 11 – From: 11 – Sunday, January 25, 2009 – 03:11 – eprint1 – 4080 Intro 01

PLAN OF DISTRIBUTION

Under the terms and subject to the conditions contained in a Terms/Syndication Agreement, datedJanuary 23, 2009, the dealers named below (the “Dealers”) have severally agreed to purchase from theCompany, and the Company has agreed to sell to the Dealers, severally, the respective principal amount ofNotes set forth opposite their respective names below:

Dealer Principal Amount of

Notes11111112

Citigroup Global Markets Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$245,000,000J.P. Morgan Securities Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,000,000Credit Suisse Securities (Europe) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000Goldman, Sachs & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000Merrill Lynch, Pierce, Fenner & Smith

Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000

11111112

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$500,000,0001111111211111112

The Company has been advised that the Dealers propose to offer the Notes directly at the offeringprice set forth on the cover page of this Pricing Supplement and may offer the Notes to certain dealers (whomay include the Dealers) at such offering price less a discount not in excess of 0.20% of the principal amountof the Notes. The selected dealers may reallow a concession not in excess of 0.10% of the principal amountof the Notes to certain other brokers and dealers. After the offering, the offering price, the concession toselected dealers and the reallowance may be changed by the Dealers.

DOCUMENTS INCORPORATED BY REFERENCE

This Pricing Supplement and the attached Offering Circular Supplement shall be deemed to beincorporated in, and to form part of, the accompanying Offering Circular. No other documents areincorporated by reference herein or therein. Any statement contained in the Offering Circular shall bedeemed to be modified or superseded to the extent that a statement contained herein or in the attachedOffering Circular Supplement modifies or supersedes such earlier statement (whether expressly, byimplication or otherwise). Such documents will be available for inspection at the principal offices in London,England of the Bank of New York Mellon (formerly the Bank of New York), the fiscal, principal paying andtransfer agent for the Notes (the “Fiscal Agent”), and for collection without charge from The Israel ElectricCorporation Limited, 1 Netiv Ha’Or, P.O. Box 10, Haifa 31000, Israel. In addition, such documents will beavailable free of charge, for so long as any Note is outstanding, at the specified office of the Paying Agent(as defined below) in London.

If at any time prior to the completion of the distribution of any Tranche of Notes, any event occurs asa result of which this Pricing Supplement, the Offering Circular Supplement or the accompanying OfferingCircular would include any untrue statement of a material fact or omit to state any material fact necessary tomake the statements therein, in light of the circumstances under which they were made, not misleading, orif it shall be necessary to amend or supplement this Offering Circular Supplement or the accompanyingOffering Circular to comply with applicable law, the Company will promptly prepare and provide to theDealers (and file with the SGX-ST and any securities exchange on which any Notes are listed, if necessary)an amendment which will correct such statement or omission or effect such compliance.

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Level: 10 – From: 0 – Monday, January 19, 2009 – 01:14 – Eprint2 – 4080 Intro 02

OFFERING CIRCULAR SUPPLEMENT(To Offering Circular dated April 23, 2008)

THE ISRAEL ELECTRIC CORPORATION LIMITEDU.S.$2,000,000,000

Global Medium-Term Note Program

This offering circular supplement (the “Offering Circular Supplement”) is prepared in connectionwith the U.S.$2,000,000,000 Global Medium-Term Note Program (the “Program”) established by The IsraelElectric Corporation Limited (the “Company” or “IEC”), a company organized under the laws of the Stateof Israel and 99.85% owned by the State of Israel, under which the Company may from time to time issueGlobal Medium-Term Notes (the “Notes”). This Offering Circular Supplement is supplemental to, andshould be read in conjunction with, the offering circular dated April 23, 2008 (the “Offering Circular”),which accompanies this Offering Circular Supplement. Capitalized terms used herein and not otherwisedefined have the meaning ascribed to such terms in the accompanying Offering Circular.

Approval has been obtained from the Singapore Exchange Securities Trading Limited (the “SGX-ST”) for the Program to be listed on the Official List of the SGX-ST. The SGX assumes no responsibility forthe correctness of any of the statements made or opinions expressed or reports contained herein. Admissionof the Program to the Official List of the SGX-ST and the approval of the SGX-ST is not to be taken as anindication of the merits of the Company or any of its subsidiaries, the Program or the Notes. Notes may alsobe listed on one or more additional stock exchanges. Unlisted Notes may also be issued. Any Notes issuedunder the Program that are listed and quoted on the Official List of the SGX-ST will be traded on the SGX-ST in a minimum board lot size of U.S.$200,000 for so long as any of the Notes are so listed. The applicablePricing Supplement will state whether or not the Notes are to be listed, and, if so, on which stock exchangeor exchanges.

SEE “RISK FACTORS” STARTING ON PAGE 21 OF THE ACCOMPANYING OFFERINGCIRCULAR AND ON PAGE S-26 BELOW FOR CERTAIN CONSIDERATIONS RELATING TOAN INVESTMENT IN THE NOTES.

The Notes have not been and will not be registered under the United States Securities Act of 1933, asamended (the “Securities Act”). Subject to certain exceptions, Notes may not be offered, sold or deliveredwithin the United States or to U.S. persons (as defined in Regulation S under the Securities Act (“RegulationS”)). The Notes may be offered for sale (i) to qualified institutional buyers (as defined in Rule 144A underthe Securities Act (“Rule 144A”)) (“QIBs”) in the United States in reliance on Rule 144A, (ii) to a limitednumber of institutional investors that qualify as accredited investors (as defined in Rule 501(a)(1), (2), (3)and (7) under the Securities Act (“Institutional Accredited Investors”)) or (iii) outside the United States, inreliance on Regulation S. See “Plan of Distribution” in the accompanying Offering Circular. The Notes aresubject to restrictions on transfer. See “Transfer Restrictions” in the accompanying Offering Circular.

Co-ArrangersCiti J.P. Morgan

Euro DealersCiti J.P. Morgan

U.S. DealersCiti J.P. Morgan

January 18, 2009

IN CONNECTION WITH THE ISSUE OF THE NOTES, J.P. MORGAN SECURITIES LTDAND CITIGROUP GLOBAL MARKETS INC. (OR PERSONS ACTING ON THEIR BEHALF)MAY OVER-ALLOT NOTES (PROVIDED THAT THE AGGREGATE PRINCIPAL AMOUNT OFNOTES OVER-ALLOTTED DOES NOT EXCEED 105% OF THE AGGREGATE PRINCIPALAMOUNT OF THE NOTES) OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTINGTHE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHTOTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT J.P. MORGANSECURITIES LTD AND CITIGROUP GLOBAL MARKETS INC. (OR PERSONS ACTING ONTHEIR BEHALF) WILL UNDERTAKE STABILIZATION ACTION. ANY STABILIZATIONACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLICDISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN,MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THEALLOTMENT OF THE NOTES.

