DBRS Changes Trends on Innergex Renewable Energy Inc. to Negative from Stable

DBRS has today confirmed Innergex Renewable Energy Inc.’s (Innergex or the Company) Issuer Rating at BBB (low) and Preferred Shares at Pfd-3 (low) and changed the trends on both to Negative from Stable. This rating action follows the Company’s recent announcements of acquisitions and its intended acquisition of hydroelectric and wind power generation assets in British Columbia, Québec and Ontario. The Company issued approximately $124 million of common shares to fully fund initial acquisition costs and increased the limit of its credit facility to $425 million from $350 million.

DBRS believes the acquisitions are negative for the Company’s financial risk profile. Although the common share issuance, including the dividend reinvestment plan, would provide equity capital, the Company has been paying significant dividends in excess of net income. As a result, Innergex’s equity base is expected to continue declining, limiting its ability to assume higher debt levels at the holding company to support its growth strategy. The ongoing construction, development and acquisition activities are expected to continue through 2017 and are likely to result in increased borrowings in the near to medium term, weighing on credit metrics that are outside of the acceptable range for the current rating category.

The Company needs to manage its debt-to-capital ratio on both a consolidated and non-consolidated basis in a way that provides the financial flexibility required for growth and consistent execution of project-level borrowing. A large percentage of the Company’s existing debts are at the project level which provides certain protections at the holding company issuer level. However, growth has gradually caused increases in the usage and size of the corporate revolver. The revolver is supported by unencumbered project assets, and is intended mainly to provide flexibility for arrangement of project-level borrowing. More revolver debt is a higher risk strategy matching a shorter term liability to long-lived project assets. DBRS notes that a return to a greater share of consolidated debt at the project level will be positive for credit quality and support the Company’s growth activities.

DBRS believes that the acquisitions are more or less neutral for Innergex’s business risk profile. All of the assets acquired or to be acquired have long-term contracts with British Columbia Hydro & Power Authority (rated AA (high) with a Stable trend), Hydro-Québec (rated A (high) with a Stable trend) or Ontario Power Authority (rated A (high) with a Stable trend). The acquisitions are largely in line with the Company’s existing business profile in terms of contract protection and bring incremental benefit of diversification. If growth is successfully executed, Innergex’s business risk profile is expected to remain strong for the current rating category. Diversified and contracted hydro and wind power operations with high credit quality counterparties, relatively newer operating assets, a track record of successful completion of construction projects and prudent management of exposure to development and execution risk is positive for credit and supports the confirmation of the rating.

Considering Innergex’s business risk profile and the structural protections of a non-recourse, project-financing strategy, DBRS views deconsolidated leverage (i.e., debt at the issuer level) of approximately 30% and consolidated leverage of 60% appropriate for maintaining an investment grade rating. Consistent and reliable performance at the project level and increased share of debt at the project level would be supportive of the credit and return to Stable trends. DBRS expects that free cash flow deficit due to funding needs for growth will be financed by a balanced combination of project debt and equity to maintain leverage ratios at acceptable levels. DBRS will review the Company’s plans and progress, if any, in addressing this issue. On the other hand, a continued decline in equity base could have negative rating implications.

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

The applicable methodologies are Rating Companies in the Non-Regulated Electric Generation Industry (May 2011), DBRS Criteria: Rating Parent/Holding Companies and Their Subsidiaries (March 2010) and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (August 2009), which can be found on our website under Methodologies.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.