Israel Electric to Expand Abroad to Lift Revenue Amid Losses

By Sharon Wrobel & Shoshanna Solomon – Dec 16, 2012 4:45 PM GMT+0200-

Israel Electric Corp. plans to invest in power projects abroad to boost global revenue 25-fold in five years as local regulation stifles the loss-making utility’s efforts to tackle soaring fuel prices.

The state-owned energy provider asked for government permission to expand, Ex
ecutive Vice President Yakov Hain said in an interview. The Haifa-based company is seeking to emulate European peers that since the 1990s have invested $62.9 billion in international acquisitions, primarily in the U.S. power and gas industries.

Limits on tariff increases in Israel prevented the company from offsetting higher fuel costs after turmoil in Egypt cut gas supplies. That contributed to a cash flow crunch and a nine- month 1 billion-shekel ($356 million) loss this year compared with a profit of 1 billion shekels a year earlier. The company has asked domestic banks for a state-guaranteed 2 billion-shekel loan, a person familiar with the matter said Dec. 13.

“Our plan is to boost annual revenues from international activities in the coming five years to around 5 billion shekels from the current 200 million shekels,” Hain said a Dec. 12 interview inTel Aviv. “We see growth opportunities by expanding green energy projects in countries where we can provide added value and where demand is great, including eastern Europe, South Africaand India.”

Financial Partners

The company, which expects to raise as much as 11 billion shekels in Israel and abroad next year, said Nov. 29 that it will bring its cash flow needs in order by the end of 2013. It has raised 8 billion shekels this year to refinance debt and cover running costs.

Israel Electric’s 6.5 percent bond maturing February 2015, which soared to a year-high on Oct. 14, decreased for a third day slipping 0.1 percent to 130.79 at today’s close in Israel, according to data from the Tel-Aviv Stock Exchange.

The utility’s plans include buying foreign power stations as well as selling electricity and renewable energy services abroad, Hain said. “We have the professional expertise to become a leader in the global energy market and will look for financial partners to fund projects.”

Israel Electric, which generates virtually all of the country’s power, said last month that is not able to buy needed fuels, which account for more than 70 percent of its operating costs, without government help. The company has been forced to buy more expensive alternative fuels amid a natural gas shortage after a stoppage of long-standing pipeline from Egypt and a decline in flows from the off-shore Yam Tethys gas field.

Private Producers

The company has signed a supply agreement for natural gas from Israel’s offshore Tamar field, expected to start production by the second quarter of next year. That will result in savings of as much as 1 billion shekels in fuel costs each month, according to the company.

Nascent private electricity producers are expected to generate as much as 18 percent of the country’s electricity by 2014, Israel Electric said in its third quarter report. The government seeks to have private producers generate 20 percent of the state’s capacity by 2020.

The utility last month brought forward to this year 2 billion shekels in state-guaranteed debt from 2013 to bridge a cash flow gap of 1.45 billion shekels. The company was reported Dec. 13 to be seeking 2 billion shekels in government-guaranteed loans from local banks.

Fierce Regulation

On Dec. 12, the Finance Ministry transferred to the energy provider 435 million shekels confiscated from taxes collected by the government on behalf of the Palestinian Authority. Finance Minister Yuval Steinitz said the utility is owed “hundreds of millions of shekels” for power supplied to Gaza and the West Bank.

Global energy companies are able to generate better profits while Israel’s fierce regulation hampers growth possibilities, Hain said. The utility is subject to the Electricity Sector Law, which regulates tariffs and determines the terms and conditions for entry of private and non-private energy companies into the industry.

“The development strategy to expand abroad is not impossible, but premature,” said Mikhail Galkin, head of credit research at VTB Capital in Moscow. “There are more immediate issues that need to be fixed, including deleveraging to turn the company from a cash-burning into a cash-earning machine.”

The company’s aspirations build on its experience over the past five years as part of engineering and energy project management contracts with Levallois-Perret, France-basedAlstom SA (ALO) and South Africa’s power utility Eskom Holdings SOC Ltd. Other contracts include engineering services, design of solar plants and power stations in India, Greece, Spainand Angola.

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