Fitch Affirms Pennsylvania Econ Devel Fin Auth's $68MM Sewage Sludge Revs at 'BBB'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'BBB' rating on approximately $68 million of Pennsylvania Economic Development Financing Authority (the authority) sewage sludge disposal revenue bonds, series 2009 at 'BBB'. The proceeds were loaned by the authority to Philadelphia Project Finance, LLC (the borrower) to finance the construction of a new biosolids processing facility (the project) and improvements to the existing facility in Philadelphia, PA. The Rating Outlook is Stable.

KEY RATING DRIVERS:

Strong Counterparty, Robust Contractual Protections: Project cash flows are derived from a fixed price service agreement with the Philadelphia Water Department (PWD), rated 'A+' by Fitch. Pursuant to the service agreement, PWD will deliver at least 49,000 dry tons per year (DTY) of sludge for processing. Payments are structured to compensate the project for the cost of debt and for the fixed and variable operating expenses associated with treatment and disposal. The project must fulfill certain processing requirements or incur revenue deductions, though this has not occurred to date. Revenue Risk: Midrange

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

Level Debt Service With Adequate Structural Features: The bonds are fully amortizing, and there is no escalation of annual debt service obligations. The dividend lock-up test is set at 1.2x and the cash-funded debt service reserve covers one year of maximum annual debt service. Under Fitch's rating case scenario, annual debt service coverage ratio (DSCR) should remain near or above 1.4x through the life of the debt. Leverage is moderate at approximately 7.0x net debt-to-cash available for debt service (CFADS). Debt Structure: Stronger

Parent Exposure: The 'BBB' rating is based on the project's stand-alone credit profile but is limited by potential exposure to the credit quality of Synagro Technologies Inc. (STI), Synagro's parent and a deeply sub-investment-grade entity. While the project has been organized as a bankruptcy-remote, special-purpose vehicle, partially mitigating potential linkage to STI, Synagro is vulnerable to potential volatility in STI's overhead costs, as management service fees are currently allocated across STI's entities as a percentage of revenues. Ownership & Sponsors: Weaker

RATING SENSITIVITIES:

--Sustained operational performance that results in DSCR below 1.3x would be inconsistent with the current rating;

--A significant decline in the credit quality of PWD could pressure the rating;

--An inability to sell processed product at improving margins would further stress EBITDA, lowering DSCR to a level inconsistent with the current rating.

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.

CREDIT UPDATE:

Dry tons treated in 2013 were approximately 10% below initial projections. Synagro presently expects that 56,500 dry tons will be treated in 2014, up 4% from the prior year but still approximately 6% below initial projections of 60,000 dry tons per annum. Despite processing lower volumes, DSCR remained above 1.7x in 2013 given lower O&M costs.

Based on budgeted expectations for 2014, Fitch expects CFADS, which reflects deductions for management fees and maintenance expectations, will total approximately $9.9 million resulting in 1.6x coverage for the year.

Fitch's base case scenario, which assumes expenses grow approximately 1% faster than revenues, and management fees increase by 2% annually, indicates that DSCRs would average approximately 1.52x during the next five years. In Fitch's rating case, which assumes expenses grow approximately 1.5% faster than revenues, and management fees increase by 3% annually, DSCRs average approximately 1.49x over the next five years.

Fitch will continue to monitor the net results from sales of processed product generated at the facility as they currently result in net losses. Widening net loss operations from such sales could pressure future coverage levels, as could increases in management fees beyond projected levels.

The project is the result of a public/private partnership between PWD and a wholly owned subsidiary of STI to construct a new biosolids processing facility and to make improvements necessary to the existing facility. The newly constructed facility is designed to more effectively process the sewage sludge generated from three water pollution control plants in the city of Philadelphia into Class A biosolids. Synagro is the largest recycler of organic residuals in the United States.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Guidelines for Infrastructure and Project Finance' (Aug. 2, 2012);

--'Rating Guidelines for Availability-based Infrastructure Projects' (June 18, 2013);

--'Pennsylvania Economic Development Financing Authority, Philadelphia Biosolids Facility Project' (Nov. 24, 2009).

Applicable Criteria and Related Research:

Rating Criteria for Availability-Based Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710784

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822679

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Contacts

Fitch Ratings
Primary Analyst
Zane P. Latham, +1-415-732-5612
Associate Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Christopher Joassin, +1-312-368-3166
Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Zane P. Latham, +1-415-732-5612
Associate Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Christopher Joassin, +1-312-368-3166
Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com