This article first appeared in The Edge Financial Daily on March 1, 2018 - March 7, 2018

KUALA LUMPUR: Fitch Ratings has upgraded Tenaga Nasional Bhd’s (TNB) long-term issuer default ratings (IDRs) for both local and foreign currency to “A-” with a stable outlook, from “BBB+” previously.

It has upgraded TNB’s senior unsecured ratings — again for both currency categories — to “A-” from “BBB+” as well.

In a statement, Fitch said key rating drivers include strong government support, which holds an effective 60% ownership in TNB. “We view the status, ownership and control linkages between TNB and the state as “moderate”,” it said.

The rating agency said the ratings on TNB have been removed from Rating Watch Positive, having been under watch since November 2017 after the release of the exposure draft of the government-related entities criteria.

As of now, Fitch said TNB’s stand-alone credit profile of “BBB” represents its position as the owner and operator of Malaysia’s electricity transmission and distribution network, and supplier of 52% electricity in Peninsular Malaysia.

The rating agency pointed to TNB’s regular and appropriate implementation of the Imbalance Cost Pass-Through (ICPT) mechanism since June 2015, which it said had further strengthened TNB’s financial profile beyond the normal range for power producers with stand-alone profiles of “BBB”.

That rating is still constrained despite TNB’s financial profile appearing better than those of Indonesia’s PT Perusahaan Listrik Negara and Korea Electric Power Corpa, said Fitch.

Fitch views any stand-alone credit profile rating upgrade for TNB as dependent on how it implements ICPT under the Incentive Based Regulation framework “especially in the coming 12 to 18 months” on expectations that coal and gas prices will rise to lift generation costs above benchmark costs in the short run.