Enemalta Corporation had its credit rating downgraded by a leading rating agency, Standard and Poor’s, which gave the energy company a negative outlook.
In a scathing overview of the government-owned company, the rating agency attributed the downgrading to high debts, very weak cash flow generation and weak corporate governance.
Standard and Poor’s reduced Enemalta’s standalone credit profile to B- from B and it lowered the long-term rating to BB from BB+.
Credit ratings are a tool used by bankers and financial institutions to determine the risks associated with companies and their ability to pay back loans.
A negative rating carries higher risk and the potential to attract even higher interest rates.
Standard and Poor’s said the negative outlook was a result of delays to introduce a sustainable refinancing plan that would lead to an extension of debt when it matured.
The corporation has huge debts, which include those incurred to build the Delimara power station in the early 1990s.
According to the National Audit Office report for 2009 Enemalta had loans of almost €450 million.
Standard and Poor’s warned Enemalta’s inability to have a successful refinancing plan over the medium term could lead to lower ratings.
The rating agency also said the company faced a “potential weakening of performance” because of delays to adjust tariffs to volatile fuel costs.
Enemalta’s lack of financial results, the last of which date back to the full year 2008, was also a bone of contention.
“The significant delays and infrequent publication of this company’s financial reports pose high information risk, reduce transparency and indicate weak corporate governance practices,” Standard and Poor’s said.
The agency commented positively on the 40 per cent hike in utility tariffs announced in December 2009 (which applied for 2010 and 2011), saying this “should allow Enemalta’s profitability to recover gradually”.
Standard and Poor’s cited lack of competition in the energy sector and the fact the government guaranteed a significant proportion of debt as factors that helped buoy the ratings.
“The BB rating on Enemalta reflects our opinion that there is a very high likelihood that the Republic of Malta would provide timely and sufficient extraordinary support to the company in the event of financial distress.”
Reacting to the credit downgrade, the Finance Ministry said the government would continue to support the energy company and ensure it had a solid financial base.
The ministry noted that two of the biggest issues identified by Standard and Poor’s as being a financial burden on Enemalta had been addressed in recent years. These included the upward revision of utility rates to reflect the true cost of oil – this was not the case in the past – and recovering part of the capital expenditure by including this in the tariff structure.
On the lack of updated accounts, the ministry said the company was in the process of reviewing its reporting systems and would shortly start publishing its financial statements regularly.
The Labour Party said the rating agency’s report confirmed the government’s inability over the past 25 years to put the corporation on solid financial footing.
“The government has simply burdened consumers with tariffs that reflect years of inefficiency and debt that was never paid back,” it said.