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

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Notes rating of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low) with Stable trends. The confirmations reflect CUC’s stable financial performance, strong 2017 key credit metrics and a stable regulatory system in Grand Cayman. All credit metrics for the nine months ended September 2017 (9M 2017) were strongly supportive of CUC’s current ratings. The current ratings reflect: (1) a supportive regulatory environment that allows the Company to earn good returns on its rate base and to generate predicable cash flow; and (2) CUC having no exposure to commodity price risk and only facing modest regulatory lag associated with the recovery of fuel and non-fuel costs as well as capital spending. The ratings also incorporate the Company’s exposure to hurricane risk and the relatively small size of its operations and customer base.

CUC’s low business risk profile is supported by the cost of service regulation in Grand Cayman. The 2017 return on rate base (RORB) is targeted in the 6.75% to 8.75% range (unchanged from 2016), which is equivalent to a return on equity in the 10% to 13% range (assuming a 45% deemed equity in the rate base). DBRS expects CUC’s actual RORB for 2017 to be within the target range. The recovery of energy costs and operating costs is viewed as manageable, subject to a reasonable two-month lag. DBRS notes that the major risk for the Company are natural disasters, as its operations are concentrated on a small island prone to hurricanes. CUC is allowed to recover extraordinary costs associated with hurricanes; however, if the extraordinary costs are substantial, the recovery period could potentially be lengthy since the actual annual increase in base rates is capped at 60% of the change in the Price Level Index (60% of the Cayman Islands Consumer Price Index (CPI) and 40% of the U.S. CPI).

The Company’s liquidity was solid as at September 30, 2017, reflecting sizable available credit facilities, stable cash flow and minimal long-term debt due in the near term. Capital expenditures for 2018 are estimated to be approximately $69 million (compared with $54 million in 2017), with a substantial amount expected to be spent on transmission and distribution upgrades. A free cash flow deficit is expected to be incurred in 2018, but the deficit should remain modest and manageable. As a result of a stable financial performance, CUC’s credit metrics remained strong in 2016, and 9M 2017. Based on the Company’s targeted long-term capital structure of 55% debt and the expected stable cash flow from operations under the current regulatory framework, CUC’s credit metrics are expected to remain stable in the near-to-medium term.

Given the hurricane risk and the small size of the customer base, a positive rating action is not likely to occur in the near term. A negative rating action could be taken if, although unlikely, the debt-to-capital ratio increases to over 65% and the cash flow-to-debt ratio weakens significantly to below the 12.5% range on a sustained basis.

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

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry Methodology, which can be found on dbrs.com 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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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