Enemalta will continue to make a loss until 2016 and this will weigh further on the company's already very weak debt structure and debt coverage metrics, Standard & Poor said in a report on the corporation.
The rating agency rated Enemalta at B+/Negative and said it projected negative funds from operations in 2013-2014 with a return to positive territory only in 2015.
“Enemalta should 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.
S&P said it could downgrade Enemalta if it thought that Enemalta would struggle to generate positive cash flow before working capital in 2015. This could occur if the benefits of the submarine link did not materialise as planned, if electricity tariffs were reduced as a means to support the local economy, or if the government decided to no longer fund part of Enemalta's costs through the national budget.
On the other hand, it said it could revise the outlook to stable if it thought Enemalta could improve its currently tight liquidity position while achieving cash flow break even earlier than it (S&P) currently expected.
“Our view of Enemalta's business risk profile as "vulnerable" reflects the company'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,” it said.
S& P assessed the management and governance score of Enemalta as weak relative to its rated portfolio of utility companies in Europe, the Middle East, and Africa.
“Our assessment reflects our view of Enemalta's unsystematic and market-driven risk policies and low insulation from political intervention.”
S&P highlighted Enemalta’s "very important" role as Malta's sole power generator, and owner and operator of the island's distribution grid, which is isolated and not connected to the continental European electricity grid.
It noted that Enemalta has historically benefited from state guarantees for most of its debt and that the state has provided guarantees on short notice for bank overdrafts and short-term loans.
S&P acknowledged that the government played a crucial role in allowing the recent refinancing of some €318 million of Enemalta's bank loans.
In the agency’s view, Enemalta’s volatility stemmed from high oil derived costs that the corporation could not fully recover through the electricity tariffs it charged 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.
“We believe Enemalta will remain free cash flow negative after capital expenditure over 2013-2015.”
S&P said that its assessment of Enemalta's liquidity as less than adequate reflected its expectation that the corporation’s available cash resources would not be sufficient to meet liquidity uses over the next 12 months.
“We remain confident, though, that Enemalta will continue to benefit from ongoing support from the government.”
“We understand that Enemalta is accumulating fiscal liabilities, which at the time of writing amounted to €60 million owed to the government. We understand that Enemalta's existing loans carry covenants on minimum tangible net worth, which are met following the company's debt refinancing which comprises the transfer of assets from the Republic of Malta to Enemalta.”
PN statement
In a statement the PN said the report confirmed that lower rates were only possible with its proposal of an interconnector with Sicily and that Labour’s proposal to invest in another power station did not make sense.
PL statement
But in another statement, the PL said S&P confirmed that unless a new direction was given to Enemalta, tariffs could not be reduced. The PL’s plan would revive Enemalta and the people would benefit through the cheaper tariffs.