DBRS Confirms EnerCare Solutions Inc. at BBB (high) with Stable Trends

DBRS has today confirmed both the Issuer Rating and Senior Notes of EnerCare Solutions Inc. (EnerCare or the Company) at BBB (high) with Stable trends. EnerCare’s overall business and financial risk profiles remain within the bounds of the current rating. The Company’s business risk profile of BBB (high) reflects: (1) stabilizing attrition rates, (2) the size and scope of the Company’s water heater rental operations in Ontario and (3) the high barriers for new players to build meaningful market share. DBRS expects EnerCare to remain one of the two dominant water heater rental players, who combined currently represent approximately 90% of the total market share (each player accounts for roughly 45%). The Company’s overall key credit metrics are somewhat weak for the BBB (high) rating category. However, DBRS acknowledges that the two primary financial metrics — debt-to-cash flow and EBITDA interest coverage — have improved as a result of the refinancing of debt at a lower cost in 2013, and have shown resilience through the cycle.

The Stable trend reflects: (1) EnerCare’s stabilizing attrition rate toward the range of 4% to 5% that DBRS assumed in the current rating category for the medium term and (2) the Company’s customer base remaining at over one million customers (currently at about 1.15 million). The rentals attrition trajectory remains one of the most important credit driving factors for the Company, as it has direct implications on the size of the customer base and the stability of cash flow generated from this base, two of the primary elements that underpin the current rating category. DBRS downgraded the long-term rating to BBB (high) from A (low) in 2012, predominately driven by rising competition and an increased attrition rate from the historical level of 2% to 3% that was prevalent during periods of low competition. The recent improvement in attrition (as DBRS expected) was a result of a number of initiatives to defend its market position, as well as the dissipation of negative media coverage and consumer sentiment surrounding a re-contracting campaign initiated in the six months ended June 30, 2012 (H1 2012). After peaking at 7% (annualized) in H1 2012, EnerCare’s attrition rate has decreased to around 5% for the 12 months ended September 30, 2013. DBRS expects this positive improvement in attrition rate to continue and support the current rating category. Furthermore, the enactment of consumer protection legislation in December 2013 should greatly assist the Company in its continued efforts to combat attrition. However, 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 rises above 5% over the medium term, this higher-than-anticipated churn rate could result in negative rating implications.

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

The applicable methodology is Rating Companies in the Consumer Products Industry (October 2013), which can be found on our website under Methodologies.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

DBRS’s rating on EnerCare Solutions Inc. is based on the DBRS Methodology Rating Companies in the Consumer Products Industry (October 2013). However, DBRS views EnerCare’s strong franchise as having a superior business risk profile than that of a traditional consumer products company. 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.