Israel Electric In 2025: The Gas Shift Is Advancing, but 2026 Is A Funding And Tariff Test

Getting To Know The Company

At first glance, Israel Electric can still look like an old regulated monopoly that prints profit through the tariff. That is no longer the right way to frame it. In practice, this is a critical infrastructure platform in the middle of a double transition: a gradual exit from coal and ramp-up of new gas-fired combined-cycle units on one side, and a steadily more open power chain on the generation and supply side on the other. By 2025 those two processes were no longer future tense. They had already moved into cost, cash flow, and the way 2026 needs to be judged.

In physical terms this is still a very large system. At year-end 2025 the company operated 13 generation sites with 42 generation units and installed capacity of 9,474 MW, while employing 11,090 people. At the same time it remained the market's default electricity supplier even as competition in generation and supply kept widening. That is why any serious reading of the company has to connect generation, grid investment, tariff mechanics, and funding.

What is clearly working right now is the operating base. Revenue rose to NIS 26.745 billion, system operating cost fell to NIS 21.001 billion, operating profit from the electricity system jumped to NIS 5.744 billion, and operating cash flow climbed to NIS 7.026 billion. The fourth quarter was even sharper: revenue was almost flat, but operating profit from the system nearly doubled. That does not happen by accident. A large part of the improvement came from a better fuel mix, lower system cost, and a further shift toward a system in which gas carries more of the load and coal carries less.

But this is not a clean earnings year. Anyone stopping at the NIS 4.763 billion profit for the year can miss how much of the result still runs through regulatory accounts, tariff recognition, old debt collections, and insurance income. At the same time, anyone focusing only on customer migration to private suppliers can reach the opposite conclusion and assume profitability is already being eroded rapidly. That is also too simplistic. Supply competition is moving quickly, but under the current tariff framework the direct economic hit is still fairly limited at the consolidated level.

That is also the real bottleneck in the story. The operating proof is already there, but there is still no clean path in which the gas transition, grid investment, and competitive opening can all coexist without putting fresh pressure on liquidity and debt-market dependence. The company says explicitly that the tariff does not fully cover investment spending when that spending is made, so most investment and refinancing still need external funding. That makes 2026 less a story of how much profit was booked in 2025 and more a story of how much of the operating transition can be financed without losing financial discipline.

There is also an important actionability filter to put on the table early: in the local market this is a bond name, not a listed equity story. The market therefore reads it mainly through ratings, issuance windows, funding cost, and compliance with financial targets, not through a P/E multiple. That is not cosmetic. It changes how the entire 2025 result set should be interpreted.

The Economic Map

Events And Triggers

The first trigger: the coal-to-gas shift moved from construction into operation. By the end of 2025 gas already accounted for 75% of the company's generation mix versus 64.6% a year earlier, while coal dropped to 24.5% from 34.9%. Unit 70 was already operating under license during 2025, and on January 7, 2026 Netiv HaOr received the generation license for unit 80, valid through December 26, 2049, with commercial operation beginning upon receipt of the license. That matters because the transition is no longer only a capital-spending story. It is starting to work through tariff, availability, and fuel cost.

The second trigger: the fourth quarter confirmed that the improvement was not only a one-off phenomenon. Quarterly revenue was essentially unchanged at NIS 5.622 billion versus NIS 5.624 billion in the comparable quarter. But system operating cost fell by NIS 654 million to NIS 4.309 billion, and operating profit from the system jumped to NIS 1.313 billion from NIS 661 million. That is an important signal because it shows that the operating core improved even without help from revenue growth.

The third trigger: the funding window remained open, and that is part of the thesis rather than background noise. On January 20, 2026 the board approved an offering of up to $0.5 billion of notes to institutional investors in the US. A day later pricing was completed, with a 5.633% annual USD coupon on notes due January 28, 2038. On January 22, 2026 Moody's assigned a Baa2 rating and S&P Global Ratings assigned a BBB+ rating to the same notes. By March 19, 2026 the company was already preparing two new local bond series for a public offering in Israel. That is good news, but it is also a clear signal: the debt market is not just a helpful extra layer. It is part of the business model.

