The Consumers' Waterheater Income Fund
TSX : CWI.UN

The Consumers' Waterheater Income Fund

March 07, 2008 14:03 ET

The Consumers' Waterheater Income Fund Announces New Billing and Trust Arrangements

TORONTO, ONTARIO--(Marketwire - March 7, 2008) -

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

The Consumers' Waterheater Income Fund (TSX:CWI.UN) ("Fund") and its wholly-owned trust, The Consumers' Waterheater Operating Trust ("Trust"), today announced that Enbridge Gas Distribution Inc. ("EGD") and Direct Energy Marketing Limited ("DE"), the Fund's servicer, among other parties, entered into an Open Bill Access and Collection Services Agreement effective March 10, 2008 ("OBA"). The OBA and related trust arrangements are effective concurrently with the termination of the existing billing and trust arrangements.

"The entering into of the OBA and related trust and transition agreements lets us continue with the full confidence and security of billing and trust arrangements with EGD and DE for the next 16 months," said Steve Bower, CFO. "Completing the agreements also allows us to focus our energies on the refinancing of our bridge credit facility in the coming months."

The OBA provides the Fund with extended access to the EGD bill until June 30, 2009 and continues the means by which the Fund will receive 99.5% of the amounts billed on the EGD bill, subject to certain exceptions. The related trust agreement gives the Fund the added comfort of bankruptcy remoteness from EGD in the event EGD fails to remit the required payments under the OBA when due. In that event, DE (and the other billers) will be paid directly out of the trust account ("Account").

The following summarizes the terms of the OBA and related agreements, as well as an outline of the material risks faced by the Fund and Trust in relation to those agreements. In 2006, EGD was ordered by the Ontario Energy Board ("OEB") to bring forward a comprehensive "Open Bill" solution that would enable other energy service providers in addition to DE to access the EGD bill on an equivalent basis. EGD presented its comprehensive Open Bill solution to the OEB in 2007 which was accepted on an interim basis. These new arrangements gave rise to the need to redesign the trust arrangement that has been in place since May of 2002.

Open Bill Agreement

Under the OBA, EGD will provide billing and collection services to DE (including essentially all of the Fund's assets) in the EGD franchise area in Ontario until June 30, 2009, unless terminated prior to such date in accordance with its terms. The OBA will be automatically renewed for successive terms of one year unless either DE or EGD gives not less than six months prior notice of non renewal. Under the OBA, the Fund, through DE, will be entitled to receive from EGD, subject to certain exceptions, 99.5% of all amounts ("Payment") invoiced to customers (including rental payments for installed water heaters and HVAC units owned by the Fund) on the EGD bill.

The OBA may be terminated by EGD at any time upon (i) DE failing to perform or observe any of its obligations under the OBA or the New Trust Agreement (see following paragraph) or being in breach of any representation or warranty made thereunder and such failure or breach not being remedied within 30 days of notice thereof, (ii) the occurrence of various insolvency and bankruptcy events in respect of DE, (iii) DE ceasing to be a party to the New Trust Agreement, (iv) the enforcement of any execution, distress or other enforcement process that would have a material adverse effect on the financial viability of DE, and (v) 30 days prior notice, upon the occurrence of a regulatory change established by a governmental authority which causes, results in, requires or necessitates such termination. In connection with the expiration or termination of the OBA for any reason, EGD will co-operate with DE to effect the orderly transition and migration from EGD to DE of all the billing services then being performed under the OBA for a reasonable period of time, not to exceed 18 months.

New Trust Agreement

EGD, DE, CIBC Mellon Trust Company ("CIBC Mellon"), as trustee, and Accenture Business Services for Utilities, Inc. ("ABSU"), as servicer, among others (including other billers), entered into a Proceeds Transfer, Servicing and Trust Agreement ("New Trust Agreement") effective March 10, 2008 under which DE and the Fund, as well as the other billers transfer their interest in proceeds received from their respective receivables billed on an EGD bill to CIBC Mellon, which proceeds are deposited by ABSU on behalf of CIBC Mellon into a designated Account held in trust by CIBC Mellon for the benefit of EGD, DE and the other billers. On each business day, proceeds on deposit in the Account are allocated by ABSU in accordance with an allocation formula set forth in the New Trust Agreement and are to be withdrawn and paid by CIBC Mellon to EGD on such day and to DE and the other billers on the 21st day after such day. The allocation formula essentially provides that DE and the other billers will receive, out of the Account, 99.5% of the amount billed on an EGD bill with certain structural safeguards in relation to payments as between DE (and the other billers) and EGD. In exchange for and upon receipt of the Payment, DE and the Fund will transfer to EGD their entitlement to the distributions under the New Trust Agreement in respect of those receivables for which the Payment has been made. To the extent DE does not receive a Payment in respect of any of the receivables, it will, instead, receive the distribution entitlement in respect of such receivables pursuant to the above-described allocation formula under the New Trust Agreement.

