June 24, 2014 / 7:12 AM / 3 years ago

RPT-Fitch Affirms Australia's Ergon Energy at 'AA'; Outlook is Stable

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June 24 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has today affirmed Australia's Ergon Energy Corporation Limited's (Ergon) Long-Term Foreign Currency Issuer Default Rating (IDR) and Foreign Currency Senior Unsecured rating at 'AA'. The Outlook on the IDR is Stable.

KEY RATING DRIVERS

Strong Linkages with State: Ergon's ratings reflect its very strong legal, strategic and operational linkages with its sole owner, the State of Queensland (AA/Stable). The state does not explicitly guarantee Ergon's obligations, but Fitch believes the links are sufficiently strong to warrant equalisation of Ergon's ratings with those of the state.

Strategically Important Business: Ergon's electricity distribution network services the rural and regional areas of the state. The company is operationally integral to the functioning of the state due to the economic and social importance of its services. It also reflects the Queensland government's current policy to retain its portfolio of network electricity assets in public ownership, as also noted in the state budget on 3 June 2014.

Integrated with the State: The state borrowing authority, Queensland Treasury Corporation (QTC, AA/Stable), arranges all of Ergon's debt. The virtually assured availability of perpetual senior debt funding from QTC indicates a high degree of financial integration with the state, which effectively controls the appointment of Ergon's board, as well as its capex and cash distribution policies.

Private Sector Investment: Fitch notes that state government expects private sector investment in electricity network companies through a hybrid instrument, for a share of revenue streams in future. However, Fitch also notes that the state government remains committed to retaining full ownership of these companies. Such investment is only likely after the next state election in mid-2015. Any rating implications will include a review of the term sheet of the hybrid instrument.

Strong Standalone Credit Profile: Ergon's standalone credit profile benefits from the stable and predictable nature of cash flows generated by its monopoly regulated distribution network, and the transparent regulatory environment in which it operates. Ergon is a Queensland state owned electricity distribution company which manages more than AUD11bn in distribution assets, with a network spanning 97% of the state.

RATING SENSITIVITIES

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 support, including privatisation and/or private sector investment.

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