Update 2 | Standard & Poor’s maintains Enemalta B rating, negative outlook

Credit ratings agency Standard and Poor's said today it was maintaining Enemalta's rating of B after having downgraded the corporation from BB back in February 2012, with the outlook still 'negative'.

But the agency also said that it would downgrade Enemalta if it saw the state utility struggling to generate a positive cash flow in 2015 unless the benefits of the Malta-Italy interconnector do not materialize or if "tariffs were reduced to support the local economy" - an observation that reflects S&P's belief that tariffs should rise.

Labour is pledging to reduce tariffs for households by 2014 and for businesses by 2015 on the basis of a new LNG terminal and power station, as well as using the Delimara power station through gas and 20% of the interconnector cable.

S&P said that Enemalta will remain loss-making over 2013-2016, which in turn will weigh further on the company's already very weak debt structure and debt coverage metrics.

"In our base-case scenario, we project 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.

The credit rating agency said it would downgrade Enemalta if it saw that it could struggle to generate positive cash flow before working capital in 2015. "This could occur if the benefits of the submarine link did not materialize as planned, if electricity tariffs were reduced as a means to support the local economy, or the government decided to no longer fund part of Enemalta's costs through the national budget."

On the other hand, S&P said it would revise the outlook to stable if Enemalta improves its tight liquidity position, with an earlier cash flow break.

S&P based its scenarios on a situation where tariffs are not increased to reflect costs over 2013-2015; €25 million of Enemalta's costs are subsidised by government over the same period; 40% of Malta's energy needs would be procured from Italy from 2015 at half the local generation cost; Enemalta starts consolidating its debt using a special purpose vehicle as from 2013; and no proceeds are received from hedging.

S&P said its view of Enemalta's business risk being 'vulnerable' reflected its poor profitability, high costs, old generation portfolio based mainly on fuel and gas oil, exposure to oil prices, and tariffs that were not based on cost-recovery. It also said the company had a "low insulation from political intervention".

Enemalta also said that as Malta's sole power generator and owner of the distribution grid, Enemalta "provides a key public service that could not readily be carried out by a private entity, given that the electricity tariff structure has historically not factored in all costs."

Enemalta has had some €318 million of its loans financed by the government, and would continue to benefit from ongoing support from the government and the local banking system, S&P said. "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 reaction

In a reaction, the PN insisted that tariff reductions would only be possible through its re-election.

"S&P said that the only way to generate lower tariffs is through the Malta-Sicily interconnector. This confirms the seriousness and feasibility of our electoral programme.

"The report also shows that Labour's proposal - a new power station running on gas with LNG tanks at a cost of some €600 million - does not make sense and won't lead to a reduction in tariffs. A KPMG assessment confirmed the proposal would lead to an increase in 5%. S&P's report confirms that Labour's proposal to reduce tariffs will downgrade Enemalta further."

The PN added that Labour had desisted from responding to claims that its own consultants had shown the PN's proposal was cheaper, a substantial part of capital spending of €200 million was missing, and that no 10-year gas purchase agreements had yet been proven.

Labour statement

The PL on its part said that S&P's report confirmed that Enemalta's current state of affairs was proof that Enemalta needs a new direction. "Our roadmap will bring Enemalta back on its feet, saving €187 million of which €110 million will be used to refinance Enemalta and €77 million will go into people's pockets by reducing tariffs."

Labour also said that the interconnector would be ready by 2015, and not by 2014 as claimed by Lawrence Gonzi. "Our country cannot wait. At this rate, Enemalta's workers will lose their jobs."