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Standard & Poor’s has announced:

• On Dec. 16, 2020, S&P Global Ratings lowered its long-term issuer credit rating (ICR) on Innergex Renewable Energy Inc. to ‘BB+’ from ‘BBB-‘.
• We also lowered our global scale rating and Canada scale rating on Innergex’s preferred shares by two notches to ‘B+’ and ‘P-4(High)’, respectively, from ‘BB’ and ‘P-3’.
• The downgrade reflects credit metrics that continue to show weakness in light of the company’s aggressive expansion, moderate distribution growth, negative free cash flow, and reliance on corporate debt to fund acquisitions and development.
• The stable outlook reflects our expectation that the company’s cash flow quality will continue to benefit from its portfolio of contracted assets, which will generate sufficient cash flows to support debt obligations at the holdco level. Under our base-case scenario, we forecast that funds from operations (FFO)-to-debt will be around 19% through 2022.

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Although Innergex has added considerable generation capacity to its portfolio, its capital and investment spending has exceeded cash flow growth. The downgrade essentially reflects credit metrics that continue to reflect weakness in light of the company’s aggressive expansion, moderate distribution growth, negative free cash flow, and heavy reliance on corporate debt to fund acquisitions and development projects. Since the beginning of 2017, Innergex has brought into operation more than 1.8 gigawatts of net capacity, either through developments, or via opportunistic acquisitions across different markets. Although this has helped increase scale, as well as improve asset and geographical diversity, the growth in distributable cash at the holdco level has lagged our expectations, and, combined with an increasing dividend and ongoing capital spending requirements, has left the company with limited, or no room for debt reduction.
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We view Innergex’s financial risk profile as aggressive based on projected FFO-to-debt of about 19% and debt-to-EBITDA of 4.0x-4.5x through our two-year outlook period. Our analysis excludes both nonrecourse project debt (and associated debt service) from corporate debt and adjusted interest expense.

The stable outlook reflects our expectation that Innergex’s cash flow quality will continue to benefit from its portfolio of contracted assets, which will generate sufficient cash flows to support debt obligations at the holdco level. We also expect that the company’s future investments and developments will remain backed by commercial certainty via contracts or PPAs. Finally, under our base-case scenario, we forecast that FFO-to-debt will remain around 19% through 2022.

We could lower the rating if we forecast FFO-to-debt will remain below 16% on a consistent basis. This could occur if the company’s reliance on corporate-level debt financing to support growth or expansion plans is higher than expected, or if its financial performance falls short of our base-case forecast.

We could consider a positive rating action if Innergex achieves and maintains FFO-to-debt ratio of at least 23% on a sustained basis. This could be achieved if the company experiences better-than-expected financial performance, or if it reduces debt at the holdco level.

Affected issues are INE.PR.A and INE.PR.C.

This entry was posted on Thursday, December 17th, 2020 at 6:47 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.