Israel Electric in the first quarter: profit fell, but the 2026 test is funding and tariffs
Israel Electric opened 2026 with much lower reported net profit because last year's one-off prior-period income did not repeat, while normalized EBITDA barely weakened. The quarter sharpened the real test: FFO sits below target, the tariff mechanism is starting to react faster, and supply competition has already reached roughly 406 thousand customers.
The first quarter of Israel Electric looks very weak if the reader stops at net profit: NIS 442 million versus NIS 1.595 billion in the comparable quarter. That is not operating deterioration on the same scale, because the prior-year quarter included prior-period income from East Jerusalem Electricity Company and the Palestinian Authority, as well as insurance compensation, while the current quarter includes a new retirement cost. Normalized EBITDA, including regulatory account movements and excluding special items, rose to NIS 1.782 billion from NIS 1.733 billion. That stabilizes the read, but it does not make the quarter clean: FFO to adjusted financial debt fell to 13.7%, below the 15% to 23% target range, and operating cash flow was helped by an unusual pension-fund receipt. At the same time, supply competition advanced to roughly 406 thousand customers who moved to private suppliers, and the Electricity Authority updated the tariff mechanism so it can react faster to customer exits and grid investments. That makes 2026 a funding and tariff proof year: the debt market remains open, the new CCGT entered operation, but unit availability, tariffs and debt ratios will decide whether the normalized stability really holds.
What Net Profit Hides
Israel Electric is a government-owned infrastructure company that still controls central parts of the electricity chain: generation, transmission, distribution and supply. This is not a normal equity story. There is no active equity trading line, and investors mainly meet the company through its tradable debt in Israel and abroad. The quarter therefore needs to be read through debt-service capacity, ratings, market access, capex pace and tariff recovery, not through an earnings multiple.
It is also a natural continuation of the previous annual analysis and the funding analysis: 2026 was supposed to test whether the gas shift and development plan can move from economic logic to funded execution. The first quarter gave a partial answer. CCGT 80 entered commercial operation, but net profit fell because one-offs did not repeat, and the cash-generation measure relative to debt weakened.
Revenue fell 9% to NIS 5.966 billion, mainly because less electricity was sold to residential customers and because the prior-year reversal of unrecognized revenue did not repeat. The cost of operating the electricity system fell by almost the same amount, NIS 576 million, so profit from operating the system was almost unchanged: NIS 1.377 billion versus NIS 1.379 billion. The sharp decline came mostly from the surrounding layers: other income of NIS 345 million in the comparable quarter, including insurance compensation, turned into other expenses of NIS 38 million, while reform and other agreements included a roughly NIS 198 million retirement provision.
The gap between these two figures is the quarter's main read. Reported profit in 2025 was above recurring activity because of prior-period income and insurance compensation, while the current quarter carries a retirement cost. After that adjustment, the activity looks steadier, but not strong enough by itself to fund a heavy investment program.
The Cash And Tariff Test
The all-in cash picture here means cash after capex, debt repayments, leases, interest and actual cash uses, not only operating cash flow. Operating cash flow reached NIS 2.515 billion versus NIS 1.681 billion, but most of the improvement came from a refund from the pension fund. During the same quarter the company invested NIS 1.868 billion in fixed and intangible assets, repaid NIS 1.762 billion of bonds, paid NIS 138 million of net interest and fees, and repaid NIS 44 million of lease liabilities.
Against those cash uses stood a USD 500 million bond issue, which brought in NIS 1.539 billion. After the balance-sheet date, the company added a local NIS 3 billion bond issue, and in May 2026 it prepaid NIS 1.5 billion of bank loans. Real net financial debt stood at NIS 32.047 billion at the end of March, and real net financial debt to EBITDA was roughly 4.2 against a ceiling of 5.0. The counterweight is FFO to adjusted financial debt, which fell to 13.7%, below the target range. Moody's affirmed Baa2 and raised the outlook to stable, while Midroog affirmed Aaa.il, so this is not immediate funding pressure. The yellow flag is different: the debt market is open, but the company still needs it to bridge the timing gap between investment and tariff recovery.
