# ANNUAL REPORT

— 200 9

OHIO VALLEY ELECTRIC CORPORATION

and subsidiary

INDIANA

- KENTUCKY ELECTRIC CORPORATION1 

# Ohio Valley Electric Corporation

GENERAL OFFICES, 3932 U.S. Route 23, Piketon, Ohio 45661

Ohio Valley Electric Corporation (OVEC) and its wholly owned subsidiary, Indiana

- Kentucky Electric Corporation (IKEC), collectively, the Companies, were organized on October 1, 1952 . The Companies were formed by investor

- owned utilities furnishing electric service in the Ohio River Valley area and their parent holding companies for the purpose of providing the large electric power requirements projected for the uranium

enrichment facilities then under construction by the Atomic Energy Commission (AEC) near Portsmouth,

Ohio.

OVEC, AEC and OVEC’s owners or their utility

company a ffiliates (called Sponsoring Companies) entered into power agreements to ensure the availability of the AEC’s substantial power requirements. On
October 15, 1952, OVEC and AEC executed a 25

- year agreement, which was later extended through

December 31, 200 5 (DOE Power Agreement). On September 29, 2000, the DOE gave OVEC notice of cancellation of the DOE Power Agreement. On April 30, 2003, the DOE Power Agreement terminated in

accordance with the notice of cancellation.

OVEC and the Sponsoring Companies s igned an

Inter

- Company Power Agreement (ICPA) on July 10, 1953, to support the DOE Power Agreement and provide for excess energy sales to the Sponsoring Companies of power not utilized by the DOE or its predecessors. Since

the termination of the DOE Power Agreement on April 30, 2003, OVEC’s entire generating capacity has been available to the Sponsoring Companies under the

terms of the ICPA. In 2004, the Sponsoring Companies
and OVEC entered into an Amended and Restated ICPA,

which extends its term from M arch 13, 2006 to

March 13, 2026.

OVEC’s Kyger Creek Plant at Cheshire, Ohio, and IKEC’s Clifty Creek Plant at Madison, Indiana, have nameplate generating capacities of 1,086,300 and 1,303,560 kilowatts, respectively. These two generating
stations, both of which began operation in 1955, are connected by a network of 776 circuit miles of 345,000

- volt transmission lines. These lines also interconnect with the major power transmission networks of several of the utilities serving the area. The current Shareholders and their respective percentages of equity in OVEC are:

Allegheny Energy, Inc.

................................ ...... 3.50 American Electric Power Company, Inc.*

.......... 39.17 Buckeye Power Generating, LLC 1

...................... 18 .00 Columbus Southern Power Company* * 2

............ 4.30 The Dayton Power and Light Co mpany 3

............. 4.90 Duke Energy Ohio, Inc.*** 4

............................... 9.00 Kentucky Utilities Company 5

............................. 2.50 Louisville Gas and Electric Company 5

................ 5.63 Ohio Edison Company 6

................................ ...... 7 .50 Southern Indiana Gas and Electric Company 7

..... 1.50 The Toledo Edison Company 6

............................ 4.00

100.00

These investor

- owned utilities comprise the Sponsoring Companies and currently share the OVEC power participation benefits and requirements in the following percentages:

Allegheny Energy Supply Company LLC 8

........... 3.01 Appalachian Power Company 2

............................. 15.69 Buckeye Power Generating, LLC 1

........................ 18 .00 Columbus Southern Power Company 2

.................. 4.44 The Dayton Power and Light Company 3

............... 4.90 Duke Energy Ohio, Inc. 4

................................ ...... 9.00 FirstEnergy Generation Corp. 6

............................. 11 .50 Indiana Michigan Power Company 2

..................... 7.85 Kentucky Utilities Company 5

............................... 2.50 Louisville Gas and Electric Company 5

.................. 5.63 Monongahela Power Company 8

........................... 0

. 49 Ohio Power Company 2

................................ ......... 15.49 Southern Indiana Gas and Electric Company 7

....... 1.50

100.00

Some of the Common Stock issued in the name of:

*American Gas & Electric Company

** Columbus and Southern Ohio Electric Company

*** The Cincinnati Gas & Electric Company

Subsidiary of:

1 Buckeye Power, Inc.

2 American Electric Power Company, Inc.

3 DPL Inc.

4 Duke Energy Corporation

5 E.ON U.S. LLC

6 FirstEnergy Corp.

7 Vectren Corporation

8 Allegheny Energy, Inc.

## OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPANY

2 

# A Message from the President

Ohio Valley Electric Corporation (OVEC) and

Indiana

- Kentucky Electric Corporation (IKEC) s old to their customers, the Sponsoring Companies, more than 96 percent of t heir available generation during 2009

, when the nationwide demand for electricity was low due to a slowly recovering

economy. The Companies, recognizing the need to reduce costs in this difficult power market, implemented several cost

- saving measures in 2009

to produce power more competitive ly

. In all aspects of our operations, we look forward to t he challenge of remaining a safe and environmentally responsible provider of economical power.



### F LUE 

### G AS 

### D ESULFURIZATION 

### (FGD)

P ROJECT S

Although construction activities had been suspended for more than a year, we have completed a redesign and replacemen t of certain components and plan to commence construction in the near

term. Until construction is complete, we will

continue to meet sulfur dioxide emission requirements through a combination of low

- sulfur fuel purchases and emission allowance purchases

.

P OWER C OSTS

In 2009, OVEC’s average power cost to the Sponsoring Companies was $41.97 per MWh compared with $40.29 per MWh in 2008. The increase was primarily due to increased operation

and maintenance costs and additional debt service costs to fund the FGD construction projects. OVEC’s average power cost is projected to increase to $47.64 per MWh in 2010 due to increased fu el

costs and major maintenance costs.

E NERGY S ALES

OVEC’s use factor

— the ratio of power scheduled by the Sponsoring Companies to power

available

— for the combined on

- and off

- peak periods averaged 96.3 percent in 2009 compared

with 96.4 percent in 2008. The on

- peak use factor averaged 99.8 percent in 2009 compared with

99.9 percent in 2008. The off

- peak use factor averaged 91.7 percent in 2009 and 91.9 percent in

2008.

In 2009, OVEC delivered 15.07 million MWh to the Sponsorin g Companies comp ared with

15.03 million MWh in 2008. In 2010, OVEC
expects to generat e and deliver 15.2 million MWh to the Sponsoring Companies.

