Enemalta’s lack of creditworthiness is the main reason why the government stepped in as guarantor for a multi-million euro loan to the company building the new gas plant.
Industry sources said Enemalta’s financial state was why the government included a security of supply agreement as part of the gas plant bidding process in the first place.
“The security of supply agreement was the credit guarantee offered to bidders in the competitive process without which the project would not have been possible,” the sources said.
However, with the European Commission not yet clearing the agreement, Electrogas, the private company tasked to build the gas plant, would have never convinced banks to finance the project, the sources said.
And with government insisting that construction deadlines be respected – the plant should start supplying electricity in June next year after an 18-month delay – it had to step in with a €360 million bank loan guarantee pending Brussels’s decision.
“It was the government’s political decision not to wait for EU clearance, which led to the bank guarantee,” the sources said.
It was the government’s political decision not to wait for EU clearance
Electrogas has power and gas supply agreements with Enemalta, which are distinct from the security of supply agreement. The security of supply agreement stipulates that the government would step in and buy the electricity and gas if Enemalta reneges on the deal.
“Electrogas’s only client is Enemalta since it cannot export the electricity it will produce. With the State energy company still below investment grade the security of supply agreement is a crucial cog in the wheel for the consortium and its financiers,” the sources said.
Meanwhile, Electrogas yesterday waded into the controversy over the €360 million government guarantee, insisting the security of supply agreement was “part and parcel of the original competitive process”.
Electrogas said the bridge loan taken out with four major banks, including Bank of Valletta and HSBC, required temporary guarantees by the government and Electrogas shareholders.
“As soon as the EU has ratified the security of supply agreement, the [government] guarantee will be rescinded and the company will enter into long-term project finance agreements with its group of international banks,” Electrogas said.
It said the consortium issued “irrevocable letters of credit” equivalent to a capital contribution in excess of €90 million. Electrogas also paid the government fees equivalent to €8.8 million.
“The irrevocable letters of credit and the fee paid by the consortium... confirm that Electrogas Malta has never had any difficulty in raising financing for the project,” Electrogas said as it rebutted scepticism over its ability to fund the project.
The lead partner in the consortium, Gasol, dropped out last month after it faced financial problems. Its shares were redistributed between the other three partners – Germany’s Siemens, Azerbaijan’s Socar and Maltese firm GEM Holdings – with each holding equal shares.
Electrogas said the project was progressing in “a timely manner and all stakeholders are extremely satisfied with the progress to date”.
According to the timelines presented by the government, the gas plant had to be ready in March this year but was postponed until next year. The delay was attributed to the government’s decision to seek Chinese investment for Enemalta.
Clearing the gas: an idiot’s guide
If the new gas power station is being built by a private company why did the government provide a bank guarantee of €360 million?
This is a very legitimate question because the main thrust of the government’s energy plan was the inclusion of the private sector to finance a project that Enemalta would otherwise not be able to invest in. The guarantee is unprecedented because it involves a private company. The government has argued the guarantee is only temporary (22 months) until the European Commission clears the security of supply agreement with Electrogas.
Does this mean Electrogas found it difficult to raise its own finances?
The guarantee suggests that the banks were unwilling to provide Electrogas with the necessary finance unless the security of supply agreement got the OK from Brussels.
Did the government fork out the €360m?
No. A guarantee is just that and money will only be paid if Electrogas reneges on its loan commitments with the banks.
But what is this security of supply agreement?
Electrogas has a power purchase and gas supply agreement with Enemalta. As part of the bidding process, the government also had to enter into a separate security of supply agreement.
The security of supply agreement means that the government would step in and buy the electricity itself if Enemalta reneged for one reason or another.
Why was it necessary?
At face value the security of supply agreement gives the government and the private company peace of mind. But with Enemalta’s creditworthiness languishing below investment grade, no bank would have dished out the necessary finance for the gas project. The security of supply agreement guarantees the government would step in if Enemalta went belly up.
How is the EU involved?
The security of supply agreement may be construed as some form of market support that could potentially fall foul of EU competition rules, so the government and Electrogas wanted it cleared by Brussels.
The evaluation process is ongoing.