The New Trust Agreement may be terminated at any time upon (i) the termination of the servicer at the direction of EGD, if a successor is not appointed by EGD, (ii) notice to the other parties if EGD is prohibited by a governmental authority from participating as a beneficiary under the New Trust Agreement, or (iii) the termination of the OBA (unless EGD determines otherwise). Pursuant to the New Trust Agreement, the Fund will be responsible for the fees and expenses of ABSU and the Trustee.

All amounts paid or payable to the Fund pursuant to the OBA, New Trust Agreement and Transition Agreement (see below) (collectively, the "Billing Agreements") will be deposited by ABSU or EGD directly into the trust account maintained pursuant to the Co-ownership Agreement between DE and a subsidiary of the Fund. The Billing Agreements have been assigned to CIBC Mellon as custodian under the Co-ownership Agreement, to be held by it as custodial assets on behalf of DE and a subsidiary of the Fund as co-owners.

Transition Agreement

The existing Receivables Trust Agreement was terminated effective midnight on March 9, 2008 and the trust was terminated in accordance with its terms. EGD and DE, among others, have entered into a Transition Agreement effective as of March 10, 2008 pursuant to which, among other things, DE will transfer its and the Trust's receivables billed on an EGD bill on or prior to February 14, 2008 which are outstanding as of March 9, 2008 for certain scheduled payments from EGD, adjusted to reflect a payment by EGD or DE, as applicable, in respect of the difference between the amount paid by ABSU to DE during 2007 and to February 14, 2008 in accordance with the Client Services Agreement dated May 7, 2002 between CustomerWorks Limited Partnership and DE, as amended to effect the collection mechanism set forth under the existing Receivables Trust Agreement and the amount that would have been paid by EGD to DE during 2007 under the terms of the OBA had it been in operation as of January, 2007.

In addition, the Fund, through DE, will be entitled to receive from EGD 99.5% of the amounts invoiced to customers on the EGD bill during the period February 15, 2008 to March 7, 2008. Those payments are to be made daily by EGD commencing March 10, 2008 and ending March 31, 2008. In the event EGD fails to make any such payment, on the due date therefor, DE will receive such payments out of the Account, with certain structural safeguards in relation to payments to be made on that day as between those in respect of the transition agreement and those in respect of the OBA. In exchange for and upon receipt of such payments (whether from EGD directly or out of the Account), DE and the Fund will transfer to EGD their interests in those receivables for which the payment was made.

Risks Associated with the Billing Agreements

As a result of the Billing Agreements, unitholders are reliant on the personnel, expertise, technical resources, proprietary information and judgment of ABSU, among others, in providing billing and collection services ("Customer Services") to DE. The Fund and Trust are therefore exposed to adverse developments in the business and affairs of ABSU, and to its management and financial strength. Although EGD is required, under the OBA, to make the Payment to the Fund, thereby effectively guaranteeing the Fund and Trust's collection of 99.5% of the amount invoiced by the Fund on the EGD bill, there can be no assurance that EGD will have the financial capability to honour such obligation.

The OBA and New Trust Agreement are scheduled to expire on June 30, 2009. Unless alternative arrangements are put in place on or before that date, consolidated billing with EGD would cease on that date.

The regulatory basis on which the OBA and New Trust Agreement have been entered into is interim and falls under EGD's comprehensive "Open Bill" solution as proposed by EGD and approved by the OEB in 2007. EGD will be making further representations to the OEB with respect to confirming this billing solution before the end of 2008. Despite EGD's regulatory commitment to do so, there can be no assurance that the long-term solution to be put forth by EGD will include open bill access and/or that the OEB will approve any long-term solution.

In the event that the long-term solution to be put forth by EGD either does not contemplate continued billing and collection services being provided to DE or the proposal is rejected by the OEB, DE has advised the Fund that it may provide the billing and collection services and issue stand-alone bills in the EGD billing territory, either itself or through contracts with other third parties.

Any provision of Customer Services by DE and stand-alone billing could have a material adverse effect on the distributable cash generated by the Fund and Trust as there can be no assurance that the Customer Services delivered by DE, or other third parties, will be of the same standard as those delivered under the OBA and stand-alone billing may result in an increased bad debt. Bad debt experience may also increase if any arrangement relating to stand-alone billing and collection services does not include a collection guarantee. It is also possible that transitional issues may arise following a termination of the interim or any comprehensive consolidated billing solution and associated arrangements, and those issues may have a material adverse impact on the distributable cash generated by the Fund and Trust.

Furthermore, any failure to maintain such billing and trust arrangements may have an adverse impact on the credit rating of the Trust's outstanding indebtedness, the Fund's stability ratings and the Trust's ability to refinance its bridge credit facility.

Additionally, third parties who have access to the EGD bill under the interim solution and/or any long-term solution, including competitors of DE, may be permitted to include promotional materials in the billing package. At this stage, it is too early to assess the impact that third-party access to the EGD bill may have.

About The Consumers' Waterheater Income Fund

The Consumers' Waterheater Income Fund owns a portfolio of approximately 1.4 million installed water heaters and other assets, rented primarily to residential customers in Ontario.

Additional information regarding the Fund and Trust, including the Fund's current Annual Information Form dated March 19, 2007, is available on SEDAR at www.sedar.com.

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