Mekorot in the First Quarter: The New Water Rules Are Already Pressuring Cash Flow and Debt Ratios
Mekorot opened 2026 with a loss, another impairment and negative operating cash flow, but the more important issue is the gap between regulatory accounting recognition and actual cash. The quarter turns the dispute with the Water Authority from a legal-regulatory argument into a funding, development and leverage issue.
Mekorot did not merely report a weak quarter. It showed that the new water rules are already moving from a regulatory dispute into cash flow, equity and debt-ratio pressure. The net loss of NIS 133 million was affected by another NIS 278 million pre-tax impairment, but the damage was not only accounting-related: operating cash flow was negative NIS 142 million, cash declined by NIS 515 million and the working-capital deficit widened. At the same time, net regulatory accounts increased by NIS 464 million to NIS 1.721 billion, meaning a large part of the economic balancing mechanism is deferred into future years rather than entering cash now. The company still has debt-market access, signed credit lines and in-principle approval for bond issuance, so this is not an immediate liquidity-distress report. It is, however, a report that clarifies the interim cost: without better regulatory recognition or a complementary state solution, the development program and debt ratios remain dependent on external funding and deferred cash recovery. In the coming quarters, the key point is whether the dialogue with the Water Authority translates into sufficient cost recognition, easier investment funding and a return of the debt ratios to the path set by the board.
Company Background
Mekorot is a government-owned national water infrastructure company. Its economics are driven by a national water system, heavy capital investment, regulatory cost recognition and a return on recognized assets. Net profit alone is therefore less important than what the regulator recognizes, when that recognition turns into cash and on what terms the company funds development until the cash arrives.
Regulatory accounts offset a large part of the loss. The company recorded a NIS 490 million loss before regulatory-account changes. After a positive NIS 357 million effect, that became a NIS 133 million net loss. The offset matters, but it is not cash at the same date. In a quarter when regulatory recognition increased, cash declined and working capital tightened.
In the previous annual analysis, the focus moved from whether the water system works to whether the regulatory model can fund it without damaging equity and debt ratios. The first quarter gives that question a more quantitative shape: another impairment, debt ratios below company targets, negative cash flow and another build-up of regulatory assets.
The Water Rules Are Already Pressuring Equity and Debt Ratios
Revenue totaled NIS 1.029 billion, a modest increase of NIS 16 million from the comparable quarter. But water-supply revenue fell to NIS 847 million, mainly because the quantity supplied declined by 10.2%, partly offset by an 8.9% increase in the average tariff. The volume decline came mainly from lower transfers to Jordan and the Palestinian Authority and a rainy winter that reduced agricultural consumption. This was not a quarter in which the tariff solved the volume decline or the cost increase.
Operating costs did not fall with volume. Cost of sales and work increased by NIS 38 million to NIS 1.295 billion, mainly because of desalination water purchases, energy, maintenance, wages and depreciation. Reported gross loss was NIS 266 million, versus NIS 244 million in the comparable quarter. After regulatory-account adjustments, adjusted gross profit was almost unchanged at NIS 219 million. The rules balance part of the economics over time, but they do not remove the pressure on cash and equity while costs and investments are already being paid.
The additional impairment sharpens the issue. During the quarter, the company increased the real after-tax discount rate from 3.49% to 3.62%, with no other change in assumptions or methodology, and recorded a NIS 278 million pre-tax impairment. The valuation assigns a 60% probability to a scenario in which a future rules update provides full operating-cost coverage but leaves return and profit under the new rules, and a 40% probability to a scenario that also includes full recognition of an adequate return. The weighted recoverable amount was NIS 18.448 billion, compared with a NIS 18.726 billion carrying value. The company is measuring value under assumptions in which full regulatory recovery is still not the central scenario.
A technical error in cash-flow data used for the 2025 impairment test increased that impairment by NIS 44 million before tax, from NIS 1.367 billion to NIS 1.411 billion, and increased the after-tax loss by NIS 34 million. The company classified it as immaterial, but it still highlights the sensitivity of reported equity to regulatory rules, forecast cash flow and the discount rate.
| Financial ratio | First Quarter 2026 | Quarterly target | End of 2025 | Meaning |
|---|---|---|---|---|
| Adjusted FFO to debt | 1.8% | Above 2% | 8.1% versus annual target above 8% | The quarter opened below the required 2026 path |
| Interest coverage | 3.4 | Above 3 | 3.6 | The only ratio still above target |
| ROCE | 0.68% | Above 0.75% | 3.12% versus annual target above 3% | Return on capital employed is already eroding |
| Leverage | 71.4% | Below 70% | 70.15% | Leverage crossed the ceiling even after the restatement |
The table does not point to a funding collapse, but it explains why the quarter matters. The board writes that without complementary steps by the state and regulators, the company will reassess the development program and the financial-target plan. For a government infrastructure company, that is a strong signal: the current model may force a choice between development and protecting debt ratios.
Cash Flow Fell While the Regulatory Asset Grew
Cash flow separates regulatory accounting from liquidity. Operating cash flow was negative NIS 142 million, compared with positive NIS 182 million in the comparable quarter. The company attributes the decline to higher payments to desalination plants, lower customer receipts and higher supplier payments. Water-consumer receivables rose to NIS 884 million from NIS 621 million at the end of 2025.
At the same time, investing cash flow was negative NIS 365 million, mainly because of fixed-asset investment, and financing cash flow was negative NIS 8 million. All-in cash flexibility after actual cash uses declined quickly: cash and cash equivalents fell from NIS 1.250 billion to NIS 735 million. This does not mean the company cannot meet near-term obligations, but the gap between regulatory recognition and collection requires interim funding.
The regulatory accounts show why this can weigh even without an operating crisis. The net balance increased to NIS 1.721 billion, up NIS 464 million from the beginning of the year. Within that balance is a NIS 425 million asset for payments to desalination facilities, whose recovery is expected to be spread over roughly 21 years. The balance sheet can show an asset while the cash account still needs funding.
The dispute over Palestinian Authority tariffs points to the same pattern. The company cites approximately NIS 81 million for 2024, 2025 and the first quarter of 2026 that has not yet been taken into recognized revenue. It recognized a NIS 41 million receivable against water revenue and increased a regulatory liability by NIS 81 million, with a NIS 32 million net loss impact. The solution depends on coordination between the Water Authority and the Ministry of Finance, not only on operating execution.
Against that pressure, the company has a funding cushion. Government and Water Authority approvals allow up to NIS 4.8 billion of 2026-2028 loans, including up to NIS 2.4 billion during 2026, and the company has about NIS 750 million of signed credit lines. But the proceeds are aimed mainly at development, payments and debt refinancing, with only up to 10% of the cumulative amount for ongoing activity. Funding buys time, but it does not answer whether the new rules sufficiently cover system costs and returns.
Conclusion
The first quarter makes the Mekorot story more concrete. After the 2025 report, the impairment could still be framed as a major event driven by a regulatory update. After the first quarter, cash flow is negative, cash is falling, the working-capital deficit is widening, several debt ratios open below target and the regulatory asset keeps growing. The system continues to operate, but funding the system is becoming the central issue for 2026.
The next proof point is not another accounting explanation, but a regulatory or government decision that changes the actual numbers. The Water Authority and the company are discussing the rules, a High Court petition is pending and the company expects progress after responses due in June 2026. Better recognition of costs, return and collection gaps could turn the impairment and ratios into a transition cost. Without that improvement, the direction is already visible: more regulatory assets, more external funding and less room to execute the development program without eroding company targets.
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