A VAILABILITY

In 2009, the combined availability of the five generating units at Kyger Creek and the six units at Clifty C reek was 85.8 percent compared with

85.2 percent in 2008. The availability improvement was the result of reducing the forced outage factor from 5.6 percent in 2008 to 4.2 percent in 2009.

The combined equivalent availability of the Kyger Creek and Clifty Creek units was

81.7 percent in 2009 compared with 80.5 percent in

2008. In addition to fewer forced outages, the improved equivalent availability reflects a reduction in the unit derating factor from 3.36 percent in 2008 to 2.91 pe rcent in 200 9.

DOE A RRANGEMENTS WITH OVEC

In 200 9 , OVEC purchased 2 64,664 MWh of power and energy from other electricity suppliers for delivery and use by the Department of Energy (DOE) for its Portsmouth facility. At the request of the DOE, OVEC m akes these limited purchases of power and energy under the terms and conditions of an Arranged Power Agreement with DOE.3

T RANSMISSION S YSTEM C HANGES

The DOE load previously was served from

two 345

- kV substations owned, operated and maintained by the DOE. Each DOE substation was integrated with the OVEC system by two double

circuit tower 345

- kV lines and with neighboring systems by one single

- circuit 345

- kV line. With the deactivation and permanent shutdown of the DOE ’s X533 substation in 2008, OVEC is in the process of reconfiguring the circuits that were previously t ied

to that substation. The circuit reconfiguration is

scheduled to be completed in 2010.

E NVIRONMENTAL C OMPLIANCE

OVEC and IKEC place great emphasis on complying with federal, state and local requirements relating to protection of the environment. During 2009, the Kyger Creek and Clifty Creek plants operated in compliance with their respective emission limits and environmental regulations, and the Companies received no notices

of vio lation from any of the environmental agencies.

$200 M ILLION T AX

- E XEMPT D EBT I SSUED

In 2009, OVEC , in conjunction with the Ohio Air Quality Development Authority, issued $200 m illion of tax

- exempt Air Quality Revenue Bonds. The proceeds were used to finance a portion of the Clifty Creek and Kyger Creek FGD projects. Of the $200 million of bonds issued, $100 million was issued with a fixed interest rate of 5.625 percent and will mature October 1, 2019. The remaining $100 million of credit

- enhanced bonds were issued at floating interest rates and will mature February 1, 2026 . The total long

- term debt currently outstanding is $1. 3 billion.

R EVOLVING C REDIT F ACILITY

In June 20 10

, OVEC extend ed its Revolving Credit Facility for three years in the amount of $225 million . The Revolving Credit Facility provides short

- term financing for inventories

, capital improvements and liquidity for general obligations

. S AFETY

Safety is at the forefront of the Companies’ stated values and is a priority in all facets of our operations. OVEC and IKEC employees realize the importance of safety and take an active role in assuring a safe workplace environment. In 2009,

we achieved a 30 percent reduction in the number

of OSHA recordable accidents

, and 2010 is off to a very positive start. It is im perative t o continue to

strive for safety and health excellence in the work

environment

.

M ANAGEMENT AND B OARD OF D IRECTORS C HANGES

In July 2010, Scott N. Smith was elected vice president and assistant to the president of both

OVEC and IKEC , effective August 1, 2010. On July 31, 2010

, David L. Hart will retire as vice president and assistant to the president of both Companies

. In October 2009, G. Annette Hope was named plant manager at the Kyger Creek p lant

, succeeding Ralph E. Amburgey

, who retired from

OVEC . In November 2009, Steven M. Smith accepted the position of plant ma nager at the Clifty

Creek p lant

, replacing M. Ray Wilson

, who retired

f rom IKEC

. These managers bring with them a fresh perspective and a diverse array of business, engineering and management skills to effectively

lead the Companies in the future.

In October 2009, Charles E. Zebula

, senior vice president and treasurer of American Electric Power Service Corporation, was elected assistant secretary and assistant treasurer of OVEC and

IKEC.

In October 2009, Nicholas K. Akins, executive vice president

– generation of American

Electric Power , was elected to serve as an OVE C director following the resignation of Holly K. Koeppel. Ms. Koeppel had served on the OVEC

board since 2002. In May 2010, JoAnn M. Grevenow resigned as a director of IKEC.

Ms. Grevenow had served on the IKEC board since

2008.

On behalf of m y fello w directors and officers, I congratulate the employees of both Companies for two consecutive years of substantial impr ovements in safety performance

— a 40 percent reduction in

### the number of OSHA recordable accidents in 2008 and a 30 percent reduction in 2009. Furthermore, the employees achieved a 0.8 percent increase in equivalent availability in 2008, followed by an additional 1.2 percent increase in 2009. Clearly, these performance measures demonstrate the

increased focus and dedicated efforts of all employees toward performing their jobs in the

safest manner possible and operating and maintaining the production facilities more effectively. Although difficult challenges lie ahead, including the competitive pressures to keep production costs as low as possible and the

uncertainties we face regarding additional environmental restrictions, 

### I am certain that the employees will respond in a manner confirming that

OVEC and IKEC will remain competitive energy producers for many years to come.

Michael 

### G. Morris

President

July 14,20 105678

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

9 1. ORGANIZATION AND SIG NIFICANT ACCOUNTING POLICIES

Consolidated Financial Statements

— The consolidated financial statements include the accounts of Ohio Valley Electric Corporation (OVEC) and its wholly owned subsidiary, Indiana

- Kentucky Electric Corporation (IKEC), collectively, the ―Companies.‖ All intercompany transactions have been eliminated

in consolidation.

Organization

— The Companies own two generating stations located in Ohio and Indiana with a

combined electric production capability of approximately 2,256 megawatts. OVEC is owned by several

investor

- owned utilities or utility holding companies and an affiliate of a generation and transmission rural electric cooperative. These entities and their affiliates compri se the Sponsoring Companies. The Sponsoring Companies purchase power from OVEC according to the terms of the Inter

- Company Power Agreement (ICPA), which in 2004 was extended for an additional 20 years from March 13, 2006 to

March 13, 2026. Approximately 30 % of the Companies’ employees are covered by a collective bargaining agreement that expires August 31, 2011.

