DPL Making Strategic Shift

DPL Reports Q1'09 Operating & Financial Results

DPL Inc. (DPL - Analyst Report) reported its financial results for its 1st quarter of fiscal 2009. DPL reported 1st quarter 2009 earnings of $0.61 per share, compared to $0.66 per share for the same period in 2008.  Total diluted shares outstanding were 112.7 million for the first quarter of 2009 and 116.4 million for the same period in 2008.

In the reported quarter, revenues decreased $1.1 million to $415.0 million compared to $416.1 million in the year-ago quarter. This decrease was primarily the result of lower retail and wholesale sales volumes and lower average wholesale rates, partially offset by higher average retail rates and higher RTO capacity revenues.

Retail revenues increased $2.2 million, resulting from higher average retail rates due largely to the continued recovery of environmental costs and the expiration of certain statutory and settlement rate discounts in 2009. These were largely offset by a 9% decrease in sales volume, primarily driven by the economy and milder weather.

Wholesale revenues decreased $26.2 million primarily as a result of a $5.3 million, or 15%, decrease in average wholesale market prices and a $20.9 million decrease in wholesale sales volume. The decrease in wholesale sales was primarily driven by reduced generation and lower demand.

Liquidity and Cash Flow: Net cash provided by operating activities decreased during the 1st quarter of 2009 compared to the year-ago quarter due to negative changes in certain assets and liabilities and lower net income. In effect, cash & cash equivalents at March 31, 2009, decreased to $26.6 million compared to $62.5 million at December 31, 2008 -- a decrease of $35.9 million.

Earnings Guidance:

DPL also reaffirmed its 2009 earnings guidance of $2.00 to $2.30 per share.

DPL continues to benefit through its stable regulated electric power operations. Looking back over 2008, operating and financial results benefited from the steps taken to strengthen the company's financial position, including gains on the sale of coal and emission allowance, rein in of fuel cost through scrubbers, and higher revenue mainly in the retail segment.

Inception of 2009 witnessed cost deferrals by PUCO, lower purchased power costs, and continued focus on debt reduction. However, lower demand percolating to lower wholesale revenues, a renewable energy thrust in the new Ohio electric energy bill, and uncertainty over the successful allocation of new capital towards greater earnings power remain concerns.

Going forward, investors may take comfort in management’s strategic shift toward stable regulated utility operations and a focus towards environment-friendly power, and away from volatile unregulated businesses. We also note the optimistic signal implied in the company’s consistent increase in its quarterly dividend, which currently yields a relatively attractive 5.02% -- above the electric power utility industry average yield. The sustainability of the dividend is supported by cash inflow generated by the sale of the company’s private equity funds, as well as reasonable projected earnings payout ratios.

DPL currently trades at 10.9x and 9.9x, respectively, our 2009 and 2010 earnings per share estimates, or in-line with the range of its diversified energy utility peers. Meanwhile, relative sales, cash flow and book value multiples indicate DPL valuations at the upper-end of the range of its comparable competitors.

Given our preference for share-price multiples of operating earnings relative to comparable multiples of a company’s peers, combined with an above industry average long-term earnings growth expectations, forecasted year-over-year EPS in 2010, a competitive dividend yield and continued consolidation in the utilities sector, we maintain our BUY recommendation on DPL common stock. We have a six-month target price of $24.50, or 11.8x and 10.7x, respectively, our 2009 and 2010 earnings per share estimates.

Price appreciation to our near-term valuation target, coupled with the $0.285 per share quarterly cash dividend -- which we consider to be sustainable and secure based upon projected dividend payout ratios of 54.5% and 49.6%, respectively, of our projected 2009 and 2010 EPS estimates -- represents annualized total return potential of 21.9%.

Dayton, Ohio-based DPL Inc., a diversified energy utility, sells electricity through its two principal subsidiaries: Dayton Power and Light Company (DP&L) and DPL Energy, LLC (DPLE).  DPL owns approximately 900 megawatts (MW) of natural gas and diesel peaking generation, and 2,800 MW of coal-fired generation.