DBRS Confirms Consumers Waterheater Operating Trust at “A”

DBRS has today confirmed the ratings of The Consumers’ Waterheater Operating Trust’s (Consumers’, CWOT or the Trust) Series 2009-1 and Series 2009-2 Senior Notes (Senior Notes) at “A” with Stable trend. The ratings confirmation reflects the Trust’s strong operating characteristics and asset quality, as the residential water heater rental business is well established and comprises a large, diversified pool of water heaters with relatively long operating lives. The confirmation is also supported by the expected continuation of stable cash flows from the Trust’s large portfolio of rental water heaters. The business risk of the underlying water heater rental business is viewed as moderately low given the Trust’s large presence in the market (providing for both economies of scale and brand awareness), and the fact that its operating risk is mitigated by its arrangements with DE Marketing Limited (DE).

In February 2009, the Trust issued $330 million of Senior Notes. The Senior Notes consist of $60 million of 6.20% Series 2009-1 Senior Notes due April 30, 2012, and $270 million 6.75% of Series 2009-2 Senior Notes due April 30, 2014. The net proceeds from the Senior Notes were used to repay existing indebtedness, including CWOT’s $310 million Bridge, and an $18.8 million loss on a related interest rate hedge instrument.

While the Senior Notes rank equally with the Trust’s $225 million AAA-rated Series 2003-1 A-2 Secured Notes (the AAA Notes), rated Notes and credit facility, the rating incorporates the assumption that the Senior Notes will be refinanced by the expected final payment date of January 28, 2010, and that a Release Date will occur. After the occurrence of the Release Date, the Senior Notes will lose a number of the structural protections of the AAA Notes and will transition to a more corporate-style offering, with fewer covenants, less restrictions and no security.

The terms of the open bill access and collection services agreement (OBA) between DE and Enbridge Gas Distribution Inc. (EGD), as well as the Trust and other potential billers, are currently under negotiation. In December 2008, EGD provided DE with notice of termination of the OBA effective June 30, 2009. In March 2009, DE and EGD agreed that the term of the OBA will be extended beyond June 30, 2009, for such length of time as is reasonably necessary to ensure an appropriate transition to a new OBA. The Trust believes that joint billing arrangements on substantially similar terms as the OBA will be entered into by DE and EGD concurrently with the termination of the OBA.

The Trust has recently experienced an increased level of competition, leading to a rise in attrition. In response, the Trust has launched new sales and marketing initiatives to boost customer retention. The Trust’s parent entity, The Consumers’ Waterheater Income Fund (the Fund), has also announced in September 2009 a reduction in distributions that will save the Trust approximately $32 million per year, with the cash to be used to fund the sales and marketing initiatives, invest in the sub-metering and rentals businesses, and strengthen the Trust’s financial profile.

Factors that limit the Trust’s Senior Notes rating include increased competition as a result of new entrants into the Trust’s service area, as well as the ability of Consumers’ competitors to access EGD’s bill, limited geographic diversification, refinancing risk and the impact on cash flow from the federal income SIFT tax effective 2011. DBRS would expect the Trust to seek a re-financing in advance of its 2010 AAA Notes maturity.

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

The applicable methodology used is a combination of General Rating Methodology for Non-Financial Companies and an analysis of the structure, allocation of cash-flows to senior secured notes as well as other structural mitigants.

This is a Corporate rating.