The fourth trigger: supply competition is already moving faster than the damage visible in the income statement. The number of customers fell to 2.852 million from 2.987 million at the end of 2024. The number of supply points that had migrated to private suppliers reached 342.7 thousand by the end of 2025, up 116% from the prior year-end, and by January 1, 2026 about 360 thousand customers had already switched to private suppliers. At the same time, by the approval date of the statements there were already 50 licensed virtual suppliers. That is a fast migration rate. But the company also says that supply-segment revenue is only about 2.4% of total company revenue, so the direct hit to consolidated profitability is still not dramatic. The real point is not the pain already visible in 2025. It is the direction of travel for 2026 and beyond.

The fifth trigger: the investment plan became the main debate of 2026. Under a board decision from December 2025, the 2026 development-plan budget stands at about NIS 8.7 billion, and the average annual investment planned for 2027 through 2030 is also about NIS 8.7 billion. Out of the 2026 budget, about NIS 1.2 billion is to be brought back for reapproval at the end of the first quarter based on the then-current financial position and progress toward the targets. Even more important, the plan assumes the state will exempt the company from the government-company dividend requirement at least until the development plans are completed. That is the heart of the story. The operating transition is moving forward, but its funding still relies on a regulatory safety net.

Efficiency, Profitability And Competition

The central 2025 insight is that the operating improvement is real, but reported earnings still look stronger than the recurring economics. Total revenue rose 2% to NIS 26.745 billion. System operating cost fell 8% to NIS 21.001 billion. As a result, operating profit from the electricity system jumped 71% to NIS 5.744 billion. That is already a much better picture than 2024.

But that is where the gap between operating reality and the headline begins. Net other income narrowed to an expense of only NIS 576 million, versus an expense of NIS 6.857 billion in 2024. Net finance expense fell to NIS 883 million from NIS 1.341 billion. Movements in deferred regulatory accounts swung from a negative contribution of NIS 1.649 billion in 2024 to a positive NIS 1.955 billion in 2025. All of that helped lift profit for the period to NIS 4.763 billion, up from NIS 3.361 billion a year earlier.

The problem is that this figure is still crowded with items that do not represent the recurring earning power of the business on a standalone basis. The company itself presents normalized EBITDA of NIS 7.617 billion for 2025, versus NIS 7.223 billion in 2024. That is a respectable improvement of about 5.5%, but far more modest than the jump in the bottom line. And once the adjustments are laid out, the reason becomes clear: 2025 included about NIS 1.377 billion of tariff recognition for the Eshkol land component, including the confiscation amount plus linkage and interest; about NIS 391 million of treasury receipts for East Jerusalem Electric and Palestinian Authority debts; about NIS 343 million of insurance compensation related to the Rotenberg crane collapse; and about NIS 255 million from the sale of lease rights in the technical center.

So 2025 is better, but not cleaner. Anyone trying to build the thesis only from net profit will miss the fact that recurring economics improved by much less. On the other hand, anyone dismissing the reported profit as all one-off also misses the point. The company still generated NIS 5.744 billion of operating profit while lowering system cost. That says the base business did improve.

What Actually Improved In 2025

The shift to gas is not only an environmental story. It changed the economics in practice. Fuel cost fell to NIS 5.632 billion from NIS 6.302 billion in 2024. The decrease mainly reflected the change in the fuel-consumption mix and lower generation volume. Inside that line there are two opposite stories. On the positive side, coal lost weight quickly: coal consumption fell to about 3.0 million tons from about 4.5 million tons a year earlier, and coal cost in generation fell to NIS 2.028 billion from NIS 2.906 billion. On the other side, gas cost rose to NIS 3.258 billion from NIS 3.045 billion because the system relied more heavily on gas. That is the point. The company is not simply buying cheaper fuel in the abstract. It is moving the production mix toward a more efficient fuel in the context of a new generation fleet.

