The rating agency said on Wednesday the ICPT mechanism allows changes in power generation costs to be passed through to customers.
In June, the Pakatan Harapan government had in the biannual review cycle, allowed the continuation of the ICPT mechanism even in the current environment of rising fuel costs.
Tenaga's standalone credit profile of “BBB” is constrained by a lack of an established record of passing through fuel costs in an environment where fuel prices are increasing beyond ICPT benchmarks.
Malaysia's electricity regulator requires final government approval before changing the country's electricity tariffs.
The new government came to power on May 9 after the stunning victory in the 14th General Election, only one month before the June regulatory review.
The next regulatory review is due in December this year, after which there should be more clarity on the government's policy stand for Fitch to re-evaluate Tenaga's standalone credit profile.
The company incurred additional costs of RM698.2mil, or 1.35 sen per kilowatt hour (kWh), between Jan 1, 2018 and June 30, 2018 due to higher fuel and generation costs.
The government announced in June that it will maintain an average base tariff of 39.45 sen/kWh for JUly to Decmeber 2018 and pass through excess costs via a surcharge in line with the ICPT mechanism.
A surcharge of 1.35 sen/kWh will apply to non-domestic customers. Domestic customers are not affected, as the ICPT surcharge does not apply to customers that consume less than 300kWh of electricity and domestic customers that consume above this amount will have their ICPT surcharge funded by the Electricity Industry Fund (Kumpulan Wang Industri Elektrik).
The savings from the renegotiation of Tenaga's power-purchase agreements with independent power producers in lieu of extended tenors have supported the fund until now. However, we expect the fund to have limited, if any, capacity to sponsor future compensation to Tenaga.
“We affirmed Tenaga's long-term issuer default rating at 'A-' with a stable outlook in April 2018. Tenaga's ratings are equalised with those of Malaysia (A-/Stable) to reflect its strong linkages with the sovereign, in line with Fitch's government-related entities rating criteria.
“The company's standalone credit profile is supported by its position as the owner and operator of Malaysia's electricity transmission and distribution network, near-54% share of Peninsular Malaysia's power generation capacity and solid financial profile.
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