"We'll investigate, and leave no stone unturned. We'll report matters properly, and will act transparently and credibly," Israel Electric Corporation (IEC) (TASE: ELEC.B22) CEO Eli Glickman told "Globes", speaking about the NIS 1.5 billion cash flow shortfall, the discovery of which in September caused a schism between the Ministry of Finance and the utility, and which jeopardizes its financial stability.
Glickman admitted that serious flaws were found in IEC's conduct, and he disclosed that he would ask the board of directors' approval to increase the amount of capital that the utility plans to raise in November, and to bring forward offerings planned for early 2013.
Today, IEC's management will hold an expanded meeting to discuss the shortfall and its repercussions on the utility. The board of director's audit committee will also convene to discuss the findings of the external examiner's report by Goren Capital Group Ltd.. IEC's management says that it has no plans to draw personal conclusions against executives at this time.
"It's disgusting to demand the resignation of executives at this stage, before the facts are clear," an IEC executive told "Globes". "The CEO, CFO, and other executives are working day and night under enormous pressure caused by events beyond their control. It's anarchic and irresponsible to pass judgment before the facts are heard."
The scandal broke out in September, when IEC notified the TASE that the update of its cash flow projections found a NIS 1.5 billion shortfall, partly due to higher fuel costs. Last week, Glickman and IEC CFO Harel Zeev Blinde asked Ministry of Finance officials for state aid in raising the amount. They asked the government to increase its guarantees to IEC beyond the NIS 5.5 billion already raised with government guarantees since the beginning of the year. The utility wants to increase the latest offering, which the Knesset Finance Committee has not yet approved, from NIS 500 million to NIS 2 billion, and says that this is the only way that it can buy all the fuel it needs for the production of electricity.
The request has infuriated the Ministry of Finance, especially the Accountant General's Department, which previously opposed increasing the government guarantees to IEC beyond NIS 4 billion. The Accountant General's Department fears that increasing the government guarantees to IEC will negatively affect the State of Israel's credit rating. IEC's debt totals almost NIS 70 billion, the second largest in the country, after the government debt.
In August, you received government guarantees to raise NIS 2 billion, on the promise that IEC would not need more capital through the end of the year. What happened?
Glickman: "We said that IEC would not need government aid through the end of the year, provided that there were no unexpected changes in the cost of fuels. We're going through unusual times, and there are constant changes. For example, we've been notified that our first cargo of liquefied natural gas (LNG), which was due to arrive on November 15, will not arrive before December 1, and that we will have to boost our purchases of diesel. On the other hand, the amount of natural gas supplied by Yam Tethys will be greater than expected, which will save us tens of millions of shekels."
But this doesn’t explain the NIS 1.4 billion shortfall.
"The shortfall was in our cash flow forecast for August and September. It was caused by 10% greater-than-expected electricity consumption in June-July, breakdowns at coal-fired power stations in July, which greatly increased the consumption of diesel, and because of an unexpected rise in the amount of electricity we purchased from solar energy producers."
You have dozens of people working on the cash flow forecasts, statisticians, and expensive computer systems. Why did this take you such a long time?
"There is no question that the calculation time was too long. It's unacceptable that that it took from the end of August until 20-something of September to update the forecast. There are things that must change at the company."
The rating agencies point out that your cash reserves are too small and do not allow you to absorb unexpected events like the ones that have occurred.
"IEC's management will recommend increasing the safety cushion, which currently stands at NIS 1 billion."
In practice, there were times when your reserves were far below that amount.
"True, but that's our target. We'll also recommend to the board to bring forward offerings. In addition to the NIS 500 million offering for which we have government guarantees, we planned to raise a NIS 700 million bridging loan without guarantees. We'll increase this.
Do you believe that the Ministry of Finance will ultimately agree to increase the guarantees this time too?
"I believe that the Ministry of Finance will stand by its promises to help IEC buy fuel for the production of electricity."
Published by Globes [online], Israel business news - www.globes-online.com - on November 4, 2012
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