NEW YORK--()--Fitch Ratings has affirmed Ohio Valley Electric Corporation's (OVEC) Issuer Default Rating (IDR) at 'BBB-'. Approximately $1.6 billion of debt is outstanding. The Rating Outlook is Stable. A full list of rating actions is shown at the end of this release.
OVEC owns approximately 2,400 megawatts (MW) of coal-fired generation capacity in Ohio and Indiana. OVEC is a sponsor-owned generation company that sells electricity to its sponsors 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.
Key Rating Drivers
--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 $1.4 billion environmental upgrade program at its power plants is in its final stages;
--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. Consequently, OVEC does not bear market risks such as pricing, volumetric, or commodity risks.
Contractual performance by the sponsors is critical to OVEC's ratings. Fitch rates, or considers all the sponsoring companies to be investment grade. Payment by the sponsors to OVEC, in turn, is frequently recoverable from their customers through the state utility regulatory mechanism under which sponsors operate.
American Electric Power Co., Inc. (AEP, 'BBB' IDR, Stable Outlook) 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 favorably in the OVEC rating.
OVEC is in the final stages of a $1.4 billion capital investment program at its power plants consisting of environmental upgrades including installation of Flue Gas Desulfurization units. The Kyger Creek plant 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.
Credit concerns 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. Sponsor obligations, however, would remain unchanged.
The Stable Outlook reflects the underlying credit support of OVEC's sponsors and sufficient liquidity. OVEC increased its revolving line of credit to $275 million from $225 million in 2012. OVEC receives semi-monthly payments from its sponsors for energy and demand charges which minimizes working capital requirements.
What Could Trigger a Rating Downgrade:
OVEC's credit profile is dependent on its investment grade Sponsors, the largest of which is AEP which owns a 43% stake in OVEC. Changes in the credit profile of OVEC's Sponsors could result in a downgrade of OVEC.
What Could Trigger a Rating Upgrade:
There are presently no circumstances that would likely result in a rating upgrade.
OVEC is a generating company that is owned by 14 sponsoring companies. The sponsors are severally responsible for OVEC's expenses including debt service. The creditworthiness of the sponsors serves as the primary basis of OVEC's ratings. OVEC is located in Ohio and owns 2,400MW of nameplate coal-fired generation capacity.
Fitch affirms the following ratings with a Stable Outlook:
--IDR at 'BBB-';
--Senior Unsecured Debt at 'BBB-';
--Secured Debt at 'BBB'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria For Utilities' (Nov. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Utilities