DBRS Confirms EnerCare Solutions, Changes Trend to Negative

DBRS has today confirmed the A (low) rating of the Senior Notes of EnerCare Solutions Inc. (EnerCare Solutions or the Company; formerly The Consumers’ Waterheater Operating Trust) but has changed the trend to Negative from Stable. The trend change reflects DBRS’s concern that the continued challenging water heater rental market environment may cause the Company’s credit risk profile to deteriorate to a level that is no longer consistent with the current rating category. The Company has faced intense competition, which has resulted in a high attrition rate over the past several years. This is expected to continue over the near to medium term despite the expiration of the Competition Bureau’s Consent Order effective February 2012.

Competition in the water heater rental business has remained intense. As a result, EnerCare Solutions has recently been losing its monopoly-like market position. Regulatory changes in the last decade have lowered barriers to entry and have made it easier for consumers to terminate their existing contracts with EnerCare Solutions. In terms of rental units, EnerCare Solutions’ customer base decreased to 1.2 million at the end of 2011 from 1.4 million in 2008 (an attrition rate of 8.0% in 2009, 6.4% in 2010 and 6.0% in 2011). Attrition rates have declined recently, however, as the Company has implemented protective initiatives to defend its market position (currently nearly 50% in Ontario). The Negative trend reflects DBRS’s concern that the Company still faces significant headwinds over the near to medium term. Recently, the Company called off a campaign designed to boost customer loyalty by offering its pre-2005 customers a new contract. DBRS believes that it will be challenging for the Company to reduce the attrition rate to the historical level of 2%.

DBRS acknowledges that the credit metrics of EnerCare Solutions remained stable in 2011, as the Company was able to raise rental rates to largely offset a decrease in earnings from the smaller customer base. In addition, liquidity is viewed as adequate for the refinancing of $60 million in long-term debt due in April 2012. DBRS assumes that the Company will largely use cash to repay this debt.

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

The applicable methodology is Rating the Consumer Products Industry, which can be found on the DBRS website under Methodologies.