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Rating Action:

Moody's affirms the ratings of DPL and DP&L; outlook stable

07 Aug 2015

New York, August 07, 2015 -- Moody's Investors Service today affirmed the Ba3 senior unsecured long term debt rating of DPL Inc and Dophin Sub II, Inc (assumed by DPL Inc). Concurrently, Moody's also affirmed the ratings of Dayton Power & Light Company (DP&L) including its Baa3 Issuer rating, its Baa2 senior secured rating and its Ba2 preferred stock rating. The rating outlooks are stable.

Moody's today also withdrew the public ratings of both issuer's previously existing bank credit arrangements that were scheduled to expire in May 2018. These consisted of two unsecured revolving credit facilities executed by DP&L (up to $300 million) and DPL (up to $100 million) as well as DPL's unsecured bank loan (outstanding amount March 2015: $130 million). On July 31, 2015, the issuers replaced these liquidity arrangements with the following; DPL executed a five year secured revolving credit facility for up to $300 million as well as an amortizing $125 million bank loan due, both due in 2020; DP&L executed a new 5-year unsecured revolving credit facility for up to $200 million scheduled to expire in 2020.

RATINGS RATIONALE

Today's affirmations of DPL's and DP&L's ratings are largely driven by Moody's acknowledgement of the group's prudent risk management initiatives to enhance the group's liquidity profile. The previous existing bank arrangements were scheduled to expire in May 2018; however, DPL's previous revolving credit facility and bank loan were subject to an earlier expiration in 2016 if the holding company failed to refinance its 6.5% notes due in 2016. Therefore, the execution of the new bank arrangements well ahead of the 2016 notes maturity date is a significant credit positive. Moody's also understands that the increase in the size of DPL's revolving credit facility to $300 million (the facilities were increased to $205M with an ability to go up to $300M subject to certain conditions) aims to enhance the group's ability to support the unregulated power generation operations. At the same time, the reduction in DP&L's revolving credit facility is driven by management's anticipation of the utility's smaller liquidity requirement upon the implementation of the power generation assets separation on January 1, 2017.

Moody's notes that DPL's new revolving credit facility and term loan are now secured with collateral, including capital stock in DP&L (including capital stock in DP&L limited to the amount permitted to be pledged in DPL Inc's 2011 & 2014 Bond Indentures) and a guarantee provided by DPL Energy, LLC, the owner of the group's current 556MW merchant peaking generation capacity. While this collateral package enhances the recovery expectations of these two pieces of DPL's indebtedness compared to the rest of its outstanding unsecured indebtedness, Moody's does not believe that the additional value provided by this collateral is enough to trigger a downgrade of DPL's Ba3 outstanding notes. This view also considers that the legal documentation explicitly excludes DP&L's current generation assets from becoming part of the collateral package.

The affirmation of DP&L's Baa3 Issuer rating also reflects the issuer's efforts to reduce the significant financial leverage that will remain at the utility upon the separation of its generation assets from its transmission and distribution operations on January 1, 2017. To this end, DP&L has recently redeemed $114.1 million in Pollution Control Bonds (PCBs) due in 2028 and 2034, namely the 2005 Boone County PCBs of $35.3 million, the 2005 Ohio Water PCBs of $41.3 million, and $37.8 million of the $137.8 million 2005 Ohio Air PCBs. The utility further used the proceeds from the August 3, 2015 issuance of $200 million of 2015 Series A and Series B PCBs to refinance the $100 million balance of the $137.8 million 2005 Ohio Air PCBs and the $100 million 2008 Series A & Series B Ohio Air Quality PCBs. That said, today's rating action is largely predicated on the assumption that the Ohio regulatory environment will remain credit supportive and that PUCO's temporary relief regarding the utility's 50% debt capital structure requirement will remain in place. This is an important consideration because according to Moody's calculations and despite the utility's deleveraging efforts DP&L will not be able to return to a 50% capital structure before the 2019/2020 timeframe. In September 2014, the PUCO temporarily allowed the utility to record long-term debt that will account for 75% of its $1 billion rate base upon the separation of the generation assets on January 1, 2017.

The ratings of DP&L and DPL remain constrained by the group's significant financial leverage including the material amount of holding company indebtedness. DP&L is expected to remain a significant source of cash flows to service this holding-company indebtedness. Moody's expects DPL's holding company debt will approximate $1.25 billion at year-end 2015 with further reduction upon the repayment of the $130 million outstanding under its 6.5% notes due in 2016; however, Moody's also anticipates that the holding-company indebtedness will continue to constitute 60% of the total consolidated debt over the next several years despite both issuer's efforts to reduce their respective outstanding indebtedness.

