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

DBRS Limited (DBRS Morningstar) confirmed all ratings of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low) with Stable trends. The rating confirmations reflect CUC’s strong credit metrics for the first 12 months ended September 30, 2022, and DBRS Morningstar's expectation that CUC's credit metrics will likely remain stable in 2023 and the medium term. The rating conformations also reflect CUC's stable business risk profile and its solid resilience in coping with high inflation and higher interest rates over the past year. The current ratings also incorporate CUC’s exposure to, and its ability to cope with, hurricane risks as its operations are concentrated on a small island that is prone to hurricanes and the relatively small size of its operations and customer base. The Stable trends incorporate a significant increase in electricity demand in Grand Cayman, the Cayman Islands, benefitting from an economic recovery following a period of Coronavirus Disease (COVID-19) pandemic restrictions.

CUC’s relatively low business risk profile is supported by the cost-of-service regulation. The 2022 allowed return on rate base was in the range of 6.25% to 8.25%, which was slightly higher than in 2021 and relatively high compared with most jurisdictions in Canada. Cash flow stability continues to benefit from CUC having no exposure to fuel price risk and only modest regulatory lag associated with the recovery of nonfuel and nonregulatory costs as well as capital spending. In addition, CUC is allowed to recover extraordinary costs associated with hurricanes, subject to regulatory review. The recovery of these costs is subject to the annual increase in base rates, which is capped by applying 60% to the total Price Level Index (60% of the Cayman Islands Consumer Price Index (CPI) and 40% of the U.S. CPI). This could lead to a potentially longer period of recovery should the extraordinary costs be substantial. DBRS Morningstar recognizes that CUC's infrastructure system has improved significantly over the past several years to minimize the impact of major hurricanes.

DBRS Morningstar notes that in light of high inflation and rising fuel costs, the Utility Regulation and Competition Office approved CUC's proposal to defer the billing of required rate increase for the period from June 1, 2022, to December 31, 2022. The deferred amounts are expected to be recovered within two years from January 1, 2023. CUC reported the deferred amount of $1.6 million at September 30, 2022, which was modest and did not have a material impact on CUC's credit metrics.

CUC’s key credit metrics for the first nine months of 2022 (9M 2022) were strong, and its liquidity remained solid, reflecting sizable credit facilities, stable and timely cash flow, and minimal long-term debt due in the near term. CUC's capital investment plan (CIP) was approved at $403.4 million for the next five years, which is higher than previous years. The CIP aims to improve CUC's grid resiliency and reliability. CUC could incur extra capital expenditure (capex) outside of the CIP to take on renewable projects, which is part of its sustainable energy plan.

DBRS Morningstar reviewed CUC's financing plan and believes CUC will remain committed to financing future capex with a combination of internal cash flow, equity injection, and additional debt within the 55% debt/45% equity target. The debt/capital ratio at the end of September 2022 was 51.5% that provided CUC with good financial flexibility. Based on the Company’s projected cash flow and its long-term leverage target, DBRS Morningstar expects CUC’s credit metrics to remain stable in 2023 and the medium term. Given the risks from adverse weather conditions and the relatively small size of the customer base, a positive rating action is unlikely in the near term. Although it is unlikely, should CUC’s business risk profile and its credit metrics weaken significantly from the current levels on a sustained basis, DBRS Morningstar could take a negative rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
"Climate and weather risks" was a key factor that had a significant effect on the credit analysis of CUC. DBRS Morningstar considers that CUC is subjected to risks associated with natural disasters as its operations are concentrated on a small island that is prone to hurricanes. A major hurricane, if it occurs, could disrupt the issuer’s operations and cause a negative financial impact.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

The principal methodology applicable to the rating is Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616).

The rating methodology used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 [email protected].

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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