DBRS Confirms Veridian Corporation at “A,” Stable

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 (1) the Company’s low business risk assessment (BRA) – predominately a regulated electricity distributor; and (2) the Company’s strong financial risk assessment (FRA), largely driven by low leverage and a robust operating performance in 2015. DBRS expects Veridian to fund future growth investments in a prudent manner to avoid material structural subordination risk (the senior unsecured debt at Veridian Corporation ranks junior to the senior unsecured debt at Veridian Connections Inc., which is Veridian’s primary operating subsidiary). A negative rating action is likely to occur should the senior unsecured debt at Veridian Corporation account for more than 10% of total debt excluding shareholder debt at Veridian Corporation (approximately 8% as at December 31, 2015).

Veridian’s BRA has remained in the “A” rating range, and DBRS does not anticipate any material change in the Company’s BRA 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 2016. Following the sale of its water heater business in 2011, the Company’s non-regulated activities have been limited to rooftop solar installation, accounting for less than 1% of consolidated assets as at December 31, 2015. While the Company intends to expand its non-regulated business lines (primarily focusing on renewable generation supported by long-term power purchase agreements), earnings from the non-regulated business activities are expected to remain immaterial at less than 5% of consolidated earnings over the next ten years (approximately 1% in 2015).

Veridian’s financial performance was robust in 2015, achieving a return on equity (ROE) in excess of the deemed ROE of 9.36%. Strong earnings performance was largely driven by improved operational efficiency, earnings related to energy conservation programs and lower interest expense. With moderate customer growth and reasonable parameters, incremental revenues in 2016 should suffice to offset general cost inflation pressure and unfunded amortization (caused by excess capital spending (capex) over depreciation), and thus, Veridian should achieve an ROE close to the deemed ROE in 2016. Excess earnings above the deemed ROE are expected to be relatively limited in 2016, as continued operating efficiency improvements would be offset by incremental operating expenses related to more frequent billing, which has been mandated by the Ontario Energy Board. With relatively stable operating cash flow and manageable capex and dividends, DBRS believes Veridian’s FRA will remain supportive of the current rating category over the next several years. In addition, the Company continues to have significant financial flexibility for the current rating category, as approximately 49% of total debt was owed to its shareholders as at December 31, 2015.

Notes:
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 (October 2015), which can be found on our 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.