Unit economics tell the same story. The average generation cost of natural gas fell to 13.8 agorot per kWh from 14.3 agorot in 2024. By contrast, the average coal cost rose to 26.1 agorot per kWh from 25.3 agorot. That is not only about environmental regulation. It is a basic power-generation economics point.

The transition also changes the risk structure. The company itself says that as renewable energy and private generation keep expanding, its own units increasingly become residual units that fill the gap at any given moment. That means more starts and stops, more wear, and greater risk of missing normative-availability targets. So the shift to gas improves the cost mix, but it also raises the importance of availability management and tariff incentive and penalty mechanisms.

Supply Competition Still Has Not Broken The Group

The picture is more delicate in supply. By the end of 2025 about 89% of low-voltage customers were still buying electricity from the company, but the pace of migration to private suppliers was already fast. Private suppliers sold 24.16 billion kWh, up 12% versus 2024. The number of migrated supply points reached 342.7 thousand, and by January 2026 the figure was already around 360 thousand.

Even so, the consolidated income statement still requires perspective. The company states explicitly that revenue from the supply segment currently represents only about 2.4% of total company revenue. Under the current tariff framework, consolidated profitability is therefore not expected to be materially harmed only because more customers leave. On the other hand, the current supply-tariff structure does not reflect the company's cost structure, and customer migration does create lost revenue inside the segment. So this is not really the problem of the current year. It is a problem about the quality of the forward economics.

That is an easy point to miss: competition in supply is moving faster than the segment's current profitability damage, and the segment's profitability damage is moving faster than the effect on the group. That gap is exactly why near-term market interpretation will focus not only on customer-migration numbers, but on whether the regulator keeps adjusting the tariff structure so the group does not absorb broader economic erosion.

Cash Flow, Debt And Capital Structure

This section needs two cash views, and they should not be mixed. In a normalized cash-generation frame, the existing business produced NIS 7.026 billion of operating cash flow in 2025, versus NIS 6.412 billion in 2024. That is a decent picture of the system's recurring cash generation. In an all-in cash-flexibility frame, meaning after capex, interest, debt repayments, and lease cash, the picture is much less comfortable. Here it becomes clear that Israel Electric still had to refinance, monetize assets, and raise new debt in order to finish the year with more cash than it started with.

The key number is simple: investment in property, plant, equipment and intangible assets came to NIS 7.524 billion. That consumed almost the entire operating cash flow. On top of that came NIS 1.913 billion of bond repayments, NIS 1.664 billion of long-term loan and state-obligation repayments, NIS 1.001 billion of interest and commissions paid, and NIS 172 million of lease-liability payments. So even after a good operating year, the business on its own did not cover all of its cash requirements in an all-in frame.

That gap does not point to immediate liquidity distress. In fact, as of December 31, 2025 the company held NIS 2.383 billion of cash and cash equivalents plus NIS 419 million of short-term investments, had positive working capital of about NIS 700 million, and had available long-term credit lines of NIS 1.5 billion and $250 million. In addition, the board still requires a liquidity buffer of at least NIS 3 billion, measured as cash and short-term investments plus unused credit lines.

But it is a very clear sign that the transition is still being funded. The company finished the year with only a NIS 263 million increase in cash despite more than NIS 7 billion of operating cash flow, because that cash was almost fully absorbed by capex and financing uses. That is exactly the difference between saying the business generates cash and saying the company has comfortable free room to maneuver.

The Balance Sheet Improved, But The Liquidity Cushion Fell

On the balance sheet there is both a positive signal and a yellow flag. The positive signal is that equity rose 13% to NIS 43.269 billion, and the debt-to-assets ratio stood at 59%, below the 65% target ceiling. Gross real financial debt fell to NIS 36.4 billion from NIS 38.569 billion in 2024. That means the company is not moving forward merely by piling on gross debt.

