Standard & Poor’s revise Enemalta’s credit rating to positive

Credit rating agency Standard & Poor’s has revised Enemalta’s credit rating from stable to positive, affirming a B+ rating.

The positive result was due to S&P’s consideration that Enemalta PLC was a government-related entity with a "very high" likelihood of receiving extraordinary support from the government.

Enemalta’s business risk profile is still being assessed as “vulnerable” and its financial risk profile as “highly leveraged” pending the return to positive cash flow generation.

The revised outlook stems from a similar action when S&P reviewed Malta’s economic growth to positive.

The agency’s rating on Enemalta incorporated three notches of uplift for government support, reflecting the view that there was a "very high" likelihood of timely and sufficient extraordinary support for Enemalta from the government if needed.

S&P argued that Enemalta played “a very important role” as the sole owner and operator of Malta's power distribution grid, which was connected to Europe in spring 2014 through a cable linking the island to Sicily.

The assessment could be revised after the construction of a new third­party gas­fueled generation facility is completed.

S&P said the recent acquisition of Enemalta shares made by Shanghai Electric Power did not affect its assessment since it is a minority stake.

“Although we observe that the government continues to provide full and timely support to Enemalta if needed, we think it aims to gradually reduce its guarantees on most of Enemalta's debt, which would reduce the sovereign's exposure to contingent liabilities,” S&P’s said.

The agency assessed Enemalta's stand­alone credit profile (SACP) at 'ccc+'. “Therefore, the Maltese government's improving credit quality has an impact on our long­term rating on the company.”

S&P’s view of Enemalta's SACP is unchanged. Some momentum in the roll out of the government's energy reform was seen, believed to be positive for Enemalta's future development.

“However, we continue to assess the company's business risk profile as vulnerable and its financial risk profile as highly leveraged pending the return to positive cash flow generation.”

Standard & Poor’s said it would raise the rating on Enemalta by one notch if Malta was upgraded by one notch, barring no change to the "very high" likelihood of extraordinary government support.

The rating would go up if S&P believed the company's ongoing restructuring would be able it to achieve financial stability in the long term.

“This could occur if Enemalta generated positive operating cash flow on a sustainable basis and posted at least neutral free cash flow, which is not imminent, in our view.

“We could lower the rating on Enemalta if we perceived a delay to the full conversion of Malta's power generation system to gas, forcing Enemalta to continue its current oil­fired generation operations.

“We consider that such a delay would jeopardize the stabilization of Enemalta's cost base. We could also downgrade the company if the government decided to further trim power tariffs to a level that would make it challenging for the utility to recover costs, or if Enemalta's shareholders adopted a very aggressive policy that would undermine the likelihood of sustainable deleveraging.”