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 reflects its low business risk profile, stemming from its regulated electricity distribution business, reasonable regulatory framework and good credit metrics.

Virtually all of the Company’s earnings and cash flow are generated from its regulated electricity distribution business and are expected to remain stable, underpinned by a reasonable regulatory framework in Ontario. Veridian currently operates under a three-year Incentive Regulation Mechanism (IRM) where it has an allowed return on equity (ROE) of 9.85% and deemed equity component of 40%. These are viewed as reasonable and are expected to remain unchanged until rebasing under the Cost of Service (COS) framework in 2014. In October 2012, the Ontario Energy Board (OEB) released its report on the renewed regulatory framework for electricity distributors in Ontario. Under this new framework, DBRS expects Veridian to transition to the 4th Generation Incentive Regulation (IR; see Regulation section). Although these frameworks have a longer IR period (four-plus years, versus three years), which increases regulatory risk, Veridian, like its peers in Ontario, has the option to initiate a regulatory review of the IR application if actual ROE is less than 300 basis points consistently, providing downside protection. In addition, the OEB expects to release details on key factors for the IR frameworks in mid-2013. Should the key factors increase regulatory risk (e.g., aggressive efficiency targets), it could have negative rating implications.

The Company’s financial profile remained reasonable in 2012, supported by good cash flow and interest coverage ratios (although cash flow-to-total debt has declined since 2008, due to higher debt and lower cash flow). Rising debt levels over the past few years were largely due to increased capital expenditures (capex) spent on the smart meter program and system developments. However, Veridian’s debt leverage of 52.5% for 2012 is still well within the current rating category. In addition, approximately 50% of the Company’s total long-term 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, since the Company has completed its smart meter program and a building extension project.

Notes:
All figures are in Canadian unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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