DBRS Confirms EnerCare Solutions Inc. at A (low), Stable

DBRS has today confirmed the Senior Notes rating of EnerCare Solutions Inc. (EnerCare or the Company; formerly The Consumers’ Waterheater Operating Trust) at A (low), with a Stable trend. The confirmation reflects the Company’s well-established position in the Ontario residential water heater business and its reasonable financial profile (although its financial flexibility has been reduced due to weakening key credit metrics).

While EnerCare is expected to remain a key waterheater provider in Ontario, DBRS is increasingly concerned about rising competition in the sector, which has resulted in the higher-than-normal erosion of the Company’s customer base over the past several years. It remains to be seen whether the expected termination of the Competition Bureau’s Consent Order (the Consent Order) in February 2012 would revert EnerCare’s high attrition rate to historical levels, at around 2%. Any further material decrease in the customer base could cause EnerCare’s credit risk profile to deteriorate to a level that is no longer commensurate with the current rating.

The Company has been pursuing geographic and product diversification to sustain its revenue base, including expansions into New Brunswick and Alberta and new products such as heating, ventilation, air conditioning (HVAC) and small commercial products. DBRS believes that it would take several years for these new initiatives to generate a meaningful contribution to earnings.

EnerCare is exposed to significant refinancing risk as all of the senior notes mature within the next three years. However, DBRS believes that its liquidity, through a combination of $44 million in cash and a $35 million undrawn bank facility, should be adequate to finance short-term obligations and long-term debt due in 2012. DBRS expects the Company to term out or pay down debt in a prudent manner.

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

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.