NEW YORK--(BUSINESS WIRE)--The Ohio Supreme Court's rejection of Dayton Power and Light's (DP&L: 'BB+' Long-term Issuer Default Rating [LT IDR]/Stable Outlook) "service stability rider" (SSR) charge could have material credit impact on DP&L and its parent DPL Inc. (DPL: 'B+' LT IDR/Stable Outlook), according to Fitch Ratings.
In addition to cash flow reduction in the near term, the ruling could jeopardize the potential extension of a similar rate structure beyond 2016 as requested in the currently pending Electric Security Plan (ESP) filed by DP&L in February 2016. Fitch views the receipt of these payments as key to reducing leverage at DP&L.
The Ohio Supreme Court is expected to issue a mandate within 10 days from the ruling, which may provide some clarity and alternatives for DP&L. Fitch will closely monitor the mandate and determine the necessary rating actions at that time.
The ruling will likely terminate the collection of the remaining SSR in 2016 of approximately $60 million while the $250 million of SSR payments that have already been collected are not subject to refund. More importantly, Fitch expects that the court mandate may indicate that the ruling denied the legality of the SSR, thus will cast serious doubts upon the extension of a similar rate structure, which is a crucial part of the pending ESP. The ESP requested that a 10-year non-by-passable fixed-charge rider similar to the SSR be adopted, as an alternative to a "reliable electricity rider" (RER). RER is a construct that is similar to the Purchased Power Agreement (PPA) constructs proposed by other Ohio utilities. Fitch notes that similar PPAs in Ohio have faced challenges from the Federal Energy Regulatory Commission due to the non-by-passable nature of these charges.
Fitch has previously stated that the outcome of the pending ESP will be a key determinant of the ratings and Outlook for both DP&L and DPL. In light of the Supreme Court order, Fitch anticipates negative rating pressure on both entities. The timing and severity of the negative rating actions will be subject to additional details provided in the pending court mandate as well as Fitch's assessment of the likelihood and extent of alternate regulatory support from the Public Utility Commission of Ohio (PUCO). Such support, if provided, could take the form of alternative earnings-enhancing rate structures, such as the capacity pricing scheme without a retail stability rider which was adopted by a peer utility, Ohio Power Company ('BBB+' LT IDR/Stable Outlook).
Additional information is available at 'www.fitchratings.com'.
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