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Announcement:

Moody's affirms Ohio Valley Electric Corporation's Baa3 ratings; outlook remains negative

17 Nov 2010

Approximately $1.4 billion of debt securities affected

New York, November 17, 2010 -- Moody's Investors Service affirmed the Baa3 senior unsecured rating for Ohio Valley Electric Corporation (OVEC). The rating outlook is negative.

The Baa3 senior unsecured rating primarily reflects OVEC's strong suite of fixed and variable cost recovery mechanisms. These costs, which include debt service obligations, are governed by a long-term Inter-Company Power Agreement (ICPA) between thirteen separate, investment grade electric utility companies. The weighted average senior unsecured rating for the thirteen sponsors is Baa2. From a credit perspective, the ICPA represents one of the most important considerations associated with OVEC's long-term credit quality.

The negative outlook considers the strong ICPA, but also reflects a weak financial profile and highly levered balance sheet. Over the past few years, OVEC's ratio of cash flow from operations adjusted for working capital changes (CFO pre-working capital) to debt has been steadily declining, and has been below the 7% range, a level which we believe is inconsistent with maintaining an investment grade rating. The negative outlook also reflects the age of the plants, the ability to maintain economic energy supplies and the risks associated with increasingly stringent environmental mandates. OVEC has been attempting to address the environmental issues with a sizeable capital investment upgrade program. This program is nearing its completion.

OVEC's total adjusted debt outstanding has increased significantly over the past few years, from approximately $400 million in 2004 to $1.2 billion in 2008 to $1.4 billion in 2009. We expect the debt outstanding to continue to rise over the near to intermediate term horizon as the company completes its environmental capital spending program.

We also believe OVEC's business and operating risk profile has increased in recent times. In our opinion, older coal-fired generating facilities face a higher degree of uncertainty associated with increasingly stringent environmental mandates. exacerbated by the longer-term prospects for natural gas and coal commodity prices, which influence the price of power, all of which is compounded by OVEC's exposure to a region that has been negatively affected by the recession. Related to this issue and factored into the negative rating outlook is our concern about the ability of OVEC to amortize substantial portions of the recently incurred indebtedness by the current expiry date of the ICP. An inability to make meaningful progress on this issue could affect the current Baa3 rating.

OVEC is a hybrid credit which exhibits characteristics commonly found in the not-for-profit generation and transmission cooperative, merchant wholesale generator, project finance and regulated utilities sectors.

From an ownership, governance and revenue generation perspective, OVEC is most comparable to the G&T cooperative sector. For example, thirteen separate electric utility companies share ownership in OVEC, the majority of which are investor-owned utilities. These companies are responsible on a several basis for the payment of all fixed and variable costs at OVEC, including its debt service, allocated among the owners based on their ownership. This cost and expense allocation is governed by the ICPA, which expires in 2026. The costs associated with operating OVEC are generally recovered by the owner-utilities through either their authorized base-rates or fuel and purchased power mechanisms. The weighted average credit rating of the owner-utilities, based on their ownership percentages, is roughly Baa2 with the ratings of the owners ranging from Baa3 to A2. The ICPA is the principal legal document supporting OVEC's rating.

From a business and operating perspective, OVEC is most comparable to the non-regulated wholesale power and power project sectors. OVEC is comprised of two, approximately 50 year old coal-fired generating facilities: Clifty Creek and Kyger Creek. These generating facilities are viewed as having reasonable operating track records, with a 5-year average capacity factor of approximately 80%. While OVEC is exposed to asset concentration risk, the generating facilities produce a relatively economic source of energy supply for their owner-utilities.

Moody's last rating action for OVEC occurred on August 5, 2009, when OVEC's Baa3 senior unsecured rating was affirmed and the outlook was changed to negative from stable.

The principal methodology used in this rating was U.S. Electric Generation & Transmission Cooperatives published in December 2009. In addition, elements of other methodologies, including the Global Unregulated Utilities and Power Companies published in August 2009, Regulated Electric and Gas Utilities published in August 2009 and Power generation Projects published in December 2008 were utilized. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Ohio Valley Electric Corporation, headquartered in Piketon, Ohio, owns and operates two coal-fired generating plants, Kyger Creek in Ohio and Clifty Creek in Indiana, that have a combined capacity of approximately 2,400 MW.

New York
James Hempstead
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's affirms Ohio Valley Electric Corporation's Baa3 ratings; outlook remains negative
No Related Data.
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