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

DBRS Limited (DBRS) 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 confirmations reflect Enwave’s improved business risk profile and incorporate DBRS’s view that the Company’s credit metrics are expected to weaken modestly and temporarily over the near term, reflecting the proposed debt issuance of $100 million. DBRS expects that Enwave’s credit metrics would likely improve over the medium term, reflecting incremental cash flow from newly acquired assets, system expansion and new connections.

Enwave’s size, diversification and contract profile improved following the acquisition of district energy assets in London, Ontario (London District Energy), and Charlottetown, Prince Edward Island (PEI District Energy), in June 2017 (the Acquisition). The London assets include an existing combined heat and power (CHP) system under a 20-year contract with the IESO (rated A (high) with a Stable trend) with 11 years remaining. PEI District Energy, under contract with the Province of Prince Edward Island, produces steam and hot water for a large customer base of approximately 108 customers.

In addition, the 3.85 megawatt CHP facility in Toronto, which is under a 20-year contract with the IESO, was completed on schedule and on budget and was commissioned in Q1 2017, further improving cash flow stability for the Company. Together, the Acquisition and the Toronto CHP facility account for approximately 14% of the 2018 forecast EBITDA. Enwave’s business risk profile further benefits from not having exposure to commodity price risk, as fuel costs are passed on to customers. DBRS notes that approximately 11% of 2018 forecast revenue is generated from consumption-only contracts or non-contracted sources, exposing Enwave to some volume risk. However, volume risk is viewed as modest since the non-capacity contracts benefit from strong supply-demand fundamentals.

Enwave’s credit metrics were strong for the 12 months ended September 30, 2017 (LTM 2017), reflecting strong cash flow from existing contracts, newly acquired assets, the Toronto CHP project and new connections. However, they are expected to weaken modestly in the near term as the Company proposes to issue $100 million in Senior Secured Notes. The proposed $100 million debt issuance will be used to: (1) finance a portion of the Acquisition and (2) to pre-finance future expansion capital expenditure. The Company plans to use a portion of proceeds from the debt issue to pay back Brookfield Infrastructure Fund I, which financed the Acquisition in June 2017. Based on DBRS’s pro forma (adjusted the pre-financing debt amount), the cash flow-to-adjusted debt ratio would decline from 12.8% in LTM 2017 to approximately 12% in 2018 and would improve to around 13% in 2019. The pro forma debt-to-EBITDA ratio would increase to above 6.0 times (x) in 2018 (5.42x LTM

2017) and would decrease to around 5.5x in 2019. DBRS expects the cash flow-to-adjusted debt and adjusted debt/EBITDA to be maintained at the mid-12% level and around the 6.0x level, respectively, on a sustainable basis to support the current ratings.

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.

This rating is no longer endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate initially in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.