DBRS Updates Report on Veridian Corporation

DBRS has today updated its report on Veridian Corporation (Veridian or the Company), providing updated detail to its current Issuer Rating of “A” with a Stable trend. The credit quality of Veridian Corporation (Veridian or the Company) reflects its low business risk profile as a regulated electricity distributor, with 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 electricity 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. The current rating is based on DBRS’s expectation that the implementation of the renewed regulatory framework in Ontario will not have a material impact on the credit profile of Veridian (see DBRS Commentary: No Real Credit Substance in the Ontario Energy Board’s Report on the Renewed Regulation Framework for Electricity Distributors, dated October 19, 2012).

The Company’s financial profile remained reasonable for the twelve months ended June 30, 2012 (LTM 2012), supported by good cash flow and interest coverage ratios (although weaker due to higher debt levels). Rising debt levels over the past three years were largely due to increased capital expenditures (capex) spent on the smart meter program and system developments. However, Veridian’s debt leverage of 51% for LTM 2012 was still viewed as reasonable and remained below the deemed debt level of 60%. In addition, approximately 56% of the Company’s total debt is owed to its shareholders, providing it with significant financing flexibility. Over the near-to-medium term, Veridian’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.

Notes:
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.