The Company accepts responsibility for the information contained in this Offering CircularSupplement. The Company, having made all reasonable inquiries, confirms that the accompanying OfferingCircular and this Offering Circular Supplement together contain all information with respect to the Company,the Group (as defined in the accompanying Offering Circular) and the Notes that is material in the contextof the issue and offering of the Notes, the statements contained herein relating to the Company and the Groupare in every material respect true and accurate and not misleading, the opinions and intentions expressed inthe accompanying Offering Circular as supplemented hereby with regard to the Company and the Group arehonestly held, have been reached after considering all relevant circumstances and are based on reasonableassumptions, there are no other facts with respect to the Company, the Group or the Notes, the omission ofwhich would, in the context of the issuance and offering of the Notes, make any statement in the OfferingCircular Supplement and the accompanying Offering Circular misleading in any material respect and allreasonable inquiries have been made by the Company to ascertain such facts and to verify the accuracy ofall such information and statements.

This Offering Circular Supplement is confidential. The Offering Circular Supplement has beenprepared by the Company solely for use in connection with the proposed offering of the securities in theOffering Circular Supplement and the accompanying Offering Circular. This Offering Circular Supplementis personal to each offeree and does not constitute an offer to any other persons or to the public generally tosubscribe for or otherwise acquire securities. Prospective investors are authorized to use this OfferingCircular Supplement and the accompanying Offering Circular solely for the purpose of considering thepurchase of the Notes. Distribution of this Offering Circular Supplement and the accompanying OfferingCircular to any other person other than the prospective investor and any person retained to advise suchprospective investor with respect to its purchase is unauthorized, and any disclosure of any of its contents,without the Company’s prior written consent, is prohibited. Each prospective investor, by accepting deliveryof this Offering Circular Supplement and the accompanying Offering Circular, agrees to the foregoing andto make no photocopies of this Offering Circular Supplement and the accompanying Offering Circular or anydocuments referred to in this Offering Circular Supplement and the accompanying Offering Circular.

In making an investment decision, prospective investors must rely on their own examination of theCompany and the terms of the offering, including the merits and risks involved. Prospective investors shouldnot construe anything in this Offering Circular Supplement and the accompanying Offering Circular as legal,business or tax advice. Each prospective investor should consult its own advisors as needed to make itsinvestment decision and to determine whether it is legally permitted to purchase the securities underapplicable legal investment or similar laws or regulations.

No person has been authorized in connection with any offering made hereby to give any informationor to make any representation that is not contained in or consistent with this Offering Circular Supplement

S-2


or any other information supplied in connection with the Notes and, if given or made, such information orrepresentation may not be relied upon as having been authorized by the Company, the Co-Arrangers, theDealers or any affiliate of any of the foregoing. Neither the Co-Arrangers nor any of the Dealers haveseparately verified the information contained in this Offering Circular Supplement and the accompanyingOffering Circular. Accordingly, no representation, warranty or undertaking, express or implied, is made andno responsibility is accepted by the Co-Arrangers or the Dealers as to the accuracy or completeness of thisOffering Circular Supplement and the accompanying Offering Circular or any further information suppliedin connection with the Notes. The Co-Arrangers and the Dealers accept no liability in relation to thisOffering Circular Supplement and the accompanying Offering Circular or any other information provided bythe Company in connection with the Notes.

This Offering Circular Supplement and the accompanying Offering Circular are to be read inconjunction with all documents which are deemed to be incorporated herein and therein by reference. See“Documents Incorporated by Reference” herein and in the accompanying Offering Circular. This OfferingCircular Supplement shall be read and construed on the basis that such documents are so incorporated andform part of this Offering Circular Supplement.

Neither the delivery of this Offering Circular Supplement and the accompanying Offering Circular norany amendment or supplement thereto nor the offer, sale or delivery of any Note shall under anycircumstances create any implication that the information contained herein is correct at any time after thedate hereof or the date upon which this Offering Circular Supplement has been most recently amended orsupplemented or that there has been no change in the business, properties, financial condition, results ofoperations or prospects of the Company since the date hereof or of such amendment or supplement or thatany other information supplied in connection with the Program is correct as of any time subsequent to thedate on which it is supplied or, if different, the date indicated in the document containing the same. The Co-Arrangers and the Dealers expressly do not undertake to review such matters during the term of the Program.

Neither this Offering Circular Supplement and the accompanying Offering Circular nor anyamendment or supplement thereto nor any other information supplied in connection with the Notesconstitutes an offer or invitation by or on behalf of any of the Company, the Co-Arrangers, the Dealers orany affiliate of any of the foregoing to any person to subscribe for or to purchase any of the Notes. ThisOffering Circular Supplement and any amendment or supplement thereto are not intended to provide thebasis of any credit or other evaluation and should not be considered as a recommendation by the Companyor any of the Dealers that any recipient of this Offering Circular Supplement or any amendment orsupplement thereto should purchase Notes. Each investor contemplating purchasing Notes should make itsown independent appraisal of the creditworthiness of the Company. Neither the Co-Arrangers nor any of theDealers undertake to review the financial condition or affairs of the Company during the term of thearrangements contemplated by this Offering Circular Supplement nor to advise any investor or potentialinvestor in the Notes of any information coming to the attention of the Co-Arrangers or any of the otherDealers.

The distribution of this Offering Circular Supplement and any amendment or supplement thereto andthe offer, sale and delivery of Notes in certain jurisdictions may be restricted by law. Persons into whosepossession this Offering Circular Supplement or any amendment or supplement thereto comes are requiredto inform themselves about and to observe any such restrictions. For a description of certain restrictions onoffers, sales and deliveries of Notes and on distribution of this Offering Circular Supplement and otheroffering material, see “Plan of Distribution” in the accompanying Offering Circular. Certain other restrictionsmay apply as described in the applicable Pricing Supplement. This Offering Circular Supplement may notbe used in connection with an offer to sell or the solicitation of an offer to buy the Notes in any jurisdictionin which such offer or solicitation is unlawful.