Rate Regulation

— The proceeds from the sale of power to the Sponsoring Companies are designed to be sufficient for OVEC to meet its operating expe nses and fixed costs, as well as earn a return on equity before federal income taxes. In addition, the proceeds from power sales are designed to cover debt amortization and interest expense associated with financings. The Companies have continued and expec t to continue to operate pursuant to the cost plus rate of return recovery provisions at least to March 13, 2026, the date of termination of the ICPA.

The accounting guidance for ―Regulated Operations,‖ provides that rate

- regulated utilities account for an d report assets and liabilities consistent with the economic effect of the way in which rates are established, if the rates established are designed to recover the costs of providing the regulated service and it is probable that such rates can be charged a nd collected. The Companies follow the accounting and reporting requirements in accordance with the guidance for ―Regulated Operations.‖ Certain expenses and credits subject to utility regulation or rate determination normally reflected in income are defer red on the accompanying consolidated balance sheets and are recognized in income as the related amounts are

included in service rates and recovered from or refunded to customers.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

10 The Companies’ regulatory assets, liabilities, and amounts authorized for recovery through Sponsor billings at December 31, 2009 and 2008, were as follows:

Regulatory Assets

— Regulatory assets consist primarily of deferred depreciation, asset retirement costs, and pension benefits. Deferred depreciat ion is recovered over the life of the debt that was used to fund the related plant additions. The Companies follow the sinking fund depreciation method for ratemaking purposes, and the difference between straight

- line depreciation and the debt principal pa yments billed to customers is recorded as deferred depreciation. With the exception of deferred debt costs, which will be recovered during 2010, other regulatory assets are being recovered on a long

- term basis.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

11 Regulatory Liabilities

— The regulatory liabi lities classified as current in the accompanying

consolidated balance sheet as of December 31, 2009, represents interest expense collected from customers in advance of expense recognition. These amounts outstanding will be credited to customer bills during 2010. Other regulatory liabilities consist primarily of income taxes refundable to customers and postretirement benefits. Income taxes refundable to customers are credited to customer bills in the period

when the related deferred tax assets are realized. The Companies’ current ratemaking policy recovers postretirement benefits in an amount equal to estimated service cost. As a result, related regulatory liabilities are being credited to customer bills on a long

- term basis. The remaining regulatory liabilit ies are awaiting credit to customer bills in a future period that is yet to be determined.

Cash and Cash Equivalents

— For purposes of these statements, the Companies consider temporary cash investments to be cash equivalents since they are readily convert ible into cash and have original

maturities of less than three months.

Electric Plant

— Property additions and replacements are charged to utility plant accounts. Depreciation expense is recorded at the time property additions and replacements are billed t o customers or at the date the property is placed in service if the in

- service date occurs subsequent to the customer billing. Customer billings for construction in progress are recorded as deferred revenue

- advances for construction. These

amounts are clos ed to revenue at the time the related property is placed in service. Deferred depreciation, depreciation expense, and accumulated depreciation are recorded when financed property additions and replacements are recovered over a period of years through custo mer debt retirement billing. All depreciable property will be fully billed and depreciated prior to the expiration of the ICPA. Repairs of property are charged to maintenance expense.

Fuel in Storage, Emission Allowances, and Materials and Supplies

— The C ompanies maintain coal, reagent, and oil inventories for use in the generation of electricity and emission allowance inventories for regulatory compliance purposes due to the generation of electricity. These inventories are valued at average cost. Material s and supplies consist primarily of replacement parts necessary to maintain the generating facilities and are valued at average cost.

Long

- Term Investments

— Long

- term investments consist of marketable securities that are held for the purpose of funding po stretirement benefits and decommissioning and demolition costs. These securities have been classified as trading securities in accordance with the provisions of ―Investments

— Debt and Equity Securities‖ accounting guidance. Trading securities reflected in Long

- Term Investments are carried at fair value with the unrealized gain or loss, reported in Other Income. The cost of securities sold is based on the specific identification cost method. The fair value of most investment securities is determined by

refe rence to currently available market prices. Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value. See ―Fair

Value Measurements‖ in Note 11. Due to tax limi tations, the amounts held in the postretirement benefits portfolio have not yet been transferred to the Voluntary Employee Beneficiary Association (VEBA) trusts (see Note 9). Long

- term investments primarily consist of municipal bonds, money market mutual f und investments, and mutual funds. Net unrealized gains recognized during 2009 and 2008 on securities still held at the balance sheet date were $4,632,659 and $638,007, respectively.

Special Deposits

— Special deposits consist of money market mutual funds held by trustees primarily restricted for use in specific construction projects.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

12 Money market mutual funds reflected in special deposits are carried at fair value with the related investment income, reported in Other Income. The cost of securities sold is based on the specific identification method. The fair value of money market mutual funds is determined by reference to currently available market prices. There were no unrealized gains or losses recognized on this portfolio during 2009.

Fair Value Measurem ents of Assets and Liabilities

— The accounting guidance for ―Fair Value Measurements and Disclosures‖ establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Where observable inputs are available, pricing may be completed using comparable securities, dealer v alues and general market conditions to determine fair value. Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive ma rkets and other observable inputs for the asset or liability.

OVEC utilizes its trustee’s external pricing service in its estimate of the fair value of the underlying investments held in the benefit plan trusts and investment portfolios. The Companies’ man agement reviews and validates the prices utilized by the trustee to determine fair value. Equities are classified as Level 1 holdings if they are actively traded on exchanges. Fixed income securities do not trade on an exchange and do not have an official closing price. Pricing vendors calculate bond valuations using financial models and matrices. Fixed income securities are typically classified as Level 2 holdings because their valuation inputs are based on observable market date. Observable inputs used fo r valuing fixed income securities are benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers,

and economic events. Other securities with model

- derived valuation inputs that are observable are also

classified as Level 2 invest ments. Investments with unobservable valuation inputs are classified as Level 3 investments. OVEC’s only level 3 investment is the John Hancock Group Annuity Contract held in the Pension Trust (Note 9). The fair value of the insurance contract is calculate d based on estimated redemption value of the policy.

Unamortized Debt Expense

— Unamortized debt expense relates to loan origination costs incurred to secure financing. These costs are being amortized using the effective yield method over the life of the

r elated loans.

