DBRS Confirms EnerCare Solutions at BBB (high), Stable Trend

DBRS has today confirmed the rating of the Senior Notes of EnerCare Solutions Inc. (EnerCare or the Company) at BBB (high) with a Stable trend. The rating confirmation reflects DBRS’s expectation that EnerCare’s attrition rate will decrease gradually and its customer base will stabilize as a result of a number of initiatives to defend its market position. If the high attrition rate persists in the medium term, this could trigger further negative rating implications.

EnerCare’s attrition rate has decreased since the first half of 2012. In H2 2012, the Company’s attrition rate was approximately 5% (annualized), compared to 7% (annualized) in H1 2012. This positive improvement is mainly attributable to increased consumer awareness through direct marketing, as well as the dissipation of negative media coverage and consumer sentiment surrounding a re-contracting campaign initiated in H1 2012. DBRS expects this positive improvement in attrition rate to continue going forward, given EnerCare’s plan to explore new initiatives and to modify existing programs toward enhancing customer retention. The rating assumes that EnerCare’s attrition rate will gradually decrease and stabilize at around 4% to 5% in the medium term. DBRS believes that for EnerCare to decrease its attrition rate to historical levels of approximately 2% to 3% remains a challenge; if the attrition rate continues to remain at levels higher than 5% over the medium term, this could result in further negative rating implications.

Although EnerCare is expanding its rental operations in markets outside of Ontario, DBRS expects the Company to continue generating the majority of its revenue from the Ontario market. In 2012, the majority of EnerCare’s revenue is generated from the rental of water heater and heating, ventilation and air conditioning (HVAC) equipment in Ontario.

The Company’s key credit metrics remained relatively stable in 2012, as increased rental rates and higher-margin products entering the portfolio largely offset the decrease in earnings from the smaller customer base. EBITDA is expected to remain stable in 2013, given the 3% increase in weighted-average rental rate in January 2013 and the assumption that attrition rates will likely improve. During 2012 and early 2013 the Company repaid or refinanced all of its debt due in 2012 to 2014 with cash on hand, debt issuances and drawdown on its credit facility. As a result, the Company does not face refinancing risk until 2016.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

DBRS’s rating on EnerCare Solutions Inc. is based on the DBRS methodology Rating the Consumer Products Industry. However, DBRS views EnerCare’s strong franchise as having a superior business risk profile than that of a traditional consumer products company, and as a result, the Company is able to manage higher leverage metrics.

Overall, in DBRS’s assessment of the credit quality of EnerCare, DBRS factors in the following key items: (1) competition arising from regulatory changes; (2) effects of attrition on customer base; (3) stability of cash flow generated from customer base; (4) flexibility to increase rental rates; (5) limited operational risk through a co-ownership agreement; and (6) dependency on new home developments for growth.