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

DBRS Limited (DBRS) has today confirmed the Issuer Rating, the Senior Secured Notes rating and the Senior Term Facility rating of Enwave Energy Corporation (Enwave or the Company) at A (low), all with Stable trends. The rating confirmations reflect the Company’s stable business risk profile and a modest improvement of its credit metrics in 2015 and H1 2016. The Stable trends reflect DBRS’s expectation that Enwave’s sizable growth capital expenditures (capex) in 2017 will be appropriately funded and its key credit metrics will continue to improve over the medium term.

With the large capex spending to connect new customers over the last two years without incurring additional debt, the Company’s credit metrics have improved, benefiting from incremental EBITDA and cash flow — the result of a growing customer base. All key credit metrics were consistent with the current ratings at the end of H1 2016. The cash flow-to-debt reached the 11% range in the last 12 months ended June 2016 (compared with 8.8% in 2014) and the mid-12% range in H1 2016, which was consistent with the level required to support the current ratings. Other key credit metrics, such as EBIT-interest coverage and senior debt-to-EBITDA, have also improved modestly, with the senior debt-to-EBITDA falling below 6.0 times (x) in H1 2016 (7.76x in 2014), which was consistent with DBRS’s expectation in its previous review. In 2017, DBRS expects growth capex to increase from the 2016 level. The increased growth capex will be primarily used to fund new customer connections, system expansion and completion of a combined heat and power facility, which is expected to generate incremental earnings and cash flow. The funding of the 2017 growth capex is mostly from internal cash flow and a modest amount of debt from the credit facility. As a result, DBRS expects the Company’s key credit metrics to continue to improve over the medium term.

Enwave’s business risk profile remained stable, continuing to be supported by the following:
(1) A diverse customer base, including governments, hospitals, educational institutions and data centres. The customer base continues to improve with the signing of three additional buildings (two Brookfield buildings) to Enwave’s system in 2016.
(2) A solid contract profile that remained largely unchanged, with the average length of approximately 9.3 years for heating and 12.0 years for cooling.
(3) Modest exposure to volume risk, with approximately 82% of heating division and approximately 92% of cooling division revenues generated from capacity contracts that charge a fixed rate to customers regardless of the volume consumed.
(4) No exposure to commodity price risk, as fuel costs are passed on to customers. The portion of cash flow generated from either non-capacity contracts or usage exposes the Company to some volume risk; however, volume risk is viewed as modest since the non-capacity contracts currently benefit from strong supply-demand fundamentals.

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.

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), which can be found on our website under Methodologies.