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Rating Action:

Moody's places DP&L and DPL long-term debt ratings under review for downgrade

15 Sep 2014

New York, September 15, 2014 -- Moody's Investors Service placed today Dayton Power & Light Company's (DP&L) Baa1 senior secured long-term debt rating and its backed revenue bond ratings under review for downgrade. Concurrently, Moody's placed DPL Inc and Dolphin Sub II, Inc.'s (assumed by DPL Inc.) Ba2 senior unsecured long-term debt rating under review for downgrade. Moody's affirmed DP&L's Baa3 Issuer and senior unsecured rating as well as its Ba2 preferred stock rating.

RATINGS RATIONALE

The review for downgrade of DP&L's Baa1 senior secured debt rating is prompted by the possibility that the Public Utility Commission of Ohio (PUCO) could authorize the generation asset separation plan as requested by DP&L. This includes transferring the generation assets not later than January 1, 2017 to an affiliate that would result in a significant decrease in the amount of collateral that currently supports the utility's outstanding secured debt. As a result, Moody's believes that if approved it would be appropriate to reduce the notching difference between DP&L's secured and unsecured ratings from our typical two to one alpha-numeric rating differential given the expected lower amount of asset coverage.

The affirmation of DP&L's Baa3 Issuer and senior unsecured rating reflects Moody's expectation that despite the credit negative aspect of a possible PUCO authorization of the company's generation separation application that could include a capital structure that results in long-term debt representing 75% of the utility's remaining regulated transmission and distribution rate base, the utility will be able to generate investment grade cash flow credit metrics over the near term. That said, the affirmation assumes that the proposed capital structure will be temporary and that excess cash flows will be used to further reduce outstanding indebtedness such that the utility will be able to record a debt to total book value ratio that is commensurate with the Baa-rating category according to the key financial ratios outlined in Moody's regulated electric and gas utility rating methodology.

Importantly, the senior unsecured rating affirmation incorporates Moody's expectation that after the generation assets separation and expiration of its Service Stability Rider, DP&L will be able to record interest coverage and retained cash flow (RCF) to debt credit metrics that are robust for the Baa-rating category. Specifically, the RCF to debt and interest coverage metrics will exceed 20% and 5.0x, respectively. That said, DP&L's rating continues to be constrained by the material amount of holding company debt at DPL that currently aggregates to around $1.4 billion. Moody's expects that the utility's cash up-streams will remain the holding company's main source of cash flows to service its outstanding indebtedness.

Moody's considers as credit positive DPL's ongoing tender process which if accepted would postpone the maturity of the bulk of Dolphin's $450 million outstanding global notes due in 2016. While the tender process could result in a reduction of holding company indebtedness, we nevertheless expect that, for the foreseeable future, the holding-company debt will continue to represent around 60% of total consolidated debt.

Moody's decision to place Dolphin's Ba2 long-term debt that has been assumed by DPL under review for downgrade is prompted by a wider rating notching consideration between the parent and its utility subsidiary from two to three notches. Similar to other peers, this would be largely driven by a combination of the very high holding company indebtedness but also the anticipated increase in DPL's exposure to non-regulated operations after 2016 with the addition of DP&L's power generation assets to DPL's retail activities. This rating action is predicated on Moody's understanding that DPL's strategy is currently focused on maintaining the merchant fleet over the foreseeable future as part of the group's operations. Other factors that may contribute to downward movement in DPL's rating include any significant dividend restrictions that the PUCO may impose on DP&L in return for approving the company's transition plan or any requirement to improve DP&L's debt to total capitalization ratio which could potentially curtail significant cash upstreamed from DP&L or require DPL to infuse equity into the utility.

The review for downgrade of DP&L's senior secured rating and DPL and Dolphin's senior unsecured ratings will largely consider PUCO's order regarding the key terms of DP&L's asset separation plan.

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. (DPL: Ba2 under review down) is a regional energy company headquartered in Dayton, Ohio and is the parent company of The Dayton Power and Light Company (DP&L: Baa3 Issuer Rating), a regulated electric utility.

DP&L provides electric service to more than 513,000 retail customers in West Central Ohio. Its primary source of internal generating capacity is from ownership in eight coal-fired power plants with a combined generating capacity of 2,465 megawatts (MW). Additionally, DP&L owns in aggregate 432 MW's of incremental solar/natural gas/diesel-fired generating capacity.

DPL also owns retail energy suppliers DPL Energy Resources, Inc. or DPLER and MC Squared Energy Services, LLC and operates 556 MWs of merchant peaking capacity in Ohio and Indiana through its DPL Energy, LLC subsidiary.

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

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.

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 places DP&L and DPL long-term debt ratings under review for downgrade
No Related Data.
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