Mekorot Reports Higher Second Quarter Profit, but Regulatory Changes Weigh on 2026 Results

A Sharp Rebound in the Second Quarter

Israel's national water company Mekorot delivered a striking improvement in its bottom line for the second quarter of 2026, posting a net profit of approximately NIS 243 million compared with roughly NIS 62 million in the same period last year. The jump, reported this week, was driven in large part by a positive accounting effect tied to the revaluation of fixed assets. With interest rates declining, the discount rate used to value the company's long-lived infrastructure shifted, producing a one-time boost that flattered the quarterly figures.

For a state-owned enterprise that rarely makes headlines outside of drought seasons or infrastructure crises, the numbers nonetheless offer a window into the financial mechanics of a company that sits at the heart of Israel's water economy. The revaluation effect is a reminder that Mekorot's balance sheet is sensitive to macroeconomic currents far beyond the Kinneret or the coastal aquifer — namely, the monetary policy decisions of the Bank of Israel and global bond markets.

The First-Half Picture Tells a Different Story

Look at the first six months of 2026 as a whole, however, and the picture is considerably more subdued. Net profit for the first half stood at approximately NIS 110 million, down sharply from roughly NIS 244 million in the corresponding period of 2025. The contrast between the strong second quarter and the weak first half underscores the uneven impact of the regulatory overhaul that took effect at the start of the year.

The company itself was candid about the cause. In its financial report, Mekorot said the first-half results continued to reflect regulatory changes approved at the end of 2025 and implemented at the beginning of 2026. These changes altered the company's operating model, including the return it is permitted to recognize and the manner in which its fixed assets are accounted for on the balance sheet. The result was a net decline in the value of its assets of approximately NIS 83 million during the first half of 2026 — a continuation of a much larger downward adjustment of roughly NIS 1.4 billion recorded in the company's 2025 financial statements.

What the Regulatory Changes Actually Did

To understand what happened, it helps to recall how Mekorot operates. As a regulated monopoly, the company does not set its own water tariffs freely. Instead, the Water Authority and the Ministry of Finance determine the framework under which Mekorot earns a return on its massive infrastructure base. The regulatory changes approved late last year and implemented in early 2026 redefined that framework — specifically, the recognized return and the accounting treatment of fixed assets.

In practical terms, the changes mean that Mekorot can no longer carry certain assets on its books at the same values as before. The NIS 83 million decline in asset value during the first half of 2026, following the NIS 1.4 billion hit in 2025, reflects this recalibration. For analysts and investors tracking the company's state-guaranteed bonds, the key takeaway is that the regulatory environment has become less generous — at least on paper. The underlying operational business, as the second-quarter operating profit suggests, remains fundamentally sound.

Revenue Largely Flat, Volume Slightly Down

On the top line, Mekorot's revenue in the second quarter totaled approximately NIS 1.43 billion, compared with roughly NIS 1.44 billion in the same quarter last year. The slight decline was attributed, among other factors, to a decrease in the volume of water sales. For a company that supplies about 80% of Israel's drinking water and operates thousands of facilities from the Golan Heights to the Negev, even a small dip in volume is noteworthy.

The stability of revenue despite lower volumes is itself a reflection of the regulated tariff structure. When consumption falls, Mekorot does not simply lose revenue dollar-for-dollar; the regulatory framework includes mechanisms that adjust tariffs over time to recover fixed costs. Still, the trend bears watching. If water demand continues to soften, the company may face pressure to justify its cost base to regulators.

Agriculture Demand Drops on a Rainy Winter

One of the most telling figures in the report is the approximately 9.5% decline in water consumption for agriculture during the first half of the year. Mekorot attributed the drop to the rainy winter, including significant rainfall in March. For farmers in the Jezreel Valley, the western Negev, and the Jordan Valley, the wet season meant less reliance on the national carrier and on Mekorot's reservoirs and pipelines.

This is, on the surface, good news — a sign that Israel's water economy has room to breathe after years of drought anxiety. But it also carries implications for Mekorot's financial planning. Agricultural water sales are a meaningful revenue stream, and a wet winter reduces demand precisely when the company is investing heavily in infrastructure. The decline also highlights the delicate balance between Israel's natural water resources and its engineered water systems. When the rains come, the reservoirs fill, and the demand for Mekorot's product falls.

Profitability Strength Beneath the Surface

Despite the flat revenue and the regulatory headwinds, Mekorot's operational performance in the second quarter was robust. Operating profit increased to approximately NIS 138 million, compared with NIS 99 million in the same period last year. EBITDA — earnings before interest, taxes, depreciation, and amortization — rose by approximately 16%, reaching roughly NIS 447 million, compared with about NIS 387 million in the second quarter of 2025.

