OREANDA-NEWS. Fitch Ratings has today affirmed CS Energy Limited's (CS Energy) Long-Term and Short-Term Issuer Default Ratings (IDR) at 'AA' and 'F1+' respectively. The Outlook is Stable.

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. Whilst the state does not explicitly guarantee CS Energy's obligations, Fitch views the strategic, operational and financial links to be 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, its capex and its dividend policies.

Weak 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 operating conditions for merchant generators in Queensland, where there is surplus generation capacity. This is partly offset by an increase in electricity demand following the commencement and ramp-up of gas liquefaction capacity in the state.

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
- No dividend payout

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-Upgrade in Queensland's ratings, provided the current linkages with state remains intact.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Downgrade in Queensland's ratings
-Weakening of linkages between Queensland and CS Energy, including privatisation.

For the sub-sovereign rating of Queensland, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 2 September 2015:

Negative rating action could occur if a significant, unexpected increase in Queensland's debt levels occurs along with a large deterioration in its operating performance. Forecast operating margins do not allow much room for unexpected shocks.

An upgrade in the short term is unlikely as Queensland's operating and current margins would need to improve unless it reduces its debt more significantly..