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KUALA LUMPUR: Moody's Investors Service (Moody's) has upgraded the senior unsecured bond ratings of Tenaga Nasional Bhd (TNB) and TNB Capital (L) Ltd to A3 from Baa1.

Moody's said at the same time, TNB's baseline credit assessment (BCA) was also raised to Baa2 from Baa3 with the outlook raised to positive from stable.

In a statement today, it said the positive outlook reflects the outlook for the Malaysian sovereign (A3 positive) as well as TNB's importance to Malaysia's economy, being the sole transmission and distribution networks operator and largest power generating company in the country.

The upgrade of the company's BCA to Baa2 reflects its dominant market position as the only fully integrated power utility in Malaysia, and takes into account the favourable regulatory environment following the implementation of the Incentive-Based Regulation (IBR) mechanism, said Moody's.

Moody's Vice President and Senior Analyst Ray Tay said IBR's Imbalance Cost Pass-Through (ICPT) adjustment allows for the adjustment of tariffs every six months to reflect a change in variable costs like fuel and power purchase costs.

"The ability to pass through these variable costs insulates TNB's financial performance from factors beyond its control compared to the previously ad-hoc tariff regime," said Tay.

The rating agency said although tariff revisions are subject to final approval from the Malaysian government (A3 positive), it has previously reimbursed TNB for funding shortfalls as a result of freezing tariffs.

Tay said a longer track record of the government's commitment to pass through changes in variable costs through the adjustment of tariffs would be credit positive.

Power purchase agreement adjustment would no longer be taken into account in recognition of the ability to pass through such costs and especially in view of the declining reserve margin in Peninsular Malaysia, said Moody's.

It said a lower reserve margin reduces the cost of capacity payments on unused capacity, especially during periods of low power demand.

Moody's said TNB's rating could be upgraded if Malaysia's sovereign rating is upgraded given its relatively high BCA of Baa2.

At the same time, the BCA could also be raised if the government achieves a track record of adjusting tariffs in accordance with changes in variable costs through the ICPT adjustment, it added.-- Bernama

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