OREANDA-NEWS. Fitch Ratings has today revised the Outlook on Australia-based Energex Limited's (Energex) Long-Term Foreign Currency Issuer Default Rating (IDR) to Stable from Negative. The agency has also affirmed Energex's Long-Term Foreign Currency IDR at 'AA' and Short-Term Foreign Currency IDR at 'F1+'.

The revision in the Outlook on Energex's IDR reflects the economic policies of the new state government that took office in February 2015, which exclude any sale of Energex or lease of its electricity distribution business in Queensland. The state government is committed to retaining ownership of Energex, a Queensland state-owned electricity distribution company. Fitch also expects the state government to remain in control of Energex'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 Energex, the Queensland government also proposes to merge the three state-owned electricity networks companies into one, which may further strengthen the strategic linkages of the merged company with that of the state. The state does not explicitly guarantee Energex's obligations, but Fitch believes the links are sufficiently strong to warrant equalisation of Energex's ratings with those of the state.

Funding 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.

Strong Standalone Credit Profile: Energex's strong standalone credit profile reflects the largely regulated nature of its network business and the transparent and stable regulatory environment.
Fitch expects the regulator to provide guidance of the regulatory approach on Energex's forecast expenditure and expected total invested capital returns over the next regulatory determination period from 1 July 2015 to 30 June 2020 in its preliminary decision due late-April 2015. This would be the first regulatory determination under the new electricity rules introduced in late-2013.

KEY ASSUMPTIONS
Fitch'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
- Leverage profile - as reflected by debt to regulatory asset base - and funding costs to stay within regulatory benchmarks over the current regulatory determination period
- Very limited exposure to non-regulated revenues

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.