EnerCare Inc.
TSX : ECI

EnerCare Inc.

November 13, 2014 07:15 ET

EnerCare Announces Strong Third Quarter 2014 Results

On Track to Achieve All Strategic Priorities for 2014

Direct Energy Transition Seamless to Date

TORONTO, ONTARIO--(Marketwired - Nov. 13, 2014) - EnerCare Inc. ("EnerCare") (TSX:ECI), one of Canada's leading providers of energy conservation products and services, today reported its financial results for the third quarter ended September 30, 2014.

Q3 2014 Financial Highlights

Quarter ended September 30, 2014 versus quarter ended September 30, 2013

(in thousands of Canadian dollars except per unit amounts)(1)

  • Total revenues increased by 4% to $80,469
  • Rentals attrition improved by 8% with nine consecutive quarters of year-over-year improvement in attrition
  • EBITDA(2) increased by 0.5% to $38,740: EBITDA would have improved by 8% to $41,926 after adjusting for Acquisition related costs
  • Payout Ratio - Maintenance(2) improved to 49%
  • Sub-metering sales activities were strong with 3,000 contracted units
(1) Unless otherwise noted, amounts are reported in thousands, except customers, units, shares and per share and per subscription receipt amounts and percentages. Dollar amounts are expressed in Canadian currency.
(2) EBITDA, Adjusted EBITDA, Acquisition Adjusted EBITDA, Payout Ratio - Maintenance, are non-IFRS financial measures. Refer to the non-IFRS Financial and Performance measures section in the MD&A.

"It has been a tremendous year so far," said John Macdonald, President and CEO. "At the beginning of the year specific strategic priorities were established. We have stayed the course and good progress is being made on all levels. As a result, going into the last few months of the year, our operating segments have good momentum."

Macdonald continued, "Now that the acquisition of Direct Energy's Ontario home and small commercial services business is complete, we have taken our first successful steps towards integrating the two businesses. We continue to achieve our goals of a seamless transition with no impact on our sales or services levels."

Recent Developments

EnerCare Completes Acquisition of Direct Energy's ("DE") Home and Small Commercial Services Business in Ontario ("OHCS") (the "Acquisition")

On October 20, 2014, EnerCare completed its previously announced Acquisition.

The purchase price of the Acquisition was approximately $550,000, subject to working capital and other adjustments. The Acquisition and related transaction costs were financed through a combination of debt and equity, including approximately $333,262 of subscription receipts ("Subscription Receipts") ($317,000 net of fees), $150,000 from debt facilities entered into in connection with the Acquisition, and a private placement of 7,692,308 EnerCare common shares ("Shares") to DE. The Shares issued to DE are subject to a 12-month lock-up and thereafter, one-half of such Shares will be subject to a further 6-month lock-up.

In accordance with the terms of the agreement pursuant to which the Subscription Receipts were issued, each outstanding Subscription Receipt was exchanged for one Share resulting in the issuance of 25,635,525 Shares and a cash payment equal to $0.1208 per Subscription Receipt. The cash payment is equal to the aggregate amount of dividends per Share for which record dates occurred since the issuance of the Subscription Receipts, less any withholding taxes, if any.

EnerCare Solutions Inc.'s ("EnerCare Solutions") new debt financing with two Canadian chartered banks is comprised of: (i) the new term loan, which has been drawn for the purpose of financing the Acquisition and re-financing EnerCare Solutions' previous term loan; and (ii) the new revolver, which replaces the previous revolver, which was undrawn at the time of repayment.

Concurrent with the closing of the Acquisition, EnerCare and DE entered into a transition services agreement pursuant to which DE will provide certain transition services to EnerCare relating to, among other things, the provision of ongoing information technology, other support and information technology decoupling services for an initial period of 15-months, subject to extension by either party for up to two additional 3-month terms.

Stronger Protection for Ontario Consumers Act, 2013

On November 27, 2013, the Stronger Protection for Ontario Consumers Act, 2013 ("Bill 55") passed third reading in the Ontario Legislature. Bill 55 is a direct response by the Ontario Government to aggressive and deceptive door-to-door water heater rental sales.

On March 7, 2014, the Ontario Ministry of Consumer Services (the "Ministry") issued proposals for regulations to implement Bill 55 and invited public consultation on the proposals. EnerCare submitted its comments on the proposals to the Ministry on April 22, 2014.

