Fitch Affirms CS Energy at 'AA'; Withdraws Ratings

(The following statement was released by the rating agency) Fitch Ratings-Sydney-August 06: Fitch Ratings has affirmed Australia-based CS Energy Limited's Long- and Short-Term Issuer Default Ratings at 'AA' and 'F1+', respectively. The Outlook is Positive. Fitch has simultaneously withdrawn the ratings for commercial reasons. The ratings reflect CS Energy's strong linkage with its 100% parent, State of Queensland (AA/Positive); we see the company's standalone profile as being materially weaker than that of the state. The company is a Queensland merchant generator with a market share of about 36% in terms of electricity dispatched into the National Electricity Market (NEM). Queensland's electricity market has benefitted from a ramp-up of the liquefied natural gas (LNG) industry; however, we expect demand to moderate in the medium term. KEY RATING DRIVERS Strong State Linkages: CS Energy is fully owned by the state and we see the status, ownership and control linkages between the company and Queensland as very strong. The company operates as a commercial entity but the state appoints its board and senior management and reviews its annual business plan. CS Energy's ratings are equalised with the state under Fitch's Government-Related Entities Rating Criteria to reflect the state's policy of ruling out the 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 the ratings. Strong Support Incentive: Fitch sees the socio-political implications of a default by CS Energy as strong, as it could affect about 36% of Queensland's power supply, though we expect the government would take measures to ensure supply was not interrupted. We see the financial implications of a default as very strong, as it would affect all funding provided by the state. Improving Standalone Credit Profile: CS Energy has resolved several of its legacy issues, in particular, the coal-supply dispute for Callide Power Station. The company has also entered a retail joint venture with Alinta Energy in south-east Queensland to supply electricity, providing CS Energy some exposure to downstream integration. However, its standalone credit quality is constrained by its limited equity in upstream fuel assets and downstream integration, as well as minimal generation-source and revenue diversification. However, it does hedge a proportion of its forward production to improve cash flow predictability. Ramp-up of LNG Industry: The ramp-up of Queensland's LNG industry that caused a resurgence in the state's electricity demand is now largely complete. We expect continued energy demand from gas processing and production facilities, which feed the state's LNG projects. However, this will be partially offset by falling electricity demand from lower energy-intensive manufacturing and residential sector consumption. Lower Market Prices: A hotter-than-usual summer and lower supply across the NEM saw a significant rise in electricity prices over the financial year ended June 2017. However, the Queensland government has directed Stanwell Corporation Limited (AA/Positive), the state's largest electricity-generation company, to dispatch higher generation into the NEM at a lower price to provide electricity price stability and put downward pressure on the state's wholesale electricity price. Additional renewable energy supply should also contain prices. Regulatory Impact Limited: The Australia Competition and Consumer Commission recommended that the Queensland government split its two generators, CS Energy and Stanwell, into three equally sized separate companies to reduce concentration and increase competition. Fitch believes the likelihood of this being implemented is limited, as the government is planning to create a new 'CleanCo' for renewable generation, which will provide competition. However, we have not factored the creation of a clean-energy generator, which could further increase supply and lower prices, into our base-case due to uncertainty over policy and timing. DERIVATION SUMMARY CS Energy is rated in line with Queensland due to its strong linkage with the state, which owns 100% of the company. The state also provides the company with its long- and short-term financial requirements. CS Energy's rating is in line with Stanwell, which is also fully owned by Queensland. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - Funding support from Queensland Treasury Corporation (QTC) - 80% dividend payout ratio RATING SENSITIVITIES No longer relevant as ratings have been withdrawn LIQUIDITY Full Funding Support from QTC: CS Energy has a sound liquidity profile, with all its financial needs met entirely by QTC. Borrowings from QTC have no fixed repayment date and can only be called by QTC with 24 months' notice. Contact: Primary Analyst James Hollamby Associate Director +61 2 8256 0347 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Leo Park Associate Director +61 2 8256 0323 Committee Chairperson Ying Wang Senior Director +86 21 6898 7980 Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234 , Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023785 Government-Related Entities Rating Criteria (pub. 07 Feb 2018) https://www.fitchratings.com/site/re/10019302 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10040222 Solicitation Status https://www.fitchratings.com/site/pr/10040222#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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