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. The rating confirmation reflects Veridian’s low business risk profile as a regulated electric distributor, a reasonable regulated framework and good credit metrics (albeit weaker).

Following the disposition of its water heater business in August 2011 (2% of earnings), the Company’s regulated electric distribution operations account for all of its earnings and cash flow, which are expected to remain stable, underpinned by a reasonable regulatory framework in Ontario. Veridian presently operates under an Incentive Regulation Mechanism (IRM) until 2014. Under the IRM, the Company is subject to formula-based adjustments to its distribution rates between cost of service (COS) applications (the last rebasing year was 2010). Veridian’s current deemed equity component (40% of the rate base) and return on equity (ROE, 9.85%) are viewed as reasonable and are expected to remain unchanged until the next COS application. In addition, the Company has no exposure to power price risk as all of purchased power costs are passed through to customers. However, DBRS notes that the Company is exposed to volume risk (mostly weather-related) and the manageable risk of not achieving the price cap index adjustment factor embedded in the formula (0.88% for 2012).

The Company’s financial profile remained reasonable in 2011, supported by good cash flow and interest coverage ratios (although they were weakened recently due to higher debt levels). Rising debt levels over the past three years were largely a result of debt financing of increased capex due to the Company’s smart meter program and system developments. However, the Company’s debt leverage of 52% at the end of 2011 was still viewed as reasonable and remained below the regulatory capital structure of 60% debt/40% equity. In addition, approximately 57% of the Company’s total debt is owed to its shareholders, providing the Company with significant financing flexibility. Over the near-to-medium term, the Company's metrics should remain stable as free cash flow deficits are expected to decline significantly since the Company has completed its smart meter program and a building extension project.

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

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