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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Notes rating of Caribbean Utilities Company, Ltd. (CUC or the Company) at A (low) with Stable trends. The Company’s financial performance in 2016 was strong, resulting in a solid balance sheet and stronger cash flow and coverage metrics than in previous years. The ratings reflect a supportive regulatory environment that allows the Company to earn good returns on its investment, with no exposure to commodity price risk and only modest regulatory lag associated with the recovery of fuel and non-fuel costs as well as capital spending. The ratings factor in the Company’s significant exposure to hurricane risk and its small size.

The Company’s business risk profile is supported by the cost-of-service regulation in Grand Cayman. The 2017 return on rate base (RORB) is targeted in the 6.75% to 8.75% range (unchanged from 2016), which is viewed as Excellent based on DBRS’s methodology. DBRS notes that the Company’s actual RORB for 2016 was 7.4%, which was consistent with the target range. The recovery of energy costs and operating costs is viewed as reasonable, subject to a two-month lag. DBRS views that historical regulatory lag has been manageable. The major risk to CUC is that associated with 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, regulatory lag could potentially be lengthy if the costs are significant because of the small size of the customer base.

The Company’s project execution risk is eliminated, as construction of the 39.7-megawatt diesel-generating plant was completed on time and under budget in June 2016. CUC had financed this project with a mix of debt and equity in a manner that maintained its capital structure in line with the Company’s targeted long-term capital structure of 55% debt. The debt-to-capital ratio over the past two years was lower than the target range because of significant equity issuance in 2015. As a result of strong financial performance, CUC’s credit metrics remained very solid in 2016 and are supportive of the current ratings. CUC’s liquidity was solid at the end of 2016, reflecting stable cash flow, minimal long-term debt due in the near term and the Company’s current plan to term out the drawing from the demand loan facility. Capital expenditures for 2017 are estimated to be approximately $54.0 million ($47.6 million in 2016), with a substantial amount expected to be spent on transmission and distribution upgrades. CUC is expected to have a modest free cash flow deficit, but the financing of the cash flow deficit is expected to be in a manner so that the leverage target of 55% will be maintained and other key credit metrics will remain stable and within the current rating category.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on dbrs.com under Methodologies.