(The following statement was released by the rating agency)SYDNEY, July 01 (Fitch)
Fitch Ratings has affirmed Australia-based Ergon Energy Queensland Pty Ltd's (EEQ) Long-Term Foreign-Currency Issuer Default Rating and foreign currency senior unsecured rating at 'AA'. The Outlook is Stable.
EEQ is a Queensland (AA/Stable) state-owned energy retailer and wholly owned subsidiary of Ergon Energy Corporation Limited (Ergon). The rating affirmation follows the merger of Ergon with Queensland's other state-owned electricity distribution network, Energex Limited, on 30 June 2016, under a new holding company - Energy Queensland Limited (EQL). EQL is wholly owned by the state of Queensland.
KEY RATING DRIVERS
Very Strong Strategic Linkages: EEQ's ratings are aligned with those of Queensland under Fitch's Parent and Subsidiary Linkage methodology. Queensland's commitment to retain ownership of EEQ supports its strong strategic linkages with the state. Queensland does not explicitly guarantee EEQ's obligations, but Fitch believes the links are sufficiently strong to warrant equalisation of EEQ's ratings with those of the state. Integrated with the State: The state borrowing authority, Queensland Treasury Corporation (QTC; AA/Stable), will continue to arrange all of EEQ's debt following the merger. EEQ will receive funding from QTC via EQL and Ergon. The virtually assured availability of perpetual senior debt from QTC indicates a high degree of financial integration with the state. State Payments Support Profile: EEQ's unsupported credit profile reflects that of a pure retailer.
Fitch believes a pure or standalone retailer generally bears high business risks. The company's credit profile, however, benefits from the community service obligation (CSO) payments from the state. These payments compensate EEQ for the shortfall in recovering its costs as a result of the state's uniform tariff policy.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:- continuation of CSO payments - funding support from Queensland and QTC
RATING SENSITIVITIES
The issuer's rating is currently equalised with that of Queensland. Positive: Future developments that may, individually or collectively, lead to positive rating action include an upgrade in Queensland's ratings, provided ratings linkages remain intactNegative: Future developments that may, individually or collectively, lead to negative rating action include a downgrade in Queensland's ratings or evidence of weakening state support.For the sub-sovereign rating of Queensland and QTC, the following sensitivities were outlined by Fitch in its Rating Action Commentary, Fitch Affirms Queensland and QTC at 'AA'; Outlook Stable /a , dated 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.The ratings of the Australia-backed securities are linked to the ratings of the sovereign. A downgrade of the sovereign's IDR would result in a downgrade of QTC's guaranteed senior unsecured debt rating.