The yellow flag is that net real financial debt actually rose to NIS 32.616 billion from NIS 31.893 billion. Why? Because the liquidity cushion fell. Cash and short-term investments together stood at NIS 2.802 billion at the end of 2025, down from NIS 5.696 billion a year earlier. In other words, part of the balance-sheet improvement was funded by using the liquidity cushion, not only by reducing gross debt. That is not an immediate problem, but it does mean the company enters 2026 with less comfortable excess liquidity than it had at the end of 2024.

The financial targets sharpen that picture further. Net real financial debt to EBITDA stood at 4.28, better than the 2025 ceiling of 5.2 and also below the 2026-2030 ceiling of 5.0. FFO to adjusted debt came in at 15.4%, exactly at the lower end of the 15%-23% target range. The ratio of FFO plus interest expense to interest expense stood at 6.86, well above the minimum of 3. By contrast, return on capital employed was 4.7%, above the long-term target of 4.3% but below the short-term target of 5%. So resilience held, but not every cushion looks equally wide.

Why Debt Markets Remain Part Of The Model

Here the company is unusually direct. It says explicitly that the tariff does not cover investment outlays at the time they are spent, so most funding for investment and refinancing must come from external sources. It also explains that the theoretical capacity of the Israeli banking and institutional market is below its financing needs, so it sometimes needs to raise debt abroad as well. That is why the $0.5 billion issuance in January 2026, together with the Baa2 and BBB+ ratings, is not just a financing event. It is a thesis event.

The implication is straightforward: Israel Electric cannot fund this transition only from current operations, and not only from the Israeli market. Every successful issuance window therefore acts as confirmation that the market still believes the company can keep rolling the investment wave without entering stress. But it is also dependence. If the debt market were to close, or if the regulator were not to translate costs into tariff treatment adequately, the entire transition thesis would look different.

Outlook

Before moving into 2026, four non-obvious findings need to be held together. First: 2025 was not a clean peak-earnings year, but an operating-improvement year that also got a strong push from regulatory accounts and unusual income items. Second: the gas transition moved from promise to operation, so the next challenge is less about construction and more about availability, cost, and tariff treatment. Third: debt issuance is no longer a supporting layer on the side. It is part of the core model. Fourth: supply competition is moving faster than the consolidated damage, so 2026 will be judged not only by year-end numbers but by how the regulator and the company manage the transition quarter by quarter.

That also makes it easier to name the coming year. This is a funded proof year. It is not a clean breakout year because the cash still does not remain comfortably inside the business. It is not a reset year because the operating core clearly improved. And it is not full stabilization because the investment burden and competitive transition are still running. It is a year in which the company will need to prove that the 2025 improvement can hold while capital intensity stays high.

The first proof point is financing. The 2026 development budget stands at NIS 8.7 billion, and the company says a similar average annual investment is expected for 2027 through 2030. Part of the budget, NIS 1.2 billion, is still subject to reapproval depending on the financial position. That wording matters. It says the framework exists, but is not completely automatic. Any weaker quarter in funding, availability, or tariff treatment could reopen the discussion.

The second proof point is regulatory. Unit 80 is meant to operate within the same Noga dispatch framework as the company's other units, and its return on investment and operating cost are meant to be recognized through Electricity Authority review and tariff updates. If that recognition flows smoothly, the shift to gas can keep improving the operating profile without creating a new hole in cash. If there are delays or gaps, that is where the problem starts.

The third proof point is competitive. At the end of 2025 about 89% of low-voltage customers were still buying electricity from the company, but migration to private suppliers was already fast and there were 50 licensed virtual suppliers. As long as supply revenue is only 2.4% of consolidated revenue, the issue looks manageable. But if competition keeps accelerating and the tariff structure does not keep changing with it, the gap between fixed cost and segment income becomes much more relevant.

