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

DBRS Limited (DBRS Morningstar) 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 trends remain Stable. The confirmations reflect Enwave’s continued strong competitive position and operating performance. The confirmations also incorporate DBRS Morningstar’s view that financial metrics will weaken modestly and temporarily in 2020, reflecting significant planned expansionary capex that will be partially funded with debt. DBRS Morningstar expects financial metrics to improve after 2020 as new customers come on line and begin to contribute additional revenues.

Enwave continues to maintain its strong market position, which is demonstrated through customer growth and the expected renewal of all customer contracts that were scheduled to expire in 2019. The Company’s system reliability for 2018 and for 2019 remains high at over 99.9%. The Company’s high system reliability, cost competitiveness and high customer switching costs should continue to support strong contract renewals into the future. In 2019, Enwave’s contract profile improved to 11.5 years from 11.1 years in 2018 from the commissioning of new customers and the renewal of expiring customer contracts. Enwave’s customer base remains well diversified with customers in the government, hospital, commercial and data centre sectors. No single customer represents over 9% of the forecasted revenues. Enwave expects to complete a 20 MW Combined Heat and Power (CHP) plant in London, Ontario, in Q4 2019, which will operate under a 20-year capacity agreement with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS Morningstar) and will improve revenue diversification and stability going forward.

Revenues and financial metrics improved for the last 12 months (LTM) ended September 30, 2019, compared with 2018, largely because of growth in customers and contracted increases in revenues. EBITDA is expected to further improve in 2020 with a full year’s contributions from customers that were commissioned in 2019 and a full year’s contribution from the completed London CHP facility.

DBRS Morningstar notes that the company has significant expansionary capex expected for the Toronto distribution network over the next few years that will be partially funded with draws on the Company’s credit facilities and subordinated debt. DBRS Morningstar expects additional borrowing from the credit facilities to weaken the Company’s senior debt/EBITDA and cash flow/senior debt ratios in 2020 below the level required to support the current ratings. DBRS Morningstar further expects that financial metrics will improve to the A (low) level in 2020 when expansionary projects are completed and begin generating revenues. Additionally, DBRS Morningstar expects that after 2020, Enwave will maintain its cash flow-to-adjusted debt in the mid-12% range and its adjusted debt-to-EBITDA around the 6.0 times level on a sustained basis; otherwise, a negative rating action may occur.

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

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on dbrs.com under Methodologies & Criteria. Because Enwave is a non-regulated utility, DBRS Morningstar’s assessment of Enwave’s business risk profile is based on the strength of its contractual arrangements with its customers rather than on regulatory framework.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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