DBRS Confirms Caribbean Utilities Company, Ltd. at A (low), Stable Trend

DBRS has today confirmed the Senior Notes of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low) with a Stable trend, based on its supportive regulatory regime, the stable Cayman Islands Government (CI Government), a reasonable economic environment and credit metrics.

The economic environment in the Cayman Islands has witnessed a continued contraction in 2009 and 2010. As a result, gross domestic product (GDP) is anticipated to be in the range of negative 3.5% to negative 4.5% for 2010. Due to the contraction in the economy, the Company’s financial performance was modestly impacted, offset by reasonably stable sales volumes.

In March 2011, the Electricity Regulatory Authority (ERA) approved CUC’s proposed $134 million 2011-2015 Capital Investment Plan for non-generation installation expenditures. CUC also submitted for $85 million of capital investment that relates to new generation. The new generation amount is subject to a solicitation process. As part of the approval, the ERA agreed to the delayed retirement of two generating units and any new installation of generating assets until the recovery in growth is well underway.

CUC continues to operate under its 20-year exclusive Transmission and Distribution Licence and a 21.5 year non-exclusive Generation Licence granted by the CI Government, which expire in April 2028 and September 2029, respectively. The Company’s return on rate base (RORB) for 2010 was 7.9% and is targeted to be in the 7.75% to 9.75% range.

The ERA has approved a fuel hedging program to reduce the fuel price volatility to CUC. All the costs of the program are passed through to customers. Additionally, the ERA supported the introduction of the Feed-in Tariff structure (FIT) for CUC to purchase renewable energy from participants. The program’s costs are also passed through to customers.

On June 1, 2011, the Company announced the closing of the first tranche – $30 million of an aggregate $40 million private placement. The second tranche is expected to close in July 2011. The proceeds from the private placement will be used to repay short-term debt and to finance ongoing additions and upgrades to the Company’s generation and transmission and distribution system.

CUC experienced two incidents with its generating units. One was an explosion of a diesel generating unit that resulted in injuries to two employees and the second was a mechanical failure to another diesel generating unit. The Company believes that the losses as a result of the incidents will be covered by the Company’s property and machinery breakdown insurance.

The Company’s financial profile remains limited by its dividend payout policy, hurricane risk and free cash flow deficits, which are expected to continue during CUC’s anticipated $219 million capital expenditure build-out over the next five years. Capital expenditures have been lower over the last couple of years to reflect lower growth projections. DBRS believes that over the medium term, ratios should remain within ranges consistent with the current rating.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.