EnerCare Inc.
TSX : ECI

EnerCare Inc.

July 24, 2014 15:15 ET

EnerCare Signs Agreement to Acquire Direct Energy's Home and Small Commercial Services Business in Ontario and Announces $310 Million Bought Deal Offering

TORONTO, ONTARIO--(Marketwired - July 24, 2014) -

NOT FOR RELEASE IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICES

EnerCare Inc. ("EnerCare") (TSX:ECI) and EnerCare Solutions Inc. ("EnerCare Solutions" and with EnerCare, the "Company"), one of Canada's leading providers of energy conservation products and services, announced today that the Company has entered into a definitive asset purchase agreement to purchase the Ontario home and small commercial services ("OHCS") business of Direct Energy Marketing Limited ("Direct Energy"), a wholly-owned subsidiary of Centrica plc ("Centrica") (LSE: CNA) (the "Acquisition") for a purchase price of $550 million, subject to customary working capital and other adjustments.

In conjunction with the Acquisition, EnerCare also announced that it has entered into an agreement with a syndicate of underwriters to issue, on a bought deal basis, approximately $310 million of subscription receipts (the "Subscription Receipts") to partially finance the Acquisition. In addition, existing lenders have committed to provide debt funding for the Acquisition.

"With our strong financial track record and solid balance sheet, the timing is now right to reunite the two businesses," said John Macdonald, President and CEO of the Company. "Operationally, this acquisition is an excellent fit. In one step it creates a winning platform for our customers, employees, investors and other stakeholders. The transaction, which is expected to be immediately accretive to pro forma Distributable Cash per common share1, enhances EnerCare's ability to continue to grow the business and return capital to shareholders."

Transaction Highlights

  • Restores what was once a combined business and significantly aligns, strengthens and expands the Company's platform and offers additional opportunities for growth.

  • Aligns the two entities and creates a stronger integrated business that will have direct access to its customers and control over all aspects of its operations.

  • Accretion in excess of 25% in pro forma Distributable Cash per common share(1) is expected by 2015.

  • Post-closing the Company expects to maintain a strong capital structure with an investment grade credit rating.

  • Ongoing alignment with Direct Energy who will be a significant shareholder for at least 18 months.

  • Closing expected in the fourth quarter of 2014.

The Acquisition

In May 2002 Centrica, through Direct Energy, acquired Enbridge Services Inc. and its Canadian home and business services operations, which included what is now the Company's water heater rental program. In December 2002, EnerCare (formerly The Consumers' Waterheater Income Fund) completed its initial public offering and purchased the water heaters and other assets from Direct Energy and entered into a co-ownership agreement and 20-year origination agreement with Direct Energy relating to the servicing and origination of the Company's rental portfolio.

Today, Direct Energy's services business in Ontario is a leading provider of home services in the province. OHCS services approximately 98% of the Company's rental water heater and HVAC portfolio and has the largest technician and installer workforce in Ontario. In addition to servicing the Company's rental portfolio, Direct Energy's home and small commercial services business in Ontario also includes:

  • protection plans involving service and maintenance for heating, cooling and plumbing equipment;

  • HVAC services, including sales, replacement, repairs and maintenance services;

  • plumbing, duct cleaning and energy audits; and

  • a division which installs and services small commercial water heaters and HVAC equipment.

The closing of the Acquisition, which is expected to occur in the fourth quarter of 2014, is subject to customary closing conditions, including Competition Act and Toronto Stock Exchange approval and third party consents. The Acquisition is not subject to due diligence or a financing condition, but is subject to settling the definitive terms of a transition services agreement relating to ongoing information technology support by Direct Energy and information technology decoupling.

For the year ended December 31, 2013, if OHCS and EnerCare had been combined, EnerCare's pro forma revenue and pro forma Adjusted EBITDA would have been $527 million and $210 million, respectively. The Acquisition is expected to be immediately accretive to EnerCare's revenue, pro forma Adjusted EBITDA and pro forma Distributable Cash. The Acquisition provides immediate accretion of 22% to 2013 pro forma Distributable Cash per common share1.

John Macdonald stated, "The focus for the first 12-months will be on executing the reunification of our two businesses. Direct Energy has been our service provider since our inception and we know them well. I see a good cultural fit and the opportunity to share ideas and expertise. Together we can continue to grow this business and create a very powerful customer experience."

In conjunction with the Acquisition, Direct Energy and Centrica will agree not to compete in Ontario with the services business in Ontario for a period of 8 years.

National Bank Financial Inc. acted as financial advisor to EnerCare on the Acquisition, with Torys LLP acting as legal counsel.

