Innergex & Hydro-Québec Announce the First Joint Acquisition Under Their Strategic Alliance

Source: 8/17/2021, Location: North America

• Acquisition of the 60 MW Curtis Palmer run-of-river hydroelectric portfolio in the state of New York
• Leverages the Strategic Alliance between Innergex and Hydro-Québec via a joint 50-50 acquisition
• Expands Innergex’s U.S. presence with entry in the attractive New York renewables market
• PPA with Niagara Mohawk Power Corporation (A3 / BBB+) expected to contribute US$19.7 million ($24.6 million) of average annual Free Cash Flow1 to Innergex without any debt financing
• Innergex expects double-digit annual Free Cash Flow per Share1 accretion and greater than 10% reduction in Payout Ratio1 in the first full year of ownership
• Innergex to benefit from a $175.0 million bought deal common equity financing and $43.5 million concurrent private placement with Hydro-Québec

Innergex Renewable Energy Inc. and HQI US Holding LLC, a subsidiary of Hydro-Québec (“Hydro-Québec”) have entered into a Membership Interest Purchase Agreement with Atlantic Power to acquire Curtis Palmer, a 60 MW run-of-river hydroelectric portfolio located in Corinth, New York, consisting of the 12 MW Curtis Mills and 48 MW Palmer Falls facilities (“Curtis Palmer” or the “Facilities”) for upfront cash consideration of US$310.0 million ($387.5 million) and an earn-out provision subject to the evolution of NYISO market pricing. This joint acquisition is the first under the Strategic Alliance formed by Innergex and Hydro-Québec in 2020. Upon closing, Innergex will own indirectly a 50% interest in the Facilities with Hydro-Québec indirectly owning the remaining 50% interest. Innergex is also announcing a $175.0 million bought deal equity financing of common shares and $43.5 million concurrent private placement of common shares to Hydro-Québec.

“We are thrilled to announce this first joint acquisition with Hydro-Québec under the Strategic Alliance. The acquisition of Curtis Palmer represents an opportunity for Innergex to apply its 30 years of expertise in managing small run-of-river hydroelectric facilities, while leveraging Hydro-Québec’s experience in New York to get a foothold in a new market,” said Michel Letellier, President and Chief Executive Officer of Innergex. “We are also announcing today an equity financing that will be used to fund the purchase price of this acquisition and further our expansion and diversification efforts. We are very pleased with this support for Innergex and look forward to further grow in our Strategic Alliance with Hydro-Québec.”

“After having been commercial partners with the State of New York for more than 100 years, we are now entering a new phase by investing directly in the State’s hydropower generation infrastructure alongside Innergex, to which we will both bring our extensive expertise. This investment clearly demonstrates our commitment to developing the share of renewables in the energy mix of North America,” commented Sophie Brochu, President and CEO of Hydro-Québec.

“The Curtis Palmer facility is one of the highest quality assets in the Atlantic Power portfolio and an important hydro facility in the New York market,” said James J. Moore, Jr., Chief Executive Officer of Atlantic Power. “We are honored to have been stewards of it and now see it transferred to experienced operators like Innergex and Hydro-Québec.”

Financial Contribution to Innergex
The Facilities have a power purchase agreement (“PPA”) for energy, RECs and capacity with Niagara Mohawk Power Corporation (A3 / BBB+) that expires upon the earlier of either December 31, 2027 or the delivery of cumulative 10,000 GWh (which is expected in 2026). Following the expiry of the PPA, it is expected that the Facilities will sell energy, RECs and capacity in the NYISO market. The New York renewable energy market benefits from state programs that support existing renewables and can offer additional upside potential to the Facilities, including the recent Tier 2 REC program, and the introduction of the social cost of carbon into energy markets.

The Facilities have an attractive cash flow profile and are expected to generate average annual Adjusted EBITDA2 of US$42.5 million ($53.1 million) and average annual Free Cash Flow of US$39.5 million ($49.4 million) through the end of the PPA, without debt financing on a 100% basis. The purchase price implies a multiple of average annual Adjusted EBITDA of 7.3x and an average annual Free Cash Flow yield of 13% through year 2025. The additional 60 MW of capacity from Curtis Palmer will increase Innergex’s hydro portfolio to 1,259 MW and total portfolio to 3,801 MW of gross capacity.

During its first full year of ownership, Curtis Palmer is expected to contribute to Innergex’s financial results by providing double-digit accretion to Free Cash Flow per Share, reducing the Payout Ratio by more than 10%, and reducing overall corporate leverage by 0.4x. Innergex expects the Facilities’ contribution to Free Cash Flow per Share and Payout Ratio to be sustained throughout the term of the PPA. With Free Cash Flow representing a return on capital in excess of 50% during the term of the PPA without debt financing, Innergex expects the Facilities to continue to generate an attractive return on investment for its shareholders in the long run.

The acquisition is expected to close in Q4 2021 and is subject to regulatory approvals including FERC and HSR, as well as customary closing conditions.

Leveraging the Strategic Alliance between Hydro-Québec and Innergex
In February 2020, Hydro-Québec and Innergex announced the creation of a Strategic Alliance that would allow both corporations to accelerate their respective growth strategies and mutually benefit from their complementary skills and knowledge. The acquisition of Curtis Palmer will be the first co-investment with Hydro-Québec through the Strategic Alliance and the second opportunity for Hydro-Québec to subscribe for additional common shares of Innergex, following the acquisition of the remaining 50% interest in Energía Llaima SpA in July 2021. This acquisition under the Strategic Alliance will benefit from Hydro-Québec’s decades of experience in the New York market coupled with Innergex’s experience operating run-of-river hydroelectric assets.

Concurrent Equity Offering and Private Placement in Innergex
Innergex has entered into an agreement with a syndicate of underwriters led by CIBC Capital Markets, National Bank Financial Inc., BMO Capital Markets and TD Securities Inc. (collectively the “Underwriters”), pursuant to which the Underwriters have agreed to purchase on a bought deal basis, an aggregate of 9,021,000 common shares at an offering price of $19.40 per share (the “Offering Price”) for aggregate gross proceeds to the Corporation of approximately $175.0 million (the “Offering”). In connection with the Offering, Innergex has granted the Underwriters an over-allotment option, exercisable in whole or in part, at any time for a period of 30 days following the closing of the Offering, to purchase up to an aggregate of an additional 1,353,150 common shares at the Offering Price.

Innergex has also entered into a subscription agreement with a wholly-owned subsidiary of Hydro-Québec to purchase 2,242,000 common shares at the Offering Price, for gross proceeds to the Corporation of $43.5 million through a private placement (the “Private Placement”) as part of Hydro-Québec's rights contained in the Investor Rights Agreement between Innergex and Hydro-Québec, dated February 6, 2020. As part of the Private Placement, Hydro-Québec owns the option, exercisable following the exercise of the over-allotment option by the Underwriters and prior to the expiry of the Underwriters’ over-allotment option, to purchase additional common shares under the Private Placement at the Offering Price as to allow Hydro-Québec to maintain a 19.9% ownership of the common shares following the exercise of the Underwriters’ over-allotment option. The common shares offered in the Private Placement are being sold directly to Hydro-Québec without an underwriter or placement agent.

The net proceeds of the Offering and Private Placement will be used to fund the purchase price of the acquisition of Curtis Palmer, with the remainder of the net proceeds, or should the acquisition of Curtis Palmer not successfully close, the net proceeds of the Offering and Private Placement will be used for general corporate purposes including future growth initiatives.

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