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To permit compliance with Rule 144A in connection with resales of the Notes, the Company willfurnish upon the request of a holder of a Note and a prospective purchaser designated by such holder theinformation required to be delivered under Rule 144A(d)(4) under the Securities Act if, at the time of suchrequest, the Company is neither a reporting company under Section 13 or Section 15(d) of the U.S. SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder.

None of the stock exchanges on which the Notes may be listed under the Program assumes anyresponsibility for the correctness of any of the statements made or opinions or reports expressed or containedin this Offering Circular Supplement. Admission of the Notes to listing and quotation on any such exchangeis not to be taken as an indication of the merits of the Company, its Subsidiaries or the Notes.

This Offering Circular Supplement has not been and will not be registered as a prospectus with theMonetary Authority of Singapore (the “MAS”) and the Notes are offered by the Company pursuant toexemptions invoked under Sections 274 and 275 of the Securities and Futures Act (Chapter 289) ofSingapore (the “SFA”). Accordingly, the Company has not offered or sold the Notes or caused the Notes tobe made the subject of an invitation for subscription or purchase, nor will it offer or sell the Notes or causethe Notes to be made the subject of an invitation for subscription or purchase, nor has it circulated ordistributed nor will it circulate or distribute this Offering Circular Supplement or any other document ormaterial in connection with the offer or sale, or invitation for subscription or purchase, of the Notes, whetherdirectly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 274 ofthe SFA, (ii) to a relevant person pursuant to Section 275(1) of the SFA, or any person pursuant to Section275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (iii)otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where Notes are subscribed or purchased under Section 275 of the SFA by a relevant person whichis:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) thesole business of which is to hold investments and the entire share capital of which is owned byone or more individuals, each of whom is an accredited investor; or

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to holdinvestments and each beneficiary of the trust is an individual who is an accredited investor,

shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights andinterest (howsoever described) in that trust shall not be transferred within six months after that corporationor that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except:

(i) to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevantperson defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is madeon terms that such shares, debentures and units of shares and debentures of that corporation orrights or interests in that trust are acquired at a consideration of not less than S$200,000 (or itsequivalent in a foreign currency) for each transaction, whether such amount is to be paid for incash or by exchange of securities or other assets, and further for corporations, in accordancewith the conditions specified in Section 275 of the SFA; or

(ii) where no consideration is or will be given for the transfer; or

(iii) where the transfer is by operation of law.

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TABLE OF CONTENTS

OFFERING CIRCULAR SUPPLEMENT

SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES ................ S-6PRESENTATION OF FINANCIAL AND OPERATING DATA ...................................... S-7FORWARD-LOOKING STATEMENTS .......................................................................... S-8INFORMATION ABOUT THIS OFFERING CIRCULAR SUPPLEMENT .................. S-9SUMMARY ...................................................................................................................... S-11RECENT DEVELOPMENTS .......................................................................................... S-13RISK FACTORS ................................................................................................................ S-27USE OF PROCEEDS ........................................................................................................ S-29CAPITALIZATION............................................................................................................ S-30SELECTED FINANCIAL DATA ...................................................................................... S-31EXCHANGE RATES ........................................................................................................ S-32MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL CONDITIONS........................................................ S-33

MANAGEMENT .............................................................................................................. S-40INDEX TO INTERIM FINANCIAL STATEMENTS ...................................................... Supplement F-1SUPPLEMENT ANNEX A - CONDITIONS IN ISRAEL .............................................. Supplement A-1

OFFERING CIRCULAR

SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES ................ 6PRESENTATION OF FINANCIAL AND OPERATING DATA ...................................... 7DOCUMENTS INCORPORATED BY REFERENCE .................................................... 8FORWARD-LOOKING STATEMENTS .......................................................................... 8SUMMARY ...................................................................................................................... 9RISK FACTORS ................................................................................................................ 21RELATIONSHIP WITH THE STATE OF ISRAEL ........................................................ 29USE OF PROCEEDS ........................................................................................................ 31EXCHANGE RATES ........................................................................................................ 31CAPITALIZATION............................................................................................................ 32SELECTED FINANCIAL DATA ...................................................................................... 33MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL CONDITIONS........................................................ 34

BUSINESS ........................................................................................................................ 45GLOSSARY ...................................................................................................................... 76MANAGEMENT .............................................................................................................. 78TRANSACTIONS WITH RELATED PARTIES .............................................................. 85DESCRIPTION OF THE NOTES .................................................................................... 86TAXATION ........................................................................................................................ 130PLAN OF DISTRIBUTION .............................................................................................. 139TRANSFER RESTRICTIONS .......................................................................................... 143INDEPENDENT AUDITORS .......................................................................................... 145LEGAL MATTERS .......................................................................................................... 145INDEX TO FINANCIAL STATEMENTS ........................................................................ F-1ANNEX A—CONDITIONS IN ISRAEL ........................................................................ A-1ANNEX B—FORM OF PRICING SUPPLEMENT ........................................................ B-1

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SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES

The Company is organized under the laws of the State of Israel. All of its directors and officers andthe independent accountants named herein reside outside the United States (principally in Israel). All or asubstantial portion of the assets of these persons and of the Company are located outside the United States.As a result, it may not be possible for investors to effect service of process within the United States uponsuch persons or the Company or to enforce against them judgments obtained in United States courtspredicated upon the civil liability provisions of the federal securities laws of the United States. The Companyhas been informed by its legal counsel in Israel, Herzog, Fox & Neeman, that it may be difficult to assertU.S. federal securities laws claims in original actions instituted in Israel. Israeli courts may refuse to hear aclaim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bringsuch a claim. In addition, even if an Israeli court agrees to hear such a claim, under exceptionalcircumstances it may determine that Israeli law and not U.S. law is applicable to the claim. However, subjectto certain time limitations, Israeli courts are empowered to enforce foreign (including United States) finalexecutory judgments for liquidated amounts in civil matters, obtained after completion of process before acourt of competent jurisdiction (according to the rules of that court’s country and of private international lawcurrently prevailing in Israel) which recognizes similar Israeli judgments. The foregoing is conditioned upon(a) adequate service of process being effected and the defendant having a reasonable opportunity to be heard,(b) such judgments or the enforcement thereof not being contrary to Israeli law, public policy, security or thesovereignty of the State of Israel, (c) such judgments not being in conflict with any other valid judgment inthe same matter between the same parties, (d) such judgments not having been obtained by fraudulent meansand (e) an action between the same parties in the same matter not being pending in any Israeli court at thetime the lawsuit is instituted in the foreign court. The Company has appointed Corporation Service Company,1133 Avenue of the Americas, Suite 3100, New York, New York 10036 as agent for service of process in anyaction in any federal or state court sitting in the City of New York arising out of the offering or any purchaseor sale of the Notes or with respect to the Company’s obligations under the Notes and the Fiscal AgencyAgreement. Consent has not been given by the Company for such agent to accept service of process inconnection with any other action.

