New Issue: MOODY'S ASSIGNS Aa3 RATING TO HAMILTON COUNTY SEWER DISTRICT'S (OH) $161 MILLION

SEWER SYSTEM IMPROVEMENT REVENUE BONDS, SERIES 2009A AND 2009B; OUTLOOK IS STABLE

Global Credit Research - 05 Aug 2009

Aa3 RATING APPLIES TO $775 MILLION OF OUTSTANDING REVENUE BONDS, INCLUDING

CURRENT OFFERINGS

Metro. Swr. Dist. of Greater Cincinnati, OH

Water/Sewer
OH
Moody's Rating
ISSUE RATING
Sewer System Improvement Revenue Bonds, Series 2009A Aa3
Sale Amount $45,965,000
Expected Sale Date 08/11/09
Rating Description Sewer Revenue

Taxable Sewer System Improvement Revenue Bonds, Series 2009B (Federally Taxable-Build
Aa3
America Bonds-Direct payment)
Sale Amount $115,445,000
Expected Sale Date 08/11/09
Rating Description Sewer Revenue

Opinion
NEW YORK, Aug 5, 2009 -- Moody's Investors Service has assigned Aa3 ratings to Hamilton County (OH)
Sewer District's $45.9 million Sewer System Improvement Revenue Bonds, Series 2009A (The Metropolitan
Sewer District of Greater Cincinnati; Tax-Exempt) and $115.4 million Taxable Sewer System Improvement
Revenue Bonds, Series 2009B (The Metropolitan Sewer District of Greater Cincinnati; Federally Taxable -
Build America Bonds - Direct Payment). Concurrently, Moody's has affirmed the Aa3 rating on the county's
outstanding sewer revenue debt; the district has $775 million of total parity debt, including the current
issues. The outlook for the system's debt is stable. Proceeds from the current bonds will replenish the
surplus account for previous capital expenditures. The high-grade Aa3 rating reflects a large and diverse
user base that covers the City of Cincinnati (GO rated Aa1/stable outlook) and surrounding suburbs;
extremely strong liquidity supported by rate-setting autonomy and a history of timely rate increases; and a
high debt ratio that is expected to remain elevated as the system funds capital improvements required by a
U.S. Environmental Protection Agency (EPA) Consent Decree and conditionally approved Wet Weather
Improvement Plan.
STABLE LOCAL ECONOMY EXPECTED TO MAINTAIN LONG-TERM DIVERSITY, DRIVING LIMITED TO
MODERATE GROWTH IN USER BASE
The Metropolitan Sewer District of Greater Cincinnati (MSD) provides wastewater collection and treatment
services to Hamilton County (GO rated Aa3), and small portions of three neighboring counties. The state's
third largest county in both population and land area, Hamilton County had a 2000 census population of
845,303 (a 2.7% decrease since 1990) which is estimated to have grown by less than 1% since then (2009
estimated population of 332,458). The presence of many long-standing employers within and around the
City of Cincinnati including Procter and Gamble, the U.S. government, and the University of Cincinnati is
complemented by additions from smaller industrial and service firms in the suburbs. Hamilton County
unemployment trends have risen (8.8% in May 2009) though they remain below the state and national
rates, reflecting the diversity of the job market in the region. The system's top customers also reflect the
diversity of the region, with the largest user (Cognis-Henkel-Emery) composing less than 1% of FY08
revenues, and the top 10 representing a minimal 5.1%. The system reports no material reduction in flow
revenues, and the top 10 representing a minimal 5.1%. The system reports no material reduction in flow
from any large users and does not expect major changes in its customer base.
While the eastern two-thirds of the service area are sewered and substantially developed, additional
residential development is anticipated over the very long-term in the predominantly unsewered western
region. The district has a multi-year plan to provide wastewater management to this area, with connection
fees expected to support the costs. Although expansion of sewered areas continues, the system has seen
little growth in user accounts, averaging a modest 0.4% annual increase over the last five years, with
billable flow averaging a decline of 2.5% during the same time period, reflecting decreasing average usage
per customer. While such usage patterns are not unusual, this trend, coupled with only moderate customer
growth, could necessitate greater rate increases to maintain adequate debt service coverage.
AMPLE LIQUIDITY; RATE SETTING AUTONOMY AND COUNTY'S MULTI-YEAR RATE SETTING PROVIDES
ADDITIONAL FLEXIBILITY
Moody's expects that, given the demonstrated commitment to increasing rates to adequate levels in a
timely manner and the county's rate setting autonomy, the system will continue to generate sufficient
revenues to maintain adequate coverage ratios. Prudent fiscal management is evidenced by 17 rate
increases beginning in 1985 and annual increases that have averaged over 9% annually since 2001. Future
rate increases are already estimated and have been approved by county commissioners through 2011 with
12% increases anticipated in 2010 and 2011. Notably, these rate increases require adoption in each fiscal
year, but are also subject to adjustment as the need arises. For example, while an 8% increase was
