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Rating Update:

MOODY'S AFFIRMS A3 RATING ON HAMILTON ELECTRIC REVENUE BONDS;OUTLOOK STABLE

02 Dec 2010

HAMILTON IS MAJOR PARTICIPANT IN AMP MELDAHL HYDROELECTRIC PROJECT

Hamilton (City of) OH
Electric Utilities
OH

Opinion

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.

RATING RATIONALE

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.

OUTLOOK

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 the region.

What Could Change the Rating - DOWN:

*Deterioration in financial position and/or the loss of a significant industrial customer.

*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:

None

STRENGTHS

*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

CHALLENGES

*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 risk.

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 significantly lower.

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.

KEY INDICATORS

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.

Analysts

Dan Aschenbach
Analyst
Public Finance Group
Moody's Investors Service

John Medina
Backup Analyst
Public Finance Group
Moody's Investors Service

Chee Mee Hu
Director
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY'S AFFIRMS A3 RATING ON HAMILTON ELECTRIC REVENUE BONDS;OUTLOOK STABLE
No Related Data.
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