In an action in Israel to recover an amount in a non-Israeli currency, the Israeli court may renderjudgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date thereof.Israeli courts may also render judgments in foreign currencies. Pending collection, the amount of thejudgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Consumer Price Indexin Israel (the “CPI”) plus interest at the annual rate (set by Israeli regulations) prevailing at such time. Theregulations also set the rate of interest to be paid on judgments of Israeli courts in foreign currencies. Alljudgment creditors must bear the risk of unfavorable exchange rates. For information concerning the CPI,see Notes 2.a.3.2 and 2.r to the Company’s unaudited financial statements as of and for the nine-monthperiod ended September 30, 2008 included in this Offering Circular Supplement.

NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED STATES

Neither the U.S. Securities and Exchange Commission (“SEC”) nor any state securities commissionhas approved or disapproved of these securities or determined if this Offering Circular Supplement is truthfulor complete. Any representation to the contrary is a criminal offense.

The Notes are subject to restrictions on transferability and resale and may not be transferred or resoldexcept as permitted under the Securities Act and the applicable state securities laws pursuant to registrationor exemption therefrom. Prospective investors should be aware that they may be required to bear the financialrisks of this investment for an indefinite period of time. Please refer to the sections in the accompanyingOffering Circular entitled “Plan of Distribution” and “Transfer Restrictions.”

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NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FORA LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISEDSTATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY ISEFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEWHAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANYDOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.NEITHER, ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION ISAVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OFSTATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, ORRECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION.IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER,CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONSOF THIS PARAGRAPH.

PRESENTATION OF FINANCIAL AND OPERATING DATA

In this Offering Circular Supplement, references to “U.S. Dollars”, “U.S.$”, or “$” are to the currencyof the United States of America and references to “NIS,” “Shekels,” or “Agorot” are to the currency of Israel.One Shekel equals 100 Agorot. Unless otherwise specified or the context otherwise requires, references to“Australian Dollars” are to the currency of Australia, references to “Canadian Dollars” or “CDN” are to thecurrency of Canada, references to “Danish Kroner” are to the currency of Denmark, references to the “euro”are to the single currency introduced at the start of the third stage of the European Economic and MonetaryUnion pursuant to the treaty establishing the European Union (as amended from time to time), references to“Hong Kong Dollars” are to the currency of Hong Kong, references to “Y,” “Yen” or “Japanese Yen” are tothe currency of Japan, references to “New Zealand Dollars” are to the currency of New Zealand, referencesto “Swiss Francs” are to the currency of Switzerland, references to “S$” or “Singapore Dollars” are to thecurrency of Singapore, and references to “Sterling” or “£” are to the currency of the United Kingdom ofGreat Britain and Northern Ireland.

The Company’s financial statements and the notes thereto for the nine-month period ended September30, 2008 and the comparable data contained therein for the nine-month period ended September 30, 2007and the year ended December 31, 2007 (the “Interim Financial Statements”) have been prepared inaccordance with the Government Companies Regulations (Principles for the Preparation of FinancialStatements of the Israel Electric Corporation Ltd.) (Temporary Order), (Amendment), 2008 (the“Government Companies Regulations”). The Government Companies Regulations were recently extendeduntil December 31, 2009. By virtue of the Government Companies Regulations, the Company prepared itsfinancial statements for 2008 and interim periods therein, including comparative data for the nine-monthperiod ended September 30, 2007 and the year ended December 31, 2007, in accordance with IFRS asmodified by the following sentence. The Government Companies Regulations also requires the Company toprepare the Interim Financial Statements in NIS that have been adjusted to reflect changes in purchasingpower of the NIS due to inflation and to implement the principles of U.S. FASB Standard No. 71 as listed insection Re6 to the combined version of the FASB standards with respect to regulated activities. The InterimFinancial Statements differ from U.S. GAAP and IFRS in certain significant respects. The unauditedfinancial statements of the Company as of and for the nine months and three months periods endedSeptember 30, 2008 and 2007, reflect the effect of those IFRS standards that are effective as of September30, 2008 and, therefore, assume that these standards will also be in effect as of December 31, 2008.Accordingly, the current Government Companies Regulations information is preliminary and is subject tochange related to new IFRS interpretations that become effective between September 30, 2008 and

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December 31, 2008 with regard to existing standards. Practice with respect to the interpretation andapplication of IFRS standards continually evolve. Therefore, before the first annual financial statementsprepared under Government Companies Regulations are complete and such financial statements are audited,the Government Companies Regulations financial information may be subject to change. See Note 2 of theInterim Financial Statements included herein.

The December 31, 2007 comparative financial data included in the Interim Financial Statementsincluded herein were prepared in accordance with accounting policies that differ from the accountingpolicies used in the preparation of the December 31, 2007 audited financial statements (the “FinancialStatements”) included in the accompanying Offering Circular. The Financial Statements included in theaccompanying Offering Circular were prepared in accordance with Israeli GAAP and under the governmentcompanies regulations as were in effect until December 31, 2007 (the “previous reporting rules”). See Note12 to the Interim Financial Statements for adjustments of financial information previously presented inaccordance with the previous reporting rules to financial information in accordance with the GovernmentCompanies Regulations.

The Interim Financial Statements as of and for the nine-month period ended September 30, 2008 havebeen reviewed by Brightman Almagor & Co., a member of Deloitte International.

The annual financial statements as of and for the year ended December 31, 2005 included in theaccompanying Offering Circular have been audited by Kost Forer Gabbay & Kasierer, a member of Ernst &Young Global, the annual financial statements for the year ended December 31, 2006 included in theaccompanying Offering Circular have been audited jointly by Kost Forer Gabbay & Kasierer and BrightmanAlmagor & Co., a member of Deloitte International, and the Financial Statements for the year endedDecember 31, 2007 included in the accompanying Offering Circular have been audited by BrightmanAlmagor & Co. The Financial Statements for the years ended December 31, 2005, 2006 and 2007 have beenprepared in adjusted December 2007 Shekels.

