| SYNAGRO TECHNOLOGIES INC Item 1A Risk Factors Risk Factors That May Affect Future Results Federal wastewater treatment and biosolid regulations may restrict our operations or increase our costs of operations |
| Federal wastewater treatment and wastewater residuals laws and regulations impose substantial costs on us and affect our business in many ways |
| If we are not able to comply with the governmental regulations and requirements that apply to our operations, we could be subject to fines and penalties, and we may be required to invest significant capital to bring operations into compliance or to temporarily or permanently stop operations that are not permitted under the law |
| Those costs or actions could have a material adverse effect on our business, financial condition and results of operations |
| Federal environmental authorities regulate the activities of the municipal and industrial wastewater generators and enforce standards for the discharge from wastewater treatment plants (effluent wastewater) with permits issued under the authority of the Clean Water Act, as amended |
| The treatment of wastewater produces an effluent and wastewater solids |
| The use and disposal of biosolids and wastewater residuals is regulated by 40 CFR Part 503 Regulations promulgated by the EPA pursuant to the Clean Water Act (“Part 503 Regulations”) |
| The Part 503 Regulations also establish use and disposal standards for biosolids and wastewater residuals that are applicable to publicly and privately owned wastewater treatment plants in the United States |
| Biosolids may be surface disposed in landfills, incinerated, or applied to land for beneficial use in accordance with the requirements established by the regulations |
| To the extent demand for our wastewater residuals treatment methods is created by the need to comply with the environmental laws and regulations, any modification of the standards created by such laws and regulations, or in their enforcement, may reduce the demand for our wastewater residuals treatment methods |
| Changes in these laws or regulations and/or changes in the enforcement of these laws or regulations may also adversely affect our operations by imposing additional regulatory compliance costs on us, and requiring the modification of and/or adversely affecting the market for our wastewater residuals management services |
| 18 _________________________________________________________________ [58]Table of Contents We are subject to extensive and increasingly strict federal, state and local environmental regulation and permitting, which could impose substantial costs on our operations or reduce our operational flexibility |
| Our operations are subject to increasingly strict environmental laws and regulations, including laws and regulations governing the emission, discharge, treatment, storage, disposal and transportation of certain substances and related odor |
| Wastewater treatment plants and other plants at which our biosolids management services may be implemented are usually required to have permits, registrations and/or approvals from state and/or local governments for the operation of such facilities |
| Some of our facilities require air, wastewater, storm water, composting, use or siting permits, registrations or approvals |
| We may not be able to maintain or renew our current permits, registrations or licensing agreements or to obtain new permits, registrations or licensing agreements, including for the land application of biosolids when necessary |
| The process of obtaining a required permit, registration or license agreement can be lengthy and expensive |
| We may not be able to meet applicable regulatory or permit requirements, and therefore may be subject to related legal or judicial proceedings |
| Many states, municipalities and counties have regulations, guidelines or ordinances covering the land application of biosolids, many of which set either a maximum allowable concentration or maximum pollutant-loading rate for at least one pollutant |
| The Part 503 Regulations also require certain monitoring to ensure that certain pollutants or pathogens are below designated thresholds |
| The EPA has considered increasing these thresholds or adding new thresholds for different substances, which could increase our compliance costs |
| In addition, some states have established management practices for land application of biosolids |
| Some members of Congress, some state and local authorities, and some private parties, have sought to prohibit or limit the land application, agricultural use, thermal processing or composting of biosolids |
| Much of this public opposition and challenge, as well as related complaints, relates to odor issues, even when we are in compliance with odor requirements and even though we have worked hard to minimize odor from our operations |
| Public misperceptions about our business and any related odor could influence the governmental process for issuing such permits, registrations and licensing agreements or for responding to any such public opposition or challenge |
| Community groups could pressure local municipalities or state governments to implement laws and regulations which could increase our costs of our operations |
| In states where we currently conduct business, certain counties and municipalities have banned the land application of Class B biosolids |
| Other states and local authorities are reviewing their current regulations relative to land application of biosolids |
| There can be no assurances that these or other prohibition or limitation efforts will not be successful and have a material adverse effect on our business, financial condition and results of operations |
| In addition, many states enforce landfill restrictions for nonhazardous biosolids and some states have site restrictions or other management practices governing lands |
| These regulations typically require a permit to use biosolid products (including incineration ash) as landfill daily cover material or for disposal in the landfill |
| It is possible that landfill operators will not be able to obtain or maintain such required permits |
| Any of the permits, registrations or approvals noted above, or related applications may be subject to denial, revocation or modification, or challenge by a third party, under various circumstances, which could have a material adverse effect on our ability to conduct our business |
| We are affected by unusually adverse weather and winter conditions, which may adversely affect our revenues and operational results |
| Our business is adversely affected by unusual weather conditions and unseasonably heavy rainfall, which can temporarily reduce the availability of land application sites in close proximity to our business upon which biosolids can be beneficially reused and applied to crop land |
| Material must be transported to either a permitted storage facility (if available) or to a local landfill for disposal |
