Morningstar DBRS Confirms Caribbean Utilities Company, Ltd.’s Issuer Rating and Senior Notes at A (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed all ratings of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmations reflect CUC’s strong credit metrics for the 12 months ended September 30, 2023, and Morningstar DBRS's expectation that CUC's credit metrics will likely remain stable in 2024 and the medium term. The rating confirmations 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 and the relatively small size of the customer base.

CREDIT RATING DRIVERS
Based on the Company’s projected cash flow and its long-term leverage target of 55%, Morningstar DBRS expects CUC’s credit ratings to remain stable in 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 (i.e., cash flow-to-debt below 15.0%), Morningstar DBRS could take a negative rating action.

EARNINGS OUTLOOK
Morningstar DBRS expects earnings to modestly strengthen in the medium term following the base rate increase and increased demand driven by residual pent-up demand and recovery of Grand Cayman's tourism industry, albeit partially offset by higher financing costs from the capital expenditure program.

FINANCIAL OUTLOOK
Based on the Company's target capital structure and the expected higher earnings, Morningstar DBRS expects CUC's key credit metrics to remain stable over the medium term.

CREDIT RATING RATIONALE
CUC’s business risk assessment remains unchanged since the last rating confirmations, reflected by (1) CUC continuing to operate under the low-risk, cost-of-service (COS) regulation; (2) the Company's return on rate base target for 2023 is in the 7.5% to 9.5% range (2022: 6.25% to 8.25%), which Morningstar DBRS views as excellent; (3) the Cayman Islands' stable local economy and political environment; and (4) there having been no major hurricane causing material disruption to CUC's operations during the preceding 10 years. CUC successfully renewed its comprehensive insurance policy in July 2023.

CUC’s financial risk assessment has been supportive of the A (low) rating, reflected by (1) the Company’s key credit metrics for 2022 and the first nine months of 2023 that are strong within the current rating category; (2) cash flow stability that continues to benefit from CUC having no exposure to fuel price risk and only reasonable regulatory lag associated with the recovery of nonfuel and nonregulatory costs as well as capital spending; (3) the Company's liquidity that remains solid, reflecting sizable credit facilities, and minimal long-term debt due in the near term.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Climate and Weather Risk was a key factor that had a significant effect on the credit analysis of CUC. Morningstar DBRS considers that CUC is subject to risks associated with natural disasters as its operations are concentrated on a small island that is prone to hurricanes. A major hurricane, were it to occur, could disrupt the issuer’s operations and cause a negative financial impact.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of CUC, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of CUC, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of CUC, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (January 30, 2024), https://dbrs.morningstar.com/research/427244.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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