originally planned for 2008, revised projections led to a 12% increase. The autonomy and ongoing analysis
of needed rate increases insures adequate revenue growth. Moody's believes the early multi-year approach
and flexibility to make adjustments favorably reflects political and financial forethought.
In addition to the required debt service reserve, MSD has historically maintained significant liquidity, held in
separate funds beyond the operations and maintenance account, notably the surplus account. As a closed
loop system, these funds are not available for general county or city purposes. While over time these funds
will be expended on various capital projects they are available for operations or debt service should the
need arise. The system maintained a healthy $238.7 million of net working capital in FY2008 (236% of
operating and maintenance expenditures); $229 million of the available net working capital is held in the
surplus fund. The county anticipates developing financial policy guidelines in the near future which will
encompass surplus fund balances, liquidity levels, debt service coverage ratios and rate setting
considerations. While Moody's recognizes expected cash financing of a portion of the extensive capital
requirements, we expect ample liquidity to be maintained. The rate covenant affecting all parity revenue
bonds requires that net revenues cover debt service by a factor of 1.25 times.
Moody's expects that coverage levels will remain satisfactory, primarily due to current and future rate
increases which are anticipated to accompany future borrowings. MSD bondholders maintain a favorable
first lien on system revenues after O&M expenses are met. The system has a modest amount of junior lien
debt, in the form of unrated state Water Development Authority, Water Pollution Control Loans, and Public
Works Commission borrowings. Netting out connection fees and transfers from the Surplus Fund, FY2008
senior lien coverage was a suitable 1.65 times; coverage of total debt service was a satisfactory 1.53 times.
When accounting for connection fees ($3.02 million in FY2008) and transfers in from the Surplus Fund
($15.7 million), coverage levels increase to 1.96 times on senior lien debt and 1.81 times on all obligations.
Revenue has exhibited solid growth in recent years, with a 9.6% compound average annual growth rate,
largely attributable to annual rate increases as billable flow has declined. MSD anticipates near future
coverage levels to remain in line with historical norms - FY2009 and FY2010 senior lien coverage is expected
to be 1.7 times and 1.68 times, respectively. The future coverage levels include only modest connection fee
revenues, $3 million or 1.4% of revenues, reflecting reduced growth in the unsewered portions of the
county. Additionally, MSD is not seeing a material increase in delinquencies with collections remaining in
excess of 98% of billed charges.
From an operational standpoint, the current agreement between the county and the city terminates in
2018. The agreement assigns responsibilities within the district, however, the deadline is not expected to
adversely impact the credit quality given the extensive time for an agreement to be reached and the historic
basis of the relationship (since 1968). Further, given that the county and city have independently signed on
to the Global Consent Decree and Wet Weather Improvement Plan with the US and Ohio EPA, there are
practical limitations to either party attempting to dissolve or limit the agreement prior to completion of the
proposed plan. While the current plan, which is discussed in further detail below, has no deadline, work on
proposed plan. While the current plan, which is discussed in further detail below, has no deadline, work on
required projects is expected to extend well beyond 2018. County officials report that discussions are
expected to begin in coming months between the city and county to address possible alternatives for the
system's future operations.
DEBT RATIO EXPECTED TO REMAIN HIGH AS SYSTEM ADDRESSES MAJOR CAPITAL PLAN WITH
ADDITIONAL DEBT AND CASH ON HAND
The district also takes a multi-year approach to its capital planning and the preliminary five year Capital
Improvement Plan (2010-2014) anticipates total capital expenditures of $921 million. Financed with a
combination of prior bond issuances, future revenues, and new debt issuance, the county estimates
approximately $587 million of new revenue bond issuance from 2010 through 2014. New bond issuance in
2010 and 2011 is currently projected at $110 million and $125 million, respectively. Somewhat mitigating
the impact of the increased debt levels is the expectation of annual rate increases and commitment to
maintaining substantial liquidity despite some use of cash for financing improvements. The majority of the
district's five year capital plan will improve the collection system and address combined sewer overflows
(CSO) and sanitary sewer overflows (SSO). Favorably, all of MSD's debt is fixed rate and the system is not
