Electric Corp. Asks for Another Bailout

Utility admits to error in projecting cash flow and seeks up to NIS 1.4b.

State-owned Israel Electric Corporation has turned to the government for emergency financial aid out of fear it may default on debt repayments by the end of November.

In a meeting Tuesday night at the Finance Ministry, IEC said it needed urgent aid of between NIS 1 billion and NIS 1.4 billion. It said the bailout could come via a cash injection from the state as the company's controlling shareholder or via state guarantees that would let IEC raise money in the market.

At an energy conference at the start of the week, IEC Chairman Yiftach Ron-Tal said "the Electric Corporation is in a terrible financial crisis." But some of the pressure may have been eased by a decline in world energy prices.

The demand for extra aid is angering treasury officials, who made around NIS 2 billion in state guarantees to the company in August. At the time, IEC said the backing would be sufficient to get it through the end of 2012. In March, IEC issued NIS 4.5 billion in bonds, also with government backing, as well as another NIS 1.5 billion in May and NIS 2.9 billion in July.

But the summer saw record use of electricity, forcing IEC to buy extra fuel after it had lost access to low-cost Egyptian natural gas.

The immediate background to the crisis is the utility's error in forecasting cash flow to the end of this year. IEC reported the mistake in September and has sought unsuccessfully to cover the shortfall. The company has had to revise its estimate of the cash flow shortfall several times.

Management identified what caused the error and has retained Goren Capital, a consulting firm, to investigate. Goren is due to report its findings next week.

Pointing to the accounting error and the failure after a month to uncover its causes, government officials for the first time ever have expressed concerns about IEC's management abilities. Yesterday, they questioned the ability of its executives to cope with the company's financial challenges.

The treasury has refused to discuss any financial rescue until it gets a proper report on the cash flow error. It plans to insist that IEC first tap internal sources of capital, such as delaying payments to suppliers and postponing infrastructure projects.

Also at yesterday's meeting, treasury officials insisted that IEC take back around NIS 2.1 billion that was put into a fund for employees without the required authorization. Last March, the utility agreed to take back around NIS 600 million, but that process has been ensnared in problems.

In September, IEC reported a cash flow "hole" of NIS 1.5 billion because of the higher cost of buying fuel over the summer. IEC had been using cheaper Egyptian natural gas to fire up its plants until the Egyptians rescinded the contract last April.

But more recently people inside and outside IEC have expressed doubt about the explanation. Among the possible causes of the cash flow shortfall are a financial-reporting error whereby various units of the utility were not providing correct figures to one another. Two weeks ago Zaharia Kay, the manager of the company's financial division, stepped down as part of an early-retirement program.