Asset Retirement Obligations and Asset Retirement Costs

— The Companies recognize the fair value of legal obligations associated with the retirement or removal of long

- lived assets at the time the obligations are incurred and can be reasonabl y estimated. The initial recognition of this liability is accompanied by a corresponding increase in depreciable electric plant. Subsequent to the initial recognition, the liability is adjusted for any revisions to the expected value of the retirement obli gation (with corresponding adjustments to electric plant) and for accretion of the liability due to the passage of

time.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

13 These asset retirement obligations are primarily related to obligations associated with future asbestos abatement at certain generating stations and certain plant closure costs. As of December 31, 2009 and 2008, the Companies had a regulatory asset of $6.5 million and $14.6 million, respectively, related to asset retirement obligations.

During 2009 the Companies completed an updated study to estimate the asset retirement costs described above. The revised estimated costs are recorded in the accompanying balance sheets.

The Companies do not recognize liabilities for asset retirement obligations for which the fair value cannot be reasonably estimated. The Companies have asset retirement obligations associated with transmission assets at certain generating stations. However, the retirement date for these assets cannot be determined; therefore, the fair value of the a ssociated liability currently cannot be estimated and no amounts are recognized in the consolidated financial statements herein.

Income Taxes

— The Companies use the liability method of accounting for income taxes. Under the liability method, the Companies provide deferred income taxes for all temporary differences between the

book and tax basis of assets and liabilities which will result in a future tax consequence.

The Companies account for uncertain tax positions in accordance with the accounting guidance for

―Income Taxes.‖

Use of Estimates

— The preparation of consolidated financial statements in conformity with accounting principles generally ac cepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets

and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Subsequent Events

— In preparing the accompanying financial statements and disclosures, the Companies reviewed subsequent even ts through April 14, 2010.

2. RELATED

- PARTY TRANSACTIONS

Transactions with the Sponsoring Companies during 2009 and 2008 included the sale of all generated power to them, the purchase of Arranged Power from them and other utility systems in order to meet the

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

14 Department of Energy’s power requirements, contract barging services, railcar services, and minor transactions for services and materials. The Companies have Power Agreements with Louisville Gas and Electric Company, Duke Energy Ohio, Inc., The Dayton Powe r and Light Company, Kentucky Utilities Company, Ohio Edison Company, and American Electric Power Service Corporation as agent for the American Electric Power System Companies; and Transmission Service Agreements with Louisville Gas and Electric Company, D uke Energy Ohio, Inc., The Dayton Power and Light Company, The Toledo Edison Company, Ohio Edison Company, Kentucky Utilities Company, and American Electric Power Service Corporation as agent for the American Electric Power System Companies.

In September 2 006, the Companies sold two transformers and associated equipment to Duke Energy Ohio, Inc. for a total maximum purchase price of $3 million, which, subject to the terms of the asset purchase agreement, was contingently payable in equal annual installments over ten years. The annual purchase price payment obligation was contingent on the performance of the transformers, and as such, no receivable was recognized for future anticipated payment obligations. In 2008, the Companies were

informed that one of the transformers failed, and as such, no further sales proceeds are anticipated.

At December 31, 2009 and 2008, balances due from or to the Sponsoring Companies are as follows:

American Electric Power Company, Inc. and subsidiary comp any owned 43.47% of the common stock of

OVEC as of December 31, 2009. The following is a summary of the principal services received from the American Electric Power Service Corporation as authorized by the Companies’ Boards of Directors:

General services consist of regular recurring operation and maintenance services. Specific projects primarily represent nonrecurring plant construction projects and engineering studies, which are approved by the Companies’ Boards of Directors. The services are provided in accordance with the service agreement dated December 15, 1956, between the Companies and the American Electric Power Service Corporation.

3. COAL SUPPLY

The Companies have coal supply agreements with certain nonaffiliated companies t hat expire at various dates from the year 2010 through 2017. Pricing for coal under these contracts is subject to contract provisions and adjustments. The Companies currently have approximately 90% of their 2010 coal requirements under long

- term agreements of one year or greater.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

15 4. INVENTORIES

Inventories

— Net of reserves, at December 31, 2009 and 2008, consist of the following:

5. ELECTRIC PLANT

Electric plant at December 31, 2009 and 2008, consists of the following:

6. BORROWING ARRANGEMEN TS AND NOTES

OVEC has an unsecured bank revolving line of credit agreement with a borrowing limit of $200 million

as of December 31, 2009. The $200 million line of credit has an expiration date of August 4, 201 0. At

December 31, 2009 and 2008, OVEC had borrowed $65 million and $50 million, respectively, under this line of credit. Interest expense related to line of credit borrowings was $1,138,063 in 2009 and $255,699 in 2008. During 2009 and 2008, OVEC incurred annual commitment fees of $220,622 and $343,729, respectively, based on the borrowing limits of the line of credit.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

16 7. LONG

- TERM DEBT

The following amounts were outstanding at December 31, 2009 and 2008:

During 2008, OVEC issued $350 million unsecured senior notes (Senior 2008 Notes) in private placements in three tranches. The $50 million Tranche A notes were issued in March 2008, the $150 million Tranche B notes were issued in June 2008, and the $150 million Tranche C notes were issued in August 2008.

During 2009, OVEC issued $100 million variable rate unsecured senior notes (2009A Notes) in private placement, a series of four variable rate tax exempt pollution control bonds (2009A, B, C, and D Bonds), and fixed rate tax exempt p ollution control bonds (2009E Bonds). The 2009A, B, C, and D Bonds, in the amount of $25 million each, were issued in August 2009. In October 2009, the non

- amortizing 2009E Bonds were issued in the amount of $100 million. The 2009A Notes and 2009A, B, C, a nd D Bonds are

non

- amortizing issues and pay interest at variable rates. The rates listed above reflect the interest rate in

effect at December 31, 2009.

All of the OVEC amortizing senior notes have maturities scheduled for February 15, 2026. The $100 mill ion non

- amortizing senior notes will mature on February 1, 2013 with the principal amount due on that date. The tax exempt variable rate bonds all mature on February 15, 2026, with the aggregate

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

17 $100 million principal amount due on that date. The tax exemp t fixed rate bonds mature on October 1, 2019 with an amount of $100 million principal due on that date. The annual maturities of long

- term debt

as of December 31, 2009, are as follows:

8. INCOME TAXES

OVEC and IKEC file a consolidat ed federal income tax return. The effective tax rate varied from the statutory federal income tax rate due to differences between the book and tax treatment of various

transactions as follows:

Components of the income tax provision were as follows:

OVEC and IKEC record deferred tax assets and liabilities based on differences between book and tax basis of assets and liabilities measured using the enacted tax rates and laws that will be in effect whe n the differences are expected to reverse. Deferred tax assets and liabilities are adjusted for changes in tax rates. The deferred tax assets recorded in the accompanying consolidated balance sheets consist primarily of the net deferred taxes on depreciati on, postretirement benefits obligation, net operating loss carryforwards, asset retirement obligations, regulatory assets and regulatory liabilities.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

18 To the extent that the Companies have not reflected credits in customer billings for deferred tax assets, they have recorded a regulatory liability representing income taxes refundable to customers under the applicable agreements among the parties. The liability was $48,593,284 at December 31, 2009, and $47,070,877 at December 31, 2008.

