The state is forcing Eilat-Ashkelon Pipeline (EAPC), a government company, to sell its stake in the Dorad private power station, and hopes to get NIS 1 billion for it, sources inform "Globes." The government aims to reduce its presence in the electricity production sector, which is in the process of privatization. The tender is slated for publication in two months, and Edeltech, through Edelcom, an associated company, is expected to exercise its first refusal rights to the state's share. Decisions are expected by the end of the year.
The Dorad private power station was built as a result of the state's wish to take the electricity production sector out of the hands of the Israel Electric Corporation (IEC) (TASE: ELEC.B22) monopoly, thereby generating competition between several suppliers who will compete for customers and offer them cheaper electricity.
Through its Eilat-Ashekon Infrastructure Services subsidiary, EAPC was a key player in the group that built the Dorad power station on land obtained by EAPC from the Israel Land Authority (ILA). The flawed process of obtaining the land was severely criticized in a State Comptroller's report. Furthermore, EAPC paid the 37.5% share of two of its partners, Edeltech (in which the Edelsburg family owns an 18.75% stake) and U. Dori Group (controlled by contractor U. Dori and later sold to Dor Energy Exploration, controlled by businessmen Chaim Katzman and Ronen Ashkenazi) in the venture's development costs, which included a NIS 100 million development fee. EAPC also paid its partners' share of the required equity as part of the financing for the NIS 4.5 billion power station.
Now, however, 10 months after the company commenced its commercial operations, the Ministry of Finance has decided that EAPC should sell its share to a private company. The decision follows the State Comptroller's criticism and allegations that the state is in a conflict of interest, due to its holdings in Israel's largest private electricity producer.
Sources inform "Globes" that the Ministry of Finance hopes to get NIS 1 billion from the sale of EAPC's holdings, and believes that the proceeds will eventually be paid into the state treasury, because the legal structure of the holdings guarantees protection against possible lawsuits from the Iranian government. The Iranians, who are claiming 50% of the shares in EAPC's parent company, are in an arbitration proceeding with the Israeli government for their multi-billion shekel claim.
A "Globes" inquiry showed that the unusually profitable venture generated a NIS 166 million operating profit in the first quarter of its operation (in the electricity sector, the summer quarter is traditionally considered the strongest quarter). Sources inform "Globes" that the Government Companies Authority is conducting legal and economy viability checks in cooperation with leading banks. Publication of a tender is slated for this coming May, and completion of the sale is expected by the end of the year. Among other things, the legal checks are designed verify whether the partners in the project are entitled for first refusal rights.
What will affect the value of the Dorad plant, which is competing in a difficult market, are the frequent regulatory changes, disputes with IEC, and the plant's performance capabilities, which lag behind those of the other private power stations. Senior economic sources believe that these factors will affect the company's value. These sources assert that the bidders will seek a 12% return on their investment. One example of the regulatory uncertainty facing the buyer is the model for operating the plant. As of now, Dorad sells electricity to private customers, and receives payment from IEC for being available to it at peak demand hours. In other words, Dorad is undertaking a standby role, for which it receives a guaranteed payment from IEC amounting to tens of millions of shekels each quarter. The Public Utilities Authority (Electricity), however, has been assessing the operational model for several months, and it cannot be ruled out that the arrangement will be canceled. In this situation, Dorad will no longer have a reserve fund, which will affect the company's valuation.
Dorad's efficiency is only 50%, compared with the 58% efficiency of its competitors. Dorad's annual energy expenses total NIS 600 million, while those of its competitors are NIS 50 million lower. If the regulator decides to cancel the operation mechanism for the station, Dorad will therefore have to engage in competition. Finally, Dorad's disputes with IEC over systematic costs cannot be ignored. IEC currently bears the cost of a backup for the system, balancing, maintenance, and administration.
The Dorad power station is a combined cycle plant, meaning that it uses natural gas as its main fuel, but can also operate on diesel fuel as a backup, and has an 840 megawatt production capacity. The Dorad power station and the Dalia and OPC power stations are jointly expected to account for 18% of power production in Israel by the end of this year. In the first stage, the state has decided that the private power plants can sell their electricity only to industrial customers, without competing against IEC to supply electricity to home customers. Dorad's main customers include the Ministry of Defense and Mekorot National Water Company, which pay Dorad an estimated NIS 300 million a year each.
Published by Globes [online], Israel business news - www.globes-online.com - on March 3, 2015
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