Accountant General Michal Abadi-Boiangiu accuses Israel Electric Corporation (IEC) (TASE: ELEC.B22) of harming exports and therefore economic growth by its massive exploitation of government guarantees, according to a presentation, classified as "secret", that she made to the Yogev Committee on restructuring the electricity economy. Abadi-Boiangiu requested to appear before the committee for the first time because of the urgency of the issue and its repercussions.
In the brief 14-page presentation, Abadi-Boiangiu outlines a bleak picture about IEC's condition, which stunned some of committee members, one of them told "Globes".
Abadi-Boiangiu says that IEC was saved from collapse by the government rescue package, which included a gradual electricity tariff hike of 30% spread over four years (2011-14) and the granting of NIS 9 billion in government guarantees to raise additional debt by the utility. This is one-third of the NIS 28.9 billion in total guarantees that the government is allowed to provide by law.
In the briefing, Abadi-Boiangiu admits that the need to extend the such large guarantees to IEC indirectly caused real harm to exports, which greatly needs these guarantees, and therefore harmed the economy. "Government guarantees are intended to stimulate growth and expand exports. The guarantees to IEC reduced the guarantees for exports and other sectors," she says.
This is not the only charge that Abadi-Boiangiu levels at IEC. The presentation says that the Ministry of Finance lost confidence in IEC's financial controls and oversight, after the cash flow scandal, when it was learned that the utility underestimated its expenditures by NIS 2 billion. IEC's CFO and the head of its budget department resigned in the wake of the scandal. Nonetheless, Abadi-Boiangiu's confidence in the utility has not recovered. "The low level of oversight at the utility requires increasing the safety cushion from NIS 1 billion to NIS 3 billion," she says.
The comment is especially serious, given that the auditor's report appended to IEC's annual financial report made no such warning about its internal auditing ability.
Abadi-Boiangiu's presentation focused on IEC's severe financial crisis in the past two years caused by the halt in delivery of Egyptian natural gas. In 2012, then-Ministry of Finance director general Doron Cohen estimated the damage to the economy from the crisis at NIS 15 billion, of which NIS 12 billion was IEC's extra cost for alternative fuels, and NIS 3 billion in environmental damage from the use of more polluting fuels (diesel and industrial oil). However, he underestimated the damage; Abadi-Boiangiu's secret presentation states, "The total direct cost of the fuel alone is NIS 20 billion."
Other figures in the presentation underscore the depth of IEC's hole, despite the rescue package and electricity tariff hike. Its financial debt has ballooned by NIS 13 billion since the start of the crisis two years ago to reach NIS 55.6 billion, and it must repay NIS 10 billion in debts over the coming year. Despite its shaky financial position, there is one very impressive number: IEC central compensation fund for employees - the presentation states that it has a NIS 3.4 billion surplus in reserves. This is the surplus of IEC's current assets for covering liabilities to employees beyond the actuarial commitment to them.
Abadi-Boiangiu's secret presentation also states that IEC management believes that it can meet its debt payments without the need for additional government guarantees, assuming that the management's prediction of a dramatic increase in electricity sales materializes. IEC estimates that its electricity sales will total NIS 31 billion in 2013, 50% more than its usual annual revenue.
The question is: what will happen if management's optimistic prediction fails to materialize. In this context, it should be noted that a financial analysis by Shahar Harari, the financial advisor for IEC's workers committee, estimates that the utility will post a loss in 2013, despite the renewal of natural gas deliveries. Abadi-Boiangiu told the Yogev Committee that she strongly doubts that IEC can meet its debt payments without additional aid, and that any additional raising of debt would require government guarantees.
Abadi-Boiangiu also revealed that, in the first half of 2013, a NIS 1.4 billion shortfall opened up between IEC's expenditures, which are refunded from electricity tariffs, and its actual expenditures. The shortfall was the result of the refusal by the Public Utility Authority (Electricity) to recognize IEC's unnecessary expenditures, such as irregular salaries, expenses related to the delay is building power stations, and excessive pension provisions. In the end, however, the Public Utilities Authority capitulated to IEC and agreed to recognize these expenditures, thereby preventing further deterioration in IEC's already depleted equity, which is currently just NIS 15 billion.
IEC's equity is now only 17% of its balance sheet total, a leverage level that is high risk. Standard & Poor's Maalot Ltd. give IEC a credit rating of BB+, after the Ministry of Finance successfully intervened to prevent a downgrade to BB-.
Published by Globes [online], Israel business news - www.globes-online.com - on November 20, 2013
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