Deferred income tax ass ets (liabilities) consisted of the following at December 31, 2009 and 2008:

The accounting guidance for ―Income Taxes‖ addresses the determination of whether the tax benefits claimed or expected to be claimed on a tax return shou ld be recorded in the financial statements. Under this guidance, the Companies may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settleme nt. The Companies have not identified any uncertain tax positions as of

December 31, 2009 and 2008 and accordingly, no liabilities for uncertain tax positions have been recognized.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

19 On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the

PPAC Act). The PPAC Act is a comprehensive health care reform bill that includes revenue

- raising provisions for nearly $400 billion over 10 years through tax increases on high

- income individuals, excise taxes on high

- cost group health plans and new fees on selected health

- care

- related industries. In addition,

on March 30, 2010, President Obama signed into law the reconciliation measure, which modifies certain provisions of the PPAC Act.

An employer offering retiree prescription drug coverage that is at least as valuable as Medicare Part D coverage is currently entitled to a federal retiree drug subsidy. Employers can claim a deduction for the entire cost of providing the prescription drug coverage even though a portion of the co st is offset by the subsidy they receive. The PPAC Act repeals the current rule permitting deduction of the portion of the drug coverage expense that is offset by the Medicare Part D subsidy. This provision of the PPAC Act as modified by the reconciliation measure is effective for taxable years beginning after December 31, 2012.

As OVEC & IKEC currently receive a Medicare Part D subsidy the passage of the PPAC Act will result in an estimated reduction of the postemployment benefits deferred tax asset of app roximately $6 million and a reduction to the related regulatory liability (income taxes refundable to customer) of approximately $6 million.

The Companies file income tax returns with the Internal Revenue Service, the states of Ohio, Indiana and

the Commo nwealth of Kentucky. The Companies are no longer subject to federal tax examinations for tax years 2005 and earlier. The Companies are no longer subject to states of Ohio and Indiana tax examinations for tax years 2005 and earlier. The Companies are no lon ger subject to the Commonwealth of Kentucky examinations for tax years 2004 and earlier.

9. PENSION PLAN, OTHER POSTRETIREMENT AND P OSTEMPLOYMENT BENEFI TS

The Companies have a noncontributory qualified defined benefit pension plan (the Pension Plan) covering substantially all of their employees. The benefits are based on years of service and each employee’s highest consecutive 36

- month compensation period. Employees are vested in the Pension Plan after five years of service with the Companies.

Funding for the Pension Plan is based on actuarially determined contributions, the maximum of which is generally the amount deductible for income tax purposes and the minimum being that required by the Employee Retirement Income Security Act of 1974 (ERISA), as amended. T he full cost of the pension benefits and related obligations has been allocated to OVEC and IKEC in the accompanying consolidated financial statements. The allocated amounts represent approximately a 54% and 46% split for OVEC and IKEC, respectively, as of December 31, 2009 and 2008. The Pension Plan’s assets consist of an insurance contract and investments in equity and debt securities. In the following disclosures, the insurance contract is treated as a debt security because its long

- term yield is tied to the debt markets.

In addition to the Pension Plan, the Companies provide certain health care and life insurance benefits (Other Postretirement Benefits) for retired employees. Substantially all of the Companies’ employees become eligible for these benefits if they reach ret irement age while working for the Companies. These and similar benefits for active employees are provided through employer funding and insurance policies.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

20 In December 2004, the Companies established Voluntary Employee Beneficiary Association (VEBA)

trusts.

All of the trust funds’ investments for the pension and postemployment benefit plans are diversified and managed in compliance with all laws and regulations. Management regularly reviews the actual asset allocation and periodically rebalances the investm ents to targeted allocation when appropriate. The investments are reported at fair value under the ―Fair Value Measurements and Disclosures‖ accounting guidance.

All benefit plan assets are invested in accordance with each plan’s investment policy. The inv estment policy outlines the investment objectives, strategies and target asset allocations by plan. Benefit plan assets are reviewed on a formal basis each quarter by the OVEC/IKEC Qualified Plan Trust Committee.

The investment philosophies for the benefit plans support the allocation of assets to minimize risks and optimize net returns.

Investment strategies include:

Maintaining a long

- term investment horizon. Diversifying assets to help control volatility of returns at acceptable levels. Managing fees, t ransaction costs and tax liabilities to maximize investment earnings. Using active management of investments where appropriate risk/return opportunities exist. Keeping portfolio structure style

- neutral to limit volatility compared to applicable benchmarks.

The target asset allocation for each portfolio is as follows:

Each benefit plan contains various investment limitations. These limitations are described in the investment policy statement and detailed in customized investment guidelines or documented by mutual fund prospectus. These investment guidelines require appropriate portfolio diversification and define security concentration limits. Each investment manager's portfolio is compared to an appropria te
diversified benchmark index.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

21 Equity investment limitations:

No security in excess of 5% of all equities. Cash equivalents must be less than 10% of each investment manager's equity portfolio. Individual securities must be less than 15% of each manager's equity portfolio. No investment in excess of 5% of an outstanding class of any company. No securities may be bought or sold on margin or other use of leverage. As otherwise defined by fund prospectus.

Fixed income limitations:

The Pension Plan fixed income allocation consists of a Guaranteed Annuity Contract issued by the John

Hancock Life Insurance Company. The VEBA benefit plans’ fixed income allocation is comprised of a variety of fixed income mutual funds. Investment limitations for these fixed income f unds are defined by
manager prospectus.

