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Augustus Advisors Releases Letter to Shareholders of Enercare

Asks Enercare Management and Board for Cooperation to Enable Premium Purchase Offer to Shareholders

FORT WORTH, Texas--(BUSINESS WIRE)--Augustus Advisors, LLC (“Augustus”) today has released a letter to the shareholders of Enercare Inc. (TSX:ECI) (“Enercare” or the “Company”) outlining the interest of its affiliate, TPG Special Situations Partners, LLC, in purchasing the Company on behalf of certain of its affiliated investment funds (collectively, “TSSP”) and publicly requesting that Enercare’s management and Board cooperate with TSSP to enable TSSP to move forward to formulate an offer to purchase Enercare at a significant premium to the current stock price for the benefit of all shareholders.

“To date, disappointingly, the Company’s Board has not been receptive to pursuing a transaction with TSSP.”

Augustus is the investment manager of the Octavian Special Master Fund, L.P. (“Octavian”). Octavian is the owner of the 6,823,965 common shares of Enercare, representing 11.67 percent of the common shares. As Octavian’s investment manager, Augustus currently controls the largest single block of the Company’s stock.

In the letter (full text included in this press release), Augustus states, “We believe that as the owner of Enercare, we can improve the value of the business. As a result, we have discussed with Enercare’s management and the Board of Directors (the ‘Board’) TSSP’s interest in acquiring Enercare at a significant premium to the current stock price in a transaction that would maximize value to Enercare’s current shareholders.”

The letter states that management has resisted taking the steps necessary to move forward with an offer to shareholders. TSSP first approached Enercare’s management nearly a year ago, and made its interest in the Company and its intentions clear at that time. “We wanted to work with management and the Board to propose a highly attractive acquisition transaction that would maximize value to shareholders.” In four subsequent discussions, TSSP expressed its interest in a collaboration for shareholder value, culminating in a formal Letter of Indication (“LOI”), sent to the Board on May 28, 2014, again expressing interest in purchasing the Company at an attractive price – $13.50-15.00/share, or a premium of 20-33 percent of the stock price at that time – and again stating the desire to collaborate with the Board and management to develop a transaction structure approved by Enercare and supported by the Board.

As noted in the letter, “To date, disappointingly, the Company’s Board has not been receptive to pursuing a transaction with TSSP.” TSSP asked in the LOI for access to non-public information, for a four-week due diligence period and offered to enter into a confidentiality agreement. The intent was to complete diligence regarding Enercare and to firm-up financing sources so that TSSP could make a binding offer for Enercare.

The Augustus letter tells shareholders, “Enercare has more value in the hands of a private owner. This is reflected in the premium we are willing to pay to acquire the business. We believe, as a shareholder of Enercare, that it is in your best interest that you have the opportunity to evaluate an offer from TSSP. We believe it is wrong for the Board to withhold their cooperation. Without their cooperation, we cannot complete the diligence necessary to make a binding offer to you. Without the Board’s cooperation, this offer will never see the light of day and you will not have the opportunity to gain a very attractive return on your Enercare investment.”

Augustus is electing to cease to file reports under Part 4 of National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues. TSSP is seeking the cooperation of the Company’s Board to obtain access to the Company’s information so that it may complete its diligence and confirm its financing and then proceed with an offer to acquire the common shares of Enercare not owned by Octavian. However, if the Board does not agree to move forward with TSSP, it is unlikely that Octavian will remain a long term holder of a passive ownership position in the Company.

Augustus may be considered to be acting jointly and in concert with TSSP and Octavian. The issuance of this news release is not an admission that any party named herein owns or controls any of the securities described in this news release or is a joint actor with any other entity named in this news release.

Augustus Advisors, LLC
301 Commerce Street, Suite 3300
Forth Worth, TX 76102
USA

The full text of the letter to Enercare shareholders follows:

AUGUSTUS ADVISORS, LLC
301 Commerce Street, Suite 3300
Fort Worth, TX 76102
USA

July 17, 2014

Dear Fellow Shareholder:

Augustus Advisors, LLC (“Augustus”) is the investment manager of the Octavian Special Master Fund, L.P. (“Octavian”). Octavian is the owner of the 6,823,965 common shares of Enercare Inc. (“Enercare” or the “Company”), representing 11.67 percent of the common shares. As Octavian’s investment manager, we are responsible for making investment decisions regarding these shares of Enercare and we control the largest single block of the Company’s stock.

Our affiliate, TPG Special Situations Partners, LLC, is interested in purchasing the Company on behalf of certain of its affiliated investment funds (collectively, “TSSP”). We believe that as the owner of Enercare, we can improve the value of the business. As a result, we have discussed with Enercare’s management and the Board of Directors (the “Board”) TSSP’s interest in acquiring Enercare at a significant premium to the current stock price in a transaction that would maximize value to Enercare’s current shareholders. However, to date, management and the Board have not authorized the steps necessary for TSSP to move forward with an offer to Enercare’s shareholders.

In August of last year, we met with Enercare’s management in Toronto and made our intentions clear: we wanted to work with management and the Board to propose a highly attractive acquisition transaction that would maximize value to shareholders. In October, we met with Enercare’s CEO, John MacDonald, and the chairman of the Board, Jim Pantelidis, in New York and re-iterated our interest in collaborating toward an acquisition transaction that would deliver significant value to Enercare’s shareholders. We further discussed our interest and intentions with Mr. Pantelidis on January 22, March 10, and on May 27, 2014. To date, disappointingly, the Company’s Board has not been receptive to pursuing a transaction with TSSP.

