Moody's Investors Service has raised to ‘stable’ from ‘negative’ the outlook on the Baa3 senior secured ratings assigned to the Israel Electric Corporation (IEC) and the (P)Baa3 provisional rating of IEC's $5.0 bln global medium-term note (GMTN) programme, following the strengthening of its cash flow and liquidity positions, as shown in its reported results for the nine months to September 30.
The financial position of IEC, 99.85%-owned by the state, had previously been badly affected by the disruption of gas supplies. In 2010, IEC generated 37% of its electricity from gas supplied via pipeline from Egypt and from the Israeli Mari-B field. Egyptian gas supplies were disrupted following the fall of the Mubarak regime and then, in April 2012, terminated, whilst gas reserves at the Mari-B field were depleted.
Only 14% of the company's total electricity output was generated from natural gas in 2012, and the company had to burn more expensive fuel oil and diesel. Overall, fuel costs increased by 41% in 2011 and a further 51% in 2012, placing a significant strain on the company's liquidity.
Both the Public Utilities Authority (PUA), IEC's regulator, and the Israeli government responded to the company's requests for assistance. In March 2012, the PUA agreed upon various measures including tariff increases to cover the anticipated increase in fuel costs for 2012 -- although these increases were spread over the period to 2014. Government support included a large reduction in the tax on diesel; guarantees of NIS8.9 bln (EUR1.9 bln) in 2012; and NIS2.4 bln (EUR501 mln) for the refinancing of part of IEC's state-guaranteed bonds, which matured in July 2013.
In March 2012, IEC entered into a 15-year gas purchase contract with the Tamar partners, who operate the Tamar reservoir, some 90 km off the coast of Israel and very near the Cyprus exclusive economic zone where Noble Energy, Delek and Avner are exploring for natural gas.
The Tamar reservoir has 282 bln cubic meters (bcm) of proven and probable natural gas reserves and IEC has undertaken to buy at least 42.5 bcm, and up to a maximum of 77 bcm without options and 99 including options during the term of the supply contract. Natural gas deliveries commenced on March 30 with the 'running-in' of the production and delivery systems ending on June 30. Since the beginning of October, the Tamar partners have been obliged to provide gas in accordance with the contract terms and are liable to pay fines if they do not meet their supply obligations.
With fuel costs declining, IEC reported cash flow from operating activities rising to NIS3.0 bln (EUR629 mln) for the nine months to September 30, despite a 2.5% decline in net revenues from electricity sales, with lower consumption offset by higher tariffs.
Looking ahead, Moody’s said an upgrade of IEC's ratings would require continued improvement in the financial metrics and visibility as to its future organisation and role given potential reform of the Israeli electricity sector. It would also depend on the company maintaining an adequate liquidity position, the PUA not revising tariffs downwards, gas supplies from Tamar continuing to be delivered in line with the supply contract and the government continuing to provide support.
The ratings could be negatively affected by deterioration in the company's liquidity position; a failure by the PUA and/ or government to provide support; IEC experiencing material difficulties in refinancing debt; a larger-than-expected capex programme leading to a materially higher debt burden and weaker credit metrics; a restructuring of IEC or the sector that weakens the company's commercial position and strategic importance to Israel more than expected; and, negative changes in the rating of the Government of Israel (A1 stable).
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