Cash limitations:

Cash and cash equivalents are held in each trust to provide liquidity and meet short

- term cash needs. Cash equivalent funds are used to provide diversification and preserve principal. The underlyin g holdings in the cash funds are investment grade money market instruments including money market mutual funds, certificates of deposit, treasury bills and other types of investment grade short

- term debt securities. The

cash funds are valued each business day and provide daily liquidity.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

22 Projected Pension Plan and Other Postretirement Benefits obligations and funded status as of

December 31, 2009 and 2008:

On December 8, 2003, the President of the United States of America signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduced a prescription drug benefit to retirees as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescripti on drug benefit that is actuarially equivalent to the benefit provided by Medicare. The Companies believe that the coverage for prescription drugs is at least actuarially equivalent to the benefits provided by Medicare for most current retirees because the benefits for that group substantially exceed the benefits provided by Medicare, thereby allowing the Companies to qualify for the subsidy. The Companies’ employer contributions for Other Postretirement Benefits in the above table are

net of subsidies rece ived of $492,641 and $0 for 2009 and 2008, respectively. The Companies have accounted for the subsidy as a reduction of the benefit obligation detailed in the above table. The benefit obligation was reduced by approximately $13 million and $14.2 million as of December 31, 2009 and 2008. Refer to the Income Taxes footnote (Note 8) for changes in the tax law surrounding the new health

care bill.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

23 The accumulated benefit obligation for the Pension Plan was $156,891,866 and $144,698,788 at

December 31, 2009 and 2008, respectively.

Components of Net Periodic Benefit Cost

— The Companies record the expected cost of Other Postretirement Benefits over the service period during which such benefits are earned.

Pension expense is recognized as amounts are contributed to the Pension Plan and billed to customers. The accumulated difference between recorded pension expense and the yearly net periodic pension expense as calculated under the accounting guidance for ―Compensation

— Retirement Benefits,‖ is billable as a cost

o f operations under the ICPA when contributed to the pension fund. This accumulated difference has been recorded as a regulatory asset in the accompanying consolidated balance sheets.

The following table presents the classificatio n of Pension Plan assets within the fair value hierarchy at

December 31, 2009:

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

24 See rollforward for the Group Annuity Contract with John Hancock below:

The following table presents the classification of Pension Plan assets within the fair value hierarchy at

December 31, 2009:

Pension Plan and Other Postretirement Benefit Assumptions

— Actuarial assumptions used to determine benefit obligations at December 31, 2009 and 2008, were as follows:

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

25 Actuarial assumptions used to determine net periodic benefit cost for the years ended December 31, 2009 and 2008, were as follows:

In selecting the expected long

- term rate of return on asse ts, the Companies considered the average rate of earnings expected on the funds invested or to be invested to provide for plan benefits. This included considering the Pension Plan and VEBA trusts’ asset allocation, as well as the target asset allocations f or the future, and the expected returns likely to be earned over the life of the Pension Plan and the VEBAs.

Assumed health care cost trend rates at December 31, 2009 and 2008, were as follows:

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one

- percentage

- point change in assumed health care cost trend rates would have the following

effects:

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

26 Pension Plan and Other Postretirement Bene fit Assets

— The asset allocation for the Pension Plan and

VEBA trusts at December 31, 2009 and 2008, by asset category was as follows:

The target asset allocation for the Pension Plan is 30% equity securities and 70% debt securi ties and for the VEBA trust is 40% equity securities and 60% debt securities.

Pension Plan and Other Postretirement Benefit Contributions

— The Companies expect to contribute $5,700,000 to their Pension Plan and $7,500,000 to their Other Postretirement Ben efits plan in 2010.

Estimated Future Benefit Payments

— The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

Postemployment Benefits

— The Companies follow the accounting guidance in ―Compensation

— Non

Retirement Postemployment Benefits,‖ and accrue the estimated cost of benefits provided to former or inactive employees after employment but before retirement. Such benefits include, but are not limited to, salary continuat ions, supplemental unemployment, severance, disability (including workers’ compensation), job training, counseling, and continuation of benefits, such as health care and life insurance coverage. The cost of such benefits and related obligations has been al located to OVEC and IKEC in the accompanying consolidated financial statements. The allocated amounts represent approximately a 34% and 66% split between OVEC and IKEC, respectively, as of December 31, 2009, and approximately a 42% and 58% split between OV EC and IKEC, respectively, as of December 31, 2008. The liability is offset with a corresponding regulatory asset and represents unrecognized postemployment benefits billable in the future to customers. The accrued cost of such benefits was $3,211,580 and $2,236,997 at December 31, 2009 and 2008, respectively.

Defined Contribution Plan

— The Companies have a trustee

- defined contribution supplemental pension and savings plan that includes 401(k) features and is available to employees who have met eligibility requirements. The Companies’ contributions to the savings plan equal 100% of the first 1% and 50% of

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

27 the next 5% of employee

- participants’ contributions based upon total compensation. Benefits to participating employees are based solely upon amounts contr ibuted to the participants’ accounts and investment earnings. By its nature, the plan is fully funded at all times. The employer contributions for 2009 and 2008 were $1,712,262 and $1,634,334, respectively.

10. ENVIRONMENTAL MATTER S

Title IV of the 1990 Clean Air Act Amendments (CAAAs) required the Companies to reduce sulfur dioxide (SO2) emissions in two phases: Phase I in 1995 and Phase II in 2000. The Companies selected a fuel switching strategy to comply with the emission reduction requirements. The Compani es also purchased additional SO2 allowances. The cost of these purchased allowances has been inventoried and included on an average cost basis in the cost of fuel consumed when used. The cost of unused allowances

at December 31, 2009 and 2008 was $5,215,65 1 and $2,244,126, respectively.

Title IV of the 1990 CAAAs also required the Companies to comply with a nitrogen oxides (NOx)

emission rate limit of 0.84 lb/mmBtu in 2000. The Companies installed overfire air systems on all eleven units at the plants to co mply with this limit. The total capital cost of the eleven overfire air systems was approximately $8.2 million.

During 2002 and 2003, Ohio and Indiana finalized respective NOx State Implementation Plan (SIP) Call regulations that required further significa nt NOx emission reductions for coal

- burning power plants during the ozone control period. The Companies installed selective catalytic reduction (SCR) systems on ten of their eleven units to comply with these rules. The total capital cost of the ten SCR sys tems was approximately $355 million.