DPL's ability to reduce the group's indebtedness will also depend on the financial performance of the unregulated power generation assets and the power markets. In this regard, Moody's considers credit positive for DPL the recent developments in the PJM capacity market including the regulatory approval of its Capacity Performance Plan. This is expected to boost generators' revenues as they factor potential penalties into their bid auction albeit this also exposes their financial performance to operational risks, a credit negative.

The stable outlook of DP&L assumes that the utility will continue to benefit from a supportive regulatory environment including regulatory decisions beyond the tenor of its current ESP-II. It further assumes that excess cash flows will be further used to reduce its outstanding indebtedness to achieve a capital structure commensurate with an investment grade regulated utility. The stable outlook also assumes that the utility will be able to record cash flow credit metrics that are well positioned within the low end of the Baa-rating category even after the separation of its generation assets; specifically, interest coverage and retained cash flow (RCF) to debt credit metrics of 4x and mid-teens, respectively. The stable outlook assumes that that the company will also prudently manage its debt maturities, including its $445 million First Mortgage Bonds due in 2016.

The stable outlook of DPL assumes that the holding company will continue decreasing its indebtedness, including its 6.5% Notes due in 2016. It further assumes that its unregulated operations will be able to generate cash flows which along with any excess cash flows received from DP&L will be used to further reduce DPL's outstanding debt. The stable outlook assumes that that the company will also prudently manage its debt maturities.

An upgrade of DPL's rating over the short-term is unlikely given DP&L's anticipated capital structure upon separation and the material amount of holding-company indebtedness. That said, an upgrade could be triggered if the holding company is able to materially reduce its holding company debt either through an equity infusion from AES and/or if DPL chooses to divest its generation assets and use the proceeds to reduce outstanding indebtedness and improve its capital structure while also reducing the group's exposure to unregulated operations.

Given the structural subordination considered in DPL's rating, a material reduction in the holding company indebtedness along with the utility's ability to achieve a 50% debt to rate base capital structure as required by the PUCO could also trigger positive momentum on DP&L's ratings.

DPL's ratings could come under pressure should the PUCO change its decision under the September 17, 2014 Order such that it imposes significant dividend restriction on DP&L or if the requirement to improve DP&L's debt to total capitalization ratio results in a significant curtailment of the ability to upstream cash from DP&L or if DPL increases its holding company indebtedness if required to infuse equity into the utility. A downgrade of DP&L's rating could also trigger a downgrade of DPL's rating if the holding company debt remains material and without a reduction in the group's expected increased exposure to unregulated operations.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

DPL Inc. is a regional energy company headquartered in Dayton, Ohio and is the parent company of The Dayton Power and Light Company, a regulated electric utility.

DP&L provides electric service to more than 515,000 retail customers in West Central Ohio. Its primary source of internal generating capacity is from ownership in seven coal-fired power plants with a combined generating capacity of 2,465 megawatts (MW). Additionally, DP&L owns in aggregate 432 MWs of incremental solar/natural gas/diesel-fired generating capacity. Moody's understands that the issuers is currently involved in the procedures required to release the generation assets from the collateral package provided to the utility's outstanding secured indebtedness.

DPL Energy, LLC (DPLE; the guarantor of DPL's new revolver and term loan), owns and operates 556MW merchant peaking capacity in Ohio and Indiana. DPL owns the retail energy supplier DPL Energy Resources, Inc. or DPLER after selling MC Squared Energy Services, LLC. earlier this year.

DPL is a subsidiary of The AES Corporation (AES: Ba3 Corporate Family Rating, stable), a globally diversified power holding company.

Outlook Actions:

..Issuer: Dayton Power & Light Company

....Outlook, Remains Stable

..Issuer: DPL Inc.

....Outlook, Remains Stable

Affirmations:

..Issuer: Dayton Power & Light Company

.... Issuer Rating, Affirmed Baa3

....Pref. Stock Preferred Stock, Affirmed Ba2

....Senior Secured First Mortgage Bonds, Affirmed Baa2

..Issuer: Dolphin Sub II, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3

..Issuer: DPL Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3

..Issuer: Ohio Air Quality Development Authority (Supported by Dayton Power & Light Company)

....Senior Secured Revenue Bonds, Affirmed Baa2

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating as indicated:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person(s) that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natividad Martel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms the ratings of DPL and DP&L; outlook stable
No Related Data.
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