DBRS Confirms Caribbean Utilities Company at A (low), Stable Trends

DBRS has today confirmed the Issuer Rating and the Senior Notes rating of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low), with Stable trends. The ratings reflect a supportive regulatory environment that allows the Company to earn higher returns on investment than its counterparties in Canada, while minimizing regulatory lag associated with the recovery of fuel and non-fuel costs and capital spending. The ratings also reflect CUC’s solid credit metrics that are consistent with the “A” rating range. However, the prospect of CUC’s ratings being upgraded is largely limited by its small size (only 27,364 customers as at December 31, 2013) and risk related to the Company’s significant exposure to hurricane events.

CUC’s business risk profile is in the A (low) range, reflecting the following factors: (1) A supportive regulatory system that allows CUC to earn a return on the rate base (RORB) in the range of 7.0% to 9.0% for 2014, which translates into a return on equity (ROE) of over 13.0%. This level is considered favourable compared with utilities in Canadian jurisdictions (average ROE of 9.0%). (2) CUC is allowed to pass on its fuel costs (which are volatile and can be substantial as a result of its oil-fired generation) and operating costs in a timely manner, including costs associated with natural disasters, which can be significant since CUC’s operations are concentrated on a small island prone to hurricanes. Regulatory lag could also arise as a material issue because of the small size of the customer base. However, DBRS views that the historical regulatory lag has been manageable. This regulatory framework is not expected to materially change in the future, given that the island is under the British legal system, which affords a stable government.

CUC's financial profile is reflective of the "A" rating category, supported by strong cash flow and modest debt leverage for a regulated and integrated utility, which is maintained within the Company's leverage target of 55%. The cash flow profile and conservative leverage strategy have consistently resulted in solid credit metrics, which are expected to remain stable over the medium term. Currently, CUC is in the process of bidding for a 36 megawatt generation capacity expansion. The regulatory decision is expected in mid-2014, with the units expected to be in service in mid-2016. Should CUC’s bid be successful, substantial investment is required and could place pressure on the balance sheet. The Stable trend reflects DBRS’s expectation that CUC will adhere to its leverage target of 55% in financing its normal capex ($143 million for the 2014-2018 period) and in financing the potential capacity expansion, maintaining its credit metrics within the current rating range.

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

The applicable methodology is, Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.