On March 10, 2005, the U.S. EPA issued the Clean Air Interstate Rule (CAIR) that required further significant reductions of SO2 and NOx emissions from coal

- burning power plants. On March 15, 2005,

the U.S. EPA also issu ed the Clean Air Mercury Rule (CAMR) that required significant mercury emission

reductions for coal

- burning power plants. These emission reductions were required in two phases: 2009 and 2015 for NOx; 2010 and 2015 for SO2; and 2010 and 2018 for mercury. Oh io and Indiana subsequently finalized their respective versions of CAIR and CAMR. In response, the Companies determined that it would be necessary to install flue gas desulfurization (FGD) systems at both plants to comply with these new rules. Following co mpletion of the necessary engineering and permitting, construction was started on the new FGD systems.

In February 2008, the D.C. Circuit Court of Appeals issued a decision which vacated the federal CAMR

and remanded the rule to the U.S. EPA with a determi nation that the rule be rewritten under the maximum achievable control technologies (MACT) provision of Section 112(d) of the Clean Air Act. A group of electric utilities and the U.S. EPA requested a rehearing of the decision, which was denied by the court

. Following those denials, both the group of electric utilities and the U.S. EPA requested that the

U.S. Supreme Court hear the case. However, in February 2009, the U.S. EPA withdrew its request and the group of utilities’ request was denied. These actions left the original court decision in place, which

vacated the federal CAMR and remanded the rule to the U.S. EPA with a determination that the rule be rewritten under the MACT provision of Section 112(d) of the Clean Air Act.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

28 In July 2008, the D.C. Circuit Court of Appeals issued a decision that vacated the federal CAIR and remanded the rule to the U.S. EPA. In September 2008, the U.S. EPA, a group of electric utilities and other parties filed petitions for rehearing. In December 2008, the D.C. Circuit Cour t of Appeals granted

the U.S. EPA’s petition and remanded the rule to the U.S. EPA without vacatur, allowing the federal CAIR to remain in effect while a new rule was developed and promulgated. Since that time, U.S. EPA has been working on the CAIR replace ment rule and is expected to issue a draft of the new rule for comment

in the near future.

In December 2008, the Boards of Directors of the Companies authorized a delay in construction of the FGD at the Clifty Creek plant of at least 18 months due to econo mic uncertainty in the capital markets.

In March 2009, the Boards of Directors also authorized a delay in the tie

- in of the FGD systems of all five generating units at the Kyger Creek plant pending an investigation into the structural integrity of the

int ernal components of two newly constructed jet bubbling reactors (JBRs), which are major components of the FGD system. Since that time, extensive studies have been conducted relating to this design issue, which affects the FGD construction projects at both the Kyger Creek and Clifty Creek plants, and the Board of Directors have authorized a complete redesign and replacement of the JBR internal components to resolve this structural integrity issue. A schedule for completing the Kyger Creek and Clifty Creek FG D construction projects is currently under review.

Additional SO2 allowances will be purchased to operate the Clifty Creek and Kyger Creek generating units to comply with the current environmental emission rules during the delays.

The total cost to compl ete the new Kyger Creek and Clifty Creek FGD systems and the associated landfills is currently estimated not to exceed $1.4 billion, including the amounts expended to date and included in construction in progress in the accompanying balance sheets.

On Nove mber 6, 2009, the Companies received a Section 114 Information Request from the U.S. EPA. The stated purpose of the information request was for the U.S. EPA to obtain the necessary information to determine if the Kyger Creek and Clifty Creek plants have be en operating in compliance with the Federal Clean Air Act. Attorneys for the Companies subsequently contacted the U.S. EPA and established a schedule for submission of the requested information. Based on this schedule, all requested information

was submitt ed to the U.S. EPA by March 8, 2010.

11. FAIR VALUE MEASUREME NTS

The accounting guidance for ―Financial Instruments,‖ requires disclosure of the fair value of certain financial instruments. The estimates of fair value under this guidance require the applicatio n of broad assumptions and estimates. Accordingly, any actual exchange of such financial instruments could occur at values significantly different from the amounts disclosed. As cash and cash equivalents, current receivables, current payables, and line of credit borrowings are all short term in nature, their carrying amounts approximate fair value.

As of December 31, 2009, the Companies held certain assets that are required to be measured at fair value on a recurring basis. These consist of investments reco rded within special deposits and long

- term investments. The investments consist of money market mutual funds and municipal securities. Changes in

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

29 the observed trading prices and liquidity of money market funds are monitored as additional support for

determ ining fair value, and unrealized gains and losses are recorded in earnings.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Comp anies believe their valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a

different fair value measu rement at the reporting date.

Special Deposits and Long

- Term Investments

— Assets measured at fair value on a recurring basis at

December 31, 2009 and 2008, were as follows:

Long

- Term Debt

— The fair values of the senior notes and fixed rate bonds were estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements. These fair values are not reflected in the balance sheet.

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

30 The fair values and recorded values of the senior notes, fixed and variable rate bonds as of December 31, 2009 and 2008, are as follows:

12. LEASES

OVEC has entered into operating leases to secure railcars for the transportation of coal in connection with the fuel switching modifications at the OVEC and the IKEC generating stations. OVEC has railcar lease agreements that extend to as long as December 31, 2025, with options to exit the leases under certain conditions. The amount in proper ty under capital leases is $76,931 with accumulated depreciation of $8,614 as of December 31, 2009. There were no capital leases as of December 31, 2008. OVEC also has various other operating leases with other property and equipment.

Future minimum lease payments for capital and operating leases at December 31, 2009, are as follows:

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPA NY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

31 The annual operating lease cost incurred was $4,749,821 and $4,761,224 for 2009 and 2008, respectively and the annual capital lease cost incurred was $9,335 and $0 for 2009 and 2008, respectively.

13. COMMITMENTS AND CONT INGENCIES

The Companies are party to or may be affected by various matters under litigation. Management believes that the ultimate outcome of these matters will not have a significant adve rse effect on either the Companies’ future results of operation or financial position.

* * * * * *

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPANY

32 INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of Ohio Valley Electric Corporation:

We have audited the accompanying consolidated balance sheets of Ohio Valley Electric Corporation and subsidiary company (the ―Companies‖), as of December 31, 2009 and 2008, and the related consolidated statements of income and retained earnings and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companies’ management. Our responsibili ty is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform t he audit to obtain reasonable assurance about

whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are a ppropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companies’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Companies as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States

of America.