This Offering Circular Supplement contains translations of certain Shekel amounts into U.S. Dollarsat specified rates solely for the convenience of the reader. These translations should not be construed asrepresentations that the Shekel amounts actually represent such U.S. Dollar amounts. Unless otherwiseindicated, for the nine-month periods ended September 30, 2007 and September 30, 2008 such U.S. Dollaramounts have been translated at NIS3.421 to U.S.$1.00, the representative rate of exchange published by theBank of Israel, the Israeli central bank (the “Bank of Israel”), for September 30, 2008. No representation ismade that any amount in NIS or U.S. Dollars referred to in this Offering Circular Supplement has been, couldhave been or could be converted into U.S. Dollars or NIS, as the case may be, at any particular rate or at all.See “Exchange Rates” elsewhere in this Offering Circular Supplement for information regarding the rate ofexchange between the Shekel and the U.S. Dollar for the periods specified therein.

FORWARD-LOOKING STATEMENTS

This Offering Circular Supplement includes forward-looking statements, including statementsregarding the Company’s expectations and projections for future operating performance and businessprospects. 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 thanstatements of historical facts included in this Offering Circular Supplement are forward-looking statements.Such forward-looking statements involve known and unknown risks, uncertainties and other factors whichmay cause actual results or performance of the Company to differ materially from those expressed or impliedby such forward-looking statements. Such forward-looking statements are based on numerous assumptionsregarding the Company’s present and future business strategies and the environment in which the Companywill operate in the future. Accordingly, we caution you against relying on these forward-looking statements.

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The Company expressly disclaims any obligation or undertaking to release any updates or revisions to anyforward-looking statement contained herein to reflect any change in the Company’s expectations with regardthereto or any change of events, conditions or circumstances on which any such statement was based. ThisOffering Circular Supplement discloses, under the caption “Risk Factors” and elsewhere, important factorsthat could cause actual results to differ materially from the Company’s expectations. All subsequent writtenand oral forward-looking statements attributable to the Company or persons acting on behalf of the Companyare expressly qualified in their entirety by such cautionary statements.

INFORMATION ABOUT THIS OFFERING CIRCULAR SUPPLEMENT

You should read this Offering Circular Supplement and the accompanying Offering Circular togetherwith any additional information you may need to make your investment decision. You should rely only onthe information incorporated by reference or provided in this Offering Circular Supplement. We have notauthorized anyone else to provide you with other information.

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SUMMARY

The following summary should be read in conjunction with, and is qualified in its entirety by, the moredetailed information and the Company’s financial statements and notes thereto appearing elsewhere in thisOffering Circular Supplement and the accompanying Offering Circular. The following summary does notpurport to be complete and is qualified in its entirety by the full text of this Offering Circular Supplementand, in relation to the terms and conditions of any particular Tranche of Notes, the applicable PricingSupplement. A glossary of certain of the technical terms used in this summary and used throughout theOffering Circular Supplement and the accompanying Offering Circular is set forth under the heading“Glossary” in the accompanying Offering Circular.

The Company

The Company is the sole integrated electric utility in the State of Israel and generates, transmits,distributes and supplies substantially all the electricity used in the State of Israel. The State of Israel ownsapproximately 99.85% of the Company.

The Company is one of the largest industrial companies in Israel. For the nine-month period endedSeptember 30, 2008, the Company had total revenues of NIS17,993 million (U.S.$5,260 million) andrecorded a net income of NIS698 million (U.S.$204 million) and, at September 30, 2008, the Company hadtotal assets of NIS74,124 million (U.S.$21,667 million), in each case in NIS adjusted to September 30, 2008purchasing power.

As of September 30, 2008, the Company owned and operated 17 power stations (including five majorthermal power stations) with an aggregate installed generating capacity of 11,516 MW. As of December 31,2008, the aggregate installed generation capacity was 11,649 MW. In the nine-month periods endedSeptember 30, 2007 and September 30, 2008, the Company sold 37,191 Gwh and 38,873 Gwh of electricity,respectively. In the ten years from 1997 through to 2007, the aggregate demand for electricity in the State ofIsrael grew at an average annual rate of 4.8% exceeding the average annual rate of growth of the State ofIsrael’s gross domestic product (“GDP”) during the same period which was 3.8%. To meet increasedelectricity demand, the Company has recently constructed a new generation facility and expanded andimproved its transmission and distribution system. Based on projections developed by industry sources inJuly 2007, the Company currently expects electricity demand in the State of Israel to increase by an averageannual rate of approximately 3.9 % for the period 2009 to 2013, while the expected average annual rate ofgrowth of GDP for that same period is 4.2%. To meet the projected electricity demand, the Companycurrently plans to add approximately 1,905 MW of installed capacity by 2011. See “Recent Developments -Development Strategy” below and “Business—Development Strategy and Capital Investment Program” inthe accompanying Offering Circular.

The Company’s business is currently regulated pursuant to the Electricity Sector Law 5756-1996 (the“Electricity Sector Law”), which became effective on March 4, 1996. The Electricity Sector Law providesfor the issuance by the Minister of National Infrastructures of the State of Israel (the “Minister ofInfrastructures”) of licenses for various activities, including licenses for the generation, transmission,distribution and supply of electricity.

On September 4, 1997, the Minister of Infrastructures issued a transmission, distribution and supplylicense to the Company, which grants the Company the right to transmit, distribute and supply electricity inthe State of Israel. The Minister of Infrastructures also issued a generation license to the Company for eachgeneration unit operated by the Company. The Company’s generation and transmission licenses wereinitially set to expire on March 3, 2006, but were extended since then from time to time.

