IEC Chief Vows Shake-up After Big Cash Flow Error

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"A small error in cash flow is something that happens but an error of NIS 1.4 billion testifies to the fact that the Electric Corporation's management and its senior executives are cut off from what is happening in their own company."

So said a senior official in the energy sector on Sunday in response to the massive shortfall the state-owned utility has discovered in its cash flow projections for the rest of this year. The error forced IEC to turn to the government for emergency aid last week, asking for either a direct cash injection or guarantees that would enable it to borrow money in the capital markets.

Meanwhile, sources at the Finance Ministry said on Sunday that officials would likely approve some NIS 1.2 billion in guarantees for IEC.

Consultants from Goren Capital and the accounting firm Ernst & Young handed in an interim report at the end of last week that identified what caused the accounting error. But even before the board meets to discuss the findings, CEO Eli Glickman took his fellow executive by surprise by saying he would act to step up auditing functions at the company's finance unit.

"I don't have time to wait for the [final] external report," he said at a meeting of management on Sunday.

Sources in the company said they saw Glickman's remarks as an attempt to direct criticism of the company to the finance unit, in particular to Chief Financial Officer Harel Belinda. Today's board meeting will not only address the organizational shortcomings that led to the error but also who is personally responsible for it.

"When they err to the tune of NIS 1.4 billion, you don't punish the simple soldier," said the senior energy official, who spoke on condition of anonymity. "If the steps that the CEO is talking about now are so critical, why didn't he take them before? Why didn't the CEO impose them when the error was first uncovered a month-and-a-half ago rather than only after it was revealed in the media?

As reported in TheMarker on Sunday, figures on the higher costs of fuel that the company was paying last July were not built into the IEC's model for forecasted costs. Other costs were also not factored in, including excess value-added payments and costs connected with importing liquefied natural gas and the added cost of buying power from private electricity producers.

An error should have been caught immediately, but IEC's financial managers didn't see it until only several weeks later.

In an interview with TheMarker on Sunday, Glickman said that electricity consumption last July was 10% higher than had been forecast due to unusually high temperatures and a breakdown at IEC's coal-fired plants. That forced the utility to rely more on oil at a time when global petroleum prices were rising along with other cost-boosting developments.

"The result of all these we already felt in August, but we didn't digest their impact quickly enough to fully assess their impact," Glickman said.

He told the management meeting on Sunday that the main problem was the timing of the reporting of figures from IEC's various units that go into estimating future cash flow as well as faulty or absent analysis of the data. As a result, he ordered a shakeup of the finance division.

"Increased supervision, transparency, order, coordination, follow-up and auditing on everything relating to cash flow," he said.

But many of the changes Glickman ordered had been discussed before at IEC and never implemented. For example, a committee comprising heads of various divisions was supposed to monitor cash flow. It was also decided that all commitments to purchase fuel could only be done with approval of the CFO.

Glickman also promised to install an external auditor to monitor cash flow issues. He also vowed to set up a unit reporting directly to his office to audit cash flow statements and projections.

The CEO also ordered the investor relations unit to be transferred from the finance division to the regulatory division, with the aim of improving communications with banks, institutional investors and credit rating agencies.

An IEC control center. Credit: Tomer Neuberg