Fitch Affirms Energex at 'AA'; Outlook Stable

(The following statement was released by the rating agency)SYDNEY, November 12 (Fitch) Fitch Ratings has today affirmed Australia-based Energex Limited's (Energex) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA'. The Outlook is Stable. The agency has also affirmed Energex's Short-Term Foreign-Currency IDR at 'F1+'. KEY RATING DRIVERSVery Strong Strategic Linkages: The ratings are aligned with those of the state of Queensland (Queensland, AA/Stable), in line with Fitch's Parent and Subsidiary Linkage rating methodology. The state government is committed to retaining ownership of Energex. The state does not explicitly guarantee Energex's obligations, but Fitch believes the links are sufficiently strong to warrant equalisation of the company's ratings with those of the state. Potential for Consolidation: The government is looking at options to merge its state-owned electricity network companies into one company, but no final decision has been made on a preferred option. If the government proceeds with a combination of the companies, the state-owned merged network company is likely to have stronger strategic linkages with the state. Integrated with the State: The state borrowing authority, Queensland Treasury Corporation (QTC, AA/Stable), currently arranges all of Energex's debt. The virtually assured availability of perpetual senior debt funding from QTC indicates a high degree of financial integration with the state, and is evidence of tangible support. The state also effectively controls the appointment of Energex's board, as well as its capex and cash distribution policies. Deteriorating Standalone Credit Profile: The state-owned networks in Queensland are required to increase dividend payouts to the state government from the financial year ended 30 June 2015 (FY15), resulting in increased financial leverage for these businesses. Energex's credit profile, however, benefits from and reflects the regulated nature of its largely network business and the transparent and stable regulatory environment. The Queensland government has told Energex not to appeal the regulator's final decision of 29 October 2015. This provides certainty about the company's cash flows over the regulatory determination period from 1 July 2015 to 30 June 2020. KEY ASSUMPTIONSFitch's key assumptions within our rating case for the issuer include:- Capex and operating expenditure allowances to largely stay within regulatory allowances over the current regulatory determination period from 1 July 2015 to 30 June 2020- Deterioration in leverage - as indicated by an increase in debt to regulatory asset base - that stems from the state government directive to increase dividend payouts - Dividend payout ratio of 100%-Dividend payment of AUD1.3bn in FY16- Very limited exposure to non-regulated revenuesRATING SENSITIVITIESThe issuer's rating is currently equalised with that of Queensland. Positive: Future developments that may, individually or collectively, lead to positive rating action include:- Upgrade in the Queensland state's ratings, provided the rating linkages remain intact.Negative: Future developments that may, individually or collectively, lead to negative rating action include:- Downgrade in the Queensland state's ratings; or- Evidence of weakening linkages with the state.For the sub-sovereign rating of Queensland and QTC, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 2 September 2015:Negative rating action could occur if a significant, unexpected increase in Queensland's debt levels occurs along with a large deterioration in its operating performance. Forecast operating margins do not allow much room for unexpected shocks. An upgrade in the short term is unlikely as Queensland's operating and current margins would need to improve unless it reduces its debt more significantly. QTC's ratings will move in line with any rating action on Queensland.Contact: Primary AnalystSajal KishoreDirector+612 8256 0321Fitch Australia Pty Ltd, Level 15, 77 King Street, Sydney NSW 2000Secondary AnalystDavid CookDirector+612 8256 0363Committee ChairpersonBuddhika PiyasenaDirector+65 6796 7223Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@fitchratings.com.Additional information is available on www.fitchratings.com.Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=993960Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993960Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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