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

DBRS Limited (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 reasonable returns on investment, with no exposure to commodity price risk and only modest 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 27,784 customers as at December 31, 2014) and risk related to the Company’s significant exposure to hurricane events. In addition, the $85 million power generation project exposes CUC to significant project risk associated with cost overruns and delays. The Stable trends reflect DBRS’s expectation that the Company will (1) prudently fund its $85 million power generation project and maintain its leverage below 60% during the construction, (2) manage the project execution risk to complete the project within the time schedule and (3) minimize the project cost overruns to the amount that is allowed by the regulator (10%).

CUC’s business risk profile is in the A (low) rating category, reflecting the following factors: (1) A supportive regulatory system that allowed CUC to earn a return on the rate base 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 range, supported by strong cash flow and good credit metrics. In 2014, the debt leverage was modestly higher than the Company’s leverage target of 55% but still remained within its current rating category. Currently, CUC is undertaking an $85 million power generation project, which is expected to be in service in mid-2016. DBRS expects the Company’s leverage to remain modestly higher than its targeted leverage level during the construction. Following the completion of the project, leverage is expected to return to the 55% level.

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 (October 2014), 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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.