DBRS Confirms Caribbean Utilities Company, Ltd. 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. CUC is well on its schedule and budget to complete the $85 million generation project and has maintained a solid balance sheet and good credit metrics during the construction. The ratings reflect a supportive regulatory environment that allows the Company to earn good 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 as well as capital spending. The ratings also reflect the Company’s significant exposure to hurricane risk and its small size.

DBRS views the cost-of-service regulation in Grand Cayman as being supportive of the current rating with (1) very good targeted returns on the rate base (7.25% to 9.25% in 2015), significantly higher than the allowed returns earned by Canadian utilities, and (2) the recovery of energy costs and operating costs is very reasonable, subject to only a two-month lag. DBRS views that historical regulatory lag has been manageable; however, fuel costs can be very volatile and can be substantial as a result of its oil-fired generation. In addition, costs associated with natural disasters can be significant since CUC’s operations are concentrated on a small island prone to hurricanes. Although CUC is allowed to recover those costs, potentially longer regulatory lag could arise if the costs are significant because of the small size of the customer base (28,204 customers at the end of 2015).

The construction of the 39.7 megawatt diesel-generating plant has been in good progress with respect to budget and schedule. The project is expected to be completed no later than June 2016. CUC has financed this project with a mix of debt and equity in a manner that its capital structure remains in line with the regulatory capital structure. As a result, at the end of 2015, CUC’s credit metrics remained very solid and were supportive of the current ratings. With 2016 capital expenditures of approximately $61 million, CUC is expected to generate a free cash flow deficit; however, based on the Company’s financing plan, key credit metrics are expected to remain stable and within the current rating category.

Notes:
All figures are in U.S. 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.

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

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2015), which can be found on our website under Methodologies.