Standard and Poor's maintains Enemalta B+ rating

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. The outlook is still negative.

The agency said its rating reflected the "very high" likelihood that government aid would continuing supporting Enemalta's operations, which are now wracked with over €600 million in long-term debt.

But S&P also conceded that given the already high energy costs in Malta, any move towards a cost-reflective tariff would be a "risk for the local economy".

"We consider Enemalta's business risk profile to be 'vulnerable', reflecting its poor profitability, high cost and old generation portfolio based mainly on fuel oil, exposure to oil prices, and lack of timely cost-reflective adjustments in the tariffs it is allowed to charge consumers. The tariffs weigh significantly on our view of the company's credit profile, especially in the current high oil price environment," S&P said.

Back in February, Finance Minister Tonio Fenech had said government was adamant that none of the burden from the company's losses would be passed on to consumers.

But in its latest credit rating the agency said it still expected the refinancing of the current portion of Enemalta's debt to be executed in the first half of 2012.

"We now understand the Maltese parliament has not yet initiated the debate on setting up the proposed special purpose vehicle that we believe is instrumental to completing the transaction. As a consequence, we now expect the transaction to be executed by the end of 2012 as any further delay would suggest, in our opinion, that the government is struggling to address the much-needed financial restructuring of the company.

"Although we acknowledge that the government intends to assume a share of Enemalta's 2012 costs in the state budget, we believe this will only serve as a temporary solution and not properly address the restoration of the company's profitability. In addition, given the already high energy costs in Malta, we think that any move towards a cost-reflective tariff could be considered a risk for the local economy."

S&P said it forecasted Enemalta to post losses of around €60 million in 2012, based on a double-digit year-on-year increase in the cost of oil-based commodities. Governmetn is expected to assume €25 million in costs to bring the loss down to €35 million, but that Enemalta will continue to post negative free cash flow after capital expenditure in 2012 and beyond, unless cost-reflective tariffs are unexpectedly introduced.

As of June 2012, Enemalta was expected to spend €95 million in capital costs, €183.3 million in contractual debt amortisation, while earning €25 million in funds from operations and two bank loans of €150 million.

"The significant delay in refinancing outstanding debt and the lack of visibility on the timing of the possible execution have led Enemalta to roll over its existing debt and extend its bank overdraft facilities," S&P said, which added it would monitor the terms of any renegotiation or extension of debt.

The agency noted that in light of the challenging economic environment, the government may assign lower priority to providing Enemalta with timely and financial support in case of stress. The negative outlook could be revised to stable if profitability improves, which would largely be a result of electricity tariff increases or lower input costs - especially for oil - and if it refinanced its outstanding debt.