Financing the Acquisition

Equity Financings

Offering of Subscription Receipts on a Bought Deal Basis

In order to partially finance the cash component of the Acquisition, EnerCare has entered into an agreement with a syndicate of underwriters (the "Underwriters") co-led by National Bank Financial Inc. and TD Securities Inc. to sell 23,847,000 Subscription Receipts on a bought deal basis. The Subscription Receipts will be offered at a price of $13.00 per Subscription Receipt, for gross proceeds to the Company of $310,011,000 (the "Offering"). EnerCare has also granted the Underwriters an over-allotment option to purchase up to an additional 1,788,525 Subscription Receipts (or, in certain circumstances, common shares), on the same terms and conditions as the Offering, exercisable no later than 30 days after the closing of the offering.

Each Subscription Receipt represents the right of the holder to receive, upon closing of the Acquisition, without payment of additional consideration, one common share of EnerCare plus an amount per common share, equal to the amount per common share of EnerCare of any dividends for which record dates have occurred during the period from the closing date of the Offering to the date immediately preceding the closing date of the Acquisition, less any withholding taxes, if any. On or before July 30, 2014, EnerCare will file with the securities commissions or other similar regulatory authorities in each of the provinces of Canada, a preliminary short form prospectus relating to the issuance of the Subscription Receipts. Closing of the Offering is expected to occur on or about August 18, 2014, subject to TSX and other necessary regulatory approvals. The net proceeds from the offering of Subscription Receipts will be used to finance, in part, the Acquisition, as well as EnerCare's expenses of the Acquisition and the Offering, once the proceeds are released from escrow.

Private Placement to Direct Energy

Subject to the approval of the TSX, pursuant to the Acquisition agreement, EnerCare will issue approximately $100,000,000 of its common shares to Direct Energy on a private placement basis in partial satisfaction of the purchase price for the Acquisition. The common shares issued to Direct Energy will be issued at a price of $13.00 per share, the same price as the offering. Initially, all of such common shares will be subject to a 12-month lock-up and thereafter, one-half of such common shares will be subject to a further 6-month lock-up. Direct Energy will be entitled to nominate one director of EnerCare for so long as it holds common shares of EnerCare constituting no less than one-half of the number of such shares it holds immediately following closing of the Acquisition.

Debt Financing

EnerCare Solutions has entered into a commitment letter with The Toronto-Dominion Bank and National Bank of Canada pursuant to which the banks have committed, subject to customary conditions, to provide debt financing to EnerCare Solutions in the form of unsecured credit facilities in an aggregate amount of $633 million (collectively, the "Credit Facilities"), of which the Company expects to draw $223 million at closing of the Acquisition.

The Credit Facilities are comprised of two different components: (i) a non-revolving, non-amortizing variable rate term credit facility in the amount of $223 million to be available in a single drawdown, for the purpose of financing a portion of the purchase price and re-financing EnerCare Solutions existing $60 million term loan; (ii) a $100 million revolving, non-amortizing variable rate credit facility which replaces EnerCare Solutions existing $35 million revolving credit facility and is expected to remain undrawn at the close of the Acquisition.

The Credit Facilities also include a fully committed bridge facility for the purchase price and transaction expenses to be funded from the Offering should the bought deal not be completed by time of closing.

"We are very pleased with the financing structure. We have fully committed financing to fund the acquisition and have structured the deal to maintain our high quality investment grade capital structure," stated Evelyn Sutherland, Chief Financial Officer of the Company. "Post-closing we will have ample financial flexibility to continue to grow our business and return significant capital to our shareholders. We are excited about this acquisition and believe it is an exceptional opportunity to create long-term value for our shareholders."

Pro Forma Financial Highlights for EnerCare

  • Pro forma 2013 combined annual revenue of EnerCare approximately $527 million.

  • Increases 2013 pro forma Adjusted EBITDA and pro forma Distributable Cash1 of EnerCare by 25% and 87%, respectively.

  • Decreases 2013 pro forma Payout Ratio of EnerCare to 65%1 from 78%.

  • With the successful close of the Offering, total debt outstanding will be just over $700 million, with improved bank loan covenants.

  • Debt financing maintains the Company's laddered debt maturity schedule.

EnerCare Solutions anticipates that the Acquisition will have a substantially similar positive impact on its financial metrics as discussed in this news release in respect of EnerCare, having regard to the impact to EnerCare of EnerCare's sub-metering and corporate segments and the elimination of intercompany amounts.

The securities to be offered have not been and will not be registered under the United States Securities Act of 1933, as amended, or under any state securities laws, and may not be offered, sold, directly or indirectly, or delivered within the United States of America and its territories and possessions or to, or for the account or benefit of, United States persons except in certain transactions exempt from the registration requirements of such Act. This release does not constitute an offer to sell or a solicitation to buy such securities in the United States, Canada or in any other jurisdiction where such offer is unlawful.

