OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' rating on approximately \$64 million of series 2009 bonds issued on behalf of Synagro's Philadelphia Project Finance, LLC by the Pennsylvania Economic Development Financing Authority. The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating reflects a financial and operational profile that is supported by the receipt of fixed contractual revenue from the Philadelphia Water Department (PWD, 'A+'/Stable Outlook). Synagro's debt service coverage ratios (DSCRs) are forecasted to exceed 1.6x in a Fitch rating case that models reduced operational performance due to higher operating expense.

Revenue Risk: Midrange
Strong Counterparty, Robust Contractual Protections: Pursuant to the service agreement, PWD will deliver at least 49,000 dry tons per year of sludge for processing. Payments are structured to cover the cost of debt and the fixed and variable operating expense associated with treatment and disposal. The project must fulfill certain processing requirements or incur revenue deductions, though this has not occurred to date.

Operation Risk: Midrange
Routine Operations: The project incorporates a high degree of excess capacity with relatively simple and proven technology. In addition, the service agreement passes through nearly all costs to PWD, except for power consumption beyond projected levels and also operating & maintenance cost increases caused by changes in the regulatory regime for sewage treatment.

Infrastructure Development & Renewal Risk: Stronger
Manageable Capital Expenditure Profile: Fitch does not anticipate that Synagro will incur non-routine maintenance cost prior to the maturity of the bonds, and the project is not required to make specific capital improvements under the service agreement. The capacity of the facility appears sufficient to meet Synagro's contractual obligations.

Debt Structure: Stronger
Level Debt Service with Adequate Structural Features: The fixed rate bonds fully amortize with level debt service. The dividend lock-up test is set at 1.2x and the cash-funded debt service reserve fund (DSRF) covers one year of maximum annual debt service.

Financial Metrics
Metrics Consistent with Rating Level: Under Fitch's rating case scenario, DSCRs are forecasted to average 1.75x through the life of the debt. Leverage is moderate at approximately 5.4x net debt-to-cash flow available for debt service (CFADS) but is expected to evolve down to 4x within five years.

Peer Group: The peer group within Fitch's portfolio is limited to Synagro-Baltimore's sludge processing facility (rated 'BBB+' with Stable Outlook). Overall, performance is relatively similar with average and minimum Fitch rating case coverage ratios of approximately 1.7x and 1.6x, respectively. However, Synagro-Philadelphia's leverage is significantly elevated in relation to the Baltimore facility as Baltimore's debt matures at the end of next year.

RATING SENSITIVITIES

Negative - Operational Performance: Sustained operational performance that results in DSCRs below 1.3x would be inconsistent with the current rating;

Negative - Counterparty Exposure: A significant decline in the credit quality of PWD would pressure the rating;

Positive: A return to original processing forecasts over a sustained period supported by demonstrated operational performance and DSCR metrics would be viewed favorably.

CREDIT UPDATE:

The facility processed 59,700 dry tons in 2014 which is approximately in line with original projections of 60,000 dry tons per annum. Management forecasts the facility will process 60,173 dry tons in 2015 and further expects future operations to not materially deviate from the originally proposed forecast. The facility had previously processed 48,138 dry tons (approximately 20% below forecast due to a shortened operating year) in 2012 and 54,268 dry tons (approximately 10% below forecast) in 2013.

Revenue in 2014 increased 2.6% from 2013 and was 8% above original sponsor forecast. Operating expense in 2014 increased 14% due to some increased sales costs related to pellet transportation via rail. However, this increase is only 7% above original sponsor forecasts, maintaining operating margin. Management expects to resolve the transportation issue within the near term. The 2015 budget forecasts a revenue increase of 1.7% and cost increase of 1%. Fitch estimates DSCRs of 1.71x and 1.76x in 2014 and 2015, respectively.

Similar to prior years, Fitch ran various scenarios to test cash flow resiliency. In the Fitch base case, operating revenue and expense were assumed at the 2015 budget level and grown thereafter at 2% and 3%, respectively. Current budget expectations for product sales revenue and associated expense were assumed as well and grown at 3% annually. Capital expense is included in cash flow at the 2014-2015 budget level of \$500k and assumed to increase to \$650k thereafter. Through maturity, the project's DSCRs remain above 1.63x and average 1.84x.

The Fitch rating case assumes an operating stress that escalates expense at 3.5%. In this case, the project's DSCRs remain above 1.60x and average 1.75x. Additionally, Fitch ran a scenario that stresses product sales and increases disposal cost, and a scenario wherein the project receives revenue based on the minimum guaranteed 49,000 dry tons. In the product sales case DSRCs would average 1.62x, while in the minimum revenue case DSCRs would average 1.28x with a minimum of 1.16x.

The bond proceeds were loaned to Philadelphia Project Finance, LLC to finance the construction of a new biosolids processing facility and related improvements to the existing facility in Philadelphia, PA. Substantial completion and city acceptance occurred on Feb. 02, 2012. Originally there was concern of potential exposure to the credit quality of Synagro Technologies Inc. (STI), Synagro's parent; however Synagro was not consolidated in STI's 2013 bankruptcy proceedings, which Fitch views favorably.

SECURITY

The bonds are secured solely by a first and exclusive lien on the trust estate and a leasehold mortgage which pledges all of the borrower's right, title and interest in the project site and project facility and the borrower's rights as lessor under the facility lease and various contract rights associated with the project facility.