DBRS Confirms Veridian Corp. at “A”, Stable Trend

DBRS has today confirmed the Issuer Rating of Veridian Corporation (Veridian or the Company) at “A”, with a Stable trend. The rating continues to reflect Veridian’s low business risk profile and the stable cash flows of its regulated utility subsidiary, stable credit metrics, the supportiveness of its shareholders and the opportunity for the Company to historically earn higher margins from its non-regulated operations. The rating also reflects the low allowed return on equity (ROE) under which its subsidiaries operate, the lack of access to the public equity markets, the Company’s exposure to volume risk and a degree of operating risk related to the non-regulated segment of its operations.

The regulatory environment for Veridian remains stable and allows the Company to recover prudently incurred operating expenses and capital expenditures in a timely manner. Veridian is presently operating under an Ontario Energy Board (OEB) 3rd Generation Incentive Regulation plan that provides for formulaic adjustments to distribution rates between cost of service applications. In April 2011, the OEB ordered that the rate changes proposed in Veridian’s revised Tariff of Rates and Charges become effective May 1, 2011.

The regulatory framework under which Veridian’s regulated distribution business operates provides a measure of stability that underpins its strong operating results and favourable earnings and cash flows. For the year ending December 31, 2010, operating cash flows have increased as a result of a decrease in regulatory assets and liabilities offset by higher capital expenditures and dividends. Historically, the Company has successfully internally funded increased dividends and capital expenditures and DBRS anticipates that Veridian’s earnings and cash flows from continuing operations should modestly improve over the medium term as a result of the 2010 rate re-basing and improved ROE levels.

Historically, Veridian Energy Inc.’s (VEI) non-regulated operations, such as contracted services to local distribution companies, including water heater and sentinel light rentals, earned comparatively higher margins than Veridian’s regulated distribution subsidiary, Veridian Connections Inc. (VCI), and provided a source of earnings growth while requiring minimal capital. However, as Veridian has stated that it will dispose of non-regulated operations that are not a strategic fit with its overall business strategy in order to strengthen liquidity and improve its overall business mix, the Company exited from the fibre business in 2009 and will divest its water heater business in 2011. VEI will thereby become dormant in 2011 and minimal growth is planned within its non-regulated affiliates going forward. Moreover, any operating risks from investments with non-regulated affiliates will be de minimis. Since the non-regulated portion of Veridian’s operations contribute 2% to Veridian’s total operating income, DBRS does not anticipate that this will have a material impact on the Company’s overall financial profile.

Veridian is expected to pursue a strategy that will maximize earnings within the prevailing regulatory framework; any strategic investments or collaborations under consideration will continue to be subject to business case assessments to screen and identify projects that carry minimal risk and have the potential to maximize returns.

Veridian will be transitioning to International Financial Reporting Standards (IFRS) 1 on January 1, 2012, and as a result, some volatility in net income and a limited number of other income statement items may be observed. However, DBRS anticipates that any impact on cash flow and cash flow-related metrics will be de minimis.

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

The applicable methodology is Rating Companies in the North American Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.