The tariff is starting to respond faster to that gap. On May 12, 2026, the Electricity Authority updated the automatic adjustment mechanism so that certain coefficients will be calculated semiannually rather than annually, including the supply tariff coefficient for customer exits and the grid tariff coefficient for investment growth net of lower demand. The next update is due to take effect on July 1, 2026.
The timing matters because supply competition is no longer marginal. Roughly 406 thousand customers had moved to private suppliers by the end of March 2026, including customers who requested a March switch and were transferred on April 1. The number of virtual suppliers without generation assets reached 50. The supply segment improved from a NIS 20 million loss to a NIS 7 million loss, but still did not turn profitable. This is where the faster tariff mechanism can help, but the quarter does not yet prove that it offsets customer erosion.
Profit in generation and power purchases fell to NIS 278 million from NIS 931 million, mainly because prior-period income and one-offs in the comparable quarter did not repeat. Distribution, with NIS 407 million of segment profit, became the more stable profit center in the quarter. Supply is still small in the numbers, but it is the test of tariff quality under real competition.
Gas Advanced, But Availability Is Back At The Center
CCGT 80 is the clearest business progress in the quarter. On January 7, 2026, it received an operating license through December 26, 2049, and on January 9 the lease amendment took effect after the unit and common assets were purchased. Nativ HaOr was charged another NIS 2.1 billion for unit 80, bringing the total purchase cost of the two CCGTs and common assets to roughly NIS 4.8 billion.
Still, the quarter did not provide full proof of a smooth gas transition. Natural gas accounted for 68.3% of generation versus 66.8% in the comparable quarter, coal fell to 30.1% from 33.0%, and diesel rose to 1.6% from 0.2%. Fuel costs declined to NIS 1.407 billion from NIS 1.516 billion, but the shutdown of the Leviathan and Karish reservoirs at the start of Operation Roaring Lion forced coal-unit operation and additional coal cargo orders.
The projects themselves also carried friction. Rotenberg conversions were delayed by the fire in unit 4, Noga constraints and the effects of the security operation, while at Orot Rabin the company is discussing a several-month delay in converting units 5 and 6. The ADMS advanced distribution-management project has also suffered delays, and supplier GE declared force majeure. The CCGT 70 overhaul is expected to run 14 to 21 days beyond the original 43-day plan, and the company asked the Electricity Authority to exclude the unavailability period.
Reliability metrics show why that matters. Total outage minutes per customer stood at 39.3 minutes versus 35.3 minutes in the comparable quarter, while outage minutes sourced from the high-voltage grid and transmission and transformation segment rose to 30.6 minutes from 22.3 minutes. This is not a breaking point, but it connects the physical project to funding: if availability is delayed, fuel savings and tariff recognition arrive later, while the debt is already on the balance sheet.
The environmental and legal layer adds execution burden, though it does not change the thesis by itself. The company was required to perform a focused PFAS soil investigation and survey at Hagit, received stricter demands for removing asbestos-containing components, and at Orot Rabin still cannot estimate exposure around a NIS 575 million betterment levy demand for the CCGTs. If amounts are paid, the company is expected to seek tariff recognition, but until then this is another timing gap carried by debt holders.
Conclusion
Q1 2026 strengthened the move from a year of strong reported profit to a funding and tariff proof year. Recurring activity is steadier than net profit, and the debt market continues to support the company, but FFO below target, operating cash flow helped by a pension receipt, and almost NIS 2 billion of quarterly investment prevent the picture from being comfortable. The tariff is starting to adjust faster to supply and grid changes, but supply remains loss-making and customer switching keeps rising.
The counter-thesis is strong: this is essential infrastructure, with stable ratings, a regulated tariff mechanism and proven access to local and international debt markets. That is why the quarter does not signal immediate stress. But the bar for the next reports is clear: FFO to debt needs to return to the target range, the July update needs to show that the tariff mechanism closes gaps faster, and CCGT 80 together with the converted units need to move from licensing and construction into stable availability. If those three things move together, 2026 will look like a well-managed transition year. If one stalls, the profit decline will matter less than the cost of funding the transition.
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