On October 10, 2014, the Ministry issued amended proposals and once again invited commentary. EnerCare submitted its comments on the amended proposals to the Ministry on October 24, 2014.

EnerCare believes that Bill 55 is a strong enhancement in consumer protection that will provide necessary protection for its customers and greatly assist with EnerCare's continued efforts to combat attrition in its water heater business.

Appointment of Director

On October 27, 2014, Scott Boose was appointed to EnerCare's board. Mr. Boose was nominated to the EnerCare board by DE pursuant to DE's rights under a nomination agreement entered into in connection with the Acquisition. That agreement provides that for so long as DE controls not less than 3,846,154 Shares of EnerCare, DE will be entitled to nominate one individual for consideration by EnerCare's governance committee and board. Mr. Boose is the President of Direct Energy Services. Prior to this role, Scott was President of the Clockwork Home Services business (a Direct Energy company), which operates its franchise network in 48 states and has company-owned operations in the United States in 11 states, as well as 2 Canadian provinces. Scott joined Direct Energy in 2004 through the acquisition of the Residential Services Group in which he held several senior positions over a ten year period.

From 2007 to 2010, Mr. Boose served as the Managing Director of the Heating Services business for British Gas, an operating unit of Centrica PLC whereby he oversaw a team of 11,000, including 8,000 frontline engineers and installers. Scott also served on the board of British Gas Insurance during his time in the United Kingdom.

Scott resides in Sarasota, Florida and has a B.S. in Business, Accounting and Finance from Wright State University and graduated with Honors.

EnerCare Provides Voluntary Assurance to the Competition Bureau regarding Water Heater Returns

On November 6, 2014, EnerCare announced that it has fully resolved concerns that Canada's Competition Bureau (the "Bureau") had in respect of certain water heater return policies and practices of DE in respect of OHCS. This was the culmination of a co-operative process between EnerCare and the Bureau that was initiated in conjunction with the Acquisition.

As noted in the Bureau's own announcement, EnerCare had not engaged in any anti-competitive behaviour. However, following the Acquisition, EnerCare voluntarily provided written assurance to the Bureau regarding EnerCare's water heater return policies and practices, including:

  • no longer requiring customers to obtain authorization numbers before returning a rented water heater;
  • honouring agreements whereby a new supplier can terminate a customer's account on his or her behalf and return the old water heater; and
  • opening two new return depots to facilitate the return of its water heaters.

EnerCare does not expect that the changes will have a significant impact on its operating costs or attrition.

Results of Operations

Earnings Statement

Three months ended Sept. 30, Nine months ended Sept. 30,
(000's) 2014 2013 2014 2013
Revenues:
Rentals $ 49,154 $ 47,248 $ 147,014 $ 141,623
Sub-metering 30,837 30,291 89,132 81,513
Investment income 478 21 595 338
Total revenues $ 80,469 $ 77,560 $ 236,741 $ 223,474
Commodity charges 25,220 25,500 73,149 67,688
SG&A expenses:
Rentals 6,503 3,927 12,964 11,834
Sub-metering 3,804 3,475 10,924 9,477
Corporate 3,420 3,453 12,350 11,049
Total SG&A expenses 13,727 10,855 36,238 32,360
Amortization expense 25,186 25,228 74,562 73,928
Loss on disposal of equipment 2,304 2,633 7,679 8,974
Interest expense:
Interest expense payable in cash 9,663 5,852 21,270 19,951
Make-whole payment on early redemption of debt - - - 13,754
Non-cash interest expense 164 170 492 5,266
Total interest expense 9,827 6,022 21,762 38,971
Total expenses 76,264 70,238 213,390 221,921
Other income - 2,000 408 3,678
Earnings before income taxes 4,205 9,322 23,759 5,231
Current tax (expense) (8,924 ) (5,525 ) (21,338 ) (15,704 )
Deferred income tax recovery 6,852 3,134 14,183 14,498
Net earnings $ 2,133 $ 6,931 $ 16,604 $ 4,025
EBITDA $ 38,740 $ 38,551 $ 119,080 $ 114,114
Adjusted EBITDA $ 41,044 $ 43,184 $ 127,167 $ 126,766
Acquisition Adjusted EBITDA $ 43,926 $ 43,184 $ 130,751 $ 126,766

