Israel Natural Gas Lines in the First Quarter: Accounting Profit Rises as Cash Flow Normalizes

Israel Natural Gas Lines opened 2026 with net income of NIS 110.5 million, more than double the comparable quarter, but this is not a full operating breakout. Most of the improvement runs through a change that was already created at the end of 2025: the transmission license extension to July 2049 reduced depreciation and also reduced connection-fee revenue recognition, with a net positive effect of about NIS 60 million before tax, about NIS 45 million after tax, on the quarter. EBITDA, earnings before interest, taxes, depreciation and amortization, therefore barely moved: NIS 220 million versus NIS 217 million in the comparable quarter. Operating cash flow fell to NIS 160 million, mainly because the quarter no longer benefited from a 2025-style wave of advances, while investment in transmission assets jumped to NIS 272 million. What is working: capacity and flow revenue rose, offshore line works restarted in April, and the Kesem, Sorek and OPC Hadera 2 agreements add an expected future revenue layer of about NIS 70 million a year from the start of transmission services in 2028 to 2029. But those are still execution milestones, not surplus cash flow, so the next few quarters should be judged by construction pace, liquidity preservation and conversion of investments into recurring revenue.

Profit Jumped, but EBITDA Shows Less Operating Change

The company is not a conventional growth story. It is a government-owned infrastructure company that finances, builds and operates Israel's natural-gas transmission system. Its economics combine a licensed monopoly, approved tariffs, customer-funded connection projects and long-cycle execution. The first quarter should therefore be read as a continuation of the previous annual analysis: less a question of money in the treasury, more a question of execution, cash flow and the time it takes until new assets begin to contribute.

The accounting headline is strong: revenue reached NIS 270.5 million, up 6.3%, operating profit rose to NIS 156.1 million, and net income rose to NIS 110.5 million. The split matters more than the headline. Capacity and flow revenue rose to NIS 240.6 million, mainly because the comparable quarter included a roughly NIS 38 million provision that reduced export revenue in the mediation process with Chevron, and because of new sites and increased capacity for existing customers. That was partly offset by a roughly NIS 25 million hit from the suspension of flow from part of the reservoirs during Operation Roaring Lion, and another roughly NIS 11 million from the lower interruptible transmission tariff at the start of the year.

The number that blocks an overly bullish reading is EBITDA. It was about NIS 220 million, almost unchanged from about NIS 217 million in the comparable quarter. The gap between operating profit rising 73.8% and nearly flat EBITDA shows that accounting profit benefited mainly from lower depreciation after the license extension, not from a similar rise in operating earning power before depreciation.

The license extension is a real event, not an empty accounting trick. An infrastructure asset that lives until 2049 instead of 2034 should be depreciated over a longer period. Still, for bond investors or readers trying to assess business quality, the distinction is material: net income improves now, but available cash still depends on construction pace, advance payments and debt service, not only on a longer accounting life.

Cash Flow No Longer Looks Like the Advance-Payment Year

The cash-flow gap is the quarter's most important finding. Operating cash flow was NIS 160.2 million, compared with NIS 251.7 million in the comparable quarter and NIS 1.956 billion in full-year 2025. The immediate reason is the timing of periodic VAT payments and connection-fee billings, but the broader context matters more: after a 2025 year in which deferred income rose by more than NIS 1 billion, deferred income increased by only NIS 4.8 million in the first quarter of 2026. That brings cash flow back to a much more ordinary operating pace.

The cash frame needs to be explicit. All-in cash flexibility after actual cash uses asks what remains after operations, investments, leases and other real outflows. In the first quarter it looks far less impressive than net income: the company generated NIS 160.2 million from operating activity, invested NIS 272.3 million in the license and PRMS facilities plus NIS 1.6 million in property and equipment, received NIS 15.3 million in investment grants, and ended with a NIS 50.7 million decline in cash and cash equivalents before the FX effect. Liquidity is still strong, but the quarter is no longer funded by the same exceptional advance-payment pace.

The funding structure still looks comfortable, but not immune. Bond debt was about NIS 2.605 billion, almost unchanged from year-end 2025, and the current ratio declined from 2.03 to 1.93. Series D covenants are tested once a year, so there is no quarterly covenant calculation. The important question is whether the company can preserve liquidity while investments rise.

Projects Moved Forward, Revenue Still Waits for Construction

The positive side of the quarter sits mostly in execution milestones, not in the income statement. Investment in transmission assets and PRMS facilities was about NIS 296 million before depreciation, mainly in the Nitzana line, the Nesher-Sorek duplication, the Ashdod-Ashkelon offshore line and Orot Rabin. Construction work on the Ashdod-Ashkelon offshore line and the Hadera offshore line restarted in April 2026, with no material change in the expected completion schedule from year-end 2025.

The execution environment, however, has not become calm. The quarter included NIS 8.9 million of other expenses, mainly a provision for additional costs caused by Operation Roaring Lion, and the company attributed about NIS 9 million to foreign-contractor availability costs on the Ashdod-Ashkelon offshore line. In addition, the suspension of flow from part of the reservoirs reduced capacity and flow revenue by about NIS 25 million. The company says there was no material impact on its financial position, which is reasonable given the size of the balance sheet, but as an execution factor and an operating sensitivity it still matters.

Two business points soften part of the risk. The first is the land agreement with the Israel Land Authority, which settles lease and use rights for about 60 land plots used for PRMS and valve stations for 34.5 years, in exchange for about NIS 24 million before VAT and annual use fees for existing facilities. This is not a profit event, but it removes a practical uncertainty around the asset base of the transmission system. The second is the new transmission-agreement layer: the conditions precedent in the Kesem agreement were met, an agreement was signed for Sorek, and in May an agreement was signed for OPC Hadera 2, subject to conditions precedent. Together, the company estimates about NIS 70 million of revenue from the start of transmission services in 2028 to 2029.

Chevron's notice about shifting capacity from Tamar and Leviathan to the Jordan North line also deserves a careful read. The shift took effect on May 1, 2026, but the company expects it to replace part of the quantities transmitted under existing interruptible, occasional transmission services, so it is not expected to have a material effect on revenue. This is an important capacity-map movement, but not standalone proof of new earnings growth.

Conclusion

The first quarter strengthens a mixed but clear read: the company is stronger from an accounting and financing perspective than it looked before the license extension, but the rise in net income is not equivalent to a similar improvement in operations. Profit received a major push from lower depreciation, while cash flow returned closer to a normal operating pace and investment rose sharply. This is not an immediate financial weakness, because the company still holds NIS 1.837 billion of available financial balances and debt is not rising. It does, however, shift the monitoring point: less enthusiasm about reported profit, more scrutiny of execution pace, cash uses and the progress of assets that will only begin to contribute years from now.

The counter-thesis is that the license extension itself is a real economic improvement, so net income is allowed to change before EBITDA jumps. That is partly right. But if CAPEX keeps rising over the next few quarters, deferred income does not replenish meaningfully, or the offshore lines and Nitzana face further delays, the market will struggle to treat the accounting profit as proof of a full improvement in business quality. Conversely, staying on schedule, preserving liquidity and moving the Kesem, Sorek and OPC Hadera 2 agreements closer to real revenue would support the view that the first quarter was the start of a reasonable execution year, not only a good accounting result.