Policymakers have recently succeeded in raising renewables’ share of the energy pie in Canada, though it appears the country’s provinces and major cities are doing most of the heavy lifting. Despite an 88 percent surge in clean energy investment the year before last, spending suffered a 46 percent slide in 2015 and defied an otherwise impressive year for renewables investment. Keeping hold of its eighth placed global ranking therefore, requires that renewables companies step up and be heard.
Enter Innergex Renewable Energy: one of Canada’s leading independent renewable power producers, with a mission to increase renewable production by developing and operating high-quality facilities; all while respecting the environment and balancing the best interests of its host communities, partners, and investors. The company’s latest plans – to construct the Upper Lillooet Hydro Project (ULHP) – fall in step with much broader ambitions to expand the country’s renewables sector and reassert its credentials as an attractive investment opportunity.
Casting a wide net
Active since 1990, Innergex develops, owns, and operates run-of-river hydroelectric facilities, wind farms, and solar photovoltaic farms, and carries out its operations in Quebec, Ontario, British Columbia, Idaho, US and France. Its portfolio of assets currently consists of interests in 42 operating facilities with an aggregate net installed capacity of 803 MW (gross 1,318 MW), including 28 hydroelectric operating facilities, 13 wind farms, and one solar photovoltaic farm.
It has interests in four projects under construction with an aggregate net installed capacity of 187 MW (gross 297 MW), for which power purchase agreements (PPAs) have been secured; and prospective projects with an aggregate net capacity totaling 3,280 MW (gross 3,530 MW). Innergex is also rated BBB- by S&P.
On April 15, 2016, the company completed the acquisition of seven operating wind power projects located in France, from German company wpd europe GmbH. That is seven operating projects with a combined installed capacity of 87 MW.
Innergex is currently looking to expand its business into selected target markets internationally – particularly in Latin America and Europe – where the gathering competitive cost of renewables and the need to replace fossil fuels has boosted demand.
The aforementioned ULHP includes the 25.3 MW Boulder Creek and 81.4 MW Upper Lillooet River run-of-river hydroelectric projects, both of which are located near Pemberton, British Columbia. The financing is exceptional by virtue of its size at almost CAD 500m, and should be considered even more so thanks to its 40-year term and unique characteristics.
Each facility will have a weir structure, which will in turn divert partial flows to an intake structure through a bypass channel, where the water will move downhill to each powerhouse. The water will then be returned to its natural watercourse using a tailrace. Electricity generated by the hydroelectric facilities will be transmitted to British Columbia Hydro and Power Authority under a 40-year term PPA.
Innergex‘s involvement in the renewable energy sector stretches back to 1990, and the company has built 22 projects for a total value of CAD 2bn, with 21 projects completed without significant delay and construction costs under budget by a 1.9 percent on average. Innergex is leading the project’s development in which Ledcor Power Group owns a 33.33 percent stake.
Construction started in 2013 and isn’t due for completion until early 2017, at which time commercial operation will commence. During the more than three-year construction period, the project will support approximately 382 jobs, including, but not exclusive to: road construction and maintenance; penstock/tunnel installation; powerhouse and switchyard electro-mechanical installation; and transmission line construction.
It will also provide opportunities for First Nations and local contractors, suppliers, and businesses in the supply of equipment, materials, services and accommodation throughout the construction phase.
The financial breakdown
A CAD 491.6m non-recourse construction and term project financing deal was secured in March 2015 for the ULHP. The lenders are two life insurance companies – Manulife and Canada Life – and a pension fund (the Caisse de Dépôt et Placement du Québec) and the complexity of the financing boils down to two matters: the size – CAD 491m – and the tenor of the loan, at 40 years.
In the Canadian market, project financing has access to private placements with pension funds and life insurance companies. These lenders typically express an appetite for long-term financing (30-40 years), given that it matches up with their long-term liabilities. Considering that for non-rated private placements, the capacity of the Canadian market is usually limited to CAD 500m per project, this is a great achievement.
Innergex could have sought a credit rating from S&P or DBRS for this project, which would have granted access to a larger pool of investors – such as money management funds who buy rated bonds.
But doing so would have resulted in higher costs and might have negatively impacted the economics of the project, as credit rating agencies require stringent security packages for credit ratings of BBB+ or higher.
In order to get the best financing terms for the project, a debt financing competition was created where Manulife, Canada Life and the Caisse de Dépôt et Placement du Québec competed against other financial institutions to secure the right to provide long-term financing. Ultimately, these three lenders provided the most competitive terms and conditions owing to a number of innovations.
First is a five-year grace period, with no principal payments for the initial five years of operations. This is a feature that clearly improves upon the economics of the project and one that, according to the company’s knowledge, has never before been offered in project financing of renewable energy projects.
Second, the financing comprises of three tranches with varying maturities and principal payment schedules. Tranche A is a CAD 250m construction loan carrying a fixed interest rate of 4.46 percent. After commissioning, it will convert into a 40-year term loan and the principal will be amortised after the 25-year maturity of the Tranche B. Tranche B is a CAD 191.6m construction loan carrying a fixed interest rate of 4.22 percent, which will convert into a 25-year term loan and be amortised over a 20-year period, starting in the sixth year.
Finally, tranche C is a CAD 50m construction loan carrying a fixed interest rate of 4.46 percent; after commissioning it will convert into a 40-year term loan and its principal will be reimbursed at maturity.
This three-tranche structure has also introduced innovative inter-creditor clauses to ensure that all investors were pari-passu in terms of rights, despite their different tenors.
To Innergex’s knowledge, this is the first time lenders have accepted a bullet bond representing 10 percent of the total facility on a hydroelectric plant financing. This feature again greatly improves the economics of the project, as it postpones the repayment of the debt until the end of the PPA.
Given the size of the financing, the company needed to develop a flexible structure to attract long-mandate investors. The combination of a 25-year term tranche with a 40-year tranche made for an efficient financing structure, taking advantage of the lower interest rate on the 25-year maturity, while matching the life of the PPA with the tenor of the loan.
In short, by tailoring the financing to meet the different – and complementary – investment objectives of multiple lenders, the borrowers were able to secure a large amount of capital for the long term and at a very low fixed cost.
The ULHP is proof that Canadian pension funds and life insurance companies are pioneers in project finance. More than that, the project is proof that Innergex is a renewables leader in the country, and is doing its fair share to atone for a bad year on the renewables investment front.