Revenues

Total revenues of $80,469 for the third quarter of 2014 increased by $2,909 or 4% and by $13,267 or 6% to $236,741 year to date compared to the same periods in 2013. Rentals revenues for the quarter increased by $1,906 to $49,154 and by $5,391 to $147,014 year to date compared to the same periods in 2013, primarily due to a rental rate increase implemented in January 2014, improved billing completeness and changes in asset mix, partially offset by fewer installed assets. Sub-metering revenues in the third quarter of 2014 were $30,837, an increase of $546 or 2% with year to date revenues increasing to $89,132 or 9% over the comparable periods in 2013, primarily as a result of increased billable units and the associated commodity charges. Sub-metering revenue included total pass through energy charges of $25,220 in the third quarter and $73,149 year to date in 2014, a reduction of $280 and increase of $5,461, respectively, over the same periods in 2013.

Investment income was $478 in the third quarter and $595 year to date in 2014, an increase of $457 and $257, respectively, over the same periods in 2013. The change in investment income during the fourth quarter and year to date 2014 was primarily attributable to $397 of interest earned from the Subscription Receipt proceeds issued in the quarter in connection with the Acquisition.

Selling, General & Administrative Expenses ("SG&A")

Total SG&A expenses were $13,727 in the third quarter of 2014, an increase of $2,872 or 26% compared to the same period in 2013. Rentals and corporate expenses of $9,923 increased by $2,543 over the third quarter of 2013, primarily from increases of approximately $2,600 in professional fees, $300 in wages and benefits and $400 in office expenses, partially offset by reductions of $400 in bad debts, $200 in claims and $200 in selling expenses. During the third quarter of 2014, rentals and corporate SG&A expenses included $2,882 of costs associated with the Acquisition, of which approximately $2,600 were professional fees. Sub-metering SG&A expenses were $3,804 or $329 greater in the third quarter of 2014 compared to the same period in 2013, primarily as a result of increased wages and benefits of approximately $600 and cost of goods of $200, partially offset by reductions in bad debts of $350 and professional fees of $150.

Year to date total SG&A expenses were $36,238 or $3,878 higher than the same period in 2013. Rentals and corporate expenses of $25,314 year to date in 2014 increased by $2,431 over the same period in 2013, primarily from increases of approximately $3,100 in professional fees, $1,200 in wages and benefits, $300 in office expenses and $200 on account of billing and servicing costs, partially offset by decreases of $1,100 in selling expenses, $900 in claims and $400 in bad debts. Year to date rentals and corporate SG&A expenses included $3,584 of costs associated with the Acquisition, of which approximately $3,300 were professional fees. Sub-metering SG&A expenses of $10,924 were $1,447 higher year to date in 2014 compared to 2013, primarily as a result of increased wages and benefits of approximately $1,700 and cost of goods of $200 partially offset by reductions in bad debts of $200, professional fees of $100 and selling expenses of $100.

Amortization Expense

Amortization expense decreased by $42 to $25,186 in the third quarter of 2014 and increased by $634 or 1% to $74,562 year to date over the same periods in 2013, primarily due to an increasing capital asset base from asset mix changes in the rentals portfolio and increased sub-metering capital investments, which are amortized over a shorter life than the rentals business.

Loss on Disposal of Equipment

EnerCare reported a loss on disposal of equipment of $2,304 in the third quarter of 2014, and $7,679 year to date, reductions of $329 or 12% and $1,295 or 14%, respectively, over the same periods in 2013. The loss on disposal amount is influenced by the number of assets retired, proceeds on disposal of equipment, changes in the retirement asset mix and the age of the assets retired.

Interest Expense

Three months ended Sept. 30, Nine months ended Sept. 30,
(000's) 2014 2013 2014 2013
Interest expense payable in cash $ 5,791 $ 5,852 $ 17,398 $ 19,951
Interest payable on subscription receipts 3,097 - 3,097 -
Equity bridge financing fees 775 - 775 -
Make-whole payment on early redemption of debt - - - 13,754
Non-cash items: Amortization of OCI and financing costs 164 170 492 5,266
Interest expense $ 9,827 $ 6,022 $ 21,762 $ 38,971

