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June 24 (The following statement was released by the rating agency)
Fitch Ratings has today revised the Outlook on Australia's Ergon Energy Queensland Pty Ltd's (EEQ) Long-term foreign currency Issuer Default Rating (IDR) to Negative from Stable. 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.
KEY RATING DRIVERS
Outlook Revision: The revision in Outlook on EEQ's IDR follows the inclusion of proceeds from sale of the energy retail business in Queensland in the state budget in June 2014, increasing the possibility of privatisation of EEQ. EEQ is a non-competitive electricity retailer with around 700,000 customers across regional Queensland.
Weakening Strategic Linkages: The Outlook revision also reflects a weakening in the strategic linkages between the State of Queensland (QLD, 'AA'/Stable) and EEQ, should the entity be privatised, as viewed under Fitch's parent-subsidiary rating methodology. The proposed timing of this transaction is, however, only likely after the next state election due in mid-2015, given the state government's commitment to seek a public mandate through the state election. A sale of the assets can lead to a material weakening of the rating linkages with the state leading to a multiple-notch downgrade of EEQ's ratings to a level consistent with its stand-alone credit profile.
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.
Weak Standalone Credit 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. Retail margins tend to be relatively thin, and standalone retailers will generally require significant working capital and bank letters of credit to enable them to trade and cover settlement risk. Other than receivables, these businesses have few assets to provide collateral for secured bank funding should they experience a sharp deterioration in credit profile.
Positive: Considered unlikely given the likely announcement of sale of these assets following the next state election
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Downgrade in the Queensland state's ratings
-Sale of the company will likely result in a multi-notch downgrade