Approximately $1.2 billion of debt outstanding
New York, February 04, 2022 -- Moody's Investors Service ("Moody's") upgraded
the senior unsecured rating of Ohio Valley Electric Corporation (OVEC)
to Baa3 from Ba1. The outlook change to stable from positive.
A complete list of rating actions is included below.
RATINGS RATIONALE
"OVEC's credit risk profile has improved with the strengthening
of both its financial position and the overall credit quality of its sponsor
group," said Edna Marinelarena, Assistant Vice President.
The funding of a debt service reserve fund improved liquidity, lower
debt levels and the emergence of a sponsor from bankruptcy have all contributed
to the upgrade of the company to investment grade. Additionally,
there is reduced political risk associated with existing Ohio legislation
House Bill 6, which among other mechanisms provides support for
coal plant cost recovery.
OVEC's Baa3 rating and fundamental credit quality is supported by
the strength of the governing provisions of the Inter-Company Power
Agreement (ICPA) between twelve investor-owned and cooperative
utility companies, and one independent power company (collectively,
the sponsors). The rating further reflects the overall credit quality
of the sponsor group, which is mostly investment grade, but
also recognizes that the ICPA does not include a step-up provision
leaving the potential for payment shortfalls if any of the sponsors experiences
financial distress.
Over the last several years, since the bankruptcy of sponsor FirstEnergy
Solutions (ratings withdrawn), OVEC's management and the other
members of the sponsor group have implemented a plan to improve the company's
liquidity and reduce debt over time by including amortization provisions
in all of its refinancing activity. In January 2017, OVEC
began funding a debt service reserve at a rate of $2.4 million
per month, which could be used to offset future sponsor payment
shortfalls. The debt service reserve was established with the intention
of offsetting an important structural weakness in the ICPA in it does
not include a step-up provision for other sponsors in the event
a sponsor default. While the initial objective was to establish
a $44 million reserve, collections continued through the
end of fiscal 2020 when the reserve reached about $120 million
or close to one full year of debt service, which we consider a key
credit positive.
In addition, management took steps to improve the company's
financial performance through operational savings and retention of the
return on equity portion of its rates, approximately $2.5
million per year. The ROE portion continues to be retained and
provides OVEC with additional financial flexibility.
OVEC also increased its demand charges to include $5.5 million
per year for postretirement benefits, freeing up approximately $76
million of long-term investments associated with a prior Department
of Energy (DOE) settlement that was ear-marked as a source of benefit
funding.
Looking ahead, the company intends to continue its deleveraging
plan, reduce long-term debt by approximately $1.0
billion over the next eight years and target full debt amortization by
year-end 2030. At the end of 2020, the company's debt
to capital ratio had declined to 83.7% from 97.4%
in 2016 and about 43% of total debt outstanding is currently amortizing.
Ohio House Bill 6, legislation that provided financial support to
nuclear and coal plants in the state, includes a rider that supports
sponsor recovery of OVEC investments. Since its passage,
bills were introduced in 2021 seeking to repeal the OVEC rider.
The elimination of the rider would impact the cost recovery framework
of the Ohio investor-owned utility sponsors; however,
it would not negatively impact OVEC's credit profile given the existing
provisions of the ICPA and the demonstrated sponsor support for OVEC seen
in recent years. Although the bills are still pending, OVEC's
two coal units have benefitted from the recent rise in natural gas prices,
leading them to be dispatched more to support grid reliability.
Liquidity
OVEC's liquidity is solid. As of the last twelve months ending
30 September 2021, OVEC generated about $233 million in cash
flow from operations (CFO), invested $30 million in capex
and made no dividend payments resulting in free cash flow (FCF) of approximately
$203 million. Despite an increase in capex driven by environmental
remediation costs over the next 12 to 18 months, OVEC is expected
to remain free cash flow positive due to management implementation of
cost savings and no payment of dividends. As of October 2021,
OVEC had over 250 days of liquidity (including the liquid portion of long-term
investments) on hand, which is consistent with an indicated score
of "Aaa" on this factor in our US Municipal Joint Action Agencies
Methodology .
The company has access to a $185 million unsecured bank revolving
credit facility, which was extended in February 2021 and expires
26 February 2024, which $175 million was available at year-end
2021. The facility has a covenant requiring maintenance of a minimum
of $11 million of consolidated net worth (defined as stockholders'
equity); as of September 2021, we estimate the level to be
about $32 million. Draws under the facility require a representation
of no material adverse change, a credit and liquidity negative as
it may preclude borrowing under the facility when it is needed most.
As such, we have not included revolver availability in our calculation
of days liquidity on hand.
As mentioned earlier, management took proactive steps to shore up
its available liquidity in order to provide near-term coverage
for the shortfall created by a sponsor default in 2018. Traditionally,
similar organizations such as joint action agencies will establish a debt
service reserve (typically covering one year of debt service) for the
benefit of their lenders. As of 31 October 2021, OVEC's
debt reserve was funded at $122 million or about a full year of
debt service. In addition to the funds collected for a debt reserve,
OVEC's long-term investments also include about $65
million received as part of a prior settlement with the DOE, which
could also be used to provide liquidity. As of 31 October 2021,
the company had over $300 million in available liquidity,
including the $122 million in the debt service reserve.
Outlook
The stable outlook reflects our expectation that OVEC's financial
condition will remain strong over the long-term including sustaining
its ample liquidity position and continuing with its ongoing debt reduction.
The outlook further incorporates the stable overall credit quality of
OVEC's sponsors.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that Could Lead to an Upgrade
A rating upgrade could result if there were to be a credit supportive
enhancement to the ICPA such as an inclusion of a step-up provision.
An upgrade could also occur if there is material improvement in the credit
quality of the sponsor group and if financial metrics improve such that
debt service coverage ratio is above 1.6x.
Factors that Could lead to a Downgrade
A rating downgrade could occur if there was deterioration in the credit
quality of any of the sponsors, any costs under the ICPA are not
passed through to the sponsors, or if there were to be a sponsor
payment default that was not able to be covered by the existing reserves
or through swift replacement of the defaulting party.
OVEC owns and operates two coal-fired generating power plants,
Kyger Creek in Ohio and Clifty Creek in Indiana, that have a combined
capacity of approximately 2,400 MW. OVEC is sponsored by
twelve investor-owned and cooperative utility companies,
and one independent power company (collectively, the sponsors).
The sponsors purchase OVEC's power at wholesale, cost based,
rates. The ownership structure is governed by a long-term
Inter-Company Power Agreement (ICPA) expiring in 2040.
Upgrades:
..Issuer: Ohio Valley Electric Corp
....Senior Unsecured Bank Credit Facility,
Upgraded to Baa3 from Ba1
....Senior Unsecured Regular Bond/Debenture,
Upgraded to Baa3 from Ba1
..Issuer: Indiana Finance Authority
....Senior Unsecured Revenue Bonds,
Upgraded to Baa3 from Ba1
..Issuer: Ohio Air Quality Development Authority
....Senior Unsecured Revenue Bonds,
Upgraded to Baa3 from Ba1
Outlook Actions:
..Issuer: Ohio Valley Electric Corp
....Outlook, Changed To Stable From
Positive
The principal methodology used in these ratings was US Municipal Joint
Action Agencies Methodology published in August 2020 and available at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1207102.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
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Please see www.moodys.com for any updates on changes to
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Edna Marinelarena
Asst Vice President - Analyst
Infrastructure Finance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Michael G. Haggarty
Associate Managing Director
Infrastructure Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
