DBRS Provisionally Rates Enwave Energy Corporation at A (low), Stable

DBRS has today assigned a provisional Issuer Rating of A (low) to Enwave Energy Corporation (Enwave or the Company) and a provisional rating of A (low) to its proposed Senior Secured Notes (the Notes), both with Stable trends. The ratings reflect stable cash flow underpinned by long-term contracts and a diverse customer base, limited competition in the Company’s service area, and good growth potential. However, the ratings are mainly constrained by high leverage and weaker financial metrics following the recapitalization of the balance sheet.

A majority of cash flow (approximately 84%) is generated from long-term capacity contracts (averaging over 10 to 12 years in length), providing stable cash flow. The capacity contracts allow the Company to charge a fixed rate to customers regardless of the volume consumed, significantly reducing volume risk, and to pass though fuel costs (mostly natural gas and electricity), eliminating its exposure to commodity price risk. The remaining cash flow is generated from either non-capacity contracts or based on usage, exposing the Company to volume risk, although only 13% of revenue comes from contracts that are generally higher earning than capacity contracts. The Company’s customer base is diverse and stable, with approximately 40% of its 2012 revenues generated from government, hospitals, educational institutions and data centres. Competition in Enwave’s service area is limited, as its heating and cooling systems (underground, underwater networks and rights of way) are difficult to replicate. In addition, as upfront costs for customers to buy their own onsite equipment could be substantial, customers have limited incentive to disconnect. This has resulted in a low attrition rate over the past 20 years (less than 1%).

The ratings recognize higher debt-related metrics after Enwave’s recapitalization that includes (1) the issuance of the proposed Notes ($120 million), (2) a proposed $20 million new revolving credit facility and (3) additional debt of $75 million in semi-amortizing debentures. Most of the new debt will be used to pay off the acquisition facility of $100 million and to finance approximately $100 million in capex over the next two years. Following the recapitalization, DBRS estimates that the pro forma cash flow-to-debt ratio would be 7.8% and pro-forma senior debt-to-EBTDA would be 8.5 times (x) versus 5.6x immediately following its acquisition by Brookfield Infrastructure Fund (the Acquisition). However, the assigned rating factors in DBRS’s expectation that Enwave will improve cash flow-to-debt to at least 12.5% and reduce debt-to-EBITDA to mid-5.0x by 2015. In addition, DBRS expects the Company to: (1) prudently manage its growth-related capex; significant delays or cost overruns could negatively affect cash flow, liquidity and leverage and (2) maintain cash flow-to-debt commensurate with DBRS’s A (low) rating category on a sustainable basis.

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.

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.