Fitch Ratings said June 5 that the completion of new environmental controls, including SO2 scrubbers, on the coal-fired Clifty Creek power plant means that the finances of the Indiana Finance Authority are in solid shape.
Fitch assigned a ‘BBB-‘ rating to Indiana Finance Authority Midwestern disaster relief revenue bonds, series 2012A. The bonds are senior unsecured obligations of Ohio Valley Electric Corp. (OVEC) and OVEC is solely responsible for the debt service and repayment of the bonds. The rating outlook is stable, Fitch noted. Funds will be used by OVEC to complete environmental upgrades at Clifty Creek in Indiana.
OVEC, controlled by several power generators, including operating partner American Electric Power (NYSE: AEP), owns about 2,400 MW of coal-fired capacity in Ohio and Indiana. OVEC sells electricity to its sponsors under a long-term inter-company power agreement (ICPA). The sponsors – made up of investment grade utilities, captive generation affiliates of utility holding companies, and power cooperatives – are responsible for compensating OVEC for its operating and capital costs, including debt service under the ICPA which extends until 2040.
Fitch noted that there is a favorable generation cost profile, since OVEC’s plants are low in the dispatch curve. AEP, through subsidiaries, is the largest shareholder in OVEC with an approximately 43% interest. AEP provides managerial and operational support to OVEC including coal procurement and transportation. Fitch said it considers AEP’s role favorably in the OVEC rating.
OVEC is in the final stages of a $1.4bn capital investment program at its two power plants consisting of environmental upgrades including installation of flue gas desulfurization. Environmental upgrades at the Kyger Creek plant are complete. OVEC expects the Clifty Creek upgrades to be complete and in commercial service by the second quarter of 2013.
Fitch said credit concerns include:
- Uncertainty regarding environmental rules and regulations and timing and implementation;
- Both of OVEC’s plants began commercial operation in 1955 making them among the oldest baseload plants in service;
- Higher operating costs from environmental compliance.
Implementation of the U.S. Environmental Protection Agency’s Cross-State Air Pollution Rule (CSAPR), originally scheduled for Jan. 1, 2012, has been delayed due to a federal court stay. “OVEC should be well positioned to meet the more stringent environmental rules, when and if, they are implemented,” Fitch noted.
An OVEC annual report for the year 2011, released in April, said that the first Kyger Creek FGD began successfully operating in November 2011 and that the second began operating in the first quarter of this year. The Clifty Creek FGD systems are due to be fully operational by the end of the second quarter of 2013. Notable is that FGD systems like this would open the plants up to a wider variety of coals with higher sulfur contents.
OVEC and its wholly owned subsidiary, Indiana-Kentucky Electric Corp., were organized in October 1952. The companies were formed by investor-owned utilities furnishing electric service in the Ohio River Valley area and their parent holding companies to provide the large electric power requirements projected for the uranium enrichment facilities then under construction by the Atomic Energy Commission (AEC) near Portsmouth, Ohio. A contract to supply power to the U.S. Department of Energy was terminated in 2003, at which point the two plants began to supply more power to the broader market.