of power generation, customer service interruptions, and could result in injury to employees and the public. Accordingly, to ensure the continued performance of the physical assets, the Company determines expenditures that must be made to maintain and replace the assets. 

The Company continually develops capital expenditure, safety management and risk controls programs and assesses current and future operating and maintenance expenses that will be incurred in the ongoing operation of its systems. The Company also has an insurance programme that provides coverage for business interruption, liability and property damage, although the coverage offered by this programme is limited. (See “Insurance”  for discussion of insurance terms and coverage). In the event of a large uninsurable loss, the Company would apply to the ERA for recovery of these costs through higher rates. However, there is no assurance that the ERA will approve any such application (See “Regulation”  for discussion of regulatory risk). 

## Economic Conditions 

The general economic condition of CUC’s service area, Grand Cayman, influences electricity sales as with most utility companies. Changes in consumer income, employment and housing are all factors in the amount of sales generated. As the Company supplies electricity to all hotels and large properties, its sales are therefore partially based on tourism and related industry fluctuations. 

## Regulation 

The Company operates within a regulated environment. As such the operations of the Company are subject to the normal uncertainties 

faced by regulated companies. Such uncertainties include approval by the ERA of billing rates that allow a reasonable opportunity to recover on a timely basis the estimated costs of providing services, including a fair return on rate base assets. The Company’s capital expenditure plan requires regulatory approval. There is no assurance that capital projects perceived as required by the management of the Company will be approved. 

## Weather 

CUC’s facilities are subject to the effects of severe weather conditions principally during the hurricane season months of June through November. Despite preparations for disasters such as hurricanes, adverse conditions will always remain a risk. In order to mitigate some of this risk, the Company maintains insurance coverage which Management believes is proper and consistent with insurance policies obtained by similar companies facing similar risks. 

## Environmental Matters 

CUC’s operations are subject to local environmental protection laws concerning emissions to the air, discharges to surface and subsurface waters, land use activities, and the handling, storage, processing, use, emission and disposal of materials and waste products. 

In 2004, CUC was initially registered to the ISO 14001, which is the international standard for the Environmental Management System (“EMS”). The Company continuously adheres with the standard and renewal of the registration occurred in May 2010. The next scheduled renewal is 2013. Renewals occur every three years. In March 2007 the Kyoto Protocol was signed by the 

Cayman Islands; this framework aims to reduce Greenhouse Gas (“GHG”) emissions produced by certain industries. Specific details on the regulations have yet to be released by the Government and are required to assess the financial impact of compliance by the Company with the framework. 

Through the EMS, CUC has determined that its exposure to environmental risks is not significant and does not have an impact on CUC’s financial reporting including the recording of any Asset Retirement Obligations (“ARO’s”). 

## Insurance - Terms and Coverage 

The Company renewed its insurance policy as at July 1, 2011 for one year under similar terms and coverage as in prior years. Insurance terms and coverage include $100 million in property and machinery breakdown insurance and business interruption insurance per annum with a 24-month indemnity period and a waiting period on Non-Named Wind, Quake and Flood of 60 days. Any named Wind, Quake and Flood deductible has a 45-day waiting period. All T&D assets outside of 1,000 feet from the boundaries of the Company’s Power Plant and substations are excluded, as the cost of such coverage is not considered economical. There is a single event cap of $100 million. Each “loss occurrence” is subject to a deductible of $1.0 million, except for windstorm (including hurricane) and earth movement for which the deductible is 2% of the value of each location that suffers loss, but subject to a minimum deductible of $1.0 million and maximum deductible of $4.0 million for all interests combined. The 2010/2011 insurance policy had a deductible of $0.5 million for each loss occurrence. 

