DBRS Confirms Veridian Corporation at “A” with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating of Veridian Corporation (Veridian or the Company) at “A” with a Stable trend. The rating confirmation is based on the stability of Veridian’s regulated electricity distribution business in Ontario, as well as its strong key credit metrics. DBRS expects the Company to continue to fund future growth investments in a prudent manner in order to avoid material structural subordination risk. DBRS notes that the senior unsecured debt at Veridian ranks junior to the senior unsecured debt at Veridian Connections Inc., the Company’s primary operating subsidiary. A negative rating action is likely to occur should the senior unsecured debt at Veridian account for more than 10% of total debt, excluding shareholder debt, at the Company (approximately 5.9% as at December 31, 2017).

In July 2017, following the withdrawal of Oshawa Power and Utilities Corporation, Veridian entered into a Memorandum of Understanding with Whitby Hydro Energy Corporation (Whitby Hydro) for the continued evaluation of a merger (the Merger). The board of directors for both the Company and Whitby Hydro have recommended the Merger, and a decision by shareholders is expected by the end of May 2018. If the Merger is approved by the shareholders, regulatory approval will be sought with a target closing date of January 1, 2019. DBRS continues to expect the Merger to have a modestly positive impact on the Company as (1) Whitby Hydro is regulated by the Ontario Energy Board (OEB), same as Veridian; (2) Veridian will not have to issue incremental debt for the Merger; (3) leverage of Whitby Hydro is below the regulatory capital structure of 60% debt, and its earnings in the past few years have either been in line or have exceeded the regulatory return on equity; and (4) the transaction should result in meaningful synergetic benefits, which, under the current regulatory regime, would be to the benefit of the shareholders for a period of up to ten years. However, DBRS notes that this is partly offset by the integration risk associated with the Merger and early rebasing risk, which could result in synergetic benefits being less than projected.

Veridian’s business risk profile continues to be supported by the reasonable regulatory regime under the OEB. DBRS notes that while the Company plans to develop opportunities in the non-regulated space, such as renewable generation supported by long-term power purchase agreements, earnings from this segment are expected to remain at less than 5% of consolidated earnings over the next ten years (less than 1% in 2017). Veridian’s financial risk profile remained strong in 2017, with all key credit metrics supportive of the current rating category. While DBRS expects Veridian’s financial ratios to deteriorate moderately as the Seaton Municipal Transformer Station project (estimated cost of $47 million) continues, the Company’s key credit metrics are expected to remain commensurate with the current rating. DBRS additionally notes that since around 47% of total debt outstanding as at December 31, 2017, was owed to the Company’s shareholders, Veridian continues to have significant financial flexibility for the current rating category.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.