Israel Electric Faces $800 Million Tamar Contract Loss

Israel Electric Corp. (ICE) will have to pay $800 million to the Tamar Partnerships for natural gas it will not use, according to the corporation's latest filing with the Tel-Aviv Stock Exchange (TASE).  

In 2012, IEC signed a Take-or-Pay (ToP) 15-year contract with Tamar Partnerships for the years 2013-2028 for a purchase of 90 bcm natural gas.

In the filing, ICE estimates that the quantity of natural gas it will consume in the coming years will be smaller than its purchase obligation under the contract.

Therefore, in the years 2018-2019, IEC said it expects to pay $400 million and until to 2023 another $400 million for natural gas it will not consume, an expenditure that will not be covered by revenues. IEC said that it will try to sell the gas in the secondary market but if it fails it will ask raising electricity tariffs to cover those expenses.

Under normal circumstances, IEC would have to report a loss of $800 million due to its estimation error. However, Tamar Partnerships helped it to avoid such a grim outcome. In a letter from November 19, Tamar Partnerships said it will be ready to supply IEC with natural gas beyond the contract end-date in 2028. IEC will have to pay for the natural gas supply years before actual consumption, a situation that will probably create difficulties in cash flow.

The surplus issue has been known for two years and last year, in order to mitigate the situation, IEC was allowed by the regulator to sell 1 bcm of gas on the secondary market. Recently it was allowed to sell 4 bcm untill 2020, priced at 12% above the purchase price.

In a response, IEC said that according to an agreement reached with Tamar Partnerships, the company's exposure was significantly reduced and raising electricity tariffs is a solution of last resort, which currently seems unlikely.

Tamar Partnerships main partners are Noble Energy (36%, the operator), Delek Group (31.25%), Isramco (28.75%) and Alon (4%).

Ya'acov Zalel