S&P: DPL Inc. And Subsidiary Upgraded Following Sale Of Merchant Generation Assets

S&P Global Ratings today raised the issuer credit ratings on DPL Inc. (DPL) and subsidiary Dayton Power & Light Co. (DP&L) to 'BBB-' from 'BB'. We are removing the ratings from CreditWatch, where we placed them with positive implications on Dec. 20, 2017. The outlook on both entities is stable.

At the same time, we raised our issue-level rating on DPL's senior unsecured debt to 'BBB-' from 'BB' and our issue-level rating on DP&L's senior secured debt to 'BBB+' from 'BBB'. We are removing the debt ratings from CreditWatch, where we placed them with positive implications on Dec. 20, 2017.

The ratings upgrade follows DPL's announcement that it has closed on the sale of its merchant generation and related assets, including the Tait, Montpelier, Yankee, Hutchings, Monument, and Sidney generating stations, totaling about 973 megawatts (MW) of merchant generation. The completed sale essentially transforms DPL into a low-risk T&D utility, warranting a revision of the company's business risk profile to excellent from satisfactory. Although the effects of the revised U. S. corporate tax code (tax reform) weakens DPL's consolidated financial measures, we expect the company's prospective funds from operations (FFO) to debt to average about 9%. The material improvement in the company's business risk partly mitigates this weakness, further supporting the ratings upgrade.

The stable outlook incorporates the company's strategy that we expect will mostly focus on its regulated low-risk T&D utility operations going forward. The stable outlook also reflects our expectation that the company's management of regulatory risk remains consistent with peers, given the limited cushion in the ratings from the company's financial measures.

We could lower the rating on DPL if we revise our assessment of the company's business risk downward. This could occur if structural shifts in the company's regulatory constructs suggest a weakening of the company's ability to manage regulatory risk. We could also lower the rating if adverse regulatory outcomes materially weaken the company's operating performance, including FFO to debt that is consistently below 9%. In addition, we could lower the ratings if ultimate parent AES is downgraded.

Although unlikely, we could raise the rating if the company permanently improves its financial measures, including FFO to debt consistently above 14%, and strengthens its insulation measures further. We could also raise the rating if AES is upgraded.

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