Morningstar DBRS Confirms Caribbean Utilities Company, Ltd.'s Issuer Rating at A (low), Maintains Stable Trend

DBRS Limited (Morningstar DBRS) confirmed Caribbean Utilities Company, Ltd.'s (CUC or the Company) Issuer Rating and Senior Notes credit rating both at A (low). The trends on all credit ratings remain Stable.

KEY CREDIT RATING CONSIDERATIONS
CUC's credit profile remains stable, underpinned by (1) the Company continuing to operate under the low-risk, cost-of-service (COS) regulation, which allows it to pass through fuel and purchased energy costs; (2) CUC's key credit metrics for 2023 and the first nine months of 2024 (9M 2024) were strong for the current credit rating category; and (3) the Cayman Islands' stable local economy and political environment.

The current credit ratings also reflect CUC's (1) vulnerability to hurricane risks and its capability to manage those risks, as well as (2) the relatively limited size of its customer base. We note that there has been no major hurricane causing material disruption to CUC's operations during the preceding 10 years. In July 2024, CUC successfully renewed its comprehensive insurance policy under similar terms and coverage as in prior years.

CREDIT RATING DRIVERS
A positive credit rating action is unlikely given CUC's stable business risk profile, hurricane risks, and the relatively small size of its customer base. We could take a negative credit rating action 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%).

EARNINGS OUTLOOK
CUC's earnings growth has been steady and is expected to continue, reflecting the stability of its regulated operations and the annual growth in its rate base. The Company's earnings increased significantly in 2023 and 9M 2024, compared with the same periods in the previous year, due to higher electricity sales. The increases were partially offset by increased interest expenses resulting from higher interest rates and debt incurred to support the Company's capital expenditure (capex) program.

FINANCIAL OUTLOOK
CUC's key credit metrics have been supportive of the A (low) credit rating, as reflected in (1) the Company's key credit metrics for 2023 and 9M 2024 remaining well within the current credit 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. We expect capex to remain elevated with a significant portion towards replacements of diesel generation and potentially new renewable projects in the medium term, resulting in free cash flow deficits. We do not expect a material impact on CUC's credit quality as the Company has the financial flexibility and commitment to fund its capex in accordance with the target of 55% debt/45% equity on a long-term basis, albeit tempered by some level of project execution risk.

CREDIT RATING RATIONALE
CUC's credit ratings are supported by the supportive regulatory framework, very limited competition, and strong credit metrics. These are offset by climate and weather risks, as well as the relatively small size of its operations.

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. CUC's operations are concentrated on a small island that is susceptible to hurricanes. A major hurricane could disrupt the issuer's operations and cause a negative financial impact. This risk is partially mitigated by the Company's comprehensive insurance and efforts to make its system more resistant to hurricanes. In the longer term, climate change is expected to result in more frequent and severe weather events, rising sea levels, and sustained higher temperatures.
 
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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (November 25, 2024) https://dbrs.morningstar.com/research/443429.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria  (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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/431153.

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 rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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