Fitch Expects to Downgrade DPL’s Unsecured Debt to ‘BB+’; Maintains Watch Negative Pending AES Deal

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to downgrade 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 Corporation (AES; 'B+' long-term IDR, Outlook Stable). Fitch also expects at that time to downgrade DPL's short-term IDR to 'B' from 'F2' and to downgrade DPL Capital Trust II's junior subordinated debt to 'BB-' from 'BBB-'.

These expected rating actions are based on the proposed terms of the AES acquisition, which include an additional $1.25 billion of senior unsecured debt at DPL. Pro forma for the completion of the acquisition, DPL's consolidated capital structure would include approximately $2.6 billion of long-term debt and $22.9 million of preferred stock.

Fitch is maintaining DPL's 'BBB+' long-term IDR, 'BBB+' senior unsecured debt rating, and 'F2' short-term IDR on Rating Watch Negative. Fitch is also maintaining DPL Capital Trust II's 'BBB-' junior subordinated debt on Rating Watch Negative. The Rating Watch on these ratings would be resolved following the completion of the acquisition.

The ratings on The Dayton Power & Light Company (DP&L; IDR 'BBB+') were placed on Rating Watch Negative on April 20, 2011 following the announcement of the proposed acquisition by AES. A one- or two-notch downgrade of DP&L's ratings is possible, depending on any ring-fencing provisions that may be put in place prior to closing.

Key rating factors include the following concerns:

-- The anticipated significant increase in leverage at DPL and ultimate ownership by lower-rated AES, following completion of the acquisition;

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

-- A generating fleet that is nearly 100% coal-fired and exposed to future potential 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%, 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 moderating slightly from its 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% 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 $220 million revolving credit facility maturing in November 2011 and $200 million revolving credit facility maturing in April 2013. Fitch expects DP&L to replace its maturing revolving credit facility later this year to maintain sufficient short-term borrowing capacity. Near-term debt maturities are manageable, with DPL's $297.4 million senior notes maturing in September 2011 and DP&L's $470 million first mortgage bonds maturing in October 2013.

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% 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 maintained the following ratings on DPL and DPL Capital Trust II on Rating Watch Negative pending closing of its acquisition by AES:

DPL

-- Long-term IDR 'BBB+';

-- Senior unsecured debt 'BBB+';

-- Short-term IDR 'F2'.

DPL Capital Trust II

-- Junior subordinate debt 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Corporate Rating Methodology' (Aug. 16, 2010);

-- 'Recovery Ratings and Notching Criteria for Utilities' (May 12, 2011);

-- 'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628491

Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

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Fitch, Inc.
Primary AnalystKevin L. Beicke, CFA, +1-212-908-9112
Director
One State Street Plaza
New York, NY 10004
or
Secondary AnalystPeter Molica, +1-212-908-0288
Director
or
Committee ChairpersonDonna McMonagle, +1-212-908-0258
Managing Director
or
Media RelationsBrian Bertsch, +1-212-908-0549 (New York)
[email protected]

Source: Fitch Ratings