DBRS Confirms Innergex Renewable Energy Inc. at BBB (low), Pfd-3 (low), Stable Trends

DBRS has today confirmed Innergex Renewable Energy Inc.’s (Innergex or the Company) Issuer Rating at BBB (low), and Preferred Share rating at Pfd-3 (low), both with Stable trends. This action follows today’s announcement that Innergex intends to acquire all of the shares of privately-held Cloudworks Energy Inc. (Cloudworks) for $185 million (entirely equity-financed) and assumed debt of $265 million (non-recourse to Innergex).

The Cloudworks assets include 75MW of net operating capacity and 76MW of development capacity in British Columbia. Both operating and development assets are covered by 40-year Power Purchase Agreements (PPAs) with British Columbia Hydro and Power Authority (BC Hydro), rated AA (high) by DBRS (see report dated December 1, 2009). Cloudworks’ operating assets are owned by virtue of its 50.01% interest in Harrison Hydro LP (Harrison), which owns six run-of-river power facilities in southwestern British Columbia commissioned in 2009 and 2010. The installed gross capacity of 150MW is forecast to generate 594 GWh of energy annually, based on long-term average hydrology. Power generation is sold under two 40-year PPAs with BC Hydro and is expected to generate approximately $47 million in revenues increasing annually with a portion of CPI. The addition of Cloudworks’ operating assets would increase Innergex’s net installed capacity by about 23% from 326MW to 401MW.

The $185 million purchase price will be equity financed with a $150 million subscription receipts financing in addition to a private placement of $41 million in common shares. There is also a modest deferred component to the acquisition price, providing for a potential sharing of the value created if the Cloudworks assets perform better than expected. Innergex will also assume $265 million of non-recourse debt, comprised of Cloudworks’ 50.1% shares of Harrison’s non-recourse bonds (total of $246 million fixed rate bonds and $285 million real return bonds). The Harrison bonds amortize according to a 40-year principal repayment schedule, maturing in 2049 and matching the cash flow profile of the assets. The funding of the acquisition, at approximately 40% equity and 60% debt, is consistent with Innergex’s current consolidated balance sheet profile.

The rating confirmations reflect the financial and business risk impacts of the prospective acquisition. Innergex’s consolidated coverage metrics are expected to weaken minimally due to the consolidation of the non-recourse bonds. However, as a result of the all-equity-financed acquisition price, and the non-recourse nature of the assumed debt, on a non-consolidated basis Innergex’s credit metrics are expected to improve modestly. From a business risk perspective, the acquisition is positive, adding to watershed and asset diversity, and is consistent with the Company’s strategy of growth by addition of low-cost renewable assets with long-term PPAs (the acquisition increases weighted average life from an already lengthy 21 years to 25 years) and high credit quality counterparties.

The Company’s proven record of effective execution in developing, constructing and operating new generation continues to support its investment grade rating. These strengths are offset somewhat by the Company’s growth plans, which in addition to the Cloudworks assets in development, aim to bring 203MW of new capacity into service between 2011 and 2016. This capital program could limit the Company’s financial flexibility given the related external funding requirements over the next several years.

The acquisition is subject to regulatory approvals and other closing conditions, and is expected to close by March 31, 2011.

Note:
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.