Fitch Downgrades DPL to ‘BB+’ and DP&L to ‘BBB-‘ Following Acquisition by AES; Outlook Stable [Health & Beauty Close – Up]

Fitch Ratings has downgraded DPL Inc.'s (DPL) long-term Issuer Default Rating (IDR) and senior unsecured debt rating to 'BB+' from 'BBB+' following consummation of DPL's acquisition by the AES Corp. (AES; long-term IDR 'B+', Outlook Stable).

Fitch has also downgraded The Dayton Power & Light Company's (DP&L) long-term IDR to 'BBB-' from 'BBB+'.

In addition, AES' Dolphin Subsidiary II, Inc. (Dolphin) has merged with and into DPL, with Dolphin's $1.25 billion of senior unsecured debt assumed by DPL. The rating on that debt was affirmed at 'BB+'.

The ratings on DPL and DP&L have been removed from Rating Watch Negative, where they were placed on April 20, following the announcement of the proposed acquisition by AES. Their Outlooks are Stable.

A full list of rating actions is shown at the end of this release.

These rating actions reflect the acquisition of DPL by AES. The acquisition closed yesterday and resulted in an additional $1.25 billion of senior unsecured debt at DPL. DPL's consolidated capital structure now includes approximately $2.6 billion of long-term debt and $22.9 million of preferred stock.

Key rating factors include the following concerns:

--The significant increase in leverage at DPL and ultimate ownership by lower-rated AES;

--An increasingly competitive operating environment in Ohio due to customers' ability to choose electricity providers;

--A generating fleet that is nearly 100 percent coal-fired and exposed to potential additional environmental regulation.

These concerns are mitigated by the following strengths:

--Constructive regulatory mechanisms that allow for timely recovery of costs;

--A low-cost generating fleet with environmental control equipment on the majority of its coal-fired plants;

--A strong financial profile at the utility.

Projected Financial Metrics:

In 2012 and 2013, Fitch projects DPL's consolidated funds from operations (FFO)-to-debt ratio to be around 15 percent, with its EBITDA interest coverage and FFO interest coverage metrics to average in the range of 3.4 times (x) to 3.7x.

DP&L's metrics should remain robust, though Fitch expects DP&L's cash flows to moderate somewhat from their very strong historical financial performance as a result of increased competition in the competitive retail energy market. Fitch projects DP&L's FFO-to-debt ratio to average greater than 30 percent during the forecast period, with its EBITDA interest coverage and FFO interest coverage metrics both averaging greater than 10x.

Adequate Liquidity:

Liquidity is adequate and is supported by DP&L's strong cash flows and full availability on the utility's $200 million revolving credit facility maturing in August 2015 and $200 million revolving credit facility maturing in April 2013. DPL also has full availability on its own $125 million revolving credit facility maturing in August 2014.

DP&L has a significantly large debt maturity on Oct. 1, 2013, with its $470 million first mortgage bonds coming due. Although these notes account for more than half of DP&L's existing debt outstanding, Fitch expects the replacement of this debt to be manageably done prior to maturity.

Company Profile:

DPL is a holding company and diversified regional energy company with various subsidiaries. DP&L is an integrated electric utility that serves more than 500,000 customers in West Central Ohio. The utility is DPL's principal subsidiary, accounting for roughly 90 percent of consolidated gross margin. DP&L also sells electricity to affiliate DPL Energy Resources, Inc. (DPLER), DPL's competitive retail electric marketing subsidiary that has approximately 12,000 commercial and industrial customers in Ohio and Illinois.

DPL's other wholly owned subsidiaries include DPL Energy, LLC (DPLE), which engages in the operation of peaking generating facilities, and Miami Valley Insurance Company (MVIC), a captive insurance company that provides insurance services to DPL and its subsidiaries.

DPL Capital Trust II is a wholly owned business trust formed for the purpose of issuing trust capital securities to investors. Currently there is less than $21 million of junior subordinated debt outstanding.

Fitch has downgraded the following ratings on DPL, DP&L, and DPL Capital Trust II. The Rating Outlook is Stable:

DPL

--Long-term IDR to 'BB+' from 'BBB+';

--Senior unsecured debt to 'BB+' from 'BBB+';

--Short-term IDR to 'B' from 'F2'.

DP&L

--Long-term IDR to 'BBB-' from 'BBB+';

--Senior secured debt to 'BBB+' from 'A';

--Preferred stock to 'BB+' from 'BBB';

--Short-term IDR to 'F3' from 'F2'.

DPL Capital Trust II

--Junior subordinate debt to 'BB-' from 'BBB-'.

Fitch has withdrawn DP&L's commercial paper rating.

Additional information is available at 'fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12,);

--'Recovery Ratings and Notching Criteria for Utilities' (Aug. 12,);

--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16,).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=647229

Recovery Ratings and Notching Criteria for Utilities

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=648449

Rating North American Utilities, Power, Gas, and Water Companies

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=625129

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