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The most recent amendment to the Electricity Sector Law was published on August 5, 2008(“Amendment No. 8”) and came into force with effect from July 1, 2008. Amendment No. 8 extended thelicenses granted to the Company pursuant to the Electricity Sector Law for transmission, distribution andsupply of electricity and trading in electricity, as well as separate generating licenses for the variousproduction units (the “Licenses”) until July 1, 2009 and amended the previous law in order to streamline theprocess by which such Licenses may be extended. Licenses may now be extended, for periods that will notexceed one year each, by the Minister of Infrastructures and the Minister of Finance upon consultation withthe Electricity Authority and the Government Companies Authority, with approval of the EconomicsCommittee of the Knesset. Consequently, future extensions of the Licenses will not require the Knesset toamend the law. Licenses have historically been extended shortly before their expiration, however, theCompany cannot be certain that it will be granted licenses (in full or in part) in the future, or that there willbe no changes to the terms of those licenses compared with the existing Licenses. Based on past experience,the Company expects that its licenses will be extended. See “Recent Developments - Reform in ElectricitySector Law and Restructuring - Licensing Requirements” below and “Risk Factors—The Company’soperations are subject to extensive regulation” and “Business—Regulation—Licensing Requirements” in theaccompanying Offering Circular.

RECENT DEVELOPMENTS

The information in this section supplements the information in the accompanying Offering Circular.To the extent that information in this section is inconsistent with the accompanying Offering Circular, theinformation in this section replaces the information in the accompanying Offering Circular.

Reform in the Electricity Sector Law and Restructuring

Licensing Requirements

Amendment No. 8 to the Electricity Sector Law was published on August 5, 2008 and came into forceon July 1, 2008. The main provisions of Amendment No. 8 to the Electricity Sector Law are as follows:

Extension of Licenses period: Licenses previously granted to the Company covering the overall scopeof its activities were extended by Amendment No. 8 until July 1, 2009. The extended Licenses will remainin force for the duration of the extension; provided that the Company acts according to the directives of theLicenses, the Electricity Sector Law and any other law.

Granting substitute licenses: The Electricity Authority is authorized, upon approval from the Ministerof Infrastructures, to grant substitute licenses to all or any of the Licenses granted to the Company duringthe license period. Once the substitute licenses are issued, then the Company’s Licenses will apply only toactivities for which no substitute licenses have been issued. To date, no substitute licenses have been issued.

Granting generation licenses: The authority of the Electricity Authority to grant, upon approval of theMinister of Infrastructures, new generation licenses which are not in compliance with certain provisions ofthe Electricity Sector Law, was expanded to enable issuance of new generation licenses for such powerstations included in the development plan approved under the Electricity Sector Law, until January 1, 2009.

Canceling the milestones defined in Amendment No. 5 of the Electricity Sector Law as a condition toextend the Licenses: Amendment No. 8 cancelled certain rules defined in Amendment No. 5 regulating theextension of licenses to the Company, namely the Electricity Sector Order (Dates Postponement) 2007 andthe Electricity Sector Order (Extension of Licenses Validity of the Electricity Company and Implementationof the Restructuring of the Electricity Sector) 2007 (the “Implementation and Extension Decrees”). Theeffect of this was to remove certain milestones as conditions to the extension of the Licenses. However,Amendment No. 8 has not changed the requirements for the separation of the Company’s activities under theElectricity Sector Law and the consequent restructuring of the Company. For further information see Note1.a.4 to the Interim Financial Statements contained herein.

Extension of dates and licenses: Amendment No. 8 amended the Electricity Sector Law such thatfuture extensions of the Licenses granted to the Company for additional periods that shall not exceed oneyear each do not require the amendment of the Electricity Sector Law but only the approval of the Ministerof Infrastructures and the Minister of Finance, subject to consultation with the Electricity Authority and theGovernment Companies Authority and subject to the approval of the Economics Committee of the Knesset.Postponement of the dates regarding the permit to grant generation licenses to the Company for new facilitieswill be allowed only after the Minister of Infrastructures and the Minister of Finance, with due considerationof the immediate needs of the energy sector, are satisfied that there is no other reasonable alternative to builda power station.

For a further discussion of the Electricity Sector Law and the changes planned both for the Company,in particular, and the electricity sector, in general, as a result of the implementation of the Electricity SectorLaw and Amendment No. 8, see Note 1.a to the Interim Financial Statements contained herein.

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Government Decision with respect to the Electricity Sector

On June 29, 2008, the Government of Israel adopted the policy of the Ministers’ Committee forSocio–Economical Issues (the “Socio-Economic Cabinet”) to establish by August 1, 2008 two governmentcompanies, owned by the State of Israel, to operate in the Electricity Sector, namely a system managementcompany and a new power stations company. The Company was informed that, on October 26, 2008, twogovernment companies were registered at the registrar of companies, System Management Company Ltd.and New Power Stations for The Production of Electricity In Israel Ltd. To the Company’s best knowledgethese companies are not active.

The Government also decided that the granting of new generation licenses to the Company will belimited only to power stations approved under the development plan, up to January 1, 2009. For moreinformation about the development plan see “Business—Development Strategy and Capital InvestmentProgram” in the accompanying Offering Circular. Construction of power stations by the Company, with atotal output that shall not exceed 1,750 megawatts, has been approved until that date. The policy of the Socio-Economic Cabinet also stated that construction of additional power stations by the Company will not beapproved, unless there are special circumstances, and if the Minister of Infrastructures and the Minister ofFinance, upon consultation with the Electricity Authority and the Government Companies Authority, aresatisfied, in view of the immediate needs of the energy sector, that there is no reasonable alternative to theconstruction of a power station.

On January 12, 2009, the Social-Economic Cabinet of the Government of Israel set a guiding targetfor the production of electricity from renewable energy totaling 10% of the energy needs of the State of Israelfor 2020, and accordingly, among other things, to construct power stations with an aggregate installedcapacity of at least 250 MW for each year beginning from 2010 and until 2020.

Emergency Plan

Due to a considerable delay in the development of Independent Power Producers (“IPPs”), and inorder to reduce the negative impact of the subsequent capacity deficit on the reliability of the electricitygeneration system, on August 27, 2008, the Minister of Infrastructures approved an Emergency Plan (the“Emergency Plan”) which will increase the Company’s generation capacity by 1,387 Megawatts (“MW”)over five years. On December 28, 2008, the Minister of Infrastructures approved an additional 375 MW tothe Emergency Plan. The objective of the Emergency Plan is to accelerate the development of the generationsegment and includes construction of the following generation units.

According to the approval of the Minister of Infrastructures dated August 27, 2008, the following unitswill be constructed (total of 1,387 MW):

• Two gas turbines, which will generate a total of 240 MW at the Ramat Hovav site and willcome on-line in 2009; and

• Three Combined Cycle Gas Turbine (“CCGT”) units, which are expected to be constructed by2012 at the sites of Eshkol, Hagit and Ramat Hovav for a total installed capacity of 1,147 MW.Initially, gas turbines of approximately 250 MW each are expected to come on-line in 2010,and the steam turbine additions, of approximately 125 MW each, will be completed in 2012.