The improvement in operating profit and EBITDA suggests that the company's cost discipline and efficiency measures are bearing fruit. Mekorot has been working in recent years to streamline operations, reduce water losses in its distribution network, and optimize energy consumption at its pumping stations and desalination facilities. Those efforts appear to be showing up in the numbers, even as the regulatory environment tightens.

Infrastructure Investment Continues Apace

Mekorot is not sitting still. During the first half of 2026, the company invested approximately NIS 851 million in the construction, renewal, and development of water facilities and infrastructure across Israel. The company said it remains on track with its annual development program, which has a total scope of approximately NIS 1.6 billion.

For a national water company, this level of investment is not optional. Israel's water infrastructure is aging in places, and the demands of a growing population — from the high-rise towers of Tel Aviv to the expanding communities in the Galilee and the Negev — require continuous upgrades. The investment program covers everything from pipeline replacement and reservoir construction to advanced treatment facilities and smart metering systems. In a country where water security is a strategic imperative, Mekorot's capital spending is as much about national resilience as it is about commercial returns.

Financial Health Concerns and What Analysts Will Watch

Not everything in the report points in a positive direction. The total liabilities of the water sector to Mekorot, recorded as deferred regulatory accounts, increased by approximately 65% over the past year to roughly NIS 2.1 billion. This line item represents amounts that Mekorot has effectively financed on behalf of the sector — money owed by municipalities, regional councils, and other water entities that has not yet been collected through tariffs.

The company's leverage ratio also increased, reaching 71.5%, compared with 65.8% in the corresponding period last year. And cash flow from operating activities during the first half of 2026 totaled approximately NIS 113 million, down sharply from roughly NIS 325 million in the corresponding period last year. The combination of rising leverage, growing deferred regulatory accounts, and lower operating cash flow is likely to draw scrutiny from credit analysts and bondholders.

The question is whether this is a temporary squeeze or a structural trend. The deferred regulatory accounts, in particular, are a double-edged sword. They reflect the fact that Mekorot is carrying the financial burden of the water sector's unpaid bills — a burden that grows when municipalities struggle with their own budgets. If the Water Authority and the Ministry of Finance do not move to address the tariff shortfall, Mekorot's balance sheet could come under increasing strain, even as its operational performance improves.

Why Mekorot Matters to Every Israeli

For most Israelis, Mekorot is an invisible presence — a name on a water bill, a logo on a pipeline, a quiet constant in a country where water scarcity has shaped national strategy for decades. Founded in 1937, the company supplies approximately 80% of Israel's drinking water and about 70% of its total water supplies. It operates the National Water Carrier, the cross-country network that transfers water from the rainy north to the water-scarce center and south, and it runs roughly 3,000 facilities across the country, including supply systems, water quality monitoring stations, wastewater treatment plants, and desalination infrastructure.

Mekorot is also a global player in water technology, known internationally for its expertise in desalination, drip irrigation integration, and water recycling. Israeli water innovation — from the desalination plants along the Mediterranean coast near Hadera and Ashkelon to the advanced monitoring systems deployed in the Arava — has made the country a model for arid nations worldwide. Mekorot is the institutional backbone of that reputation.

The company's financial health, therefore, is not merely a matter of corporate interest. It affects the price of water for every household in Jerusalem, every factory in Haifa, every kibbutz in the Negev. When Mekorot invests in infrastructure, it is investing in the country's ability to withstand the next drought, the next heatwave, the next security crisis that might threaten the water supply. When its balance sheet weakens, the entire water economy feels the ripple effects.

Looking Ahead

The second-quarter results offer a measure of reassurance. Mekorot's core operations are profitable, its infrastructure investment program is on track, and its efficiency gains are real. But the first-half figures, and the regulatory changes that drove them, are a reminder that the company operates within a framework that is not entirely of its own making.

In the coming months, analysts will be watching several key indicators: whether the deferred regulatory accounts continue to grow, whether the leverage ratio stabilizes, and whether operating cash flow recovers to more normal levels. They will also be watching the weather. A dry winter next year would boost agricultural demand and, with it, Mekorot's revenue. A wet one would repeat this year's pattern.

For now, the message from Mekorot is one of cautious confidence. The company is building for the long term, investing in the infrastructure that will carry Israel through the next generation of water challenges. The regulatory headwinds are real, but they are not, at this stage, existential. In a country where water has always been a strategic asset, Mekorot remains the central pillar of the system — and its financial reports are, in many ways, a barometer of the nation's resilience.

This article was produced with AI-assisted research and editorial support. Sources: The Jerusalem Post.

By Hannah Berg, Staff Writer