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Rating Action:

Moody's confirms DPL and Dayton Power and Light's ratings; negative outlook

20 Dec 2019

Approximately $1.2 billion of debt securities affected

New York, December 20, 2019 -- Moody's Investors Service, ("Moody's") confirmed the ratings of DPL Inc. (DPL; Ba1 senior unsecured) and Dayton Power & Light Company (DP&L; Baa2 Issuer rating, A3 first mortgage bond). The rating action concludes the rating review of DPL and DP&L's ratings initiated on November 25, 2019. The rating outlooks for DPL and DP&L are negative.

RATINGS RATIONALE

"The confirmation of the ratings of DPL and DP&L reflects the Public Utilities Commission of Ohio's (PUCO) December 18, 2019 order authorizing the utility to revert to its original Electric Security Plan (ESP-I)", said Natividad Martel, Vice President -- Senior Analyst. "While DP&L's revenues will be lower under ESP-I, the authorization removes near-term liquidity pressure at the DPL parent company and limits, but does not avert, credit deterioration at the utility" added Martel.

The confirmation of the ratings is prompted by the implementation of ESP-I, whereby DP&L will be able to collect a non-bypassable Rate Stabilization Charge (RSC) from its customers, which we understand ranges between $75 and $80 million annually. The confirmation of the ratings of the parent company DPL considers that PUCO did not implement any restrictions on DP&L's ability to upstream cash flows to the parent, including to the RSC collected amounts, which drives our expectation that DPL will be able to continue to pay its annual interest payments of around $45 million on its holding debt of nearly $800 million.

The revision of the outlook to negative on both DPL and DP&L reflects the lower cash flow provided by ESP-I compared to the previous ESP-III, the termination of decoupling and other credit supportive riders, the less consistent and more unpredictable nature of the Ohio regulatory environment as it pertains to DP&L, and the ongoing pressure on both DPL and DP&L's financial metrics as the group strives to modernize the utility's electric grid and address significant debt maturities over the next two years.

The negative outlook also considers that the ultimate impact of the ESP-I on the group's financial profile remains uncertain until the utility implements final tariffs and reviews its capital expenditure program in light of these adverse developments. However, we anticipate a material reduction in the group's available cash flows compared to the cash flows previously generated under the ESP-III. This reduction will diminish the ability of the utility to make significant investment to grow its rate base and limit its ability to improve its capital structure. DPL's ratio of consolidated cash flow from operations before changes in working capital (CFO pre-W/C) to debt had improved to 10.4% for the last twelve month period ended September 2019 under the terms of the ESP-III, but this is unlikely to be sustained. The negative outlook anticipates a deterioration in the credit metrics going forward.

The expectation of reduced cash flows and credit metrics deterioration considers the approximately $30 million annual cash flow difference between the RSC to be collected under the ESP-I and the Distribution Modernization Rider (DMR) previously collected under DP&L's ESP-III until its termination end of November. Furthermore, the utility's cash flows will also cease to benefit from several of the non-bypassable charges and automatic cost recovery mechanisms approved by the PUCO in the utility's last rate case that concluded in September 2018. The most important mechanism being terminated is the Distribution Investment Rider (DIR), which allowed the utility to earn a return on, and of, capital investments associated with specific infrastructure projects between rate cases, subject to annual caps until 2023 (2019: $22 million; 2020: $29 million).

On another credit negative note, DP&L will also cease to benefit from the decoupling rider that became effective in January 2019 which helped insulate its cash flows from the impact of declining load in its service territory. That said, we understand that the enactment of House Bill 6 in Ohio may allow the utility to reinstate this mechanism before its next rate case. We anticipate that DP&L will have to file for a new rate case over the next months which creates uncertainty around the group's financial performance starting next year.

The negative outlook also reflects limited flexibility under the parent's bank revolving credit agreement, which not only includes a material adverse change clause representation for new borrowings, but also has two financial covenants including a maximum consolidated debt to EBITDA of 7.0x and a minimum EBITDA over interest of 2.25x. Although the company was in compliance with these covenants as of September 30, 2019 at 5.68x and 2.99x, respectively, we project the company could potentially breach these covenants as early as next year. The negative outlook reflects the possibility that the company could lose access to this revolving credit facility, if these tight covenant conditions are not addressed.

Factors that could lead to an upgrade

Given the negative outlook and the recent adverse regulatory developments, an upgrade of DPL and DP&L's ratings is unlikely. A stabilization of the outlook is possible if the credit metrics do not deteriorate materially after the utility implements its new tariffs, reviews its capital expenditure program, and addresses the lack of flexibility under parent's revolving credit facility. This would include a consolidated CFO pre-W/C to debt ratio in excess of 8%.

Factors that could lead to a downgrade

A downgrade of the ratings of DPL and DP&L is likely if there is deterioration of the credit metrics as a result of these developments, including consolidated CFO pre-W/C to debt falling below 8%. A downgrade is also likely if DPL faces challenges to refinance its next debt maturity of $380 million Notes due in October 2021 and/or loses access to its $125 million committed credit facility, should it breach, and not able to renegotiate its financial covenants of maximum consolidated debt to EBITDA of 7.0x and minimum EBITDA over interest of 2.25x.

Environmental considerations incorporated into our credit analysis for DPL and DP&L factor in the group's exit from most of its coal-fired generation operations in 2018. Social risks are primarily related to demographic and societal trends and customer relations. Corporate governance considerations incorporate the organization's financial policies and the ultimate AES parent company's lack of financial support thus far for DPL's deleveraging efforts. We note that a strong financial position is an important characteristic for managing environmental, social and governance risk.

Confirmations:

..Issuer: Dayton Power & Light Company

.... Issuer Rating, Confirmed at Baa2

....Senior Secured First Mortgage Bonds, Confirmed at A3

..Issuer: DPL Inc.

....Senior Unsecured Regular Bond/Debenture, Confirmed at Ba1

Outlook Actions:

..Issuer: Dayton Power & Light Company

....Outlook, Changed To Negative From Rating Under Review

..Issuer: DPL Inc.

....Outlook, Changed To Negative From Rating Under Review

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

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: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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