The fourth proof point is political and financial at the same time: the 2026-2030 investment plan assumes the state will exempt the company from the dividend-distribution requirement at least until the plan is completed. That is not a footnote. It means part of the forward thesis depends not only on operations and debt-market access, but also on the controlling shareholder not pulling cash out when the grid requires peak investment.

So the question for the next two to four quarters is not whether Israel Electric is profitable. It is whether the three key gears, tariff, funding, and operation, remain aligned. If they do, 2025 will look in hindsight like the start of a new stage. If they do not, 2025 will look like an unusually strong year before a more expensive capital phase.

Risks

The first risk is a funding-and-tariff risk, not a demand risk. The company says outright that the tariff does not cover investment when spent, that the local market alone is not enough for its financing needs, and that it needs access to overseas markets as well. As long as the combination of tariff support, ratings, and debt-market access holds, the model works. If any one of those weakens, room to maneuver can narrow quickly.

The second risk is structural-transition risk. The company says explicitly that the continued growth of renewables and private generation could increase the number of times its units are shut down and restarted, hurting its ability to meet normative-availability targets. That matters because the risk is not only share loss. It is also wear on units that still carry a critical share of system reliability.

The third risk is an internal-control and governance issue that has still not fully closed. The board and management concluded that internal control over financial reporting was not effective because of a material weakness around approval of the rights and benefits under which salary and pension payments are made and actuarial liabilities are recorded. The company says disclosure on that weakness has existed since 2009, that it has taken steps to address it, and that as of the report date it still did not have an official full written approval from the wage commissioner. The possible effect cannot be quantified. This is not the main operating risk, but it is a meaningful yellow flag for a company of this size.

The fourth risk is fuel-supply and energy-security risk. The company depends heavily on natural gas from Tamar, Leviathan, and Karish, while still maintaining coal inventory sufficient for five weeks of continuous operation of the coal fleet at high load. In 2025 coal was sourced from South Africa, Colombia, and Russia. The company itself says that any disruption in coal supply, especially during a prolonged war and port closures, could hurt both reliability and financial results. The move toward gas reduces one exposure, but it does not eliminate energy-supply risk.

Conclusion

Israel Electric exits 2025 stronger operationally, more efficient in its generation mix, and with proven access to debt markets. At the same time, this is still not a company whose transition funds itself comfortably. The main bottleneck is not electricity demand. It is the ability to keep financing an expensive grid, keep tariff support in place, and carry the gas transition forward without losing financial discipline. In the short to medium term, that is what will shape market interpretation.

Current thesis in one line: 2025 showed that the operating improvement is real, but 2026 still has to prove that it can be funded, priced, and sustained.

Relative to the first impression of the year, the important change is this: 2025 no longer looks like a one-off profit year, and it no longer looks like a year already broken by competition. It looks like a transition year in which the core improved, but the test moved up to the funding and regulatory layer. The strongest counter-thesis is that this risk is being overstated because the company still benefits from essential-infrastructure status, tariff coverage for much of its cost base, debt metrics that remain inside target, and open issuance windows both in Israel and abroad. That is a serious argument, and it is also why the company was able to issue debt in January 2026.

What can change near-term market interpretation is a combination of three things: the pace of tariff recognition and operating ramp-up for unit 80, the preservation of ratings and comfortable debt-market access, and continued adjustment of the supply-tariff structure as more customers move to private suppliers. Why this matters: in a government-owned infrastructure issuer with tradable bonds, value is not measured only in profit, but in the ability to keep building, operating, and refinancing without reopening structural pressure.

What needs to happen over the next two to four quarters is fairly clear: the shift to gas has to keep working at the availability level and not only at the licensing level; debt markets have to remain open at reasonable pricing; and the regulator has to keep translating enough of the cost and investment burden into tariff treatment. What would weaken the thesis is declining availability, a funding interruption, or a situation in which supply competition moves faster than tariff adaptation.