AES Ohio outlook turns negative on weak financial performance, uncertain regulatory support: Moody’s

Dive Brief:

Moody's Investors Service lowered the outlook for DPL and Dayton Power & Light, or DP&L, The AES Corp. subsidiaries known as AES Ohio, to negative from stable, in part to reflect “persistently weak” consolidated financial performance, the ratings agency said Friday.
There is also “heightened uncertainty around the credit supportiveness of the Ohio regulatory environment and the utility's relationship with key stakeholders, including the Ohio commission and its staff," Nati Martel, Moody’s vice president-senior analyst, said.
DP&L faces a possible rate freeze, which was recommended by the Ohio consumer advocate and Public Utilities Commission of Ohio staff earlier this year, according to Moody’s. “We would view any rate freeze implemented for the utility as credit negative, particularly considering the current high inflation and rising interest rate environment,” analysts with the ratings agency said.

Dive Insight:

Moody’s lowered the outlook for AES Ohio in part over concerns about the slow pace of a pending $120.8 million per year rate case, which the Dayton, Ohio-based utility filed in November 2020.

Also, the utility last month unexpectedly filed an “energy security plan” more than a year early, Moody’s said. Under the plan, called ESP 4, AES Ohio will stop collecting rate stabilization charges of about $70 million to $75 million a year, according to the ratings agency.

“The potential for a rate freeze, along with DP&L's unexpectedly early filing of its ESP 4, has heightened uncertainty around the predictability of the utility's regulatory environment and the constructiveness of the utility's relationship with stakeholders, two key drivers of DPL and DP&L's current ratings,” Moody’s analysts said. DPL owns DP&L.

Amid the regulatory uncertainty, DPL had a “substantial amount” of holding company debt at around $831 million at the end of June, according to the ratings agency. A lack of ring-fencing provisions between DPL and its utility makes it likely that a credit downgrade of DPL would also trigger a downgrade of DP&L, a key rationale for the negative outlooks on both entities, the agency’s analysts said.

With a $175 million credit facility that can be increased to $275 million, DP&L has adequate liquidity, the analysts said, noting the facility is untapped.

DPL's liquidity, however, is much more constrained as of the end of June when the company had outstanding borrowings of $50 million under its $90 million secured revolving credit facility, the analysts said.

DPL's weak financial performance has reduced the availability of its credit facility to $90 million from $105 million at the end of September 2021, the analysts said. According to the terms of the facility, failure to report a ratio of consolidated debt to EBITDA below 7 times, reduces DPL's borrowing limit by $5 million every quarter.

Moody’s analysts said they expect additional $5 million in quarterly reductions until the credit facility's scheduled expiration in June 2023.

“Despite the failure to meet the bank facility's financial performance requirements, we expect that DPL will remain in compliance with its other financial covenants,” they said.

AES Ohio’s ESP 4 proposal included an unspecified equity infusion from AES, the analysts noted.

Moody’s affirmed DPL's Ba1 senior unsecured rating and DP&L's Baa2 issuer rating. A Ba rating signifies substantial credit risk and a Baa rating indicates moderate risk, according to the ratings agency.

DPL’s net income increased to $15.6 million in the first half this year from $14 million in the year-ago period as its revenue jumped to $390.2 million from $323.3 million, the company said in an earnings report filed Aug. 4 with the Securities and Exchange Commission.

AES Ohio has about 527,000 customer accounts, serving 1.25 million people in West Central Ohio, according to the utility.

AES didn’t comment on Moody’s report.