Interest expense payable in cash decreased by $61 to $5,791 in the third quarter of 2014 and by $2,553 to $17,398 year to date, compared to the same periods in 2013. The decreases are primarily related to the conversion of convertible debentures to Shares and reduction in interest rates with the early redemption in 2013 of the $270,000 6.75% Series 2009-2 Senior Notes of EnerCare Solutions, which were redeemed on March 6, 2013 ("2009-2 Notes") associated with the issuance of the 2013 Notes. As part of the Acquisition, Subscription Receipts were issued and subsequently converted to Shares upon the closing of the Acquisition on October 20, 2014. While the Subscription Receipts remained outstanding, they were classified as a financial liability, resulting in an interest payable of $3,097, which was equivalent to the dividend payments on such Subscription Receipts had they been Shares. Equity bridge financing fees of $775 were incurred as part of the Acquisition. The make-whole payment of $13,754 was incurred upon the early redemption of the 2009-2 Notes and the drawdown of the previous term loan. Amortization of other comprehensive income ("OCI") and financing costs for 2013 include the previously unamortized costs associated with the 2009-2 Notes and $4,023 of accumulated OCI which was fully reclassified to earnings in the first quarter in 2013.

Other Income

During the first quarter of 2014, EnerCare realized a settlement of $408 from DE on account of the reclassification of certain water heaters under the co-ownership agreement to EnerCare's owned portfolio, originally associated with the Toronto Hydro Energy Services Inc. portfolio acquisition. During the third quarter of 2013, EnerCare accrued in other income a settlement from DE of $2,000 on account of water heater installation costs, billing and collection deficiencies and third-party claims. In the second quarter of 2013, EnerCare and DE reached a settlement of $1,678 on account of billing and collection matters in respect of water heater buyouts.

Income Taxes

EnerCare reported a current tax expense of $8,924 in the third quarter of 2014 and $21,338 year to date, increases of $3,399 and $5,634, respectively, over the same periods in 2013, primarily as a result of higher taxable income. The deferred income tax recovery of $6,852 for the third quarter of 2014 and $14,183 year to date, an increase of $3,718 and decrease of $315, respectively, were primarily as a result of temporary difference reversals in the rentals and sub-metering businesses, including the impact of the 2013 make-whole payment.

Net Earnings

Net earnings in the third quarter of 2014 were $2,133 or $4,798 lower than in the same period in 2013 as previously described. The 2014 year to date net earnings of $16,604 improved by $12,579 over the same period in 2013, primarily driven by the make-whole payment of $13,754 made in 2013 in respect of the early redemption of the 2009-2 Notes.

EBITDA, Adjusted EBITDA and Acquisition Adjusted EBITDA

The following table summarizes comparative quarterly results for the last eight quarters, and reconciles net earnings, an IFRS measure, to EBITDA, Adjusted EBITDA and Acquisition Adjusted EBITDA.


(000's)
Q3/14 Q2/14 Q1/14 Q4/13 Q3/13 Q2/13 Q1/13 Q4/12
Net earnings/(loss) $ 2,133 $ 7,457 $ 7,014 $ 4,793 $ 6,931 $ 7,482 $ (10,388 ) $ (2,096 )
Deferred tax (recovery) (6,852 ) (3,810 ) (3,521 ) (3,552 ) (3,134 ) (3,640 ) (7,724 ) (4,155 )
Current tax expense 8,924 6,335 6,079 6,148 5,525 4,591 5,588 5,217
Amortization expense 25,186 24,870 24,506 25,792 25,228 24,344 24,356 25,175
Interest expense 9,827 5,963 5,972 6,002 6,022 5,976 26,973 11,937
Other (income)/expense - - (408 ) (769 ) (2,000 ) (1,678 ) - 362
Investment (income) (478 ) (80 ) (37 ) (35 ) (21 ) (49 ) (268 ) (180 )
EBITDA 38,740 40,735 39,605 38,379 38,551 37,026 38,537 36,260
Add: Loss on disposal of equipment 2,304 2,371 3,004 2,666 2,633 3,449 2,892 3,523
Add: Other income/(expense) - - 408 769 2,000 1,678 - (362 )
Adjusted EBITDA(1) 41,044 43,106 43,017 41,814 43,184 42,153 41,429 39,421
Add: Acquisition SG&A 2,882 702 - - - - - -
Acquisition Adjusted EBITDA $ 43,926 $ 43,808 $ 43,017 $ 41,814 $ 43,184 $ 42,153 $ 41,429 $ 39,421
(1) Historical Adjusted EBITDA has been conformed to the current presentation which includes other income and expense.

Outlook

The forward-looking statements contained in this news release are not historical facts but, rather, reflect EnerCare's current expectations regarding future results or events and are based on information currently available to management.

