HAMILTON IS MAJOR PARTICIPANT IN AMP MELDAHL HYDROELECTRIC PROJECT
Hamilton (City of) OH
NEW YORK, Dec 2, 2010 -- Moody's Investors Service has affirmed the A3 rating with a stable outlook on
the City of Hamilton's (OH) outstanding $181 million Electric System Revenue
Bonds. The rating affirmation was in conjunction with Hamilton's participation
in the American Municipal Power's (AMP) sale in December 2010 of $667.5 million
Meldahl Hydroelectric Revenue Bonds. Hamilton has a 51% participation share
in the project and a take-or-pay obligation to pay 51% of the project's
operating and debt service costs.
The major factors that drive the A3 rating include the utility's stable customer
base; competitive retail rates and its sound financial operations. The utility's
high debt ratio is also a significant factor in the rating assigned.
The stable outlook incorporates Moody's expectation that the Hamilton electric
system will maintain sound finances and competitive retail rates and continue to
benefit from its stable service area.
What Could Change the Rating - UP:
*Significant decreases in debt, improved debt service coverage, moderation of
fuel prices, and improved cost competitiveness relative to other utilities in
What Could Change the Rating - DOWN:
*Deterioration in financial position and/or the loss of a significant industrial
*Delay in or failure to complete construction of AMP projects (Prairie State or
Meldahl Hydro) as planned, requiring the system to absorb costs under the take
or pay contractural obligation with AMP.
ELECTRIC SYSTEM REVENUE BONDS LEGAL SECURITY:
Net Revenues of Hamilton Electric System. The outstanding electric system
revenue bonds are also secured by a fully funded maximum annual debt service
reserve. The bond indenture requires the maintenance of a $4 million rate
stabilization fund, a rate covenant of a minimal 1.1 times coverage, an
additional bonds test of 1.1 times and a flow of funds with debt service coming
immediately after operating expenses. Favorably, the system is closed loop and
the only contribution the utility makes to the city's General Fund is for its
share of administrative costs and this comes after debt service in the flow of
funds. The take-or-pay obligation that secures the AMP Meldahl Hydroelectric
Project Revenue Bonds is an O&M expense of the utility system.
INTEREST RATE DERIVATIVES:
*Stable primarily residential customer base
*Electric system owned by City of Hamilton (GO bonds rated Aa3) and City Council
can set rates without external review
*Competitive retail rates in region
*Stable financial record with debt service coverage averaging 1.50 times for
past five years
*Administrative authority to pass through fuel and purchased power costs
*Strong performance record of Greenup Hydro facility
*Construction risk with regards to the Meldahl Hydroelectric Project
*High debt ratio prior to significant addition of AMP take-or-pay obligation
*Unemployment rate of 10.6% remains above average although regional economy
showing signs of recovery
*Potential more aggressive environmental regulation of coal-fired generation
particularly on smaller coal units
*Some hydrology risk given that 55% of power resources are hydroelectric
MARKET POSITION /COMPETITIVE STRATEGY: ELECTRIC UTILITY PROVIDES GENERATION AND
DISTRIBUTION TO SUBURBAN SOUTHERN CINCINNATI SERVICE AREA
Hamilton benefits from the city's role as the county seat and favorable location
in Butler County (GO rated Aa1). The city's general obligation bonds are rated
Aa3. Service area stability is also derived from a customer base that is 90%
residential. The system serves approximately 29,500 customers. The City of
Hamilton has operated its municipal electric utility since 1893 and the utility
has a near monopoly role in providing an essential service. The City Council
establishes rates without external regulation. Utility management can pass
through increased fuel or purchased power costs, as well as unfunded
environmental or governmental/regulatory mandated costs automatically. The bond
indenture does preclude the City Council from granting a competing utility a
franchise license to operate within the city limits while the bonds remain
outstanding. There is limited interest in offering such choice given that
Hamilton's electric rates are very competitive with retail rates about 30% lower
than the neighboring investor-owned utility.
The service area is relatively diverse with the top 10 customers accounting for
less than 15% of system revenues. The largest user, Mohawk, is a paper mill and
accounts for about 5% of revenues. Unemployment in Hamilton was around 10% in
2010, below the recession peak, but still higher than the national
average. Resident wealth levels are below state averages; both median
family income and per capita income approximated 82% of the state average during
the most recent census.
The electric utility has a diverse power resource mix and continues to work on a
plan to further diversify power resources in order to reduce Hamilton's reliance
on purchases of energy from the more volatile regional wholesale energy market.
In 2010, 29% of Hamilton's resource mix was from market purchases. In 2015, the
market purchase portion of power supply is forecasted to fall to 6%. The city
owns and operates several electric generation facilities with a total capacity
of 210.6 MW compared to a peak load of about 145.7 MW though average annual load
is closer to 160 MW. Power is generated from coal-fired steam generation
(comprising 39% of capacity), hydroelectric (55%) with the remainder attained
through the power purchases. The city's small coal fired power plants are
currently economic but aggressive federal regulation may require switching to
natural gas. That evaluation is now taking place.
