OREANDA-NEWS. Fitch Ratings has today revised the Outlook on CS Energy Limited's (CS Energy) Long-term Foreign Currency Issuer Default Rating (IDR) to Stable from Negative. The agency has simultaneously affirmed CS Energy's Long-Term and Short-Term IDRs at 'AA' and 'F1+' respectively.

The revision in the Outlook on CS Energy's IDR reflects the economic policies of the new state government that took office in February 2015, which exclude any sale of CS Energy or lease of its business in Queensland. The state government is committed to retaining ownership of CS Energy. Fitch also expects the state government to remain in control of CS Energy'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. This reflects the new Queensland government's policy to rule out lease or privatisation of its energy assets. The state does not explicitly guarantee CS Energy's obligations, but Fitch believes the links are sufficiently strong to warrant equalisation of CS Energy's ratings with those of the state.

Integrated with the State: Queensland Treasury Corporation (QTC, 'AA'/Stable) - the state borrowing authority, provides CS Energy with long-term funding and short-term liquidity. The state also effectively controls the appointment of CS Energy's board, and its capex and dividend policies.

Standalone Credit Profile: CS Energy's standalone credit profile reflects its merchant generation business and consequent exposure to wholesale pool prices. It also reflects the difficult operation conditions for merchant generators from weak electricity demand growth and surplus generation capacity. CS Energy is a Queensland state-owned power generator, with a trading generation capacity of 4,035 megawatts across four sites, from a mixture of coal-fired and pumped storage hydro power generation.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Funding support from QTC
- Dividend payout ratio of 80%

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.