Mekorot's Regulatory Asset: Real Cushion or Deferred Pain

The main article argued that the new regulatory regime did not only damage Mekorot's capital base. It also narrowed the company's funding room. This follow-up isolates the layer that is easiest to misread: the jump in regulatory deferred balances. On paper, it looks like a cushion. In economic terms, it is a bridge between recognized cost and cash that arrives much more slowly.

So the real question is not whether the accounting treatment is allowed. It is. The question is what it actually buys Mekorot in 2026: cash, time, or mainly a postponement of pain that has already been created.

Three Numbers That Separate Reported Profit From Cash

The first number: loss before changes in regulatory deferred balances was NIS 1.371 billion in 2025. After those changes, the reported loss came down to NIS 741 million. In other words, about NIS 630 million of the pain did not disappear. It was deferred through the regulatory mechanism.

The second number: net regulatory balance jumped to NIS 1.257 billion at year-end 2025 from only NIS 436 million a year earlier. That is an increase of NIS 821 million in one year. At the same time, working-capital surplus excluding regulatory deferred balances fell to just NIS 5 million from NIS 724 million at the end of 2024.

The third number: the short-term balance sheet almost lost its cushion in the same year the regulatory asset swelled. Current assets fell to NIS 3.106 billion against NIS 3.101 billion of current liabilities. At the same time, short-term investments fell from NIS 949 million to NIS 358 million, while cash itself barely moved and stayed around NIS 1.25 billion.

That is the heart of the issue. The regulatory balance does soften the income statement, but it does not play the same role as cash, a liquid deposit, or a healthy working-capital buffer.

What Actually Sits Inside NIS 1.257 Billion

To judge whether this is a real cushion, the composition matters more than the headline net number.

What matters here is that the jump in the net balance did not come only from a new positive asset. Part of it also came from a smaller negative item. In 2024 the negative regulatory balance in the "others" category stood at NIS 713 million. By the end of 2025 it had narrowed to NIS 462 million. That improves the net figure, but it does not create fresh cash.

The two main positive items are also very long dated. NIS 1.370 billion of regulatory assets are spread over 33 years. Another NIS 349 million of payments to desalination producers are spread over 21 years. This is not fake accounting. It is simply not cash. It assumes that Mekorot will recover the value through tariffs and regulation over many years, not at a pace that matches immediate funding pressure.

Put differently, the accounting says Mekorot has an economic right. It does not say that the right is available to close a near-term cash hole.

Where The Gap Moves From The Model Into The Cash Box

That point becomes much sharper once the discussion moves from profit and loss to cash flow. Mekorot generated NIS 954 million from operations in 2025. That is a respectable number. But against it stood NIS 1.827 billion of investment in property, plant and equipment, NIS 860 million of bond principal repayments, NIS 418 million of interest paid, and NIS 33 million of lease-liability repayments.

And that is before another NIS 39 million invested in intangible assets. So even on the narrower bridge above, the funding gap before new borrowing was about NIS 2.184 billion. The regulatory balance did not close that gap in cash. What partly bridged it was NIS 1.5 billion of new bond issuance, NIS 712 million collected back from bank deposits, and a visible drawdown in short-duration liquidity.

That is the real test of the regulatory asset's quality: does it shorten the path to cash, or does it mostly explain why the reported loss is not even worse. In 2025, the answer leans clearly toward the second reading.

Even A Recognized Right Is Not Collected At The Same Speed

The clearest example sits in the charges issued under Amendment 27 to the Water Law. As of the report date, charges issued through the end of December 2025 in a cumulative amount of about NIS 292 million had still not been collected. Beyond that, from the start of 2026 the company issued another roughly NIS 336 million of charges related to 2025 and prior years.

That does not mean the amounts are lost. The filing does not say that. The point is narrower, and more important: between an economic right and cash collection sit time, enforcement, and sometimes regulatory friction. In a company that depends on continuous development spending and open debt markets, that gap is not a side detail. It is part of the thesis.

This is also why the jump in net regulatory balance did not translate into a short-term cushion. If the accounting recognition is long dated, and if even already-issued charges are not collected immediately, the company remains dependent on interim funding: new debt, release of liquid assets, or both.

So Is It A Real Cushion Or Deferred Pain

The precise answer is that it is a real cushion in the accounts, but only a partial cushion in cash.

It is real because the regulatory mechanism does create a valid right to future recovery or recognition, and that is why not all of the 2025 hit had to be recognized immediately in the final reported line. It is only partial because that right stretches across 21 and 33 years while the company has to fund development, pay interest, and roll debt in real time.

That is exactly why the jump in net regulatory balance and the collapse in working-capital surplus need to be read together, not separately. If a reader looks only at the NIS 1.257 billion number, the impression is that Mekorot built a meaningful buffer. If the same reader adds the NIS 5 million working-capital surplus, the NIS 292 million of still-uncollected charges, and the more than NIS 2.1 billion cash gap before new debt, the picture changes: the pain was not erased. It was stretched over time while the cash box still has to keep functioning.

That leads directly to the three key checkpoints for 2026. First, whether charges already issued actually begin to convert into cash. Second, whether the payments-to-desalination layer starts turning into recognized revenue at a pace that eases funding pressure rather than only accumulating as a long-duration balance-sheet right. Third, whether Mekorot can rebuild a real working-capital cushion above NIS 5 million without leaning again on new debt or on another reduction in liquid assets.

If that happens, the regulatory asset will look in hindsight like a real bridge. If not, it will remain what it looks like today: a mechanism that explains why the 2025 statements look better than the cash economics underneath them.