Morningstar DBRS Confirms Enwave Energy Corporation at A (low); All Trends Remain Negative

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

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect (1) Enwave's strong business risk profile as its EBITDA is primarily from operating a district energy in downtown Toronto; (2) its improved earnings growth and credit metrics in 2023 compared with 2022; and (3) good operational efficiency and reliability (availability of 99.9%). The continuation of the Negative trends reflects Enwave has yet to improve its cash flow-to-debt ratio to or above 12.5%.

CREDIT RATING DRIVERS
Morningstar DBRS will change all trends to Stable if the Company’s cash flow-to-debt ratio improves to and is expected to stay above 12.5%. Morningstar DBRS may downgrade the credit ratings if the Company's business risk profile significantly deteriorates and/or if its cash flow-to-debt ratio remains below 12.5%. Morningstar DBRS may maintain the current credit ratings and return to Stable trends if there is a consistent improvement in the cash flow-to-debt ratio that falls well within Morningstar DBRS’ “A” range on a sustained basis. A significant deterioration or a prolonged period of poor financial metrics could result in Morningstar DBRS taking a negative credit rating action.

EARNINGS OUTLOOK
Enwave’s earnings have been steadily increasing through organic growth, benefitting from stable revenue, of which more than 90% is generated through capacity and consumption contracts. Morningstar DBRS expects this trend to continue.

FINANCIAL OUTLOOK
Enwave's financial risk assessment has improved compared with the previous year. The cash flow-to-debt ratio of the last 12 months ended September 2023 (LTM 2023) was 11.3% (versus 9.8% in 2022). However, Enwave's credit metrics are relatively weak for its current credit ratings. Morningstar DBRS anticipates Enwave's credit metrics will improve in the near term and expects the Company to finance its capital expenditures (capex) through subordinated loan contributions. To support the current credit rating, the cash flow-to-debt ratio must be at or above 12.5%.

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 believes Enwave will continue to grow by contracting and connecting new customers, with growth primarily focused on its downtown Toronto operations. Morningstar DBRS also believes Enwave will complete 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. Enwave's liquidity is likely to remain sufficient given its $50.0 million revolving line of credit and Morningstar DBRS’ expectation that Enwave’s shareholders will provide additional liquidity support if required.

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 Toronto to 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 credit rating action.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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

(B) Weighting of FRA Factors
In the analysis of Enwave, the FRA factors were 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 methodologies:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (January 30, 2024), https://dbrs.morningstar.com/research/427244
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 19, 2023), https://dbrs.morningstar.com/research/422134

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/397223.

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 ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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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