OREANDA-NEWS. Fitch Ratings has today revised the Outlook on Australia-based Ergon Energy Queensland Pty Ltd's (EEQ) Long-term foreign currency Issuer Default Rating (IDR) to Stable from Negative. The agency has simultaneously affirmed EEQ's Long-Term IDR and foreign currency Senior Unsecured rating at 'AA'.

EEQ is a 100% owned subsidiary of Ergon Energy Corporation Limited (Ergon; 'AA'/Stable). Ergon is a Queensland state-owned electricity distribution company.

The revision in the Outlook on EEQ's IDR reflects a similar change to the ratings of its parent. The economic policies of the new state government that took office in February 2015, excludes any sale of EEQ or lease of its energy retailing business in Queensland. EEQ is a non-competitive electricity retailer with around 700,000 customers across regional Queensland. The state government is committed to retaining ownership of EEQ. Fitch also expects the state government to remain in control of EEQ's operations and future investment decisions.

KEY RATING DRIVERS

Strategic Linkages Intact: The ratings are aligned with those of the state of Queensland (Queensland, AA/Stable), in line with Fitch's parent-subsidiary rating methodology. In addition to the confirmation of retaining ownership of EEQ, the government may merge its energy retailing business with a state-owned electricity generator or retain it as a standalone business, which may continue to reflect strong strategic linkages with the state. The state 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), arranges all of EEQ's debt. The virtually assured availability of perpetual senior debt funding from QTC indicates a high degree of financial integration with the state.

Government Payments Supports Profile: EEQ's unsupported credit profile will reflect that of a pure retailer. In Fitch's view, a pure or standalone retailer generally bears very high business risks. Its credit profile, however, benefits from the community service obligation (CSO) payments from the state government, compensating for the shortfall in recovery of its costs as a result of the government's uniform tariff policy across Queensland.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Continuation of CSO payments
- Funding support from 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:
- Upgrade in the Queensland state's ratings, provided the ratings 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 government support including privatisation

For the sub-sovereign rating of Queensland, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 3 September 2014:
Negative rating action could occur should Queensland be unable to restore the operating margin, or should debt grow significantly above AUD48bn.
An upgrade is unlikely in the near term, but continued fiscal recovery through strong financial management would be viewed positively.