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

DBRS has today confirmed the Issuer Rating of BBB (low) and the Preferred Shares rating of Pfd-3 (low) of Innergex Renewable Energy Inc. (Innergex or the Company). Both ratings have Stable trends. The ratings reflect the strength of the Company’s high-quality, low-cost renewable power generating assets, operating under long-term off-take contracts with highly-rated counterparties, and its consistent execution in developing and constructing new generating assets.

The Company has grown significantly in 2011. Assets more than doubled to $1,976 million and consolidated debt (including convertible debentures) grew from $438 million to $1,041 million. Growth was funded partly by increased equity capital; most of the increase in consolidated debt was project-level debt and non-recourse to the Company. (Fourteen of the Company’s 23 operating project assets have non-recourse debt totalling approximately $836 million, or 82% of consolidated debt.) However, corporate-level recourse debt (including convertible debentures) also grew, from $122 million to $213 million. Continued access to equity and project-level debt capital occurred at the same time that the Company’s bank credit facility (secured by nine of the 23 operating project assets) increased from $170 million to $350 million.

Financing growth with equity and non-recourse debt limits recourse obligations at the Innergex level and, while project-level debt (on 14 projects) is serviced ahead of Innergex debt, EBITDA available after project-level debt service is sufficient for the ratings. Growth is considered manageable, given access to non-recourse project debt, flexibility from secured bank facility liquidity, and the ability to raise equity as required. While strengths will be challenged by the Company’s continued growth plans, with 312 megawatts (MW) under construction, the Innergex business model and liquidity can support construction period capital requirements with corporate-level debt, providing flexibility to time refinancing with project-level debt.

Innergex currently owns and operates 20 hydroelectric (279.1 MW) and three windpower (121.4 MW) generating facilities (all but one located in Canada), with total capacity of 400.5 MW. The Company operates conservatively, with production sold under long-term power purchase agreements (PPAs). The PPAs provide financial stability, transferring price risk to highly-rated utility buyers. Operating asset PPAs benefit from a weighted-average term of approximately 20 years and the high credit quality of their buyer counterparties: Hydro-Québec (rated A (high)), British Columbia Hydro & Power Authority (BC Hydro, AA (high)), Ontario Power Authority (OPA, A (high)), and the Ontario Electricity Financial Corporation (OEFC, AA (low)).

Combining high-quality PPAs with modest operating risk from a new fleet of generation assets (average age of 5.9 years), cash flow is expected to be affected mainly by variance in renewable resources (hydrology, wind and solar). The Company’s capital program over the medium term is significant but manageable, with three wind projects (103 MW contracted with Hydro-Québec), seven hydro facilities (176 MW contracted with BC Hydro) and one solar project (33 MW contracted with the OPA) currently under construction. DBRS expects the high common dividend payout ratio to continue and the capital program to be mainly debt-financed at the project level.

Consolidated credit metrics are expected to remain weak for the rating category through the medium term, with EBITDA-to-interest in the 2.3 times (x) to 2.5x range and cash flow-to-debt in the 5% to 8% range. DBRS expects future modest improvement in coverage metrics as assets under construction are completed and enter service. Consolidated debt-to-capital, currently 63%, is expected to increase modestly over the next several years and peak in 2013 to 2014 until new construction assets begin to operate. Most of the consolidated debt (82%) is project-level debt and non-recourse to the Company.

In 2010, an $85 million preferred share offering refinanced existing debt and partly funded future capital expenditures. While the preferred shares are a material percentage of the capital structure, DBRS has confirmed the Pfd-3 (low) rating based on the stability of the underlying business (new generating assets and high-quality, long-dated PPAs), as well as on the financial flexibility implied by discretion over dividend payout levels.

Business risk factors are low for the rating category. Innergex’s competitive position, asset composition and contractual position are all strong for the BBB (low) rating. Asset diversification and operational expertise also support the investment-grade quality assessment. In addition, the focus on renewable assets minimizes exposure to environmental regulation and is positive for the rating. The Company’s low business risk profile mitigates weaker financial credit metrics. Renewable resources are variable, reducing energy production stability and related cash flows. However, this risk is mainly offset by the geographic diversity of the generating portfolio. Also, the Company has cash-funded reserves at the project level (typically six months of debt service) to smooth variability in cash flows from wind/hydrology resources.

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

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry, which can be found on our website under Methodologies.