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

DBRS Limited (DBRS Morningstar) confirmed all ratings of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low). The rating confirmations reflect CUC’s strong credit metrics and stable business risk profile despite the ongoing Coronavirus Disease (COVID-19) pandemic, which has not had a material impact on CUC’s financial performance to date. In August 2020, the Utility Regulation and Competition Office (OfReg) approved CUC’s proposal to its rate increase deferral on customer billings for the period from June 1, 2020, to December 31, 2020. This rate increase deferral amount was modest in 2020 (estimated to be approximately $4.0 million) and will be recovered within two years from the effective date of the increase on January 1, 2021. 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; and (3) no exposure to commodity price risk and only modest regulatory lag associated with the recovery of fuel and nonfuel costs as well as capital spending. 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 (COS) regulation in Grand Cayman, the Cayman Islands. The 2020 allowed return on rate base (RORB) was in the 6.75% to 8.75% range, which was slightly lower than 2019 but remained relatively high compared with most jurisdictions in Canada. CUC can recover energy costs in a timely fashion, subject to only a two-month lag. DBRS Morningstar notes that CUC is subject to risks from natural disasters, as its operations are concentrated on a small island that is prone to hurricanes. CUC is allowed to recover extraordinary costs associated with hurricanes; however, the annual increase in base rates is capped by applying 100% to the total Price Level Index (60% of the Cayman Islands Consumer Price Index (CPI) and 40% of the U.S. CPI). This leads to a potentially longer period of recovery should the extraordinary costs are substantial.

CUC’s key credit metrics for the nine months ended September 30, 2020, 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 were below $60 million (budgeting $80 million for the year) as CUC delayed some parts of its system upgrades to 2021. The 2020 capex was well funded with internally generated cash flow and equity issuance. The debt-to-capital at September 30, 2020, was modestly higher the long-term target of 55% but remained solidly within DBRS Morningstar’s “A” rating range. Based on DBRS Morningstar’s pro forma, this debt/capital ratio should decline to the targeted range at the end of 2020 as CUC reduced the debt with part of the proceeds from approximately $48 million in equity issuance in Q4 2020. Other key credit ratios such as cash flow-to-debt and EBIT-interest coverage remained strong and solidly support the rating confirmations. 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 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 unlikely, should CUC’s credit metrics weaken significantly from the current levels on a sustained basis, DBRS Morningstar could take a negative rating action.

DBRS Morningstar has incorporated the negative impact of ESG factors in the ratings of CUC as CUC is exposed to hurricane risk. A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (October 27, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.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 relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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