Moody’s downgrades Israel Electric to Baa3, negative outlook

Moody's Investors Service has downgraded to Baa3 from Baa2 the rating of Israel Electric Corporation and the provisional rating of the USD 2 bln Global Medium Term Note (MTN) programme to (P)Baa3 from (P)Baa2. The outlook for the ratings is negative.
The rating agency said its action reflects an erosion of IEC's financial flexibility, with declining cash reserves following the repeated disruption of gas supplies in 2011 and an associated increase in costs. It is also worried by an uncertainty surrounding gas supplies and costs for the remainder of 2011, 2012 and beyond, as well as a lack of transparency as to cost recovery, the company's high level of gearing and weak liquidity, and IEC's ability to sustain potential cash flow shortfalls in view of forthcoming debt maturities and a large capital expenditure programme.
Headquartered in Haifa, IEC is the sole integrated electric utility in Israel and generates, transmits and distributes all of the electricity consumed in Israel and the Palestinian Territories with 64 generating units with a capacity of 12.8 GW.
Nevertheless, Moody’s said the current Baa3 ratings also reflect an assumption of a very high probability of government support, given that IEC generates substantially all electricity used in the country. The rating remains investment grade as a result of the timely response of the Public Utility Authority (PUA), the electricity regulator, and the Israeli government to the July announcement of increased costs following the disruption of Egyptian gas supplies.
Moody's noted that the allowed increase in tariffs in August was below the 23% requested by IEC. Whilst the company was compensated by a reduction in diesel duty, the rating agency considers that this evidences a lack of transparency, which contributes to uncertainty as to how future cost increases may be dealt with.
The continued operation of IEC is of critical importance to Israel, Moody's said, considering the government support provided in 2011 and the December 2010 pledge that if necessary, government would provide guarantees to enable IEC to service its existing debt through the issuance of new bonds in 2011 and 2012.
The negative outlook is driven by Moody's perception of heightened event risk over the next 12-18 months, given the uncertainty surrounding fuel supply.