EnerCare continues to experience improved results in the rentals business through increasing average monthly rental rates as a result of our HVAC strategy and improved customer retention. We continue to believe that the factors contributing to the decline in attrition over the last five years, including improving consumer awareness, as well as the new Enbridge open bill access agreement and Bill 55, will create a more favourable environment for further improvement in customer retention. Our key priorities and initiatives for the rentals business in 2014 remain focused on growing revenue in excess of annual rate increases, increasing the number of unit additions, continuing to improve attrition and as a result, increase Adjusted EBITDA as well as integrating the Acquisition.

The purchase of DE's OHCS business has been transformative for EnerCare. The Acquisition has allowed EnerCare to have direct access to its customers, control over all aspects of its operations and larger financial scale.

Our priority for the first 12-months will be focused on the reunification of the two businesses, which has been successful to date. In our first week after the Acquisition, all operational and customer key performance indicators were met and sales targets exceeded. Attention now turns to implementing our 100 day plan activities with re-branding and the completion of the Transitional Services Agreement occurring in the first half of 2015.

In respect of sub-metering, we continue to make improvements in productivity and operational efficiencies through our LEAN program. In the third quarter of 2014, a revenue assurance program was launched. The program involves a rigorous reconciliation process to identify points of revenue leakage, including rate application and consumption completeness within key business processes. We anticipate substantial improvements in net revenue moving forward as a result of this initiative.

With the acquisition of OHCS, EnerCare has revised its estimate in current taxes for the fiscal year ended December 31, 2014. The new estimate of approximately $25,000 to $30,000 takes into account the incremental taxable income generated from October 20, 2014 to December 31, 2014 by OHCS. This estimate is based on a forecasted taxable income for 2014, which is shielded by unrestricted tax losses and a corporate tax rate of 26.5%. Taxable income is principally impacted by changes in revenue and operating expenses, potential acquisitions or divestitures, appropriate tax planning and capital expenditures through the capital cost allowance.

Financial Statements and Management's Discussion and Analysis

EnerCare's financial statements and management's discussion and analysis for the third quarter of 2014 are available on SEDAR at www.sedar.com or on EnerCare's investor relations website at www.enercareinc.com.

Conference Call and Webcast

Management will host a conference call and live audio webcast to discuss EnerCare's financial results for the third quarter ended September 30, 2014 this morning, at 10:00 a.m. John Macdonald, President and CEO, and Evelyn Sutherland, CFO, will be on the call. Details of the call and webcast are as follows:

Date: Thursday, November 13, 2014
Time: 10:00 a.m. - 11:00 a.m. (ET)
By Telephone: 647.788.4922 or 1.877.223.4471
Please allow 10 minutes to be connected to the conference call.
Webcast: http://www.gowebcasting.com/5123
Note: this is a listen-only audio webcast. Media Player or Real Player is required to listen to the broadcast.
Replay: An archived audio webcast will be available at: www.enercareinc.com for one year following the original broadcast.
Note: A slide presentation intended for simultaneous viewing with the conference call will be available the morning of November 13, 2014 at: www.enercareinc.com.

About EnerCare

EnerCare is one of Canada's largest home and commercial services companies with more than 900 employees. EnerCare provides water heaters, furnaces, air conditioners and other HVAC rental products, protection plans and related services to approximately 1.1 million customers. EnerCare also owns EnerCare Connections Inc., a leading sub-meter provider, with metering contracts for condominium and apartment suites in Ontario, Alberta and elsewhere in Canada.

Additional information regarding EnerCare is available on SEDAR at www.sedar.com or through EnerCare's investor relations website at www.enercareinc.com or www.enercare.ca.

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this news release are forward-looking statements, which reflect management's expectation regarding EnerCare's and EnerCare Solutions' growth, results of operations, performance, business prospects and opportunities. Such forward-looking information reflects management's current beliefs and is based on information available to them and/or assumptions management believes are reasonable. Many factors could cause results to differ materially from the results discussed in the forward-looking information. Although the forward-looking information is based on what management believes to be reasonable assumptions, EnerCare and EnerCare Solutions cannot assure investors that actual results will be consistent with this forward-looking information. All forward-looking information in this news release is made as of the date of this news release. Except as required by applicable securities laws, neither EnerCare nor EnerCare Solutions intend and do not assume any obligation to update or revise the forward-looking information, whether as a result of new information, future events or otherwise.

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