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

DBRS has today confirmed the Issuer Rating and the Senior Notes of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low), with a Stable trend. The confirmations reflect CUC’s low business risk, which is underpinned by its integrated and regulated operations (transmission, distribution and generation), a reasonable regulatory regime, a stable political system and its solid and stable credit metrics.

The credit quality of CUC is supported by its low business risk as the Company operates under 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. 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. However, hurricane costs beyond insurance coverage could be substantial and may result in a cost recovery lag because of a relatively small customer base.

In 2012, the targeted (regulatory) return on the rate base of between 7.25% and 9.25% is reasonable 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. CUC’s current rating also reflects its solid balance sheet and good credit metrics. Although the Company’s large capex resulted in a free cash flow deficit of $10 million in 2012, which was primarily funded with debt, key credit ratios (including its debt-to-capital, EBIT-interest coverage and cash flow-to-debt ratios) remained commensurate with its current rating.

In October 2012, CUC submitted its 2013 to 2017 Capital Investment Plan totalling $124.6 million to the Electricity Regulatory Authority for approval. This will likely result in modest, albeit manageable, negative free cash flows over the medium term. 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 United States dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.