Enemalta losses compensated ‘on monthly basis’ as energy costs soar

S&P Global Ratings has affirmed its ‘B+’ rating for Enemalta and removed the rating from Credit Watch with negative implications.

The Maltese government is providing ongoing financial support to energy distributor Enemalta to sustain its liquidity position.

Credit rating agency S&P said Maltese taxpayers were now fully compensating Enemalta’s losses on a monthly basis, after the government committed €200 million in energy support to to finance the increase in energy costs – which the company cannot pass through to its customers.

“This was necessary because the regulatory framework in Malta does not automatically protect the company from the rise in commodity prices nor from decline in consumption volumes and also as it is the Maltese government’s policy is to keep prices stable,” S&P said.

As a result, Enemalta is fully exposed to volume and price risks: for example, the prices for energy imported via the Malta-Italy interconnector, which represent 25%-30% of Enemalta’s needs, increased to €148.02/mWh in 2021 from an average of €58.09/mWh in 2020.

Overall, this and an increase in carbon costs and the surge in gas prices, led Enemalta to record zero net profit in 2021, resulting in S&P placing Enemalta on CreditWatch negative in December 2021.

But the energy support measures will result in improved financial performance and cash flow from 2022, S&P said.

“We understand that the government now fully compensates Enemalta’s losses on a monthly

basis. As we include the financial support from the government as a subsidy in our EBITDA adjustments, we view it as operating compensation as it is earmarked for company’s operating losses.

“We now expect the company to generate positive funds from operations (FFO) of around €32 million in 2022 and continue to generate positive cash flows in the next two-to-three years as long as government support remains.”

Enemalta’s losses were already fully covered by finance ministery in 2021, as well as those of

January and February 2022.

“These timely cash injections materially reduce the volatility in Enemalta’s credit ratios. They also materially reduce Enemalta’s exposure to price risk as it is now borne by the State.”

Enemalta still relies on short-term liquidity lines and overdrafts from banks, including a €20 million revolving loan signed in October 2019, committed until October 2024 and reviewed annually.

It also has a special €20 million ‘COVID-19 assist’ loan guaranteed by the Maltese Development Bank, signed in May 2021 and to be repaid over the next four years. Enemalta uses the credit lines when it faces liquidity shortcomings.

“Our credit rating analysis on Enemalta incorporates our opinion of a high likelihood that the government of Malta would provide timely and sufficient extraordinary support to the company in the event of financial distress,” S&P said.

The Maltese government owns 67% of Enemalta since the sale of a 33% stake to Shanghai Electric Power in 2014. Malta retains the controlling stake in the company, and it elects four of the six members on Enemalta’s board of directors.

Malta is the guarantor of all Enemalta’s pre-2014 debt and the guarantee covers some uncommitted lines, as well as some exposure to commercial agreements.