DBRS Places EnerCare Solutions Inc. Under Review with Developing Implications

DBRS has today placed EnerCare Solutions Inc.’s (ESI or the Company) Issuer Rating and Senior Notes Under Review with Developing Implications. This rating action follows the announcement that ESI has agreed to purchase the Ontario home and small commercial services (OHCS) business from Direct Energy Marketing Limited (DE) for approximately $550 million (the Acquisition). The Acquisition is expected to close in the fourth quarter of 2014, pending regulatory approvals. DBRS notes that the Acquisition will be funded through the issuance of $410 million of equity and $223 million of debt. Once the financing for the Acquisition is put in place, the ratings will likely be removed from Under Review with Developing Implications. However, any significant deviations could result in negative rating actions.

(1) BUSINESS RISK PROFILE – Neutral
DBRS views the Acquisition as neutral with respect to ESI’s business risk profile. Following the closing of the Acquisition, the Company will benefit from having control over all aspects of its water heater rental operations. ESI would also receive the 35% of rental revenue currently earned by DE for servicing the Company’s rental portfolio, and gain the relatively stable protection plan business. These benefits, however, are partially offset by integration risk during the transition period and increased operational risk associated with servicing and maintaining the water heater portfolio. DBRS acknowledges that one of the key operating challenges will be to manage labour relations, as evidenced by the work disruption with the unionized employees of OHCS in 2012. Overall, DBRS does not expect the Acquisition to have a material impact on ESI’s business risk profile.

(2) FINANCIAL RISK PROFILE – Neutral
DBRS views the Acquisition as neutral for ESI’s financial risk profile, as it will be funded through a prudent mix of debt and equity (approximately 35% debt and 65% equity). Pro forma the Acquisition, DBRS estimates ESI’s key credit metrics will remain commensurate with the current rating category, with the cash flow-to-debt ratio at over 20% and the EBITDA-to-interest coverage ratio at over six times. DBRS will likely remove the ratings of ESI from Under Review with Developing Implications once the financing for the Acquisition is put in place. However, any significant deviations that result in a material deterioration to the Company’s credit profile could result in negative rating actions.

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 ratings on EnerCare Solutions Inc. (ESI or the Company) are based on the DBRS methodology Rating Companies in the Consumer Products Industry (October 2013). However, DBRS views the Company’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 ESI, 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.

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