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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Notes rating of EnerCare Solutions Inc. (EnerCare or the Company) at BBB (high), both with Stable trends. EnerCare’s ratings are based on the stable earnings and cash flows generated by the Company’s portfolio of water heater and HVAC rental units, as well as its reasonable financial risk profile. The Stable trend reflects the attrition rate stabilizing at around the 3% to 4% DBRS has assumed for the current rating.

Following the acquisition of Direct Energy Marketing Limited’s Ontario home and small commercial services (OHCS) businesses in October 2014 (the Acquisition), EnerCare now receives all of the revenues related to its rental portfolio as well as other revenue streams from OHCS (e.g. protection plans). As a result, earnings and cash flows for the nine months ended September 30, 2015 (9M 2015) have increased significantly year over year. The Company’s interest coverage, cash flow-to-debt and EBITDA-to-debt ratios have also all recovered to a level commensurate with the current rating category. DBRS notes that integration of the OHCS businesses is nearing completion, with rebranding completed and onboarding of IT systems well underway, reducing integration risk for the remaining transition period. While the Acquisition has not had a material impact on EnerCare’s business risk profile, the Company does now face increased operational risks associated with servicing and maintaining its portfolio of rental units. Additionally, the protection plan contracts acquired through the Acquisition have a higher level of attrition (approximately 10%), which could introduce some volatility in future earnings and cash flow. The Company is also introducing water treatment products in 2016 and will begin offering internal HVAC financing. Although these services are complementary to EnerCare’s current operations and could help stimulate growth, the earnings contribution is expected to be minimal for the medium term.

The current rating of EnerCare assumes the Company’s rental base will remain at over one million customers (currently at around 1.1 million). The rentals attrition trajectory continues to be 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. With the enactment of consumer protection legislation which came into force April 1, 2015, the Company has been able to reduce rentals attrition from over 6.0% in 2010 to 3.1% in 9M 2015. DBRS believes that decreasing the attrition rate to historical levels of approximately 2% will remain challenging 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.

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 rating on EnerCare is based on the DBRS methodology Rating Companies in the Consumer Products Industry (August 2015). 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; and (5) dependency on new home developments for growth.

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