DBRS Downgrades Consumers’ Waterheater Operating Trust to A (low), Trend Now Stable

DBRS has today downgraded the Senior Notes rating of The Consumers’ Waterheater Operating Trust (CWOT or the Company) to A (low) from “A”; the trend has been changed to Stable from Negative which reflects DBRS's view that the new rating level addresses the change in the Company's competitive landscape. In February 2010, DBRS changed CWOT’s trend to Negative, largely as a result of concerns over CWOT’s attrition levels and a potential moderation in credit metrics (see the DBRS February 1, 2010, press release for further details). At that time, DBRS stated that the potential for a downgrade would be lessened if attrition levels trended toward historical levels on a sustained basis and if there was no material erosion in EBITDA or cash flow.

While CWOT has lowered attrition from 2009 levels, it remains higher than past levels of just over 2% annualized. Through the first nine months of 2010, CWOT experienced attrition and a net unit loss in the rental portfolio of 5.1% and 3.4%, respectively. This is an improvement over results from the first nine months of 2009, when the attrition and net loss values were 6.7% and 4.8%, respectively. While the results improved in 2010 due to CWOT’s various marketing and customer-retention programs, the absolute values in comparison with historical results are the primary driver of the downgrade. DBRS notes that while the Company’s credit metrics have witnessed only a modest deterioration over the past two years (with cash flow-to-debt for the last 12 months (LTM) ending September 30, 2010, of 22% compared with 25% for the year ending December 31, 2008), this is largely a result of higher rental rates; future rate increases cannot be viewed as a permanent fix for a declining customer base (noting that the rate of decline has been reduced in 2010).

The trend has been returned to Stable, reflective of CWOT’s actions to stabilize its customer base and reasonable credit metrics, which provide downside protection (EBITDA-to-interest of 4.5x, EBITDA minus maintenance capital expenditures-to-interest of 2.5x and cash flow-to-debt of 22%, all LTM as of September 30, 2010). DBRS believes that CWOT will continue to face headwinds with attrition as a result of competitive pressures, although the end of the Consent Order, which will remove some competitive restrictions post-February 2012, will provide a modest benefit.

CWOT and The Consumer’s Waterheater Income Fund (the Fund) have announced details on the Fund’s expected conversion from an income trust to a dividend-paying corporation (see the DBRS press release dated October 13, 2010, for further details). Additionally, the Fund and CWOT will be changing their names to EnerCare Inc. and EnerCare Solutions Inc., respectively. The proposed conversion, if it proceeds, will not affect CWOT’s credit rating as it is not expected to result in any substantive changes other than its legal structure.

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