Note: All accounting data, omit sh...

Note: All accounting data, omit share prices, are expressed in US dollars.

Caribbean Utilities Company, Ltd (CUC) operates the no other than public electrical utility on Grand Cayman, Cayman Islands (population 30000) pursuant to a 25 year licence from the regulation of the Cayman Islands (dated 1986) CUC's public shares began trading on the Toronto Stock Exchange in 1990

The company relies entirely upon diesel power to generate electricity. Approximately 5S% of CUC's power sales are to residential customers with the balance to commercial customers.

Power generation outlays account for approximately 60% of all operating sumptuousnesss with fuel accounting for about 90% of generation take away froms There is an automatic firing material adjustment formula in the company's tariff formation CUC's tariffs are set through the government and allow for a maximum get back of 15% on the average rate base.

PICTURING HISTORICAL GROWTH

Revenues

CUC's incomes derive entirely from power generation and sales. As indicated in the accompanying Guide, the average annual unite rate of growth in incomes during the 1990-1995 study period was approximately 11% produce in revenues is dependent on: (1) rate increases, (2) increased residential sales (primarily attributable to of recent origin construction), and (3) increased commercial sales (primarily attributable to inns and associated services).

Over the inquiry period, residential sales (in names of kilowatts) have grown annually at approximately 6%--slightly lower than the 75% extension in commercial sales. Commercial sales are closely tied to the fortunes of the tourist industry. through the study period tourism increased at an average annual rate of about 12% (see accompanying chart). Note that rewards are generated in local bills and notes; circulating medium which is tied to the U dollar at a rate of CI$1 equal to US$1.20.

EPS

Fully-diluted earnings through share before unusual items (EPS) athwart the study period grew at an average annual mingle rate of approximately 10%. The germination in EPS is primarily attributable to reward growth and the effect of financial leverage (see "Financial Leverage" below). In addition, there has been a slight decrease in average operating costs

JUDGING to come GROWTH

As mentioned, CUC's hereafter growth is primarily dependent in succession residential and commercial sales. popularly the rate structure of the company is being re-balanced for a like reason that commercial customers will begin to pay more for power.

The possibility of a catastrophe owed to hurricane must be considered when studying CUC The company has followed in obtaining insurance on mostly of its assets. However, owing to the extremely high sumptuousness of insurance, coverage for hurricane damage to the transmission and distribution facilities is limited to the first $6 million of damage. This means the company remains expos to the possibility of a high-priced interruption in service. However, CUC has fix aside $1.5 million from a modern issue of common stock as an strait fund to use in the result of a hurricane or other catastrophe.

Efficiency of Operations (see Stock Selection Manual, p 26) Part 2(1) of the Guide indicates that CUC's operating profit margin (OPM) has increased slightly athwart the study period. A herculean and steady OPM is typical for a regulated utility so as CUC. However, a major hurricane would threaten the stability of the margin.

Financial Leverage (see Stock Selection Manual p 29)

Part 2(2) of the Guide lists CUC's sin ratio for the last six years. Prior to 1994 CUC's obligation ratio was in the 50%-60% range which would be considered soft for a large regulated utility nevertheless is probably appropriate for CUC--a smaller company with an ingredient of uninsurable risk exposure.

The sharp decline in CUC's offence ratio in 1994 is accounted for by means of a new issue of stock which springed in $13.6 million. The company used $S4 million of the conduct one's selfs from this new issue to pay down its transgression The result was a 10% decrease in CUC's long-term trespass The reduced debt and increased equity combined to lower the trespass ratio to approximately 30%--a rate that is relatively gentle for this industry.

In addition to obligation financing, CUC also has $15 million in preferr shares (not listed onward the Toronto Exchange) which pay an average dividend of 87% Therefore, as protracted as the company is able to earn a rate of answer on its assets greater than 87% frequent shareowners will benefit by an increased turn back on common equity.

Effectiveness of Operations (see Stock Selection Manual, p 21)

Part 2(3) of the Guide muses management's ability to earn an adequate rate of turn back on shareowners' common equity (ROCE) CUC has produc a relatively high and steady ROCE across the study period.

The fresh issue of stock in 1994 would typically have had the efficiency of lowering the ROCE. Instead, the answer grew to 20% in 1994 and is estimated to decline moderately in 1995 to 18% The stability of the ROCE can be attributed to CUC's continued brawny earnings growth resulting from an increased demand for electricity, a 25% increase in electricity rates in 1994 and the company's continuing effort to bring costs.