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. The confirmation reflects CUC’s low business risk underpinned by its integrated and regulated operations (transmission, distribution and generation) and a reasonable regulatory regime, a stable political system, and its solid and stable credit metrics.

CUC’s business risk profile is viewed as strong, supported by a reasonable regulatory framework in the Cayman Islands, which is under the British legal system and affords a stable government and a stable regulatory regime. The economic environment in the Cayman Islands is viewed as relatively strong within the Caribbean region, albeit having some exposure to the tourism industry. CUC’s customer growth has been modest but steady, supporting a growing rate base. Since 2009, the targeted (regulatory) return on the rate base of between 7.75% and 9.75% has been viewed as relatively high, compared with North American utilities. This combined with no exposure to fuel costs and the full recovery of non-fuel costs has provided stable cash flow for CUC. DBRS notes that CUC faces a higher risk associated with hurricanes than most utilities in North America. This risk is mitigated by CUC maintaining sufficient hurricane insurance coverage. Hurricane costs beyond insurance coverage could be substantial and may result in a cost recovery lag because of a relatively small customer base.

CUC’s current rating also reflects its solid balance sheet and good credit metrics. The debt leverage was reasonable at 54% and remained within CUC’s targeted level of 55%. EBIT-interest coverage and cash flow-to-debt ratios were commensurate with DBRS’s A (low) rating guidelines. DBRS notes that CUC generated negative free cash flow in 2011, as large capex was required for distribution system and generating units upgrades. However, the deficits were manageable, given CUC’s good financial flexibility.

CUC’s 2012-2015 capex program averaging approximately $26 million per year will likely result in negative free cash flows over the medium term. In addition, capex is expected to increase significantly during this period should CUC win its bid for new generation projects (36 megawatt) to replace its aging generating plants. DBRS expects CUC to remain prudent in its financing plan to maintain its balance sheet leverage within DBRS’s A (low) rating category.

Notes:
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.