Fitch Ratings Revises DPL and DP&L to Positive Outlook

Business Wire, Nov 5, 2004

NEW YORK -- Fitch Ratings has removed the Rating Watch Negative from the ratings of DPL Inc. (DPL) and The Dayton Power and Light Company (DP&L) and assigned a Positive Rating Outlook. Approximately $2.1 billion of securities are affected. The list of debt ratings affected by the rating action is shown below.

The Positive Rating Outlook reflects the benefits to DPL and DP&L that are expected to result from becoming current with SEC financial filings and lower concerns relating to the investment portfolio. The catalysts for future rating upgrades include: a reduction of parent company leverage; positive resolutions of regulatory investigations; completion of improvements in internal controls; and execution of the back-to-basics integrated utility strategy.

Today's belated filings of the SEC forms 10-K for 2003 and 10-Qs for the first two quarters of 2004 eliminate a major credit concern because the filings cure defaults under financial contracts and are expected to restore the companies' access to public capital markets. Importantly, restatements made to prior year results were not material to credit quality in Fitch's view and the outside auditors, KPMG and PricewaterhouseCoopers, issued unqualified opinions for 2003 and 2002 financial statements, respectively.

DP&L is the main source of cash flow for the DPL group. Ratings at the DP&L subsidiary are constrained by the relatively higher leverage and business risk profile of the parent company. DP&L's strengths include a strong record of cash flow generation, conservative financial profile, and low business risk. The company's ratio of funds from operations to interest expense was approximately 7 times (x) for the 12 months ended June 30, 2004. Concerns at the utility include rising fuel, purchased power and operating expenses, risks relating to environmental emissions from the predominantly coal-fired generating fleet, and uncertainties relating to the transition to competitive electricity markets in Ohio. From 2004-2008, DP&L anticipates using internally generated cash flow to fund approximately $800 million of capital spending, of which $400 million is necessary to meet changing environmental standards.

DPL's financial portfolio is approximately $900 million and has significantly higher business risk than the utility affiliate. The portfolio has recently benefited from improving market conditions and was a net cash provider to DPL for the six months ended June 30, 2004, as well as for the years 2003 and 2002. Cash was sourced from returns of capital and distributions of net investment earnings in excess of the cash required to satisfy investment calls under existing subscription agreements. The maximum potential amount of future investment calls was approximately $227 million as of June 30, 2004, compared with $319 million at Dec. 31, 2003. The amount of capital calls will continue to wind down through 2008. DPL does not intend to make new investments in private equity funds. Fitch notes that the percentage of the portfolio consisting of more liquid cash and public securities declined to 12.4% as of June 30, 2004 from 24.7% as of Dec. 31, 2003 due mainly to contributions of about $250 million made by the portfolio to partially fund the retirement of $500 million of senior notes in April of 2004 and settle securities litigation in May 2004.

DPL had adequate liquidity as of June 30, 2004. Sources of liquidity include cash provided from operations, cash and equivalents of $137 million, and readily monetizable public securities of $78 million. There are only small amounts of debt scheduled to mature through the end of 2006 ($5 million in the second half of 2004 and approximately $13 million and $16 million in 2005 and 2006, respectively). DPL is the issuer of about $1.6 billion (over 70%) of the consolidated group debt and had FFO to interest coverage of approximately 2.3x for the 12 months ended June 30, 2004.

Fitch notes that DPL is currently subject to an inquiry from the SEC on retaining its exempt status pursuant to the Public Utility Holding Company Act of 1934. However, even if there was an adverse decision it would, in Fitch's opinion have no material adverse credit implications. In addition, the Public Utility Commission of Ohio has directed DP&L to provide a plan of utility financial integrity within 120 days of the date of the 2003 form 10-K filing.

DPL is an exempt public utility holding company. DPL's main operating subsidiary is DP&L, an electric utility that serves approximately 506,000 retail and wholesale customers in western-central Ohio. To date, there have been no significant inroads made by competitive retail electric service providers in the utility's service territory. DP&L has peak generating capacity of 4,400mw, of which 64% is coal-fired and 36% natural gas-fired. DPL's other significant subsidiaries include MVE, which manages DPL's investment portfolio, MVIC which provides insurance services to DPL, and DPL Energy, LLC., which owns nonregulated peaking generating facilities and markets wholesale electricity. The investment portfolio comprised approximately $38 million of cash, $821 million of private securities invested in 46 private equity funds, and $78 million of public securities as of June 30, 2004.