Fitch Ratings said Jan. 21 that it has affirmed the long-term Issuer Default Rating (IDR) of Ohio Valley Electric Corp. (OVEC), which controls the coal-fired Kyger Creek and Clifty Creek power plants, at ‘BBB-‘.
The Rating Outlook is Stable, Fitch added. “The ratings reflect the legal enforceability of the inter-company power agreement (ICPA) between OVEC and its sponsors. OVEC is a sponsor-owned generation company that sells electricity to its sponsors or the sponsor-appointed off-taker under a long-term ICPA. 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 ICPA expiring in 2040.”
The ICPA was last amended in August 2011 and expires in June 2040. Fitch has assumed continued ability of sponsors/off-takers to recover OVEC related costs even during the currently depressed wholesale market conditions. Currently about 60% of sponsors/off-takers can recover OVEC related costs either through a regulatory construct or through sponsors’ membership charter provisions. Fitch said it is unaware of any discussions to renegotiate the ICPA by the remaining off-takers that may not currently have any regulatory mechanism to recover high demand charges resulting from low demand and high costs, rendering the contract out-of-the-money. Any attempt by a sponsor/off-taker to terminate the contract will be negative for OVEC’s IDR.
OVEC plans to borrow funds to complete environmental compliance-related additions at its power generation facilities in 2018 and 2019, Fitch pointed out. The OVEC management estimates that the projects will cost $300m-$325m. Fitch believes that the company will have access to capital markets to borrow funds to complete the installations/modifications required under the environmental regulations. However, Fitch has concerns about the current rate of debt amortization. New borrowings will further exacerbate these concerns of an exceptionally high demand charge in a low-electricity price environment. Fitch said it expects OVEC to, over time, incorporate higher amortization of long-dated debt maturities in its demand charge to avoid a large increase in the demand charge towards the end of the ICPA.
Fitch believes that a continued cost reduction program at OVEC to lower unit cost of generation in a stagnant-to-falling wholesale electricity price environment is critical for OVEC to be competitive for its sponsors. Fitch has assumed that the management will be able to achieve the forecasted decrease of about $40m in annual non-fuel operating costs over the rating horizon and is reflected in Fitch’s rating model.
Power prices have been adversely affected by low natural gas prices and stagnant electricity demand. Fitch expects a modest recovery in the electricity-pricing environment led by strengthening capacity prices. However, a majority of off-takers still enjoy regulatory protection for the recovery of their respective power-related expenses, supporting OVEC’s credit profile.
Current and expected regulations from the U.S. Environmental Protection Agency will continue to increase pressure to retrofit coal-fired power plants with additional environmental control equipment, increasing OVEC’s unit cost of generation, in Fitch’s opinion. Any increase in compliance costs and lower capacity utilization may render the ICPA significantly out-of-money for the off-takers and is a rating concern.
Clifty Creek is a 1,300-MW power station located in Madison, Indiana. Five of its six identical units began operating in 1955, with the sixth unit beginning operations in 1956. Kyger Creek is an 1,100-MW station located in Cheshire, Ohio. Placed into service in 1955, the plant is, like Clifty Creek, located along the Ohio River.