DBRS Confirms Enwave Energy Corporation at A (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating, the Senior Secured Notes and the Senior Term Facility of Enwave Energy Corporation (Enwave or the Company) at A (low), all with Stable trends. The ratings reflect stable cash flow underpinned by long-term contracts, a diverse and solid customer base, limited competition in the Company’s service area and good growth potential. The Stable trend reflects DBRS’s expectation that the currently high leverage and relatively weaker financial metrics, following the 2013 recapitalization of the balance sheet, are expected to improve to the current rating level over the medium term.

Enwave’s current rating is supported by low business risk profile, underpinned by stable cash flow, over 80% of which is generated from long-term capacity contracts (averaging over 10 to 12 years in length). 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 some volume risk. However, this volume risk is modest since the non-capacity contracts currently benefit from strong demand-supply fundamentals. The Company’s customer base is diverse and solid, with approximately 40% of its 2014 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 capital costs for customers to buy their own onsite equipment could be substantial, there is limited incentive for customers 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 in July 2013 that includes: (1) the issuance of the Senior Notes ($120 million), (2) a $20 million new revolving credit facility and (3) additional senior debt of $75 million in semi-amortizing debentures. Most of the new debt was used to pay off the acquisition facility of $100 million and to finance the expansion capital expenditures (capex) in 2013 and 2014. In the first nine months of 2014, most credit metrics improved slightly from 2013. However, the cash flow-to-debt still remained modestly weak for the current rating range. The Stable trend is based on DBRS’s expectation that Enwave would improve cash flow-to-senior debt to at least 12.5% and reduce senior debt-to-EBITDA to under 6.0 times over the medium term and maintain at these levels on a sustainable basis. In addition, DBRS expects the Company to prudently manage its growth-related capex as significant delays or cost overruns could negatively affect cash flow, liquidity and leverage.

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.

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

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

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