As Government Readies Aid, Israel Electric Corp. Debt Set to Surpass a Record NIS 70 Billion

Finance Ministry announces it will provide state guarantees for up to a billion shekels for the IEC's corporate bonds.

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The Israel Electric Corporation's debt is about to exceed NIS 70 billion. To put things into proportion, Israel's national GDP in 2011 totaled NIS 912 billion and the national budget for the year totaled about NIS 350 billion.

Put otherwise, one utility alone, albeit government-controlled, is running a debt equivalent to a third of the national budget and nearly a tenth of GDP.

From early last year, the company has had to contend with a natural gas shortage, forcing it to resort to more expensive fuel in order to generate electricity. It has ballooning pension liabilities and this month disclosed a projected accounting error of NIS 1.4 billion.

The utility's stress should ease in mid-2013, when Israel's large offshore gas field Tamar is due to begin production. That means the company will again have a relatively low-cost fuel supply.

But, as if it needed more problems, as of January 1, a new accounting rule will add at least NIS 2.2 billion to the company's debt, by requiring the IEC to immediately record the full actuarial amounts of wage and pension benefits provided to employees.

In the past, it made provision for the obligation over a period of years. The new procedure is in accordance with the requirements of IFRS, International Financial Reporting Standards.

In the face of the NIS 1.4 billion accounting error, the Finance Ministry announced on Tuesday that it would provide state guarantees for up to a billion shekels for the IEC's corporate bonds. The IEC is expected to issue at least that amount in bonds by the end of this year.

The state backing follows statements by credit rating agencies recently, that in light of the recent developments at the IEC, and in the absence of state guarantees, the agencies would be forced to reevaluate their rating of the electric company's bonds.

The Finance Ministry responded immediately with the guarantees. This is not the first time that the threat of a credit downgrade has spurred the Finance Ministry to act. In August, Finance Minister Yuval Steinitz announced a state guarantee of NIS 2 billion after an explicit warning that the IEC's financial plight would lead to the immediate downgrading of the company by three notches.

In other development related to the troubled electric company, the State Control Committee will soon hold a hearing on the accounting error that created the NIS 1.4 billion hole in the utility's cash flow. The committee is convening at the request of its chairman, Uri Ariel of the National Union party.

Ariel demanded an urgent session on the issue, which State Comptroller Joseph Shapira, who published a highly critical report about the IEC about a month ago, will be invited to attend.

"In all probability," Ariel said, "the Israeli public will have to make up the missing sums in the Electric Corporation's cash flow from both the state treasury and from their own pockets," an apparent reference to the prospect of higher electricity rates.

For his part, Knesset Speaker Reuven Rivlin called for solutions that would avoid having the public pay for the company's problems..

Israel Electric Corporation's control center in Haifa. Credit: Tomer Neuberg