RATIONALE SUMMARY
Caribbean Information and Credit Rating Services Limited (CariCRIS), the Caribbean regional credit rating agency, has reaffirmed the ratings of CariBBB (Foreign Currency Rating) and CariBBB (Local Currency Rating) in its regional rating scale to the notional debt issue of the size of USD 15 million of Saint Lucia Electricity Services Limited (LUCELEC). These ratings indicate that the level of creditworthiness of this obligation, adjudged in relation to other obligations in the Caribbean[1] is adequate.
The ratings on LUCELEC continue to reflect the company’s dominant market position in Saint Lucia, healthy financial profile and favorable operating efficiency. These rating strengths are partially offset by the cyclical nature of the demand for LUCELEC services and its indirect exposure to fuel prices. The rating strengths are also tempered by the risks of production outages and damage to property that result from its single location generation plant and self-insurance for its transmission and distribution infrastructure.
LUCELEC is the sole commercial supplier of electrical energy in Saint Lucia. It has an exclusive license to generate, distribute and sell electricity in Saint Lucia up to 2045. Owing to rising tariffs to customers, there have been pressures to deregulate the industry and end LUCELEC’s monopoly. In CariCRIS’ opinion, competition appears unlikely in the sector over the medium term, given the lack of economies of scale. If competition does emerge, it will be limited to generation. Setting up a transmission and distribution network will entail high costs, which will then need to be passed on to the customer, defeating the purpose of deregulation.
The company has maintained a healthy financial profile marked by strong operating profit margins and favorable debt protection measures. LUCELEC experienced strong revenue growth with a three-year compounded annual growth rate (CAGR) of 28% (excluding fuel surcharge) and a good CAGR of 19% (excluding fuel surcharge) over the last five years. LUCELEC’s low cost structure, breakeven level at 35%, has enabled the generation of healthy earnings before interest, taxes, depreciation and amortization (EBITDA) margins with a three-year average of 30% (40% calculated without fuel surcharge). The strong operating profits and declining interest costs as a percentage of sales have led to good net profit margins of around 13% (without fuel surcharge) in 2007. Although declining moderately, profitability measures continue to remain healthy for the 9 months to September 2008 with EBITDA margin of 23.9%, Profit after Tax margin of 8.3% and ROCE of 12.5%. Debt protection measures are healthy with an interest cover (EBITDA/finance charges) of 9.9 times and a debt service coverage ratio (DSCR)[2] of 2.1 times in 2007. For the 9 months to September 2008 debt protection measures continue to remain healthy with a moderate decline in the interest cover to 8.6 times and an improved DSCR to 5 times. The ratio of net cash accruals to total debt improved to 0.4 times for the 9 months to September 2008 from 0.28 times in 2007, when it was curtailed by high dividend payouts of around 64%.
Over the years, LUCELEC has continuously improved its operating efficiencies through investment in its transmission and distribution network to reduce losses. On the generation side, in 2003 LUCELEC was awarded by its equipment supplier, Wartsila, the best maintained Wartsila Diesel Power Plant in the world over a four year period (1998 to 2002). LUCELEC outperforms the equipment manufacturer’s specifications on fuel efficiency due to timely servicing and constant maintenance of generation equipment. The operating parameters are among the highest of its regional peers[3]. The company derives locational advantages from the power plant situated close to its key oil supplier’s terminal, resulting in low transportation costs. From the distribution side, the generation plants are located in the vicinity of key consumer centers and main tourist areas.
These rating strengths are tempered by the following:
Electricity demand is cyclical, largely influenced by the tourism sector in Saint Lucia. The fall-out from the current global financial crisis and its effect on global economic growth will impact the revenue stream of LUCELEC. The commercial segment contributes on average 56% to LUCELEC’s total sales. The diversity in the tourist profile aids in mitigating this cyclicality, but the company is exposed to external risk factors from conditions in the source markets and natural disasters.
LUCELEC is not directly affected by increases in fuel prices as some protection is offered through the Electricity Supply Act which allows the company to pass on the excess fuel prices to the consumers. The increase in electricity tariff, from any increase in fuel prices can account for as much as 10% of a small hotel’s cost. This leads to lower off-take from these commercial establishments as they initiate efforts to conserve energy. As 56% of LUCELEC’s sales are to the commercial segment, it is indirectly exposed to the risks arising from increasing fuel prices. However, over the last five months fuel prices have significantly declined, resulting in approximately 30% reduction in tariff to customers.
The company generates power at a single plant at Cul de Sac, Castries. LUCELEC is thus exposed to operational risk as there is no formalized disaster recovery mechanism, which is particularly important in a region prone to hurricanes. The company is in the process of making final amendments to a draft recovery plan. LUCELEC has discontinued the joint insurance policy with two utilities in the Caribbean region – Dominica Electricity Services Ltd (DOMLEC) and St. Vincent Electricity Services Limited (VINLEC) for transmission and distribution infrastructure. Instead, the company has opted for self-insurance with an approximate value of EC $15 million, retaining the risk in a hurricane-prone region.
Contacts:
Arjoon Harripaul, Head – Ratings, CariCRIS
Tel: 868-627-8879
E-mail: aharripaul@caricris.com
Annisa Beharry, Rating Analyst, CariCRIS
Tel: 868-627-8879
E-mail: abeharry@caricris.com
Disclaimer: CariCRIS has taken due care and caution in compilation of data for this product. Information has been obtained by CariCRIS from sources which it considers reliable. However, CariCRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. No part of this report may be published / reproduced in any form without CariCRIS’ prior written approval. CariCRIS is also not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers/users/transmitters/distributors of this product.
[1] The term Caribbean as used here covers the following countries: Bahamas, Barbados, Belize, Costa Rica, Dominican Republic, Guyana, Haiti, Jamaica, Panama, Suriname, Trinidad and Tobago and the following countries in the OECS: Anguilla, Antigua & Barbuda, Dominica, Grenada, Montserrat, St. Kitts & Nevis, Saint Lucia and St. Vincent & the Grenadines. Refer www.caricris.com for a more detailed explanation on CariCRIS ratings and rating definitions.
[2] DSCR is computed as operating cashflows/debt service burden
[3] Regional peers of LUCELEC – Dominica Electricity Services Limited, Grenada Electricity Services Limited, Barbados Light and Power Holdings Limited and Jamaica Public Service Limited