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 confirmation reflects the low business risk profile associated with the Company’s stable, regulated electricity distribution business, and its reasonable financial profile.

Veridian’s business risk profile is in the “A” rating range, reflecting the Company’s regulated distribution operations (approximately 99% of 2013 earnings and cash flows), and a reasonable regulatory framework. Under the Ontario Energy Board’s (OEB) Renewed Regulatory Framework, Veridian will be transitioning to 4th Generation Incentive Rate-setting (IR) for its upcoming IR period. The OEB released its report on rate setting parameters and benchmarking in November 2013, which eased some concerns over key factors in the renewed framework, such as the possibility of aggressive efficiency targets. However, DBRS notes that regulatory risk under 4th Generation IR will still be modestly higher than under the previous 3rd Generation Incentive Rate Mechanism as the longer minimum term (four years versus three years) could potentially result in greater regulatory lag. This is partially mitigated by the ability of the Company to apply for the recovery of prudently spent material and necessary incremental capital expenditures (capex) during the IR period through an Incremental Capital Module. Veridian can also apply for a regulatory review if actual return on equity (ROE) is 300 basis points below the approved ROE.

The OEB released a decision on Veridian’s cost-of-service (COS) application in April 2014. The OEB’s decision was largely in line with DBRS expectations, lowering the approved ROE to 9.36% from 9.85% in 2013, and approving a $51 million increase to the rate base to $238 million from $187 million. DBRS expects earnings to remain stable during the IR period as the lower allowed ROE will likely be offset by the increase in the rate base.

Veridian’s financial risk profile is reflective of the “A” rating category, with all key credit metrics in the “A” rating range. While the Company’s debt-to-capital ratio has been increasing over the past few years (53.1% in 2013 from 46.6% in 2009) due to higher capex, DBRS notes that this leverage is still appropriate for the current rating. Additionally, the Company continues to have significant financial flexibility for the current rating category as 54% of total debt is owed to its shareholders.

Notes:
All figures are in Canadian dollars 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 Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.