The Board of Directors of the Company approved entering into an agreement with SiemensAktiengesellschaft (“Siemens AG”) to purchase three gas turbines and peripheral equipment. This approvalcomes in addition to the approval of the purchase of two gas turbines from General Electric Inc. for theRamat Hovav site. The financing of this phase of the Emergency Plan will occur in the following manner.On October 30, 2008, the Public Utility Authority (“PUA”) published its decision to recognize within theelectricity tariff the cumulative cost of NIS2 billion required to finance the Emergency Plan (see “Recent

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Electricity Authority Decisions” below). The collection of such cost will be spread over a period of two yearsstarting January 1, 2009 and ending on the earlier of January 1, 2011, or until such cost is collected.Recognition of this amount is subject to fulfilling the following conditions:

• The Company will meet the timetables of the generation segment development plan, includingthe Emergency Plan, as approved by the Minister for National Infrastructures and pursuant tothe stipulations of the document for a hearing, published by the Electricity Authority.

• The CEO of the Company will report quarterly to the Electricity Authority on theimplementation of the general development plan, including the Emergency Plan, regardingmeeting deadlines, costs and budgets, and providing an execution report, in a format approvedby the Electricity Authority.

• Unless required by law, the Company will not transfer funds to the Pension Fund, exceedingthe monthly current provision, until audits are completed and decisions are made bycommittees appointed to the Company by the Government Companies Authority and a reviewis conducted by the Electricity Authority.

• The Company will act as soon as possible to execute efficiency steps to improve the financialcondition of the Company.

Approximately NIS0.9 billion of the financing for the Emergency Plan will be received as customercredit through Siemens and the balance will come from internal sources of the Company. The Company hadmade investments of approximately NIS82 million in the Emergency Plan as of September 2008.

According to the approval of the Minister of Infrastructures dated December 28, 2008, the EmergencyPlan contemplates another CCGT being constructed by 2013 with a total installed capacity of 375 MW. Thegas turbine generating 260 MW is to come on-line in 2011, and in 2013 the steam turbine addition of 115MW should be completed. The Board of Directors of the Company has not yet considered the additional unit.

Substitution of the Company on Restructuring

In January 2008, the Company issued notes in an aggregate principal amount of U.S.$250,000,000(the “January Notes”). In May 2008, the Company issued notes in an aggregate principal amount ofU.S.$1,000,000,000 (the “May Notes”). The May Notes were issued under the accompanying OfferingCircular. The terms and conditions of both the January Notes and the May Notes contain, and certain futureindebtedness may contain, substitution provisions, pursuant to which the indebtedness of the Company undersuch notes will be assigned to the transmission company upon the transfer of the transmission business ofthe Company to such transmission company, as currently contemplated under the Electricity Sector Law. Forfurther information regarding the substitution provisions that apply to the May Notes and any Notes offeredunder the Program, see “Description of the Notes—Note Floating Charge”, “Description of the Notes—Substitution” and “Taxation—Valid Status Tax Considerations—Substitution of Obligor” in theaccompanying Offering Circular. Such substitution provisions are similar to those that apply to the JanuaryNotes.

The Credit Rating of the Company

On December 30, 2008, Standard & Poor’s Rating Services and Standard & Poor’s Maalot (together“S&P”) placed the Company on CreditWatch with negative implications. As a result, the Company’s long-term foreign / local currency rating is currently BBB+/Watch Neg & AA+/Watch Neg respectively.

S&P stated that the aforesaid CreditWatch status stems from a significant refinancing risk, weakliquidity, an aggressive capital expenditure plan, ongoing weak financial performance and the operational

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uncertainties regarding future tariffs. According to S&P, the Company’s rating is linked to the State ofIsrael’s rating through implicit and explicit support and reflects the Company’s vital role in safeguarding thesecurity of Israel’s electricity supply, strategic role in the Israeli economy and State ownership, as well as theState’s involvement in the Company’s operations, both directly and through industry regulation.

During the first quarter of 2009, S&P has indicated it will reassess the actions to be taken by theCompany to bolster its liquidity, as well as the Company’s prospects for strengthening its business andfinancial performance and will decide whether to maintain the CreditWatch status or revise the rating.

Recent Electricity Authority Decisions

On April 1, 2008, the Electricity Authority decided that the annual update for 2008, expected to occuron April 2, 2008, would be postponed because, amongst other reasons, the data for updating the fuel mix(constituting a significant component of the annual update) does not accurately reflect the fuel mix used bythe Company in the ordinary course owing to uncertainty about gas operation dates. However, on April 9,2008, the Electricity Authority made certain updates, which are not an integral part of the annual update,including premiums to producers with renewable energies, premiums to an existing producer operating acrude powered installation, payments for criteria violations, connection rates to high voltage and low voltagenetworks and rates of works at the expense of others.

On April 17, 2008, the Electricity Authority published a draft decision regarding the current ratesproposing to update current electricity rates upon the occurence of the earliest of two possible events (i) achange in the inputs basket cost of the entire system, less an amortization coefficient of at least 3.5%,provided that three months have elapsed from the date of the last update, and (ii) when six months haveelapsed from the last update date. This change is also expected to prevent periods of extreme variations inthe fuel component from causing a significant disparity between the cost incurred and its reflection in therates. The Company indicated in its response that it accepts this mechanism in principle. Nevertheless, theCompany’s implementation of the emergency plan, and in consideration of its financial position, immediateimplementation of the proposed mechanism may cause the Company to incur a cash flow burden, since theproposed mechanism will prolong the time periods between current rate updates. The Company proposes toapply this mechanism as of January 2009, at the earliest, concurrently with updating the electricity ratesupdate.

On May 28, 2008, the Electricity Authority decided to update its current tariff basis. Until thedetermination of the new base tariff, electricity tariffs will be updated on the occurrence of the earliest ofthree possible events: (i) a change to the cost of the total system inputs basket minus a reduction factor of atleast 5.5%, (ii) a change to the cost of the total system inputs basket, minus a reduction factor of at least3.5%, providing that three months have elapsed from the last update date, and (iii) when six months haveelapsed from the last update date. This updated formula is intended to ensure that the gap created betweencost reflection upon creation and its reflection in the tariff on the one hand and the stability of prices on theother hand will not be too large. On July 1, 2008, the PUA updated the electricity tariff by 5.29%. The newtariff is in effect from July 9, 2008.