Analyst Conference Call and Webcast

The Company's executives, John Macdonald, President and CEO, and Evelyn Sutherland, CFO, will host a conference call and live audio webcast to discuss the Acquisition. Following a brief presentation, there will be a question and answer session.
Details of the call and live audio webcast are as follows:

Date: Thursday, July 24, 2014
Time: 4:00 p.m. - 4:30 p.m. (ET)
By Telephone: 647-788-4922 or 1-877-223-4471
Please allow 10 minutes to be connected to the conference call.
Webcast: www.gowebcasting.com/5680
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 is available on our website at: www.enercareinc.com.

Non-IFRS Financial Measures ("IFRS")

The information presented in this news release includes certain adjusted financial measures which are not defined under IFRS as noted below. The Company's method of calculating the non-IFRS measures may differ from the methods used by other issuers. Therefore, the Company's non-IFRS measures may not be comparable to similar measures presented by other issuers.

"EBITDA" is a measure that is comprised of net earnings plus income taxes, interest expense and amortization expense, less investment and other income. It is one metric that can be used to determine the Company's ability to service its debt, finance capital expenditures, and provide for the payment of dividends to shareholders. EBITDA is reconciled with net earnings, an IFRS measure.

"Adjusted EBITDA" is a measure that is comprised of net earnings plus income taxes, interest expense, amortization expense, impairment losses, loss on disposal of equipment, less investment income. The Company's calculation of "pro forma Adjusted EBITDA" further includes adjustments to eliminate certain identified corporate allocations incurred by OHCS (such as non-cross over selling, general & administrative expenses and pension expense) in order to normalize for these "non-crossover costs" that are not expected to be incurred post-combination. Management uses Adjusted EBITDA to determine the Company's ability to service its debt, finance capital expenditures, and provide for the payment of dividends to shareholders, and has been reconciled with net earnings, an IFRS measure. Pro forma Adjusted EBITDA has been reconciled to pro forma net earnings.

"Distributable Cash" is a measure of the amount of cash generated during a period that is available to service debt, finance capital expenditures and provide for the payment of dividends to shareholders. Distributable Cash is comprised of net earnings, plus non-cash items and proceeds on disposal of equipment, less rentals capital expenditures (excluding growth capital) and other non-recurring income. The Company's calculation of "pro forma Distributable Cash" further includes adjustments to eliminate certain identified corporate allocations incurred by OHCS (such as non-cross over selling, general & administrative expenses and cash pension expense) in order to normalize for these "non-crossover costs" that are not expected to be incurred post-combination. Capital expenditures outside of the Company's traditional rentals asset purchases, such as sub-metering equipment, acquisitions and infrastructure assets are considered to be growth expenditures and are therefore not deducted in the determination of Distributable Cash. Distributable Cash is reconciled with cash from operating activities, an IFRS measure. Pro forma Distributable Cash has been reconciled to pro forma cash from operating activities.

"Payout Ratio" is the percentage of Distributable Cash to dividends declared to shareholders during a period and represents the ability of EnerCare to pay dividends, finance capital expenditures and add to its cash reserves.

EBITDA, Adjusted EBITDA, pro forma Adjusted EBITDA, Distributable Cash, pro forma Distributable Cash, and Payout Ratio are not standard measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. EBITDA, Adjusted EBITDA, pro forma Adjusted EBITDA, Distributable Cash, pro forma Distributable Cash, and Payout Ratio are supplemental measures of a company's performance and the Company believes that EBITDA, Adjusted EBITDA, pro forma Adjusted EBITDA, Distributable Cash, pro forma Distributable Cash, and Payout Ratio are relevant measures of its ability to pay dividends on EnerCare's common shares, among other things. Examples of reconciliations of EBITDA, Adjusted EBITDA, Distributable Cash and Payout Ratio to the most directly comparable measure calculated in accordance with IFRS are provided in the Company's most recently filed management's discussion and analysis.

EBITDA, Adjusted EBITDA, pro forma Adjusted EBITDA, Distributable Cash, pro forma Distributable Cash and Payout Ratio should not be construed as alternatives to net income or earnings per share determined in accordance with IFRS as indicators of the Company's performance.

