Investing.com -- Fitch Ratings has put Innergex Renewable Energy Inc (TSX:INE).’s Long-Term Issuer Default Rating (IDR) and outstanding securities ratings on Ratings Watch Negative (RWN). This action has been taken due to the anticipation of increased leverage to fund the recently announced acquisition of Innergex by Caisse de dépôt et placement du Québec (CDPQ; IDR: AAA/Stable) for $2.8 billion CAD in cash.
According to the proposed transaction, all of Innergex’s corporate-level debt will be cleared at the time of transaction closure, to be funded with cash and $1.2 billion of new senior debt. Fitch predicts that the holdco-only leverage will weaken notably to about 5.0x from 3.2x in 2024, assuming $1.2 billion of new debt. This increase is more than previously anticipated and exceeds the 4.0x downgrade sensitivity, which could result in a downgrade of one or more notches.
The acquisition is projected to be completed by the fourth quarter of 2025, pending regulatory and shareholder approvals. Fitch will resolve the RWN after the transaction and once there is more clarity on Innergex’s pro forma capital structure.
The expected weakening of holdco-only leverage is due to the proposed transaction, which will increase it to around 5.0x from approximately 3.2x in 2024. This is weaker than anticipated and above Innergex’s negative sensitivity threshold. However, the leverage improved to 3.2x in 2024 from 4.9x in 2023, showing management’s efforts to reinforce the balance sheet and improve FFO.
In 2024, the cash flow was boosted by the commercial operation of new projects and stronger production from hydro, wind, and solar resources. Fitch calculates Innergex’s credit metrics on a deconsolidated basis, as its operating assets are financed with non-recourse project debt and considers the nearly fully contracted nature of its cash flows.
The acquisition by CDPQ involves a CAD2.8 billion purchase price, reflecting an enterprise value of CAD10 billion. It includes the assumption of about CAD7 billion of project-level debt and repayment of all corporate debt. Fitch anticipates that CDPQ will fund the acquisition with CAD1.2 billion of new senior financing at closing and will aim to sell up to a 20% minority interest to investors. After the transaction, Innergex will become a private company.
Innergex’s portfolio of renewable assets typically generates relatively predictable cash flows, supported by long-term contracts with a remaining revenue-weighted average contract life of 11 years. Cash flows have been strengthened by increased availability of its renewable resources, with production increasing to 93% of its long-term average from 90% in 2023. The long-term contracts, which represented around 90% of its consolidated revenue in 2024, are typically fixed price with annual escalation mechanisms. The debt structure is designed to fully amortize during the contract period.
Innergex’s merchant price exposure is primarily in the U.S. and Chilean power market. Fitch expects the company’s merchant exposure will be maintained at approximately 10%. A significant increase in uncontracted assets could result in future negative rating actions.
Innergex’s project revenue comes from well-structured power purchase agreements with strong investment-grade counterparties. Its counterparties, which include large municipal- and investor-owned utilities, have a weighted average counterparty credit rating of ’A’ based on Fitch’s ratings and other publicly available ratings. This reinforces Innergex’s cash flow stability.
Innergex owns 90 operating facilities comprising 4,663 MW of renewable energy generation capacity, including energy storage with an additional 240MW under construction and 1.3GW under development. Wind projects contributed 54% of total production, followed by hydropower (34%) and solar (12%). Fitch believes Innergex’s relatively high concentration of wind and hydro assets increases resource and business risk. However, this concern is mitigated by the large number of assets in Innergex’s portfolio and their geographic diversity.
Consolidated revenues in 2024 were predominantly derived from Canada (46%), followed by the U.S. (29%), Chile (16%) and France (9%). Despite Chile’s ’A-’ sovereign rating, Fitch believes significant growth in this market would increase risk for Innergex due to the country’s relative political and economic uncertainty compared with North America and France. However, Fitch expects Chilean revenue contribution will remain below 20% with the majority of Innergex’s prospective projects developed in North America.
Innergex is growing rapidly and has a clear line of sight to increase its total renewable portfolio by 34% to 6.2GW by 2031 with 1.6GW of renewable assets under development. In 2024, Innergex added 370MW of renewable generation. However, this pace of development is likely to increase due to a project pipeline of over 10GW in various stages of development and expected financial support from CDPQ.
Innergex placed its 330MW Boswell Springs Wind farm in service in Q42024 and its 30MW Hale Kuawehi solar project is expected to commence operations in Q12025. In 2025, Innergex plans to bid over 500MW in future request for proposals in Canada. In 2024, Innergex successfully bid for 560MW of wind resources in British Columbia, signed approximately 1GW of 30-year power purchase agreements for wind in Canada, and signed a 350GWh/yr 15-year contract in Chile.
Fitch views Innergex’s liquidity position as adequate, with approximately CAD889 million of available liquidity under its CAD950 million revolving credit facility (RCF) as of Dec. 31, 2024, including CAD181 million of unrestricted cash and cash equivalents on hand. The credit facility matures in 2029.
As of Dec. 31, 2024, Innergex had approximately CAD242 million of borrowings drawn under its RCF and CAD2.4 million of letters of credit outstanding. In 2024, management paid down revolver borrowings using CAD 399 million of proceeds from completing non-recourse financings and CAD 26 million from the sale of a minority interest its Texas merchant assets.
Long-term debt maturities include CAD296 million in 2025 and CAD142 million in 2026. Following the expected close of the acquisition by CDPQ, Fitch expects all corporate-level debt will be repaid with proceeds from $1.2 billion of new senior financing.
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