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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Notes rating of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low). All trends are Stable. The confirmations reflect CUC’s strong credit metrics and stable business risk profile. The current ratings reflect (1) a supportive regulatory environment that allows CUC to earn good returns on its rate base and to generate predictable cash flow; (2) limited competition due to its exclusive transmission and distribution (T&D) licence; and (3) no exposure to commodity price risk and only modest regulatory lag associated with the recovery of fuel and nonfuel costs. The ratings also incorporate the CUC’s exposure to hurricane risks and the relatively small size of its operations and customer base.

CUC’s relatively low business risk profile is supported by the cost-of-service regulation in Grand Cayman, the Cayman Islands. The 2019 allowed return on rate base was in the 7.5% to 9.5% range (increased from the 7.0% to 9.0% range in 2018), which is equivalent to a return on equity in the 10.0% to 13.0% range (assuming a 45.0% deemed equity component in the rate base). The recovery of energy costs and operating costs is timely, subject to only a two-month lag. DBRS Morningstar notes that CUC is subject to significant risks from 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, the actual increase in base rates is capped for the year 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), leading to potentially longer regulatory lag.

CUC’s key credit metrics for the nine months ended September 30, 2019, were strong, and its liquidity remained solid, reflecting sizable credit facilities, stable and timely cash flows, and minimal long-term debt due in the near term. Capital expenditures (capex) for 2020 are estimated to be approximately $80 million (a modest increase from 2019) with a substantial portion expected to be spent on T&D upgrades and should be well financed with internal cash flow, equity injection, and incremental debt. CUC has a long-term capital structure target of 55% debt to 45% equity and is expected to fund its capex within that target. Based on the Company’s projected cash flow from operations, CUC’s credit metrics are expected to remain stable in the medium term. Given the risks from adverse weather conditions and the small size of the customer base, a positive rating action is unlikely in the medium term. Although unlikely, if CUC’s credit metrics weaken significantly from the current levels on a sustained basis, DBRS Morningstar could take a negative rating action.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.

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

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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