Except for the coal-fired Clifty Creek Unit 6, which still needs NOX controls, Ohio Valley Electric Corp. (OVEC) is in a good position to meet U.S. Environmental Protection Agency standards, said Fitch Ratings on Dec. 20.
OVEC is owned by a consortium of utility companies, including plant operator and coal procurement agent American Electric Power (NYSE: AEP), and controls two coal-fired power plants, Clifty Creek (in Indiana) and Kyger Creek (in Ohio).
Fitch on Dec. 20 affirmed the long-term Issuer Default Rating (IDR) of OVEC at ‘BBB-‘. The Rating Outlook is Stable.
“The ratings reflect the underlying creditworthiness of OVEC’s sponsors,” Fitch noted. “OVEC is a sponsor-owned generation company that sells electricity to its sponsors under a long-term inter-company power agreement (ICPA). The sponsors, a consortium of regulated utilities, power cooperatives, and captive generation affiliates of utility holding companies, are severally responsible to compensate OVEC for its operating and capital costs including debt service under the inter-company power agreement (ICPA) which expires in 2040.”
The ICPA was last amended in August 2011 and expires in 2040, coinciding with the expected operating life of the generating plants, Fitch added.
Power prices have been adversely affected by low peak-demand and low natural gas prices. Fitch said it does not expect any change in the current electricity pricing environment. This will continue to affect capacity utilization and unit electricity prices, especially for the off-takers who are selling their share of electricity in the wholesale electricity market. However, the majority of off-takers still enjoy regulatory protection for the recovery of their power related expenses, Fitch pointed out.
OVEC has retrofitted its power plants with the latest environmental control equipment and is now compliant with the environmental regulations currently in force, including the Mercury and Air Toxic Standards (MATS) that will become effective in April 2015. Except for Clifty Creek Unit 6, which still needs NOx control equipment, OVEC owns a well maintained portfolio of coal-fired power plants and, in Fitch’s opinion, OVEC should see low capex over the rating horizon (2014-2017).
Current public policy and opinion about greenhouse gases will continue to increase pressure to retrofit coal-fired power plants with the additional environmental control equipment, increasing unit cost of generation, Fitch noted.
OVEC’s Kyger Creek Plant at Cheshire, Ohio, and IKEC’s Clifty Creek Plant at Madison, Ind., have nameplate capacities of 1,086 MW and 1,304 MW, respectively. These two stations both began operation in 1955, making them about the age of many of the coal plants that are being retired around the U.S. due to MATS and other EPA regulatory initiatives.