party to any derivatives. With the sizable nature of long-term debt plans that are expected to result in an
ongoing leveraging of system assets and continued rate increases, Moody's believes that MSD's operations
could face challenges if practical limitations to rate increases should arise.
GLOBAL CONSENT DECREE AND WET WEATHER PLAN AGREEMENT REACHED; IMPROVEMENTS TO
ADDRESS OVERFLOWS EXPECTED TO REQUIRE SIGNIFICANT FUTURE CAPITAL SPENDING
Going forward, the capital needs will continue to be driven by a need to meet environmental mandates. A
Global Consent Decree and Interim Consent Decree have been agreed upon by the parties (the system and
the EPA), and was approved by federal courts in 2004; the decrees address combined sewer overflows
(CSOs), treatment plants and sanitary sewer overflows (SSOs). The system has a large number of wet
weather overflows and discharges into the Ohio River, which necessitated the Decrees. Recently, MSD
submitted and all relevant regulatory bodies conditionally approved a Final Wet Weather Improvement Plan
(WWIP) that will be used to implement and meet the requirements outlined in the Consent Decrees. The
plan has two phases with the first phase expected to cost $1.14 billion in 2006 dollars and required to be
completed by December 31, 2018; $300 million of projects are either completed or underway. MSD is
required to submit a plan and schedule for Phase 2, which is estimated to cost $2 billion in 2006 dollars, in
June 2017.
Moody's notes that several aspects of the WWIP are unique and have not been included in other EPA
approved Consent Decrees. These include: a phased approach with no firm deadline for the completion of
the final phase of projects; the ability for MSD to contest any aspects of WWIP implementation which may
lead to violations of bond covenants; and, a cap on residential sewer bills at 2.8% of median household
income. The conditionally approved WWIP requires an amendment to the Consent Decrees, which has
recently been filed in federal court and notice posted in the Federal Register, commencing a 30 day review
period. Following the review period, the EPA will consider public comments and either file a motion with the
Court to enter into the amended Consent Decree or withdraw its amendment to address public objections.
Moody's believes the conditionally approved WWIP includes significant operating flexibility for MSD and
provides bondholder security due to its provisions, including those allowing the system to propose changes
to the WWIP if work may place bondholder covenants in jeopardy.
Outlook
The outlook for MSD's revenue debt is stable, reflecting the system's large and diverse service area that is
holding up relatively well given current economic conditions, ample available liquidity and sound projected
coverage levels.
What could change the rating Up (or change the outlook to Positive):
"Continued positive financial trends including: maintenance or improvement in current coverage levels and
liquidity position.
"Growth in the service area leading to sustained positive billable flow trends.
"Successful federal Court approval of the proposed amendment to the Consent Decrees leading to a more
certain future capital plan.
certain future capital plan.
"Resolution of the operational agreement between Hamilton County and the City of Cincinnati leading to
clarity on MSD's future following the expiration of the current agreement in 2018.
What could change the rating Down (or change the outlook to Negative):
"Inability to achieve rate increases in the future leading to strained operations and declining coverage levels.
"Economic weakening that leads to material reductions in billable flow.
"Material changes in the proposed Consent Decree amendment or conditionally approved WWIP leading to
the need to more aggressively leverage system assets.
KEY STATISTICS:
Type of system: Closed loop; Sewage collection and treatment
Total number of accounts (2008): 229,943
2003-2008 average annual growth in accounts: 0.38%
2003-2008 average annual decline in billable flow: -2.45%
FY2008 Operating ratio: 53.4%
FY2008 senior lien debt service coverage: 1.65x (1.53x coverage of all debt)
FY2008 Debt ratio: 57.4%
Post sale parity debt outstanding: $775 million
The principal methodology used in rating the current issue was "Analytical Framework for Water and Sewer
System Ratings," which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in
the Index of Special Reports - U.S. Public Finance. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies
directory.
The last rating action was on the Metropolitan Sewer District of Greater Cincinnati, Ohio was on December
3, 2007 when the Aa3 rating was affirmed.
Analysts
Thomas P. Schuette
Analyst
Public Finance Group
Moody's Investors Service
Henrietta Chang
Backup Analyst
Public Finance Group
Moody's Investors Service
Contacts
Journalists: (212) 553-0376
Research Clients: (212) 553-1653

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