DBRS Rates Innergex BBB (low) and Preferred Offering at Provisional Pfd-3 (low)

DBRS has today assigned Innergex Renewable Energy Inc. (Innergex or the Company) an Issuer Rating of BBB (low) and a provisional rating of Pfd-3 (low) to its prospective $85 million offering of Cumulative Rate Reset Preferred Shares, Series A. Both ratings have Stable trends. The ratings reflect the strength of the Company’s high-quality, low-cost renewable power generating assets, which operate under long-term off-take contracts with very strong counterparties, and its solid track record of developing and constructing new generating assets. These strengths are offset by the Company’s growth plans, with 203 megawatts (MW) of capacity expected to come on-line between 2011 and 2016. This capital program will limit Innergex’s financial flexibility given its significant external funding requirements; in addition, Innergex-level obligations are subordinated to the project-level debt that resides in a number of its subsidiaries.

Innergex currently owns and operates 14 hydroelectric and three wind power generating facilities (all but located one in Canada), with total capacity of 326 MW. The Company operates conservatively on a commercial basis, with 100% of power production sold under long-term power purchase agreements (PPAs). The PPAs can provide significant financial stability as they eliminate market price risk. The PPAs are also characterized by a very favourable remaining weighted-average term of approximately 17 years and a highly creditworthy counterparty group – 97% of production is contracted with either Hydro-Québec (rated A (high)), British Columbia Hydro & Power Authority (BC Hydro, AA (high)), Ontario Power Authority (OPA, A (high)), or the Ontario Electricity Financial Corporation (OEFC, AA (low)). Combining the strong PPA profile with the modest level of operating risk inherent in a young generating asset fleet (average age of six years), cash flow variability from the existing assets is expected to be largely limited to the impact of fluctuations in the renewable resources (hydrology and wind).

Innergex has a demonstrated track record of developing and building renewable energy assets, having largely completed its existing projects on budget and on schedule. The Company’s capital program over the medium term is significant, yet viewed as manageable, with three wind projects (contracted with Hydro-Québec) totalling a net 103 MW currently in construction, and four hydro facilities (contracted with BC Hydro) in development. If all are completed, these would increase Innergex’s net capacity by over 60% over the next five years.

While the Company’s existing assets would be expected to produce reasonable financial results and credit metrics under a steady-state scenario, the capital program will require significant financing beyond internally generated cash flow, expected to consist largely of debt. Furthermore, DBRS expects that Innergex will maintain a high common dividend payout ratio (in excess of 100% of net income) throughout the medium term. As such, consolidated credit metrics are expected to remain tight for the rating category through the medium term, with EBITDA-to-interest in the area of 2.5 times (x) and cash flow-to-debt in the 8% to 10% range. DBRS would expect future modest improvement in coverage metrics when assets under development are completed and enter service. Debt-to-capital, currently 62%, would be expected to migrate upward over time, given the significant common dividends.

The proceeds from the intended $85 million preferred share offering will be used to refinance existing debt and to fund future capital expenditures. While the amount of preferred shares will comprise a material portion of the capital structure, particularly in relation to the book value of shareholders’ equity, DBRS is comfortable with the provisional Pfd-3 (low) rating given the stability of the underlying business (largely attributable to the young generating fleet and strong PPAs), as well as the significant financial cushion that the common dividends provide.

Eight of the Company’s 14 operating assets have non-recourse debt totalling approximately $320 million; while selective use of project financing can serve to isolate business risk at the individual asset level, the asset-level debt obligations rank ahead of Innergex’s obligations.

Renewable resources such as wind and hydrology are variable, which will cause variability in Innergex’s energy production and resultant cash flows. This risk is somewhat mitigated by the geographic diversity of the generating portfolio. Additionally, the Company has cash- funded reserves in place (currently $17 million) to aid in smoothing out the variability in cash flows that lower wind/hydrology resources may produce.

In March 2010, Innergex Renewable Energy (IRE) and Innergex Power Income Fund (Fund) combined into the current Innergex. IRE had owned 16% and was manager of the Fund.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on our website under Methodologies.