OREANDA-NEWS. Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDR) of the AES Corporation (AES) at 'BB-' and revised the Rating Outlook to Stable from Negative. Fitch has also affirmed the 'BB+' IDR of IPALCO Enterprises, Inc. (IPALCO), 'BBB-' IDR of Indianapolis Power & Light (IPL), 'B+' IDR of DPL, Inc. (DPL), 'BB+' IDR of Dayton Power Light & Company (DP&L), all with a Stable Outlook. A complete list of rating actions is provided at the end of this release.

KEY RATING DRIVERS

AES

The revision of AES' Outlook to Stable from Negative reflects Fitch's expectations that the credit protection measures will be maintained below the required threshold over the next few years, despite the macroeconomic headwinds. This stability is primarily driven by a higher amount of recourse debt reduction than previously expected. In 2015, the company reduced its recourse debt by $240 million, versus the $140 million in Fitch's initial projections. In addition, the company has announced plans to retire an additional $200 million in debt in 2016. Parent free cash flow (FCF) is expected to grow 10% from 2016 to 2018. The company has announced its plan to potentially sell $1 billion assets in the next several years, and a $150 million cost reduction/revenue enhancement program over three years, which could improve liquidity and accommodate debt reduction.

Fitch applied a deconsolidated approach when assigning AES' ratings and Outlook in light of its unique corporate profile and structure as an investment holding company that owns a diverse portfolio of regulated utilities and power generation assets. The primary credit measures are recourse debt/adjusted parent operating cash flows (APOCF) and APOCF interest coverage. The approach recognizes that assets at the subsidiaries are encumbered by debt that is structurally superior to parent debt. The residual subsidiary cash flow available for upstream dividends and distributions is more volatile than the direct cash flow of the operating subsidiaries, and may be subject to payment restrictions under subsidiary debt covenants, corporate bylaws, or national laws. Approximately 75% of AES' consolidated debt is non-recourse. Fitch expects AES' resource debt/APOCF to decline to below 5.5x from 2016-2018, consistent with the 'BB-' rating level. Fitch projects debt/APOCF in 2015 and 2016 to be 5.7x and 5.1x, respectively, and to improve to high-4x by 2018. The APOCF interest coverage is expected to improve from 2.4x to 3x from 2015 to 2018.

Maintaining the Stable Outlook depends on management's commitment to sustaining debt/APOCF below 5.5x and APOCF interest coverage above 2.5x. This will require continued balance sheet and liquidity management including execution of the planned debt reduction, a balanced approach to share buybacks relative to the financial performance of investments and debt levels, and successful execution of the cost cutting initiative.

The rating and Outlook also incorporate expectations that AES will maintain its current risk profile and continue to secure its earnings and cash flows by regulated utility holdings and long-term contracts.

DPL and DP&L

DPL's IDR and Outlook reflect a highly leveraged capital structure and still elevated regulatory risks associated with generation separation. DP&L's ratings reflect a strong business risk profile as a transmission and distribution utility post-corporate separation. However, its pro forma leverage will be high, and additional regulatory support will be needed to reach the required capital structure. DP&L's ratings are further constrained by a weak parent and the absence of explicit ring-fencing.
The major catalyst for changes in ratings and Outlook for both DPL and DP&L will be the outcome of the next Electric Security Plan (ESP), which DP&L is expected to file later this year or early 2016. Regulatory support could take the form of extending an additional service stability rider (SSR) beyond 2017, a multi-year power purchase agreement for the merchant generation segment, or other cash flow enhancing measures. The current SSR allows $110 million per year through 2016. Fitch's rating case assumes continuation of the SSR beyond 2016, albeit at a reduced level.
Fitch intends to maintain a three-notch differential between the IDRs of DPL and DP&L, driven by a regulatory enforced capital structure that requires DP&L's debt-to-cap to improve to 50% from 75% by January 2018. The approved corporate separation plan (CSP) prohibits DP&L from guaranteeing or extend credit to a nonregulated affiliate or DPL to facilitate its divesture of generating assets. It also prohibits DP&L from distributing dividends to DPL if its retained earnings balance is not positive. DPL's IDR is not linked to the ratings of AES due to weak legal linkages. AES has not extended any guarantees to DPL's debtholders nor indicated commitment of any future liquidity support to DPL, including equity infusions. Fitch has assumed future funding of DPL's capital needs will come from internally generated cash flow and access to debt markets.

The debt instrument rating at DPL is notched above or below the IDR as a result of the relative recovery prospects in a hypothetical default scenario. Fitch values the power generation assets using a net present value (NPV) analysis and the equity value in DP&L is added to derive DPL's enterprise value for the recovery analysis. Fitch assigned a 'BB/RR2' rating to DPL's senior secured revolving credit facility and term loan. The 'RR2' rating reflects a two-notch differential from the 'B+' IDR and indicates that Fitch estimates superior recovery of principal and related interest of between 71% - 90%. Fitch also assigned a 'BB-/RR3' rating to DPL's senior unsecured notes, reflecting a one-notch differential from the 'B+' IDR, implying good recovery of principal and related interest of between 51% - 70%.

