The Public Utilities Commission of Ohio (PUCO) last week directed its staff to investigate the financial condition of Dayton Power and Light (DP&L). The investigation is the result of recent reports regarding the financial activities of DP&L’s holding company, DPL Inc.

DPL announced on March 30 that it would delay filing its Form 10-K with the Securities and Exchange Commission pending completion of a review by the audit committee of DPL’s board of directors. The board is reviewing several areas of concern, including corporate governance, compensation policy, internal controls and potential tax liabilities.

Recently, credit rating agencies, including Standard & Poor’s Rating Services, Moody’s Investors Service, and Fitch Ratings have lowered DPL’s senior unsecured debt rating and the first mortgage bond rating of DP&L to below investment grade level, the PUCO noted.

Last Wednesday, Moody’s downgraded DPL’s senior unsecured debt to Ba3 from Ba2. Moody’s also downgraded the ratings of DP&L as follows: senior secured debt to Baa3 from Baa2; senior unsecured debt and issuer rating to Ba1 from Baa3; preferred stock to Ba3 from Ba2; and commercial paper to “Not Prime” from “Prime-3.”

The PUCO said that DPL’s failure to file certified financial statements by the end of the grace period could result in further negative rating actions for both DPL and DP&L, which in turn could mean higher financing costs for DP&L.

Based on these reports, the state commission has directed its staff to investigate these matters. The purpose of the investigation will be to determine how these recent activities have or will negatively impact DP&L. An assessment will also be made as to how a negative impact might be rectified and prevented in the future.

“We are concerned about the recent reports surrounding the financial activities of DPL Inc.,” said PUCO Chairman Alan Schriber. “We have a responsibility to ensure that the activities by DP&L’s holding company do not negatively impact the financial condition or service quality of the regulated public utility.”

The PUCO said that the investigation is in keeping with the commission’s goal of ensuring that the unregulated activities of holding companies do not negatively affect the financial condition or service quality of the regulated utilities serving Ohio.

The state commission initiated a similar review of the financial condition of Ohio’s major public utilities on Oct. 2, 2002. In opening that investigation, the PUCO committed to using its statutory powers to limit the exposure of the regulated utility from adverse consequences of holding company operations.

The PUCO upheld that commitment on June 24, 2003 by denying the request of DP&L to issue up to $279 million of debt securities for the purpose of refinancing a note issued by DPL. The commission did approve DP&L’s request to issue up to $471 million of debt securities to refinance a portion of its outstanding first mortgage bonds.

Moody’s said that the downgrade of DPL’s ratings reflects, among other things, the lack of a definitive timetable for completion of the pending board of directors investigation of allegations about the adequacy of internal controls and corporate governance issues raised by the company’s controller. The ratings agency is also concerned about the possibility that the investigation could delay the filing of financial statements for a substantial period.

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