Standard & Poor's Ratings Services has raised its long-term corporate credit rating for  Enemalta  to 'BB-' from 'B+'. The outlook is stable.

"The upgrade reflects our view that Enemalta's restructuring efforts to become a power distributor instead of a producer are progressing faster than we expected and that the group will post positive cash flow after capital expenditures over 2016-2018. We now assess the group's stand-alone credit profile (SACP) at 'b-', compared with 'ccc+' previously, to account for our expectation that the issuer's financial commitments are sustainable in the long run," the agency said.

"We assess Enemalta's business risk profile as weak. This reflects mainly the low predictability of Enemalta's regulatory environment, which, in our view, results in a below-average-competitive position relative to that of peers.

"Enemalta's business repositioning as a power distributor is progressing, as shown by the group's improved cost structure, and will be complete by 2017, in our view.

"That said, we believe that the group's profitability remains exposed to a regulatory environment where the independence from potential political intervention is untested."

The agency noted that power tariffs have been reduced twice in Malta, as a means to support local economic growth. Tariffs were reduced before the restructuring started to unfold its benefits on Enemalta's cost structure. This measure proved to be effective, raising the demand for power to 4% in 2015 up from an indicative long-term average (2%).

"We consequently believe that the track record of cost recovery ensured by the power tariffs needs to consolidate. In addition, we still factor in some volatility of profitability over 2016-2017, which we consider unusual for a fully regulated company and weighs on Enemalta's business risk profile.

"We continue to assess Enemalta's financial risk profile as highly leveraged, and we benchmark its credit metrics against the standard volatility table."  

S&P said it was assuming that:

• Enemalta will cease to be a power producer by 2017.
• The island's power demand will be partly sourced from the interconnector with Sicily at prices linked to the Sicilian zonal price.
• The remainder will be acquired from a consortium owned gas fired unit (Delimara 4) to be commissioned in 2016 and from another gas fired unit (Delimara 3) owned by Enemalta's shareholder, Shanghai Electric Power. The latter will reconvert the existing plant to gas starting April 2016, with plans for a two-phase commissioning to be completed in 2016 and early 2017.
• Enemalta will keep some generation assets on stand-by to ensure security of supply and absorb potential mismatches from the interconnector.

"We could upgrade Enemalta if we observed an improving trend in its credit 
metrics. An upgrade would be contingent on Enemalta's capacity to achieve and 
sustain adjusted FFO to debt above 10%. Unlike in the past, an upgrade of 
Malta would have no impact on our rating on Enemalta, all else being equal.

"We could downgrade Enemalta if we observed any renewed tension on its 
liquidity position, if for example set power Price tariffs would not enable 
the group to recover its costs, which we view as unlikely at this stage," the agency said.