Rating Action Overview

• On Oct. 7, 2020, S&P Global Ratings assigned its 'A-2' short-term issuer credit rating to New Zealand-based integrated generator-retailer company Genesis Energy Ltd. At the same time, we affirmed the long-term issuer credit rating at 'BBB+'.
• The short-term issuer credit rating reflects our 'BBB+' long-term issuer credit rating, with a stable outlook, on the company.
• We also assigned our 'A-2' short-term rating to Genesis Energy's proposed commercial paper (CP) program of up to NZ$300 million.
• The stable outlook on Genesis Energy reflects our expectations that the company will continue to generate sizable positive free cash flow and maintain a ratio of debt to EBITDA of less than 3.0x on a normalized basis over the next few years.

Rating Action Rationale

We assigned the 'A-2' short-term issuer credit rating to New Zealand-based Genesis Energy Ltd. based on the 'BBB+' long-term issuer credit rating on the company. Genesis Energy's proposed CP program of up to NZ$300 million will be senior unsecured and at par with all other senior debt of the company.

The 'A-2' short-term rating on Genesis Energy is supported by the company's strong liquidity profile. The current bank lines provide flexibility to backstop CP outstanding. We expect Genesis Energy to maintain undrawn lines to adequately cover maturing CP at all times (NZ$324 million undrawn lines outstanding as of Sept. 30, 2020).

The ratings on Genesis Energy reflect the company's position as one of New Zealand's four largest integrated electricity companies. While the planned closure New Zealand Aluminium Smelter (NZAS) will affect all integrated electricity generators in New Zealand, we believe Genesis Energy could navigate the risk provided the company can proactively manage its asset portfolio, costs, and balance sheet.

Outlook

The stable outlook on Genesis Energy reflects our expectations that the company will continue to generate sizable positive free cash flow and maintain a ratio of debt to EBITDA of less than 3.0x on a normalized basis over the next few years. We have not factored in the potential effect of the strategic review's outcome regarding the smelter operations. Any full-year effect is likely to occur in the year ending June 30, 2022. Genesis could be somewhat exposed if wholesale prices are depressed--a scenario that could be one of the factors that influences the company's dividend reinvestment plan (DRP) in the outer years.

Downside scenario

We could consider lowering the rating if debt to EBITDA were to remain more than 3.0x. This could happen due to a material change in the operating environment such as smelter closure, sustained hydrological risk, or oil price volatility that is not balanced by proactive capital management. While less likely, debt-funded acquisitions or new projects can also place pressure, because Genesis Energy's financial flexibility is fairly limited.

A downgrade could also occur if the government reduces its ownership to less than 50% or if we were to reassess the company's important role in the New Zealand economy.

Upside scenario

Given the likely trend in the current metrics, we view any upside rating potential to be unlikely.

Liquidity

The short-term rating on Genesis Energy is 'A-2'. The strong liquidity assessment reflects our expectation that Genesis Energy's sources of liquidity (including forecast funds from operations, cash balances, and undrawn committed bank facilities) would exceed estimated uses by at least 1.5x over the next 12 months and 1x over the subsequent 12 months.

In addition, we estimate that liquidity sources will remain positive over the period, even if EBITDA were to drop by at least 30%. We consider Genesis Energy to have well-established and solid relationships with banks, generally high standing in credit markets, and prudent risk management. Diversity in its funding sources and a long weighted-average maturity of over four years further support the liquidity assessment.

Genesis Energy's facilities are subject to maximum gearing and minimum interest coverage covenants. The company is operating with significant headroom against its covenants, which we expect it to maintain over the next 12 months:

Principal liquidity sources:

• Cash of about NZ$30 million as of Sept. 30, 2020.
• Undrawn lines of about NZ$300 million maturing beyond 12 months.
• Operating cash flows of about NZ$280 million over the 12 months.

Principal liquidity uses:

• Capital expenditure of about NZ$100 million.
• Distributions of about NZ$190 million.
• Debt maturities of about NZ$40 million over the 12 months.

Ratings Score Snapshot

Issuer Credit Rating: BBB+/Stable/A-2

Business risk: Satisfactory

• Country risk: Low
• Industry risk: Moderately high
• Competitive position: Satisfactory

Financial risk: Intermediate

• Cash flow/leverage: Intermediate

Anchor: bbb

Modifiers

• Diversification/portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Strong (no impact)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile: bbb

• Related government rating: AA+
• Likelihood of government support: Moderate (+1 notch from SACP)

Related Criteria

• General Criteria: Group Rating Methodology, July 1, 2019
• General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | Industrials: Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

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