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

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 market position and operating performance.

DBRS Morningstar notes that lower customer demand related to the Coronavirus Disease (COVID-19) pandemic led to a decrease in Enwave's volumes. However, since Enwave's contracts are largely fixed margin, the decrease in volumes is expected to result in only a 4% decrease to gross margin. The decrease to gross margin is expected to be partially offset by the decrease in some volume-based maintenance expenses and the Company's discretionary expenses. As a result, EBITDA for 2020 is expected to decrease by only 2% compared with plan and increase slightly compared with 2019 because of new contracts coming online. DBRS Morningstar expects that the reduced volumes related to the pandemic will return to more normal levels following the reduction of pandemic restrictions. Moreover, because Enwave is an essential service provider, construction on its Toronto expansion projects continued throughout the year, remaining on time and on budget, and they are expected to be completed in mid-2021.

Enwave continues to maintain its strong market position, which is demonstrated through both customer growth and the expected renewal of all customer contracts that were scheduled to expire in 2020. The Company’s system reliability has historically been high and is expected to remain high at over 99.9% for 2021. Enwave’s high system reliability, cost competitiveness, and high customer switching costs should continue to support strong contract renewals into the future. In 2020, the Company’s revenue-weighted contract length improved to 15 years as a result of new contracts and the renewal of expiring customer contracts, calculated on a run-rate revenue basis.

Enwave’s customer base remains well diversified, with customers in the government, hospital, commercial, and data centre sectors. In Q1 2020, the Company completed its 20-megawatt Combined Heat and Power (CHP) plant in London, Ontario, which is operating under a 20-year capacity agreement with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS Morningstar) and which has further increased contract diversification.

DBRS Morningstar notes that Enwave's cash flow/senior debt and its senior debt/EBITDA ratios will decrease in 2020 compared with 2019. This decrease is primarily a result of Enwave issuing $80 million 30-year Senior Secured Notes in Q2 2020. Part of the proceeds from this issuance was applied to repay draws on the credit facility that was used to fund growth capital expenditure projects that are expected to be completed in mid-2021. DBRS Morningstar notes that the growth projects are fully contracted and the new customer contracts have a similar risk profile as Enwave's existing customer contracts. The completion of these growth projects is expected to result in an improvement in financial metrics for 2021. Following the completion of the growth projects in 2021, DBRS Morningstar expects that Enwave will maintain its cash flow-to-adjusted debt ratio in the mid-12% range and its adjusted debt-to-EBITDA around the 6.0 times level. DBRS Morningstar may take a negative rating action if these metrics fall below this level on a sustained basis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities (October 27, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.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.

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

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