DBRS Confirms Consumers’ Waterheater Operating Trust Rating, Changes Trend to Negative

DBRS has today confirmed its rating of “A” assigned to The Consumers’ Waterheater Operating Trust’s (CWOT or the Company) Series 2009-1 and Series 2009-2 Senior Notes (Senior Notes), but has changed the trend to Negative from Stable. The change in trend reflects a number of factors, including DBRS’s belief that the Company’s operating environment has become more challenging as a result of increased competition which has in turn increased attrition levels in recent quarters, no developments on gaining relief from a Consent Order which imposes some competitive restrictions on CWOT, and the potential for a modest erosion in coverage metrics in 2010. While recent discussions with the Company were highlighted by CWOT’s continued focus on managing increased competitive pressures and defending its customer base, DBRS has revised the trend with a view to monitoring the situation throughout 2010, noting that the potential for a rating downgrade would be lessened if attrition levels begin to trend towards more historical levels on a sustained basis, and if CWOT experiences no material erosion in EBITDA or cash flow.

In response to increased competition and customer attrition levels (CWOT experienced a net unit loss in the rental portfolio of 4.8% through the first nine months of 2009) and with a goal of protecting its customer base, the Company launched a significant marketing campaign in the second half of 2009 to educate its customers as to the benefits of not changing their rental supplier. Additionally, CWOT’s parent, The Consumers’ Waterheater Income Fund, reduced its distribution in 2009 to preserve cash and increase investment in customer retention programs. While the Consent Order will expire in February 2012, the Company has been in discussions with the Competition Bureau to request relief from a number of restrictions; however, no changes have been announced to this point. The requested relief, if granted, would be expected to provide the Company with a moderate benefit in terms of curbing customer turnover. From a financial standpoint, EBITDA, cash flow and coverage metrics have to date largely tracked expectations; however, given the uncertainty in the operating environment, there is a potential for modest erosion in 2010.

DBRS will monitor the effectiveness of CWOT’s marketing and customer retention programs throughout 2010, as well as its financial and credit profile and future financing plans.

Notes:
The applicable methodology is General Rating Methodology for Non-Financial Companies, which can be found on our website under Methodologies.

This is a Corporate rating.

DBRS’s rating definitions and the terms of use of such ratings are available at www.dbrs.com.