Deloitte & Touche LLP

Cincinnati, Ohio April 14, 2010

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPANY

33 OVEC PERFORMANCE

— A 5

- YEAR COMPARISON

200 9 2008 2007 2006 2005

Net Generation (MWh) 15,260,922 15,260,029 15,109,836 16,468,342 16,638,497

Energy Sales (MWh) to:

DOE 264,664 270,369 256,613 246,371 251,375 Sponsors 15,069,699 15,026,497 14,918,727 16,226,777 16,254,716

Maximum Demand (MW) by:

DOE 39 42 41 37 45 Sponsors 2

, 212 2,216 2,233 2,300 2,291

Weighted Average Demand (MW): DOE Operating Level 34 31 29 28 29

Power Costs to:

DOE $11,450,965 $18,539,154 $14,605,000 $15,445,000 $14,520,000 Sponsors $632,506,255 $605,354,979 $527,516,000 $509,024,000 $458,345,000

Average Price (MWh):

DOE $43.266 $68.570 $56.915 $62.689 $57.764 Sponsors $41.972 $40.286 $35.359 $31.369 $28.198

Operating Revenues $648,593,000 $621,813,000 $531,362,000 $523,927,000 $468,546,000

Operating Expenses $584,88 1 ,000 $566,798,000 $494,808,000 $494,893,000 $442,420,000

Cost of Fuel Consumed $329,448,000 $340,213,000 $300,666,000 $318,762,000 $287,093,000

Taxes (federal, state, and local) $12

, 298,000 $10,808,000 $9,898,000 $9,457,000 $7,735,000

Payroll $56,589,000 $53,694,000 $49,977,000 $47,561,000 $46,447,000

Fuel Burned (tons) 7,900,894 7,891,440 7,647,397 7,820, 516 7,632,8 57

Heat Rate (Btu per kWh, net generation) 10,299 10,236 10,180 10,053 9,978

Unit Cost of Fuel Burned (per mmBtu) $2.10 $2.18 $1.95 $1.95 $1.73

Unit Availability (percent) 85. 8 85.2 85.0 88.8 88.0

Power Use Factor (percent) 96.29 96.39 96.92 98.06 99.54

Employees (year

- end) 809 817 747 748 749

### OHIO VALLEY ELECTRIC CORPORATION

AND SUBSIDIARY COMPANY

34 DIRECTORS



## Ohio Valley Electric Corporation

* ANTHONY J. AHERN

, Columbus, Ohio President and Chief Executive Officer Buckeye Power Generating, LLC

NICHOLAS K. AKINS

, Columbus, Ohio
Executive Vice President

– Generation American Electric Power

CURTIS H. DAVIS

, Greensburg, Pennsylvania Chief Operating Officer

– Generation Allegheny Energy, Inc.

WILLIAM S. DOTY , Ev ansville, Indiana
Executive Vice President

– U tility Operations Vectren Corporation

CARL L. ENGLISH , Columbus, Ohio Chief Operating Officer American Electric Power Service Corporation

GARY R. LEIDICH , Akron, Ohio
Executive Vice President FirstEnergy Corp.

*MICHAEL G. MORRIS , Columbus, Ohio Chairman, President and Chief Executive Officer American Electric Power Company, Inc. STEVEN K. NELSON , Columbus, Ohio
Chairman Buckeye Power, Inc.

PATRICK W. O’LOUGHLIN

, Columbus, Ohio Vice President and Chief Operating Officer Buckeye Power Generating, LLC

GARY G. STEPHENSON , Dayton, Ohio
Executive Vice President, Operations
DPL Inc.

*STANLEY F. SZWED , Akron, Ohio
Vice President

– FERC Policy and Chief FERC Compliance Officer FirstEnergy Service Company

PAUL W. THOMPSON , Louisville, Kentucky
Senior Vice President, Energy Services
E.ON U.S. LLC

*JOHN N. VOYLES , Louisville, Kentucky Vice President, Transmission and Generation Services
E.ON U.S. LLC

*CHARLES WHITLOCK , Cincinnati, Ohio
P resident, Commercial Asset Management Duke Energy Corporation



## Indiana

- Kentucky Electric Corporation

*CURTIS H. DAVIS , Greensburg, Pennsylvania Chief Operating Officer

– Generation Allegheny Energy, Inc.

WILLIAM S. DOTY , Ev ansville, Indiana
Executive Vice President

– Utility Operations Vectren Corporation

RONALD G. JOCHUM , Evansville, Indiana
Vice President

– Power Supply Vectren Corporation MARC E. LEWIS , Fort Wayne, Indiana
Vice President

– External Relations Indiana Michigan Power Company

*MICHAEL G. MORRIS , Columbus, Ohio Chairman, President and Chief Executive Officer American Electric Power Company, Inc.

*STANLEY F. SZWED , Akron, Ohio
Vice President

– FERC Policy and Chief FERC Compliance Officer FirstEnergy Service Company

OFFICERS

— OVEC AND IKEC

MICHAEL G. MORRIS President

SCOT T N. SMITH
Vice President and Assistant to the President

DAVID E. JONES
Vice President

- Operations

*Member of Executive Committee. JOHN D. BRODT Secretary and Treasurer

RONALD D. COOK Assistant Secretary and
Assistant Treasurer CHARLES E. ZEBULA
Assistant Secretary and
Assistant Treasurer35 

# OUR VISION: We will continue to base our business operations and long

term relationships with stakeholders upon principles consistent with our values,
environmental stewardship, operational excellence, and the ethical conduct of our
employe es. We strive to be the most cost

- competitive electricity producer in our

class with first

- quartile performance in equivalent availability, zero accidents, and
full environmental compliance. We will attain our goals through highly trained,

skilled, motivat ed, and engaged talent.



# OUR MISSION: To provide our Sponsor Companies with reliable,

cost

- competitive electricity.

Safety

– Make safety a priority in all facets of our business.

Respect

– Treat others the way we want to be treated and value each person’s talents, perspectives and experience.

Caring

– Be kind and deal peacefully with others. Be compassionate and handle disagreements without being disagreeable.

Citizenship

– Protect our e nvironment. Do our share to make our communities a better place to live and prosper.

Integrity

– Do the right thing at the right time, every time.

Trustworthiness

– Cultivate a reputation of honesty and straightforwardness as we strive to achieve corpor ate goals.

Responsibility

– Accept personal accountability for our actions and live up to high ethical expectations.

Innovation

– Encourage forward thinking and strive to find creative solutions.

Excellence

– Commit to perfection and demand high performance.



# OUR VALUES: We believe in people!