NEW YORK, July 30, 2003 — Moody’s Investors Service has downgraded DPL Inc’s senior unsecured debt to Ba1 from Baa2 and its commercial paper to Not Prime from Prime-2.
DPL has no commercial paper outstanding. Moody’s downgraded The Dayton Power and Light Company’s (DP&L) senior secured debt to Baa1 from A2; its Issuer Rating to Baa2 from A3; preferred stock to Ba1 from Baa2; and commercial paper to Prime-2 from Prime-1. Moody’s also downgraded the trust preferred securities issued by DPL Capital Trust II to Ba2 from Baa3. The outlook for all of the rated entities is stable. This action concludes the review of DPL and DP&L’s ratings that was initiated on June 12, 2003.
The downgrade of parent company DPL’s ratings reflects DPL’s higher reliance on regulated utility DP&L to service parent company debt service obligations and dividends; the uncertainty and unpredictability of cash flow being generated from its financial investment portfolio; and the minimal anticipated cash flow contribution from its wholesale merchant generation portfolio over the next several years.
On July 24, 2003, the Public Utility Commission of Ohio (PUCO) approved DPL’s request to refinance $471 million of utility debt but did not authorize $279 million of first mortgage bonds at the utility to partially refinance a $500 million senior unsecured note due at the parent company in April 2004.
As a result, Moody’s believes that DPL’s financial flexibility has been diminished as it now must refinance this debt at the parent company level. Moody’s notes that approximately 70% of DPL’s $2.1 billion consolidated long-term debt (or $1.5 billion at 3/31/03) is at the parent company, with only 30% (or $665 million) at the DP&L utility level. The relatively high proportion of debt at the parent company level, where debt service coverages are considerably lower than at the utility, remains a significant risk factor. The company has stated plans to reduce debt at the parent by $300 million over the next thirty months.
The rating action also incorporates concerns about the reliability of future cash flow from DPL’s financial investment portfolio, which consists for the most part of private equity securities, considering the uncertain conditions that have existed in parts of the private equity markets over the last several years. In addition, DPL’s wholesale merchant generation expansion strategy has not been as successful as expected because of low power prices and poor wholesale energy market conditions, and thus will not generate as much cash flow to service parent company obligations as anticipated for at least the next several years. Moody’s notes that some of the $500 million of long-term debt due at the parent company was incurred to construct this wholesale generation.
Moody’s also notes the numerous changes that have taken place at DPL over the last year, including the appointment of new auditors, the departure of the company’s chief financial officer, and the class action suits that have been filed against DPL relating to the financial investment portfolio.
The downgrade of DP&L’s ratings reflects DPL’s increasing reliance on DP&L as a source of dividends, as well as higher O&M expenses at the utility. Because of the minimal cash flow to be generated from its wholesale merchant generation and the uncertainty associated with cash flow from the financial investment portfolio, DPL is likely to continue to rely for the most part on the utility for the largest proportion of upstreamed dividends. Although DPL’s recent request to issue first mortgage bonds at the utility to refinance parent company debt was denied by the PUCO, it did illustrate management’s intent to try to use DP&L’s relative financial strength to support DPL.
The stable outlook for DPL, DP&L and DPL Capital Trust II reflects Moody’s expectation that DPL will pursue proactive measures to improve its credit worthiness, including execution of stated plans to reduce debt by $300 million over the next thirty months. It also reflects DP&L’s continued strong cash flow generation and debt service coverage measures going forward and the expectation that its pending rate settlement with the PUCO will eventually result in an extension of current retail rates for an additional five years. Ratings lowered include: DPL’s senior unsecured debt, to Ba1 (stable outlook) from Baa2, and commercial paper, to Not Prime from Prime-2. DP&L’s senior secured debt, to Baa1 (stable outlook) from A2; Issuer Rating, to Baa2 (stable outlook) from A3; preferred stock, to Ba1 (stable outlook) from Baa2; and commercial paper, to Prime-2 from Prime-1. DPL Capital Trust II trust preferred securities, to Ba2 (stable outlook) from Baa3.
DPL Inc. is a regional energy company operating in the Midwest through its subsidiaries The Dayton Power and Light Company, DPL Energy, and MVE, Inc. The company is headquartered in Dayton, Ohio.