Unconventional Accounting, Lower Usage Leave Israel Electric Corp. With a Steep Loss

But don’t be fooled by the balance sheet.

Israel Electric Corporation slashed fuel costs in the second quarter by switching to natural gas as its chief source of fuel in April, but that didn't keep its from posting a steep NIS 359 million loss, widening from NIS 206 million the year before.

IEC blamed the loss on a drop in energy consumption and a lower-than-expected rate increase, but in fact some usual accounting practices accounted for the red ink.

IEC attributed the decline in consumption to both lower summer temperatures, compared to the blistering 2012 early-summer heat, and an apparent drop in industrial power consumption. But the utility said it expects a further drop in electricity consumption by both businesses and households of about 6% through the end of the year, which will probably extend into 2014.

For the quarter, IEC said revenues eased 1.8% to NIS 6.3 billion as a result of an 87 million-kilowatt decline in electricity use, representing 0.65% of consumption. But the company’s archaic accounting practices exacerbated the pain: It reported a 1.7% drop in average revenue per kilowatt-hour after taking into account inflation. IEC is the last company in Israel to adjust its results to the consumer price index, a practice that was used by companies in the era of double- and triple-digit inflation in the 1980s and 1990s.

Meanwhile, IEC reported that its fuel bill fell 45% to NIS 2.6 billion. This was accounted for by a 98% reduction in the use of crude oil, a 13% decline in coal consumption and a 95% drop in the use of diesel oil — against a 423% jump in natural gas consumption. IEC had been forced to use high-cost imported fuels after Egypt cut off supplies of imported natural gas after the revolution that ousted President Hosni Mubarak, but starting in the second quarter of this year has been sourcing most of its energy from the Tamar gas field off Israel’s Mediterranean coast.

Still, in another unusual accounting practice, IEC reported that its cost of fuel nevertheless rose by NIS 469 million from a year earlier. That is because the government’s Electricity Authority authorized the company in March 2012 to register some NIS 7.7 billion in added fuel costs after Egypt cut off supplies. Those costs, however, were spread out over a period that runs through 2014.

The fictitious high rates enable the Electricity Authority to allow IEC to charge higher electricity rates than its real costs would justify, under a formula that fixes tariffs paid by consumers to the utility’s costs.

In fact, as IEC’s fuel costs were falling regulators approved a 5.5% increase in mid-May, but the increase was smaller than the company had expected. Therefore, it recorded a NIS 1.2 billion charge for fuel consumed in the second quarter, compared with a NIS 1.3 billion gain in the second quarter of 2012.

None of this affected IEC's cash flow, which despite all the red ink on its profit-and-loss statement showed a NIS 152 million surplus from operations in the second quarter, turning around from a NIS 439 million deficit the year before.

A 17.5% increase in electricity bought from private producers, equal to NIS 268 million, also cut into IEC's profits, along with a 13% jump in payroll costs arising from terms in the collective labor agreement that included seniority pay raises, as well as from an enlarged workforce for dealing with emergency projects and emissions reductions.

The increase in the net loss was tempered by a 60% reduction in net finance expenses to NIS 343 million, due to the effect of appreciation of the shekel against the dollar on the company's foreign-exchange linked liabilities .

Tal Cohen