Beleaguered Enemalta Corporation has been given a negative outlook by rating agency Standard & Poor’s saying the power utility would remain loss-making until 2016.
S&P is hoping that Enemalta will start deriving benefits from procuring some of Malta’s electricity needs from Italy in 2015 through the planned submarine cable that will connect Malta to Sicily “at a much lower cost than local generation costs”.
It rates the corporation business risk as “vulnerable”. This mainly for four reasons: the high exposure of generation activities and costs to volatile oil and gas prices; a regulatory environment that does not allow full and timely recovery of costs and return on investment; being structurally loss-making, partly owing to its not-for-profit status and, finally, because of significant delays in financial reporting.
The financial risk is “highly leveraged” due to very low debt coverage metrics, a negative cash flow from operating activities and large capital expenditure requirements.
S&P is projecting negative funds from operations (FFO) this year and the next, with a return to positive territory in 2015.
Enemalta could be downgraded if the rating agency felt that it would struggle to generate positive cash flow before working capital in 2015 if the benefits of the submarine link do not materialise as planned, if electricity tariffs were reduced as a means to support the Maltese economy or if the Government decided to stop funding part of Enemalta’s costs through the national Budget.
The rating agency said that its view of Enemalta’s business risk profile as “vulnerable” reflected the corporation’s poor profitability, high costs, old generation portfolio based mainly on fuel and gas oil, exposure to oil prices and lack of timely cost-based adjustments in the tariffs it is allowed to charge consumers.
Enemalta has “weak” management and governance. It also has unsystematic and market-driven risk policies and low insulation from political intervention.
S&P considers Enemalta to be a government-related entity and feels that there is a “very high” likelihood that Malta wouldprovide timely and sufficient extraordinary support to the corporation in the event of financial distress.
Enemalta, it noted, had a “very important” role as Malta’s sole power generator and was owner and operator of the island’s distribution grid. The corporation provided a key public service that could not be readily carried out by a private entity since the electricity tariff structure has historically not factored in costs.
It has a “very strong” link with the Government and benefited from State guarantees for most of its debt. The State also provided guarantees on short notice for bank overdrafts and short-term loans.
If Enemalta were to default, the rating agency noted, it would significantly affect the Government’s reputation because it is publicly associated with Enemalta through “strong political involvement and a high degree of control”.
The Government played a crucial role in allowing the recent refinancing of some €318 million of Enemalta’s bank loans, it noted.
S&P bases its assessment of Enemalta’s financial risk profile as “highly leveraged” because of the corporation’s weak and volatile credit metrics. The ratio of S&P adjusted funds from operations to debt for Enemalta swung into negative territory in 2012 and is likely remain there this year, compared with single-digit figures in 2010 and 2011.
The agency feels that the volatility stems from high oil-derived costs that Enemalta cannot fully recover through the electricity tariffs it charges customers.
“We consider that ongoing support from the Government is crucial for the rating. We expect the Government will directly or indirectly cover any potential liquidity shortfall at Enemalta until it once again generates positive operating cash flow, which, in our scenario, is unlikely to occur until 2015.”
S&P deems Enemalta’s liquidity to be less than adequate and expects that its available cash resources will be insufficient to meet liquidity uses over the next 12 months.
Yet, the agency is confident that the power utility will continue to benefit from ongoing support from the Government, “with its strong influence in the domestic banking system”.
Enemalta, it noted, was accumulating fiscal liabilities that, at the time of writing the report, amounted to €60 million owed to the Government.