On May 28, 2014, TSSP sent a Letter of Indication (“LOI”) to the Board, again expressing interest in purchasing the Company at an attractive price – $13.50-15.00/share, or a premium of 20-33 percent of the stock price at that time – and again stating the desire to collaborate with the Board and management to develop a transaction structure approved by Enercare and supported by the Board. To that end, TSSP asked in the LOI for access to non-public information, for a four-week due diligence period and offered to enter into a confidentiality agreement. The intent was to complete diligence regarding Enercare and to firm-up financing sources so that TSSP could make a binding offer for Enercare. The Board, however, has still elected not to engage with us.

Enercare has more value in the hands of a private owner. This is reflected in the premium we are willing to pay to acquire the business. We believe, as a shareholder of Enercare, that it is in your best interest that you have the opportunity to evaluate an offer from TSSP. We believe it is wrong for the Board to withhold their cooperation. Without their cooperation, we cannot complete the diligence necessary to make a binding offer to you. Without the Board’s cooperation, this offer will never see the light of day and you will not have the opportunity to gain a very attractive return on your Enercare investment.

Many companies, like Enercare, reach a point in their development where private owners can step in and achieve progress that a public company cannot. Here are a few critical examples of what a private owner can do for Enercare:

1) Time allocation: By its own account, senior management spends 40 percent of its time on investor relations. This is more than three times the global average for senior management teams1 and strikes us as remarkably high.

Enercare is no longer simply managing a financial receivable from Direct Energy. The sub-metering business, for instance, has a complex operational footprint, greater headcount, and greater operating costs than Enercare’s legacy business. Management should be spending more time managing the business, not managing investors. As owners, we would insist on that.

2) Capital allocation: As a public company, Enercare is expected to maintain a recurring dividend, which we recognize is a positive attribute of the stock to its current shareholders. However, as a private company, Enercare would have more flexibility to redirect capital and reinvest in the business at high rates of return.

According to management, the unlevered return of originating a new subscriber in all of its business segments is in excess of 17 percent. To the extent Enercare is able to reinvest in its business by originating additional sub-metering and rental subscribers at these attractive unlevered unit economic returns, this would be a meaningfully more accretive use of capital than returning it to shareholders at an approximately 6 percent yield. The business has not had net subscriber growth in the past 6 years, but has grown revenue through price increases and change in mix. This strategy only works for so long, and as owners we would bring to bear their operational expertise to organically grow net subscriber counts in new and existing markets. Additionally, the Company’s current origination strategy relies largely on delegating water heater subscriber origination to Direct Energy, whose commitment and ability to grow subscriber counts shouldn’t be relied on, evidenced by a long history of subscriber declines.

3) Corporate finance: The Company is determined to maintain its investment grade credit rating and is focused on reducing the amount of debt in its capital structure; however, maintaining a prudent amount of leverage would enhance the Company’s value. Following the conversion of the Consumers’ Waterheater Income Fund effective January 1, 2011, increased cash tax payments have been the primary contributor to an over 25 percent decline in unlevered free cash flow from 2010 to 2013. This is equivalent to over $25 million of increased annual drag, which we expect to become even more pronounced over time.

As owners of Enercare, we would have the flexibility to optimize the Company’s capital structure to reduce tax drag and enhance equity returns. In fact, based on specific discussions with their financiers, we believe the Company’s existing senior debt could be replaced with capital raised in the securitization markets, and achieve a lower overall cost-of-capital.

4) Sub-metering: While the Company highlights growth in sub-metering revenues, the vast majority of this revenue does not have margins associated with it. As a result, this business is not currently generating cash flow and may not generate meaningful amounts of cash flow for some time. While there is an installed base of 140,000 units as of the Company’s first quarter disclosure, many of those units will not become paying customers for years to come. Additionally, origination volumes have not increased despite more sub-metering headcount and SG&A.

As owners of this business, we could take a long view of the sub-metering opportunity, and would bring significant capital markets and operational expertise to bear to more rapidly originate new customers even if it did not generate cash flows in the short term. Enercare does not have that flexibility today given its desire to generate profitability in the short-term and the limitation on its resources due to its dividend policy. Over time, we think we could increase the value of Enercare by growing this business.

5) Public company costs: Based on our analysis and public filings, we believe the Company spends somewhere between $2 million to $4 million each year on public company costs. At an approximately 6.5 percent capitalization rate (roughly where the stock is trading today), this alone is worth between approximately $30 million to $60 million of value.

We believe we can offer an attractive price to Enercare’s shareholders that cannot be obtained by preserving the status quo. However, before proceeding with an offer, we need the cooperation of the Board to obtain access to the Company’s information to complete diligence and confirm financing. By refusing to engage with TSSP, the Board is denying you the ability to consider for yourselves what we believe will be an attractive opportunity to sell your shares of Enercare.

We hope that the Board can be persuaded that engaging with TSSP is in the best interests of Enercare and its shareholders. However, if the Board does not agree to move forward with TSSP, we are unlikely to be long term holders of a passive ownership position in the Company.

We thank you for your consideration.

Sincerely,

Augustus Advisors, LLC

1 Survey from XbINsight, IR Magazine, and Bank of America

Contacts

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