Fitch: Clifty Creek FGDs nearly complete, OVEC has stable rating

Fitch Ratings said Jan. 4 that it has affirmed Ohio Valley Electric Corp.’s (OVEC) Issuer Default Rating (IDR) at ‘BBB-‘ and that the company’s Rating Outlook is Stable.

OVEC owns approximately 2,400 MW of coal-fired generation capacity in Ohio and Indiana at the Kyger Creek and Clifty Creek power plants. OVEC sells electricity to its sponsors, including utility companies like American Electric Power (NYSE: AEP), under a long-term inter-company power agreement (ICPA). The sponsors, comprised of investment grade utilities, captive generation affiliates of utility holding companies, and power cooperatives, are severally responsible to compensate OVEC for its operating and capital costs, including debt service under the ICPA which extends until 2040, Fitch noted.

The key rating drivers for Fitch 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 $1.4bn environmental upgrade program at its power plants that is in its final stages; and
  • Uncertain or emerging environmental rules and regulations.

As a low-cost power provider to its sponsors, OVEC’s power prices are based on a formula that includes all direct production costs as well as soft costs including debt service, Fitch noted. That means that OVEC does not bear market risks such as pricing, volumetric, or commodity risks.

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 said it considers AEP’s major role favorably in the OVEC rating.

OVEC is in the final stages of a $1.4bn capital investment program at its plants consisting of environmental upgrades including installation of flue gas desulfurization. The Kyger Creek project is complete and in commercial operation with Clifty Creek 94% complete. OVEC expects it to be in commercial service by the second quarter of 2013. Notable is that new FGDs like this generally allow a plant to burn higher-sulfur coals.

Credit concerns, though, continue to center on future environmental rules and regulations and the timing and implementation of any such actions. Higher operating costs from future environmental rules could alter the generation economic profile and thus output of OVEC’s plants, Fitch said. Sponsor obligations, however, would remain unchanged.

Kyger Creek, at Cheshire, Ohio, and Clifty Creek, at Madison, Ind., have nameplate generating capacities of 1,086 MW and 1,304 MW, respectively.

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.