The city also has a take-or-pay contract with AMP Ohio for 32 MW of power
through the OMEGA-JV-2 Belleville Hydroelectric plant and a contract with New
York Power Authority (NYPA) for a small amount of power from the St. Lawrence
hydro project. The NYPA contract expires in December 2017.
The city's long-term power supply plan includes 35 MW of power from AMP's
ownership in the two-unit Prairie State coal-fired generating facility currently
under construction in southern Illinois. Unit 1 is expected to come on line in
2011 and Unit 2 in 2012. Hamilton also has a 51% share of the Meldahl
hydroelectric facility being constructed on the Ohio River by AMP.
As a participant in AMP's financing of the Mehldahl project, Hamilton has a take
or pay contractual obligation to pay AMP its share of the debt service and
operating costs whether the Meldahl project is operable, operating or
terminated. Moody's has received an enforceability opinion from Hamilton that
its obligation is valid and binding. The Meldahl project will double the number
of turbines it has to 6 turbines diversifying its hydro production shafts.
Favorably, the city has an agreement with AMP that upon commercialization of the
Meldahl project, AMP will purchase a 48.6% share of Hamilton's Greenup hydro
plant for $139 million. The Utility has operated Greenup Hydro since 1988 with
an average capacity factor in excess of 50%. The city currently intends, but is
not obligated, to use the funds from AMP to retire debt that was originally used
to purchase Greenup. Per the indenture, the city may use the funds from AMP for
either capital improvements or debt service. While Moody's believes that the
Hamilton does face a degree of risk ,including increased leverage, in being a
participant in the Meldahl project, successful completion would lead to a
favorable longer-term mix of power resources in terms of asset and regulatory
FINANCIAL POSITION AND PERFORMANCE: STABLE FINANCIAL OPERATIONS SUPPORTED BY
SOUND LIQUIDITY AND AMPLE RATE-SETTING FLEXIBILITY
Electric utility financial operations have had a consistent record of stability
and the system maintains sound internal financial liquidity levels. Debt service
coverage has averaged about 1.50 times from 2005 to 2010. Adjusted debt service
coverage which includes General Fund transfers has an operating expense, still
is in the 1.50 times range because there is limited General Fund transfers. The
electric utility primarily makes PILOT payments for allocated
administrative costs. The adjusted debt service coverage is lower than the
median for the largest US city-owned electric utilities but not
Another source of financial flexibility is the City of Hamilton
maintains independent rate-setting authority and can recover fuel costs with a
power cost adjustment (PCA), changed by administrative action. The PCA can be
adjusted monthly if required. Additionally, the system has the ability to
administratively to implement an Unfunded Environmental Mandate Rider and an
Unfunded Governmental and Regulatory Rider. The city has included language in
the supplemental indenture granting the administration the authority to set the
riders and other system charges ensuring that such powers will exist for the
life of the bonds.
HIGH DEBT RATIO; LIMITED FUTURE BORROWING EXPECTED
The utility's debt ratio (net long term debt divided by net fixed assets plus
working capital) is among the highest of U.S.city-owned electric utilities and
is a major weight in the credit rating. Moody's calculates the debt ratio to be
in excess of 100%. The system currently has no plans to issue additional debt.
All of the utility's debt is fixed rate and Hamilton is not party to any
swap agreements. The Moody's forecasted debt ratio for Hamilton electric for
2015 remains high when factoring into the calculation the take-or-pay obligation
for the Meldahl project. Favorably, should the city retire the direct debt on
the Greenup facility, the direct debt ratio will be reduced.
Type of System: Electric Generation and Distribution
Customers: 29,500 (90% residential)
FY2009 Debt Service Coverage: 1.67x
FY2009 Debt Ratio: 102.9% (excluding take-or-pay obligations)
Direct Debt Outstanding: $181 million
ISSUER CONTACT: Bill Moller, Finance Director (513) 785-7161
The last rating action was on August 21, 2009, when the utility's A3 rating and
stable outlook were affirmed. The rating was subsequently recalibrated to A3 on
May 7, 2010.
Moody's adopts all necessary measures so that the information it uses in
assigning a credit rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent third-party
sources. However, Moody's is not an auditor and cannot in every instance
independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last
rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time
before Moody's Investors Service's Credit Ratings were fully digitized and
accurate data may not be available. Consequently, Moody's Investors Service
provides a date that it believes is the most reliable and accurate based on the
information that is available to it. Please see the ratings disclosure page on
our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in
determining ratings, further information on the meaning of each rating category
and the definition of default and recovery.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Chee Mee Hu
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S AFFIRMS A3 RATING ON HAMILTON ELECTRIC REVENUE BONDS;OUTLOOK STABLE
Moody's Investors Service
250 Greenwich Street
New York, NY 10007