Israel Electric Corp. Triples Profit but Faces Big Gas Bill

State-owned utility is committed to buying $800 million of natural gas it won’t need and is seeking ways to cover the cost.

Tomer Neuberg

Israel Electric Corporation on Monday posted a 1.04-billion-shekel ($268 million) profit in the third quarter – nearly triple the level of a year ago – but a commitment to buy far more natural gas than it needs to power its generators threatens to saddle it with 3.1 billion shekels in unnecessary costs.

The third quarter, when the hot summer weather brings peak electricity consumption, is usually the most profitable for the state-owned IEC. But this year, revenues declined 7% to 7.19 billion shekels, both because regulators ordered a rate cut and because IEC is gradually losing customers to private power companies.

Instead, profits rose thanks to a sharp 60% decline in IEC’s financial costs, which fell to just 403 million shekels in the quarter – from more than 1 billion shekels a year ago. IEC said its debt had declined to 65.5 billion shekels by the end of September, from 70.9 billion shekels at the end of 2014, so that its debt ratio had fallen for the first time in many years to below 80%.

“Conservative and responsible governance by IEC management will continue to show itself in the financial results of the current quarter,” IEC chairman Yiftah Ron-Tal pledged.

But the problems with IEC’s contract to buy natural gas from the offshore Tamar gas field were already in evidence in the third quarter.

The cost of generating power jumped 12% (or 575 million shekels) from the second quarter, mainly due to a 300-million-shekel rise in gas costs. Of that 300 million, 178 million shekels was due to an escalator clause in IEC’s contract with Tamar that links the price to U.S. inflation and the shekel-dollar exchange rate.

IEC has just admitted it was committed to buying an estimated 3.1-billion-shekels-worth of natural gas from the Tamar partners and said it has asked the Energy Ministry for help, including the possibility of rate hikes to help cover costs.

“We have proposed to the regulator a series of measures to reduce the exposure – for example, permission to sell [excess] gas on the secondary market,” IEC said. “The company stressed [to the government] that if the measures aren’t adopted and a minimal level of exposure remains, the company will seek coverage by way of tariffs.”

IEC’s problems go back to the terms of its 2012 contract with the Tamar partnership, which is led by Texas-based Noble Energy and Israel’s Delek Group. The agreement contains a take-or-pay clause that obligates the utility to take a minimum amount of gas every year – but the quota was set at what turned out to be inflated forecasts for energy usage.

IEC negotiated a subsequent agreement with the Tamar partners that allowed it to delay delivery of the gas until even after the contract expires in 2028, enabling it to avoid booking the obligation now.

But IEC is due to make the first payments for gas it doesn’t need – in effect, making a down payment on it – in 2018 and 2019, to the tune of $400 million. That threatens to diminish IEC’s cash flow.

The Energy Ministry has no power to order rate changes, which is the remit of the Electricity Authority. But it can take other measures: In August 2014, for example, it authorized the utility to sell up to four billion of the 90 billion cubic meters of gas it is contracted to take in the secondary market (i.e., competing power companies and industry) over the next six years. IEC is now asking for permission to sell even more.