DBRS Confirms Veridian Corporation at “A,” Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Veridian Corporation (Veridian or the Company) at “A” with a Stable trend. The confirmation reflects Veridian’s track record of prudently managing its regulatory risk and reasonable financial profile.

Veridian’s business risk profile has remained in the “A” rating range and DBRS does not anticipate any material change in the Company’s business risk profile in the foreseeable future. The Company’s low-risk, regulated distribution operations are expected to continue to account for over 98% of consolidated earnings in 2015 as minimal growth is planned for Veridian’s higher-risk, non-regulated businesses. Following the sale of its water heater business in 2011, the Company’s non-regulated activities have been limited to rooftop solar installation with total assets of less than 1% of consolidated assets as at December 31, 2014. Furthermore, recent regulatory decisions for recovery of ice storm-related costs in December 2013 and 4th Generation Incentive Rate-setting (Price Cap IR) were in line with DBRS’s expectations. In March 2015, the Ontario Energy Board (OEB) approved 100% of the ice storm costs that the Company submitted for recovery in August 2014. The ice storm cost claim will be recovered through a fixed-rate rider on a 12-month recovery period ending in February 2016. In addition, DBRS views key parameters for the Price Cap IR released by the OEB in March 2015 as reasonable to ensure adequate earnings stability over the next four years under the Price Cap IR. With moderate customer growth and reasonable parameters, incremental revenues in 2015 should suffice to offset general cost inflation pressure and unfunded amortization (resulted by excess capital spending (capex) over depreciation) and, thus, achieve a return on equity (ROE) close to the deemed ROE of 9.36% in 2015. DBRS notes, however, that regulatory risk under the Price Cap IR will be modestly higher than under the previous 3rd Generation Incentive Rate Mechanism. The longer Price Cap IR term (four years versus three years) is expected to result in greater regulatory lag and could potentially weaken profitability until rebasing in 2019.

Veridian’s financial risk profile is reflective of the “A” rating category, with all key credit metrics in line with the current rating. Operating cash flow is expected to cover the bulk of capex and dividends. As a result, cash flow deficits are expected to be moderate in 2015 and no material changes are expected in the results of operations. In addition, the Company continues to have significant financial flexibility for the current rating category as approximately 48% 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.

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

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014), which can be found on the DBRS website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.