KUALA LUMPUR (May 5): Fitch Ratings has rated Tenaga Nasional Bhd's (TNB) long-term foreign- and local-currency issuer default ratings (IDRs) at "BBB+" and its short-term foreign- and local-currency IDRs at 'F2'.

The international rating agency said the outlook is "stable".

Simultaneously, Fitch has rated TNB's foreign- and local-currency senior unsecured ratings at "BBB+".

In a statement today, Fitch said TNB's ratings reflect its position as the owner and operator of Malaysia's electricity transmission and distribution network, its near 50% share of peninsular Malaysia's power generation and stable financial profile.

The ratings incorporated a "one-notch" uplift to TNB's standalone rating, due to its strategic importance to Malaysia (A-/Negative), which effectively owns about 68% of TNB, it added.

Fitch is positive on the introduction of the imbalance cost pass through (ICPT) mechanism in January last year.

It said the ICPT mechanism allowed TNB to adjust its regulated tariffs to reflect changes in fuel costs, which the utility firm was previously constrained from doing so.

"However, an upgrade would be contingent on the application of the new tariff framework consistently, especially during a period of rising generation costs," said Fitch.

Fitch commented TNB's standalone rating of "BBB" has factored expectation that Tenaga would be able to maintain funds from operations (FFO) at an adjusted leverage below 2.5 times in the next two to three years despite capital expenditure (capex) to increase capacity.

For comparison, TNB's FFO stood at 2.6 times in the financial year ended Aug 31, 2014 (FY14).

Fitch expects TNB's earnings before interest, tax, depreciation and amortisation (ebitda) margins to remain stable (28% in FY14), assuming the ICPT mechanism would be consistently applied.

It also expects fuel costs to be lower than the amounts stipulated in the ICPT mechanism until 2017, and the resultant over recoveries to be passed on to consumers by way of tariff reductions or rebates.

Fitch also noted that TNB is expecting to incur capex of over RM20 billion from FY14 to FY17, mainly to increase its generation capacity, which stood at 8.6GW at end-FY14.

The rating agency also expects TNB, over time, will further reduce its commitments to the long-term power purchase agreements signed with independent power producers for substantial capacity payments.