DBRS Updates Report on EnerCare Solutions Inc.

DBRS Limited (DBRS) has today published an updated report on EnerCare Solutions Inc. (EnerCare or the Company). On October 22, 2014, DBRS removed EnerCare’s Issuer Rating and Senior Notes from Under Review with Developing Implications. The ratings were concurrently confirmed at BBB (high) with Stable trends. The confirmation followed the closing of the Company’s acquisition of the Ontario home and small commercial services (OHCS) business from Direct Energy Marketing Limited (DE) for approximately $550 million (the Acquisition) (see DBRS press release, DBRS Removes EnerCare Solutions Inc. from Under Review with Developing Implications, dated October 22, 2014, for more details).

DBRS does not expect the Acquisition to have a material impact on EnerCare’s business risk profile or financial risk profile. While the Company will benefit from having control over all aspects of its water heater rental operations and will receive the 35% of rental revenue currently earned by DE, these benefits 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. As the Acquisition was funded through a prudent mix of debt and equity (approximately 26% debt) and in line with DBRS’s expectations, EnerCare’s key credit metrics are expected to remain commensurate with the current rating category.

The ratings of EnerCare reflect its stabilizing attrition rate at around 4% that DBRS assumed in the current rating category for the medium term, and the Company’s customer base remaining at over one million customers (currently at about 1.1 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. Although the consumer protection legislation (Bill 55), once enacted, is expected to assist the Company in its efforts to combat attrition, DBRS believes that decreasing the attrition rate to historical levels of approximately 2% to 3% will remain a challenge for EnerCare. Furthermore, 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.

DBRS’s ratings on EnerCare Solutions Inc. are based on the DBRS methodology Rating Companies in the Consumer Products Industry (October 2014). 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 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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.