DPL Inc.

The negative ratings outlook on DPL and DP&L reflects risk concerning the ability of DPL to control the execution of its future regulatory strategy given the PUCO's invalidation of the DMR. In addition, the negative outlook also reflects uncertainty regarding the company's ability to scale back its capital spending in a manner that preserves credit quality. Under our base-case scenario, we expect FFO to debt of about 7.5%, indicative of minimal cushion at the current rating. We could lower our ratings on DPL and DP&L within the next 12 months by one or more notches if we conclude DPL is unable implement rates consistent with its ESP 1 framework, it does not materially reduce its capital spending in-line with our

...Subsidiary Dayton Power and Light Co. (DP&L) recently implemented a rate plan (Electric Security Plan {ESP} 1), after ESP 3 was withdrawn. The ESP plan includes a rate stabilization charge (RSC) ranging from $75 million to $80 million annually, partially offsetting cash flows that were previously tied to the DMR under ESP 3. While we believe the implementation is positive for DPL's credit quality, our overall view, including our outlook, remains negative largely reflecting regulatory risk in Ohio and uncertainty regarding the company's ability to scale back its capital spending in a manner that preserves credit quality. DPL's exposure to environmental risk is lower when compared with peers. This largely reflects the recent transfer of the company's retired power generation facilities (Stuart and Killen), including the associated environmental liabilities, to a third party. In addition, the company's remaining coal-fired power generation asset, Conesville, which it co-owns is scheduled to...

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