DBRS Confirms Veridian Corporation at “A”, Stable Trend

DBRS has today confirmed the Issuer Rating of Veridian Corporation (Veridian or the Company) at “A”, with a Stable trend. Veridian continues to benefit from a low level of business risk, on account of its regulated electricity distribution operation, its solid financial profile and the stable regulatory environment in which it operates.

Veridian continues to demonstrate strong operating results and favourable earnings and cash flows generated by its regulated distribution business. Operating cash flows have increased as a result of a decrease in regulatory assets and liabilities offset by higher capital expenditures and dividends for the year ending December 31, 2009. The Company has successfully internally funded increased dividends and capital expenditures over the years, however in December 2009 Veridian borrowed on a new $20 million credit facility for capital expenditure purposes.

DBRS notes that in December 2009, the Ontario Energy Board (OEB) changed its methodology in calculating ROEs, which at the time of that report, resulted in an estimated base ROE of 9.75%. As per the OEB letter on Cost of Capital Parameter Updates for 2010 Cost of Service Applications dated February 24, 2010, the ROE amounted to 9.85%, representative of market conditions and rising bond yields.
In 2009, the OEB informed Veridian that it would be one of the electricity distributors to have its rates re-based for the 2010 rate year.
Accordingly, Veridian filed a cost of service application based on 2010 as the forward test year, and then subsequently filed its Settlement Proposal with the OEB. The OEB approved the settlement agreement and the Tariff of Rates and Charges, which became effective May 1, 2010. Veridian’s earnings and cash flows from continuing operations should modestly improve over the medium term as a result of the rate re-basing and improved ROE levels.

DBRS believes that the Company’s financial ratios will remain well within ranges to support its current “A” rating and strong liquidity profile. In addition, Veridian has stated that it may divest the remainder of its non-regulated operations in Veridian Energy Inc., which would further strengthen liquidity and improve its overall business mix.

DBRS notes that Veridian may consider growth via acquisitions or merger; however, the timing and scope of these acquisitions remains uncertain. Should an acquisition opportunity arise, the Company has considerable financial flexibility with its cash on hand, its new credit facility and the shareholder option to convert $17.21 million of Subordinated Promissory Notes (the Notes) into equity. As part of the OEB Settlement agreement, the conversion option on the $43.59 million of VCI notes was removed.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies.

This is a Corporate rating.