Mekorot published its second quarter report. The four profit lines in it move in opposite directions, and that makes it a good opportunity to explain what a regulated company's accounts look like.
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The Quarter
| NIS millions | The quarter |
|---|---|
| Revenue | 1,425.4 |
| Gross profit | loss 33.3 |
| Operating profit | 137.2 |
| Pre-tax profit | loss 42.0 |
| Net profit | 242.2 |
| Total assets | 25,725.9 |
| Equity | 5,876.5 |
And that is an order one does not see at an ordinary company: negative, positive, negative, positive.
What the Company Does, and Why It Matters
Mekorot is Israel's national water company. It produces, transports and supplies water - to households, agriculture and industry - and operates desalination plants, wells and a national conveyance system.
And two things about it differ from an ordinary commercial company.
The first: its price is set by regulation. Mekorot does not price water on a commercial judgement; the tariff is set by the regulator. So its revenue in any given quarter does not necessarily reflect the cost it bore in that quarter.
And the second: the filing contains no earnings-per-share line. That is consistent with its shares not being traded - the company reports to the exchange, but not as a share anyone can buy.
And here is the mechanism that explains the four lines: regulatory deferral accounts.
At a regulated company there is always a gap between what the regulator allowed to be charged and what the cost actually was. If the cost exceeded the tariff, the company is owed recovery in a future tariff; if it was lower, it will return the difference to consumers.
That gap does not disappear - it is recorded as an asset or a liability on the balance sheet, and released to the income statement over time.
So the accounting gross profit of a single quarter can be negative even while the business itself is functioning - simply because that quarter's costs have not yet received their tariff expression.
This is not accounting flexibility - it is a standard designed precisely for regulated industries, where revenue is set in advance and cost varies.
And the Largest Line: the Tax
A pre-tax loss of NIS 42.0 million. A net profit of NIS 242.2 million.
That is, the tax line contributed about NIS 284.2 million.
This is not a tax charge - it is a tax benefit, and that is how it appears in the filing itself.
And what is worth understanding about such a line.
A tax benefit is not money coming in. It is the accounting recognition of a tax asset - an acknowledgement that a loss or a timing difference will reduce tax payments in future.
So a net profit resting on a tax line says nothing about the activity. It says something about the recognition of an asset.
The figure describing the ongoing activity here is operating profit, NIS 137.2 million - and even that, at a regulated company, is affected by the movement in the deferral accounts.
And what cannot be said from the structured filing: which part of the tax benefit arises from losses and which from timing differences. That breakdown sits in the tax note of the full report.
The Balance Sheet
| Total assets | NIS 25,725.9 million |
| Equity | NIS 5,876.5 million |
| Ratio | 4.4 to one |
NIS 25.7 billion of assets is the infrastructure itself - conveyance lines, reservoirs, desalination plants and pumping stations. This is a capital-intensive business by definition, and leverage of 4.4 to one is consistent with an infrastructure company built on long-dated debt.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is useful mainly as a lesson, and less as news.
A company whose gross profit is negative and whose net profit is positive by NIS 242 million is a reminder that the order of lines in an income statement does not always tell a linear story. Anyone reading only the bottom line sees an excellent quarter; anyone reading only gross profit sees a poor one. Both are reading correctly and both are wrong.
And what Mekorot illustrates particularly well is that the regulatory framework is part of the accounts, not background to them. At a company whose price is set in advance, the gap between revenue and cost is not a management failure but a structural fact - and the accounting has built a tool designed precisely to contain it.
So what I would read in accounts like these is not the net profit but two other lines: the movement in the regulatory deferral accounts, which says whether the company is accruing a future right or a future obligation to consumers, and the cash flow from operating activities, which is the only figure unaffected by tariff timing.
And what is worth remembering for anyone looking at such a company's bonds: the ability to service debt at a regulated infrastructure company rests on the tariff, not on accounting profit. The regulator determines repayment capacity more than any line in the accounts.
(An important note: this is my personal opinion only, and nothing here is a recommendation to take any action.)