On October 26, 2008, the PUA published its decision concerning the tariff arrangement between theCompany, being the “Essential Services Provider”, and private producers of electricity, in “force majeure”events, insurance events, a change of discriminatory law and the tariff arrangement relating to anyobligations of the Company to private producers under the purchasing agreements between the Company andthe private producers (the “Purchasing Agreement”). The PUA’s decision, amongst other things, addressedthe creation of dedicated deposit accounts for private producers and the treatment of force majeure events.

Dedicated accounts: The Company must open a dedicated account for each private producer at thedate the private producer receives a permanent license. The account will be held by a trustee appointed by

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the PUA and will be excluded from the Company’s assets charged in favor of existing or future creditors. Foreach year, starting at the date of initial operation of the private producer’s business, the Company willestimate the average monthly amount it will pay to the private producer pursuant to the relevant PurchasingAgreement, and the Company shall deposit in the account an amount equal to two months’ paymentsthereunder. The deposit amount will be revised annually by the Company. For the year ending December 31,2009, the Company estimates the aggregate deposit amount for all private producers will be approximatelyNIS30 million. Such amount is expected to increase in the following years due to an increase in the numberof new private producers. If the Company is unable to pay amounts owed to a private producer under thePurchasing Agreement, the trustee will decide, after receiving the PUA’s approval, how to transfer fundsfrom the deposit account to the private producer.

“Force majeure”: In the case of a delay or damage to the private producer caused by a “force majeure”event, the Company will be obliged to pay to the private producer an amount equal to the interest paymentson the private producer’s primary debt during the time of the delay or damage. Once the delay is over or thedamage is rectified, the private producer will only be obliged to repay to the Company 40% of such amounts.Furthermore, if the “force majeure” event causes either the Company or the private producer to terminate thePurchasing Agreement, the Company will be obliged to repay the private producer’s primary debt, and theprivate producer’s generation facility will be transferred to the Company.

By a letter dated December 15, 2008, the Company appealed to the PUA stating that the PUA’sdecision exceeds its powers, does not serve the purpose for which the PUA has been granted such powers,and is otherwise legally and practically flawed.

Updating of Electricity Tariff

On July 30, 2008, the Electricity Authority published a document for a hearing that includes itsposition on three subjects: (i) recognized costs for the generation sector for the years 2008 to 2012, (ii)updates to the tariff structure book chapters on demand classification groups and consumption distribution,and (iii) a formula for compensation due to the delayed updating which applies to all electricity sectors. Atthe Company’s request, the last date to submit responses to the document was postponed to December 1,2008. The Company submitted its response to the Electricity Authority on December 1, 2008. The ElectricityAuthority will reach its final decision after reviewing the responses of the hearing. An initial analysis of thedata indicates that the decision will result in a limited increase of the rates, which, in the opinion of theCompany, is insufficient. For further information see note 3.a to the Interim Financial Statements containedherein.

On November 4, 2008, the Electricity Authority reduced the electricity tariff by 4.76%. A major factorof the update was the ending of the 5% tariff increase collection, which the Electricity Authority approvedin its decision of August 8, 2007. The new tariff is in effect as of November 9, 2008. The Electricity Authorityalso announced that collection in respect of advance recognition in the investment cost is terminated. Surplusamounts accumulated through this collection will be returned to consumers under the compensationmechanism for delayed update.

Cash Flow Forecast

The cash flow forecast is reviewed monthly by the Company and is based on the current electricitytariffs. The Electricity Authority is currently studying the update of the tariff base of the generation segment(see Note 3 in the Interim Financial Statements contained herein). The Company’s initial analysis of thedocument published for hearing by the Electricity Authority and described above under “Updating ofElectricity Tariff”, indicates that the new increased tariff rates will improve the Company’s cash flow for thenext two years. In light of the current economic climate and pursuant to the instructions of the SecuritiesAuthority, the Board of Directors of the Company has reviewed the cash flow forecast in November 2008

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and found that there is no reasonable concern that the Company will fail to meet its liabilities (current andexpected) for the next two years, based on the following assumptions:

• The current electricity tariff and the future electricity tariff, based on forecasts by the Companyof demand for electricity, including an additional amount of NIS2 billion approved by theElectricity Authority, from January 1, 2009 through December 31, 2010, with respect tofinancing the emergency plan (as specified in Note 3 to the Interim Financial Statementscontained herein).

• Execution of the development plan of the Company, including implementation of the electricitysupply emergency plan.

• Credit being procured from banks to finance the purchase of three open cycle gas turbines,amounting to NIS0.8 billion. The Company is in a stage of advanced negotiations withfinancing parties in respect of this matter.

• Fuel prices remain fixed as of November 1, 2008, although noting that changes in fuel priceshave historically been fully incorporated in the tariff.

• The cash flow forecast does not include payments with respect to an actuarial deficiency,amounting to approximately NIS3 billion, which relates to the pension funding disputebetween the Central Pension Fund (the “Pension Fund”) and the Company. This subject isunder discussion with the Capital Market, Insurance and Savings Division in the Ministry ofFinance (see “Recent Developments – Employees— Liabilities with respect to EmployeeBenefits” below and Note 4 to the Interim Financial Statements contained herein). Thesediscussions are at a preliminary stage, therefore, the Company is unable to estimate theoutcome of such discussions. However, the Company believes that no significant financialburden will be imposed on its cash flow during the next two years.

• The Company will implement the “Matzpen” efficiency plan in a manner that will not create afinancial burden on its cash flow.

• The raising of funds for the purpose of refinancing debt and certain investments, as required.The Company believes that it will be successful in raising such funds, yet if it encountersdifficulties, it will appeal to the Government for assistance, and may reconsider the feasibilityof its investment plans.

Past experience shows that the Government assisted in finding solutions to problems which theCompany encountered since it is a provider of an essential service and a Government Company and in lightof its importance to the Israeli economy.

Future Legislation, Regulations and Permits

Since the date of the accompanying Offering Circular, certain additional environmental legislation hasbeen enacted and is contemplated in Israel in the near future. The new laws and regulations could requiresignificant additional expenses by the Company; however, the Company believes that the ElectricityAuthority would increase the electricity tariffs in response to any reasonable expenditure that the Companyneeds to incur in order to comply with such new environmental legislation. The