Fitch rates OVEC as stable as emissions projects near completion

Fitch Ratings said Jan. 10 that it has affirmed Ohio Valley Electric Corp.’s (OVEC’s) Issuer Default Rating at “BBB-“, with a stable outlook.

OVEC, controlled by several power generators, including American Electric Power (NYSE:AEP), owns about 2,400 MW of coal-fired generation capacity in Ohio and Indiana at the Clifty Creek and Kyger Creek power plants. OVEC is a sponsor-owned generation company that sells electricity to its sponsors under a long-term intercompany power agreement (ICPA).

Other OVEC backers include units of FirstEnergy Corp. (NYSE:FE), AES Corp. (NYSE:AES), Duke Energy Corp. (NYSE:DUK) and PPL Corp. (NYSE:PPL), said a fact sheet on the OVEC website.

Fitch said that key positives for OVEC include: the financial strength of OVEC’s sponsors; the contractual obligation of the sponsors under the ICPA to purchase power and compensate OVEC for operating and capital costs;  a favorable generation cost profile with OVEC’s plants low in the dispatch curve; a $1.4bn environmental upgrade program at its power plants that is in its final stages; and extension of the ICPA to 2040 from 2026.

AEP, through subsidiaries, is the largest shareholder in OVEC with an approximately 43% interest. AEP provides key managerial and operational support to OVEC, including coal procurement and transportation. Fitch considers AEP’s role as favorable to OVEC’s rating.

That $1.4bn capital investment program at its power plants consists of environmental upgrades including installation of flue gas desulfurization (FGD). Three of the five turbine units at the Kyger Creek plant are in full service with FGD, with the remaining two units scheduled to be on-line during first quarter 2012. The project at Clifty Creek is reportedly approximately 65% complete and management expects it to be in commercial service by the second quarter of 2013.

Fitch said that credit concerns include uncertainty regarding environmental rules and regulations and timing and implementation, plus the fact that OVEC’s plants began commercial operation in 1955, making them among the oldest baseload plants in service.

Implementation of the U.S. Environmental Protection Agency’s Cross-State Air Pollution Rule (CSAPR), originally scheduled for Jan. 1, 2012, has been delayed by a federal appeals court. OVEC should be well positioned to meet the more stringent environmental rules, when and if they are implemented, Fitch noted.

OVEC announced in December 2010 a restart of construction on two FGD systems at Clifty Creek in Madison, Ind. The project will reduce SO2 emissions from the plant and will cost approximately $687m, OVEC said at the time. Installation of the scrubbers was announced in 2006 and construction initially began in 2007. The project was about 35% complete when work was suspended in December 2008 due to capital constraints caused by the economic downturn. Each of the two scrubbers at Clifty Creek will treat the flue gas from three of the plant’s generating units. Clifty Creek, a 1,302-MW plant, has six separate generating units, each with a generating capacity of 217 MW. Construction completion for the scrubbers is targeted for 2013, OVEC said at the time.

OVEC is also installing scrubbers on the 1,085-MW Kyger Creek plant in Cheshire, Ohio. The Kyger Creek scrubbers should be operational in 2012 and will cost approximately $661m, OVEC said in the December 2010 announcement.

Notable is that FGDs often allow a plant to burn higher-sulfur coal is that is the cheapest fuel once the FGDs are tested out and fully operating. U.S. Energy Information Administration data shows that in September 2011, the latest month for available information, Clifty Creek took coal from the high-sulfur Cumberland longwall mine in Pennsylvania of Alpha Natural Resources and the low-sulfur Black Thunder strip mine in Wyoming of Arch Coal Inc. Kyger Creek took coal last September from the high-sulfur Powhatan No. 6 and Century longwall mines in Ohio, which are controlled by coal operator Robert Murray.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.