IPALCO and IPL

IPALCO and IPL's ratings take into account the relatively supportive Indiana regulations and the expected decline in the credit metrics through 2017 due to a large capex program at IPL, and recovery to reasonable levels by 2018. IPALCO's consolidated adjusted debt-to-EBITDAR and funds from operations (FFO) fixed charge ratios at the end of latest 12 months (LTM) September 2015 were 5.7x and 3.5x, respectively. Fitch projects IPALCO's consolidated credit metrics to remain constrained until the Indiana regulators approve an increase in IPL's retail tariffs, especially to recover in the second rate case its investment in the new generating capacity after it goes into service in 2017. Assuming a reasonable outcome from rate cases, Fitch expects IPALCO's consolidated adjusted debt-to-EBITDAR ratio to be below 5.0x at the end of 2018 and FFO fixed charge coverage to be approximately 3.5x at the end of the same period, in line with Fitch's expectations for the assigned IDR.

Fitch views IPALCO's consolidated leverage ratios as a key rating driver for both IPALCO and IPL as IPL is the sole source of dividends for IPALCO. The one-notch difference between IPL and IPALCO reflects the high parent-level debt, IPL's low-risk business profile and moderate capital structure and the subordination of IPALCO's debt to that of IPL's. IPALCO's parent-level debt accounted for approximately 35% of total debt as of Sept. 30, 2015. IPL's rating is constrained by IPALCO.

AES' ownership is neutral to IPALCO and IPL's ratings. There is a modest degree of separation between IPALCO and AES. The ratio of IPALCO's EBITDA to interest must exceed 2.5x, and debt cannot exceed 67% of total capitalization on an adjusted basis to make a distribution or intercompany loan to its parent, according to IPALCO's articles of incorporation. Changing the articles would require AES approval, IPALCO board approval, and filing the revision with the secretary of state. IPALCO and IPL keep their cash separate from that of AES.

KEY ASSUMPTIONS

AES:
--10% growth for POCF each year for 2017 and 2018
--Net debt reduction of $150 million in 2016 and no debt reduction in 2017 and 2018
--$200 million asset sale from 2016-2018 each year
--$300 million share buyback from 2016-2018 each year

DPL and DP&L:
--SSR: $110 million per year for 2015 and 2016 and $50 million from 2017-2019
--Assume 70% of distribution rate case request approved, effective Jan 1, 2017
--No equity support from AES
--DP&L's debt-to-cap ratio declines to 50% in 2018

IPALCO and IPL:
--Assume 70% of requested rate increase approved
--$1.8 billion capex from 2016-2020
--55% debt-to-cap at IPL
--2016 equity injection from AES and CDPQ totalling $254 million (AES: $120 million, CDPQ: $134 million). No equity injections assumed after 2016

RATING SENSITIVITIES

AES:

Positive:

Positive rating action for AES is unlikely at this time due to the weak fundamentals and absence of material debt reduction. Nevertheless, Fitch will consider an upgrade if the debt-to-APOCF ratio remains below 4.5x and APOCF interest coverage improves to 3.5x on a sustainable basis assuming the risk profile remains the same.

Negative:

Ratings and Outlook could be pressured if AES fails to achieve APOCF interest coverage higher than 2.5x and adjusted debt/APOCF lower than 5.5x on a sustainable basis; or if AES increases shareholder distributions without an absolute reduction in debt. A change in strategy to invest in more speculative, non-contracted assets or a material decline in cash flow from contracted power generation assets could also lead to negative actions.

DPL and DP&L:

Positive:

Positive rating action is not likely in the near term given the highly leveraged consolidated capital structure, large short-dated consolidated debt maturities, and uncertainties surrounding the next ESP.

Negative:

Fitch will consider a negative rating action in the absence of regulatory support to facilitate deleveraging at DP&L. Lower-than-expected cash flow at DP&L, such that DP&L's stand-alone credit profile falls below that of a 'BBB' rated company, and a consolidated adjusted debt/EBITDAR ratio above 6.5x on a sustainable basis could also result in negative rating actions.

IPL and IPALCO:

Positive:

Positive rating action is unlikely in the foreseeable future given the pending rate case and the elevated capex at IPL that will pressure credit metrics.

Negative:

Fitch would consider negative rating actions in the event of certain adverse regulatory developments, such as a materially negative rate case outcome or changes that reduce the likelihood of timely recovery of operating costs (fuel, purchased power or environmental costs). A material increase in debt at IPALCO would also result in a negative rating action.

Fitch has affirmed the following ratings, and revised the Outlook to Stable from Negative:

The AES Corporation
-- Long-term IDR at 'BB-'
-- Short-term IDR at 'B';
-- Senior secured debt at 'BB+';
-- Unsecured debt at 'BB';
-- Trust preferred stock issued by AES Trust III at 'B+'.

Fitch has affirmed the following ratings with Stable Outlook:

IPALCO Enterprise, Inc.
-- Long-term IDR at 'BB+';
-- Senior secured debt at 'BB+'.

Indianapolis power and Light Company
-- Long-term IDR at 'BBB-;
-- Senior secured debt at 'BBB+';
-- Senior secured tax-exempt pollution control bonds at 'BBB+';
-- Preferred stock at 'BB+'.

DPL, Inc.
-- Long-term IDR at 'B+';
-- Short-term IDR at 'B';
-- Secured debt at 'BB/RR2'
-- Senior unsecured debt at 'BB-/RR3'.

Dayton Power & Light Company
-- Long-term IDR at 'BB+';
-- Senior secured debt at 'BBB';
-- Preferred stock at 'BB';
-- Short-term IDR at 'B'.

DPL Capital Trust II
--Junior subordinate debt at 'B/RR5'.