[WATCH] Enemalta’s credit rating upgraded, outlook stable

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Credit rating agency Standard & Poor’s has raised Enemalta’s credit rating to BB- on the basis that the power utility had improved its liquidity and that restructuring efforts “are delivering improvements in cost structure earlier than expected”.

“We believe the group will post positive cash flow after capital expenditures over our two-year rating horizon,” the rating agency said. “The outlook is stable.”

Enemalta’s turnaround came through after government’s sale of a minority stake to Shanghai Electric Power, as well as Enemalta’s divestment of its petroleum business to other government-controlled companies.

It recently also announced the investment in an €80 million wind farm project in Montenegro.

S&P said that the upgrade reflected their view that Enemalta's restructuring efforts to become a power distributor, instead of a producer, were progressing faster than expected. Enemalta group will post positive cash flow after capital expenditures over 2016-2018.

“We now assess the group's stand-alone credit profile (SACP) at 'b-', compared with 'ccc+' previously, to account for our expectation that the issuer's financial commitments are sustainable in the long run.

“We assess Enemalta's business risk profile as weak. This reflects mainly the low predictability of Enemalta's regulatory environment, which, in our view, results in a below-average-competitive position relative to that of peers.”

In a reaction, Energy Minister Konrad Mizzi welcomed the report as a testament to the government’s efforts.

“Government has achieved what was considered impossible by the previous administration,” Mizzi said.

“The €320 million investment by Shanghai Electric Power, the reduction of tariffs by €80 million, the shift to clean gas, the closure of the Marsa Power station, the accelerated investment in renewable energy and the electricity grid are leading to economic, social, environmental and health benefits for all.” 

Mizzi went on thank Enemalta’s management and workers for their dedication and for embracing change.

In S&P's view, Enemalta's business repositioning as a power distributor is progressing, as shown by the group's improved cost structure, and will be complete by 2017.

“That said, we believe that the group's profitability remains exposed to a regulatory environment where the independence from potential political intervention is untested.

"Regulated power tariffs have been reduced twice in Malta, as a means to support local economic growth. Tariffs were reduced before the restructuring started to unfold its benefits on Enemalta's cost structure.

“This measure proved to be effective, raising the demand for power to 4% in 2015 up from what we retain as an indicative long-term average (2%).

“We consequently believe that the track record of cost recovery ensured by the power tariffs needs to consolidate. In addition, we still factor in some volatility of profitability over 2016-2017, which we consider unusual for a fully regulated company and weighs on Enemalta's business risk profile.”

“We continue to assess Enemalta's financial risk profile as highly leveraged, and we benchmark its credit metrics against the standard volatility table.

S&P based its views on Enemalta’s:

• Important role as the operator of Malta's power distribution grid, which was connected to Europe in spring 2014 through a cable linking the island to Sicily.
• Very strong link with the Maltese government. The government's recent sale of a minority stake in the group doesn't affect our assessment.
• Although we observe that Malta continues to provide timely and full support to Enemalta if needed, we think the government aims to gradually reduce guarantees extended to Enemalta on most of its debt. The debt includes both long-term bank loans and short-term bank overdrafts, and would reduce the government's exposure to contingent liabilities.

In basing their case, S&P assumed:

• Enemalta will cease to be a power producer by 2017.
• The island's power demand will be partly sourced from the interconnector with Sicily at prices linked to the Sicilian zonal price.
• The remainder will be acquired from a consortium owned gas fired unit (Delimara 4) to be commissioned in 2016 and from another gas fired unit (Delimara 3) owned by Enemalta's shareholder, Shanghai Electric Power.
• We understand the latter will reconvert the existing plant to gas starting April 2016, with plans for a two-phase commissioning to be completed in 2016 and early 2017.
• Enemalta will keep some generation assets on stand-by to ensure security of supply and absorb potential mismatches from the interconnector.

Fredrick Azzopardi, Enemalta’s Executive Chairman, expressed the company’s satisfaction at this development. He thanked Enemalta’s employees, customers and other stakeholders for contributing to this unprecedented turnaround. “The review presented by S&P confirms that we are heading in the right direction in our effort to secure the future of Enemalta and of the electricity services we offer in the Maltese Islands. We are glad to note that rating agencies that had repeatedly criticised Enemalta’s performance in the past are now considering our Company with a more positive outlook.”

However, Azzopardi added, this result is no grounds for complacency. “We are currently investing in multi-million projects to upgrade the national grid and reduce the frequency and duration of electricity supply interruptions. Along with our strategic partners, we are introducing a new electricity generation mix based on cleaner, more efficient resources. We are also taking several measures to streamline our administrative operations and improve the quality of services to our customers.”

“We aim to continue working to achieve our principal sustainability targets. An Enemalta that is profitable and viable is an Enemalta that can generate the required resources to maintain, secure and develop the necessary electricity generation and distribution infrastructure with minimal impact on the environment, whilst providing a high quality service at affordable, stable rates to its customers.”