Morningstar DBRS Confirms Enwave Energy Corporation at A (low); All Trends Changed to Stable From Negative

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating, Senior Secured Notes (Senior Notes) rating, and Senior Term Facility (the Term Facility) rating of Enwave Energy Corporation (Enwave or the Company) at A (low). All trends were changed to Stable from Negative.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmations reflect (1) Enwave's strong business risk profile with EBITDA primarily from operating a district energy in downtown Toronto; (2) Improved Earnings and stronger credit metrics for the Last Twelve Month (LTM) Sep'2024 compared with previous year; and (3) good operational efficiency and reliability (availability of 99.97%).The trend revision to Stable from Negative reflects company's key credit metrics as measured through cash flow-to-debt ratio is expected to remain above 12.5% over the forecasted period over the medium term and Morningstar DBRS' confidence in Enwave's ability to sustain its financial improvement through organic growth, operational efficiencies, and disciplined capital deployment.

CREDIT RATING DRIVERS
Continued EBITDA growth, customer additions, and cost efficiencies could further strengthen the metrics, but an upgrade remains unlikely without sustained outperformance. Morningstar DBRS may downgrade the rating if the Company's business risk profile deteriorates and execution risks on ongoing capital projects weaken the credit metrics, leading to a sustained decline in cash flow-to-debt below 12.5%.

EARNINGS OUTLOOK
Enwave's earnings have been steadily increasing through organic growth, benefitting from stable revenue of which over 90% is generated through capacity and consumption contracts. Morningstar DBRS expects this trend will continue driven by customer additions, efficiency improvement, and the scaling of new growth projects.

FINANCIAL OUTLOOK
Morningstar DBRS expects that Enwave's cash flow-to-debt will improve in 2024 in line with expected higher earnings, with capex largely funded by subordinated loan contributions provided by Enwave's shareholders. To be compatible with the current rating, Morningstar DBRS expects the cash flow-to-debt to be above 12.5%. Enwave's liquidity is solid and is expected to remain sufficient given its revolving line of credit of $50.0 million and the expectation that additional liquidity support will be provided by Enwave's shareholders if required.

CREDIT RATING RATIONALE
Enwave's overall business profile remains stable, operating primarily in downtown Toronto with limited competition and significant barriers to entry. Morningstar DBRS expects that Enwave will continue to grow by contracting and connecting new customers, with growth primarily focused on its downtown Toronto operations. Morningstar DBRS expects that Enwave will complete capital expenditure (capex) projects to continue to decarbonize its operations, reduce operating costs, and provide additional capacity for growth. Morningstar DBRS expects the large capex projects to be completed under design-build fixed-price contracts with reputable construction contractors. We note that Enwave recently executed projects including the 4th Intake Project and the Pearl Street Energy Centre (PSEC) heat pump plant, which provided additional system capacity, and are expected to further support EBITDA growth and long-term financial sustainability.

In Morningstar DBRS' view, Enwave's downtown Toronto energy operations have a stronger business risk assessment than the Company's operations outside downtown Toronto. Morningstar DBRS expects that Toronto will remain Enwave's largest source of EBITDA over the medium term; however, if Enwave increases its share of EBITDA from operations with weaker business risk assessments, Morningstar DBRS could take a negative rating action.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Enwave, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Enwave, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Enwave, the BRA carries greater weight than the FRA.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (November 25, 2024)
https://dbrs.morningstar.com/research/443429

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria [(February 03, 2025) - https://dbrs.morningstar.com/research/447186], which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (February 03, 2025)
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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