Mekorot's Desalination Payments: The Regulatory Asset That Defers Cash for Decades
Mekorot's desalination payments are no longer just a cost line that passes through the tariff. In the first quarter they created a regulatory asset of about NIS 425 million, but the recovery is spread across many years while the cash leaves now.
The main article already showed that the first quarter moved Mekorot's water-rules dispute into cash flow and funding. This continuation isolates one mechanism behind that shift: payments to desalination facilities are made in cash now, while the regulatory recovery is spread across many years. That does not mean the payment is unrecognized, and it does not mean the company will not recover it. On the contrary, the company recorded a regulatory asset of about NIS 425 million, with the recovery spread by the Water Authority and carrying interest and indexation. But for liquidity, that is exactly the point: an asset recovered over roughly 21 to 22 years is not the same as cash received today. Desalination payments are therefore not only a large operating cost. They are a funding-timing item that increases the need for bridge financing while the company continues to invest, pay suppliers, and execute its development plan. The next proof point is not the existence of the regulatory asset, but whether recovery and collection start reducing operating cash pressure over the next few quarters.
Cash Leaves Now, Recovery Runs for Years
The treatment of desalination payments in this quarter captures the gap between regulatory recognition and cash. The company purchased water from desalination suppliers for a cumulative amount of about NIS 375 million in 2025, and another NIS 72.5 million in January through March 2026. The recovery of these purchases was not paid to the company immediately. It was spread by the Water Authority into equal payments over 22 years, with interest and indexation.
The accounting result is clear: by the end of March 2026, the company had recognized a regulatory asset of about NIS 425.4 million for these payments. In the regulatory-accounts note, the same item appears as a NIS 425 million balance, with a remaining recovery or reversal period of 21 years. In one quarter, the item increased from NIS 349 million at the start of the year to NIS 425 million, a movement of NIS 76 million.
| Layer | Quarter Data | What It Means |
|---|---|---|
| Purchases from desalination suppliers in 2025 | About NIS 375 million | Cash already paid and deferred into long recovery |
| Purchases in January through March 2026 | NIS 72.5 million | Continued cash outflow in the current period |
| Regulatory asset for desalination payments at the end of March | About NIS 425 million | The economic right is recognized, but it is not immediate cash |
| Remaining recovery period | About 21 years | Current recovery is slow relative to cash outflow |
The unusual point is not only the size of the asset, but the timing. In a regulated infrastructure company, regulatory accounts that smooth gaps between recognized costs and recognized revenue are normal. What is less routine is a payment to external water suppliers becoming a very long-duration asset while the quarter itself shows negative operating cash flow and a sharp cash decline.
The Deferral Is Already Funding-Relevant
The right cash frame here is all-in cash flexibility after actual cash uses: operating cash flow, investment cash flow, lease payments, and interest paid. On that basis, the first quarter was not only a profit issue. Operating cash flow was negative NIS 142 million, compared with positive NIS 182 million in the corresponding quarter. Cash and cash equivalents fell by NIS 515 million, from NIS 1.250 billion at the beginning of the year to NIS 735 million at the end of March.
The company ties the operating cash decline mainly to three factors: higher payments to desalination suppliers, lower customer receipts, and higher payments to other suppliers. That wording matters because it places desalination inside working capital and liquidity, not only inside cost of sales. In a quarter in which payments to desalination suppliers increased, the regulatory asset increased and the cash balance fell.
That gap does not stand alone. The first quarter also included NIS 373 million of property, plant, and equipment investment in the consolidated cash-flow statement, and financing cash flow was negative NIS 8 million. At the same time, the consolidated working-capital deficit, excluding certain regulatory accounts, reached NIS 689 million, compared with a NIS 5 million surplus at the end of 2025. Desalination payments do not explain the entire movement, but they explain why the regulatory asset can grow exactly when liquidity becomes tighter.
Credit Lines Buy Time, Not Faster Recovery
The company has sources for bridge funding. The Water Authority gave preliminary approval for the company to take up to NIS 4.8 billion of loans in 2026 through 2028, and in February 2026 the Water Authority director approved a public bond issue of up to NIS 2.4 billion by the end of 2026. The company also has signed credit lines of about NIS 750 million. This is not a claim of immediate liquidity distress.
Still, the funding structure does not erase the timing problem. Bond proceeds are designated mainly for the development plan, approved payments, debt refinancing, and a limited portion of current operations. If a payment to an external supplier is recovered as a long-duration regulatory asset, the company needs to finance the period between cash outflow and tariff recovery. The larger those payments become, the more this mechanism can increase dependence on the debt market even without any deterioration in water demand.
The valuation appendix also shows that the recovery is not a short event. In the forecast used for the value-in-use test, the desalination-income line is NIS 32 million for April through December 2026, NIS 42 million in 2027, and NIS 41 million in 2028. These numbers are not a substitute for actual cash flow, but they show the order of magnitude: against an asset of about NIS 425 million, forecast annual recovery in the early years is much smaller than the balance already accumulated.
Collection Pace Will Decide the Read
This item improves the company's accounting protection, but it makes the cash-flow interpretation more demanding. If recoveries arrive as expected, if payments to desalination suppliers do not keep expanding faster, and if debt financing remains accessible on reasonable terms, the regulatory asset will look like a legitimate smoothing mechanism for a regulated water system. If not, it will look more like deferred cash accumulating on the balance sheet while the company finances the gap through debt and credit lines.
The implication for the next reports is straightforward: the asset balance itself matters less than whether it starts releasing into cash flow. The proof point will be the pace of payments to desalination suppliers, the pace of tariff recovery, and whether operating cash flow returns to supporting the development plan instead of increasing the need for bridge financing. Until that happens, desalination payments are not only a pass-through cost. They help explain why regulatory recognition can grow while cash still erodes.
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