DBRS Morningstar Confirms Caribbean Utilities Company, Ltd. at A (low) with Stable TrendsUtilities & Independent Power
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 and stable business risk profile despite the ongoing Coronavirus Disease (COVID-19) pandemic, which has not had a material impact on the Company’s financial performance to date. 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 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 2021 allowed return on rate base was in the range of 6.00% to 8.00%, which was slightly lower than in 2020 but relatively high compared with most jurisdictions in Canada. The Company 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. The Company is allowed to recover extraordinary costs associated with hurricanes; however, the annual increase in base rates is capped by applying 60% to the total price level index (60% of the Cayman Islands CPI and 40% of the U.S. CPI). This leads to a potentially longer period of recovery should the extraordinary costs be substantial.
In August 2020, the Utility Regulation and Competition Office (OfReg) approved CUC’s proposal to defer its rate increase to customer billings for the period from June 1, 2020, to December 31, 2020. This deferred rate increase amount was modest (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. During the first nine months of 2021 (9M 2021), $1.3 million was recovered from customers. In July 2021, OfReg confirmed there would be no rate adjustment for 2021 due to the decrease in the calendar year 2020 applicable United States and Cayman Islands CPIs. The Company has also granted approval by OfReg to recover various coronavirus-related expenses. A total of $0.7 million was recorded as a regulatory asset and $0.2 million was recovered from customers during 9M 2021.
CUC’s key credit metrics for 9M 2021 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 2021 were below the budget because some renewable projects were delayed until 2022. Any changes in 2021 capex are expected to be shifted to the following years. The 2021 capex was well funded with internally generated cash flow and equity issuance. The debt-to-capital ratio at September 30, 2021, was lower than the long-term target of 55% due to the higher repayment of long-term debt and was within DBRS Morningstar’s “AA” rating range. Other key credit ratios, such as cash flow-to-debt and EBIT-to-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 it is unlikely, should CUC’s credit metrics weaken significantly from the current levels on a sustained basis, DBRS Morningstar could take a negative rating action.
Climate and Weather Risks, one of key drivers behind the rating action, belongs to the E (environmental) category under the ESG criteria. 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 could disrupt the Company’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/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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@example.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.
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