Cautionary Note Regarding Forward-Looking Statements

This news release contains forward-looking information within the meaning of applicable Canadian securities laws ("forward-looking statements"). Statements other than statements of historical fact contained in this news release may be forward-looking statements, including, without limitation, management's expectations, intentions and beliefs concerning anticipated future events, results, circumstances, economic performance or expectations with respect to the Company, including the Company's business operations, business strategy and financial condition. Forward-looking statements may include words such as "anticipates", "believes", "budgets", "could", "estimates", "expects", "goal", "intends", "may", "outlook", "plans", "strive", "target" and "will", although not all forward-looking information contains these words.

Some of the specific forward-looking statements in this news release include, but are not limited to, statements with respect to the following:

  • timing and completion of the Acquisition, which may be impacted by the conditions in the Acquisition Agreement;

  • EnerCare's ability to pay dividends to shareholders;

  • other statements made in the sections of this press release entitled "Transaction Highlights", "The Acquisition" and "Financing the Acquisition"; and

  • the impact on the Company's business of the Acquisition and current and anticipated economic conditions.

These forward-looking statements may reflect the internal projections, expectations, future growth, results of operations, performance, business prospects and opportunities of the Company and will be based on information currently available to the Company and/or assumptions that the Company believes are reasonable. Actual results and developments may differ materially from results and developments discussed in the forward-looking statements, as they are subject to a number of risks and uncertainties. In developing these forward-looking statements, certain material assumptions were made.
These forward-looking statements are also subject to certain risks. These factors include, but are not limited to:

  • actual future market conditions being different than anticipated by management; and

  • the failure to realize the anticipated benefits of the Acquisition.

Material factors or assumptions that were applied to drawing a conclusion or making an estimate set out in forward-looking statements, including pro forma financial information, include:

  • the view of management regarding current and anticipated market conditions;

  • industry trends remaining unchanged;

  • the successful completion of the Acquisition and the financing thereof;

  • the financial and operating attributes of the Company and OHCS as at the date hereof and the anticipated future performance of the Company and OHCS following the Acquisition;

  • intercompany eliminations between OHCS and the Company;

  • assumptions regarding the interest rates of the Credit Facilities;

  • the effective acquisition multiple and the extent to which the Acquisition is accretive, each of which may be impacted by final financing arrangements, the realization and timing of synergies and the operating performance of EnerCare and OHCS;

  • assumptions regarding non-recurring transaction and transition costs estimated to be incurred by the Company in connection with the Acquisition;

  • assumptions regarding future selling, general and administrative costs estimated to be incurred by the Company in connection with the running of OHCS by it following the Acquisition;

  • assumptions regarding future benefits anticipated by management to be realized in respect of certain contract negotiations completed by OHCS in its 2012 and 2014 collective agreements with unionized employees and its agreements with franchisees in 2012;

  • assumptions regarding pension and other employee related benefits liabilities and expenses to be assumed by the Company in the Acquisition; and

  • assumptions regarding the fair value of the assets acquired and liabilities assumed under the Acquisition Agreement and the related tax deductions and payments.

There can be no assurance that the Acquisition will occur or that the anticipated strategic benefits and operational, competitive and cost synergies will be realized. The Acquisition is subject to various approvals, including approvals under the Competition Act (Canada) and by the TSX, and the fulfillment of certain conditions, and there can be no assurance that any such approvals will be obtained and/or any such conditions will be met. The Acquisition could be modified, restructured or terminated at any time.

Readers are cautioned that the preceding list of material factors or assumptions is not exhaustive. Although forward-looking statements contained in this news release are based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Accordingly, readers should not place undue reliance on such forward-looking statements and assumptions as management cannot provide assurance that actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. These forward-looking statements are subject to change as a result of new information, future events or other circumstances in which case they will only be updated by the Company where required by law.

About EnerCare and EnerCare Solutions

EnerCare and EnerCare Solutions own a portfolio of approximately 1.1 million installed water heaters and other assets, rented primarily to residential customers in Ontario. EnerCare also owns EnerCare Connections Inc., a leading sub-metering company, with metering contracts for condominium and apartment suites in Ontario, Alberta and elsewhere in Canada.

Additional information regarding EnerCare and EnerCare Solutions is available on SEDAR at www.sedar.com or through EnerCare's investor relations website at www.enercareinc.com or at www.enercare.ca. For further information on the Acquisition, a slide presentation will be available on EnerCare's investor relations website.
For further information, please contact:

1 Excludes certain identified OHCS corporate allocation charges of $11 million, transaction costs estimated to be $23 million and non-recurring transition costs, as well as anticipated future synergies and estimated future unrealized benefits relating to OHCS 2012 and 2014 collective bargaining agreement, franchisee renewal and back office restructuring; pro forma Distributable Cash also includes non-cross over cash pension adjustment of $10 million. Gives effect to the bought deal offering, excluding the over-allotment option.

Contact Information