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

Credit rating agency will downgrade Enemalta if tariffs ‘are reduced to support the local economy’

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."

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SO IT WAS NOT THE FAULT OF THE OPPOSITION FOR VOTING DOWN THE BUDGET. S&P ARE SAYING IN EFFECT THAT WHAT GONZIPN ARE OFFERING AS FUTUR FIS-SOD HOLDS NO GROUND AND IF WE ACCEPT SIMON BUSUTTIL'S ADVICE NOT TO CHANGE WILL MEAN MASSIVE RISES IN ENERGY TARIFFS UNDER THE PN. PEOPLE RISE UP AND BE COUNTED. WE HAVE TO CHANGE THE COURSE OF EVENTS NEXT WEEK OTHERWISE MALTA WILL KEEP FALLING INTO THE SINKHOLE.
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@briffy According to those middle (muddle) men’s e-mails 10% was mentioned and were even asking to up it to 15%. Now 10% of Eur365 million a year= Euro35Million X 10years (at least) that this travesty has been going on =Eur365 million. Our Country would find a lot of useful things to do with Eur365 million apart from Roofless Theaters and un-needed Parliaments. And why does Enemalta need ‘MIDDLE MEN’ to buy Eur365 million worth of oil a year?
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My God! Did the PN say that they will solve the problem if re-elected. They caused the problem in the first place, how can they claim they will solve it. If they can solve it why did they create it?
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Vigilanti...although the kickbacks and commissions are quite hefty amounts, they pale into insignificance when compared to the amount spent on the purchase of oil - some Eur365 million a year. Even if the commissions are fully recouped, they are not bound to have any effect on the state of affairs of Enemalta
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who bought enemalta to its knees. report states old generation by use on oil etc . thus generation by gas will bring hope.
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L&P said that it will downgrade Enemalta even if "tariffs were reduced to support the local economy". This holds for everybody and not only for the PL. Be honest for once PN and GonziPN and stop giving half- truths. We have had enough of them through Busurtil when he was in charge of promoting the EU and the 'money no problem' policy. Why do you continue to quote out of context? Now tell us whether you are going to decrease the tariffs or not! PL has said it will do it through PRIVATE enterprise and not through Government or Enemalta itself. Lies and half-truths are tools used by evil persons!
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L-S&P qalu ezatt bil-kontra ta' li stqarrew il-PN. B'min tridu tidhqu? 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".
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Hopefully Enemalta's ratings would improve if the Kick-Backs and illicit Commission are Stopped. Outlook might even turn positive if it were possible to recover the Millions that have been Stolen under the scrutiny of our trusted admin's-traitors. An apt quote for the current situation in our Country: “Behind the ostensible government sits enthroned an invisible government owing no allegiance and acknowledging no responsibility to the people. To destroy this invisible government, to befoul the unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of today.” T R