DBRS Confirms EnerCare Solutions Inc. at BBB with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Notes rating of EnerCare Solutions Inc. (EnerCare or the Company) at BBB with Stable trends. The confirmation is based on EnerCare’s stable portfolio of water heater and HVAC rental units, mostly based in Ontario, as well as its reasonable, albeit weaker, financial risk profile. The Stable trend reflects the attrition rate, which has stabilized at around 3% and which DBRS has assumed for the current rating.

Following EnerCare’s acquisition of SEHAC Holdings Corporation (Service Experts) in May 2016, DBRS downgraded the Company’s ratings by one notch to BBB. DBRS noted that while the Service Experts acquisition would significantly expand EnerCare’s footprint in the United States, overall, it was negative for the Company’s business risk profile. In contrast to its stable rental business, the revenues and cash flows of Service Experts are not typically on a long-term contracted basis, which could potentially result in more volatility going forward. Additionally, the Service Experts acquisition was also negative to EnerCare’s financial risk profile, as the Company’s key credit metrics were expected to weaken following the transaction. As noted in the press release, “DBRS Downgrades EnerCare Solutions Inc.,” dated June 13, 2016, DBRS expected the Company’s cash flow-to-external debt and external debt-to-EBITDA ratios to weaken to 18.0% and 3.5 times (x), respectively, pro forma the acquisition. EnerCare’s performance in the nine months ending September 30, 2016, has largely been in line with DBRS expectations, with cash flow-to-external debt at 17.9% and external debt-to-EBITDA at 3.5x. To maintain the current ratings, DBRS expects the Company to manage its debt load and distributions in order for these two ratios to recover to the BBB rating range (above 20% for cash flow-to-external debt and below 3.5x for external debt-to-cash flow). DBRS notes that the recent announcement by EnerCare’s parent, EnerCare Inc., to adopt a dividend reinvestment plan could help reduce distribution requirements for the Company and alleviate pressure on these metrics. Should EnerCare’s cash flow-to-external debt and external debt-to-EBITDA ratios remain below the threshold for the BBB rating category, further negative rating action may occur.

The current ratings of EnerCare assume that 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. DBRS believes that decreasing the attrition rate to historical levels of approximately 2% will remain challenging for EnerCare and has incorporated this into the current rating. 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.

The principal methodology is Rating Companies in the Consumer Products Industry (September 2016), which can be found on dbrs.com under Methodologies. 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.