| In either case, this results in additional costs for disposal of the biosolids material |
| In addition, our revenues and operational results are adversely affected during the winter months when the ground freezes thus limiting the level of land application that can be performed |
| Long periods of inclement weather could reduce our revenues and operational results causing a material adverse effect on our results of operations and financial position |
| 19 _________________________________________________________________ [59]Table of Contents Our ability to grow may be limited by direct or indirect competition with other businesses that provide some or all of the same services that we provide |
| We provide a variety of services relating to the transportation and treatment of wastewater residuals |
| We are in direct and indirect competition with other businesses that provide some or all of the same services including small local companies, regional residuals management companies, and national and international water and wastewater operations/privatization companies, technology suppliers, municipal solid waste companies, farming operations and, most significantly, municipalities and industries who choose not to outsource their residuals management needs |
| Some of these competitors are larger; more firmly established and have greater capital resources than we have |
| If our long-term contracts are renewed on less attractive terms, or not renewed at all, or if we are unsuccessful in bidding on new long-term contracts, our operating results and financial condition would be adversely affected |
| We derive a substantial portion of our revenue from services provided under municipal contracts |
| A portion of our contracts expire annually and are sometimes subject to competitive bidding |
| Any contracts that are successfully renewed may be on less attractive terms and conditions than the expired agreement |
| We also intend to bid on new municipal contracts |
| In the event we are unable to renew our existing contracts on attractive terms, or at all, or be successful in bidding on new contracts, our operating results and financial condition would be adversely affected |
| If one or more of our customer contracts are terminated prior to the expiration of their term, and we are not able to replace revenues from the terminated contract or receive liquidated damages pursuant to the terms of the contract, the lost revenue would have a material and adverse effect on our business, financial condition and results of operations |
| A substantial portion of our revenue is derived from services provided under contracts and written agreements with our customers |
| Some of these contracts, especially those contracts with large municipalities (including our largest contract and at least four of our other top ten customers), provide for termination of the contract by the customer after giving relative short notice (in some cases as little as ten days) |
| In addition, some of these contracts contain liquidated damages clauses, which may or may not be enforceable in the event of early termination of the contracts |
| If one or more of our new facilities is not completed as scheduled, and we are not able to replace revenues from the new facility, this could have a material and adverse effect on our financial performance and cash flow |
| Our ability to generate revenues and cash flow sufficient to pay dividends on our outstanding common stock and interest on outstanding debt is dependent upon successfully financing and completing five new facilities scheduled to commence operations 2006 |
| Although permitting processes for all five new facilities are complete and construction is in progress or near completion, there can be no assurance that we will be able to complete construction as scheduled and begin to operate the facilities without the need to remedy certain defects that may arise immediately after construction |
| In addition, as with our other facilities, our relationship is governed by customer contracts which can be terminated prior to the expiration of their term |
| A significant amount of our business comes from a limited number of customers and our revenue and profits could decrease significantly if we lost one or more of them as customers |
| Our business depends on our ability to provide services to our customers |
| One or more of these customers may stop buying services from us or may substantially reduce the amount of services we provide them |
| Any cancellation, deferral or significant reduction in the services we provide these principal customers or a significant number of smaller customers could seriously harm our business, financial condition and results of operations |
| For the year ended December 31, 2005, our single largest customer accounted for 16 percent of our revenues and our top ten customers accounted for approximately 41 percent of our revenues |
| 20 _________________________________________________________________ [60]Table of Contents If we were unable to obtain bonding required in connection with certain projects, we would be ineligible to bid on those projects |
| Consistent with industry practice, we are required to post performance bonds in connection with certain contracts on which we bid |
| In addition, we are often required to post both performance and payment bonds at the time of execution of contracts for commercial, federal, state and municipal projects |
| The amount of bonding capacity offered by sureties is a function of the financial health of the entity requesting the bonding |
| Although we could issue letters of credit under our credit facility for bonding purposes, if we are unable to obtain bonding in sufficient amounts we may be ineligible to bid or negotiate on projects |
| As of March 27, 2006, we had a bonding capacity of approximately dlra172 million with approximately dlra148 million utilized as of that date |
| We could face personal injury, third-party or environmental claims or other damages resulting in substantial liability for which we are uninsured or inadequately insured and which could have a material adverse effect on our business, financial condition and results of operations |
| We carry dlra51 million of liability insurance (including umbrella coverage), and under a separate policy, dlra10 million of aggregate pollution and legal liability insurance (dlra10 million each loss) subject to retroactive dates, which we consider sufficient to meet regulatory and customer requirements and to protect our employees, assets and operations |
| It is possible that we will not be able to maintain such insurance coverage in the future |
| Our insurance programs utilize large deductible/self-insured retention plans offered by a commercial insurance company |
| Large deductible/self-insured retention plans allow us the benefits of cost-effective risk financing while protecting us from catastrophic risk with specific stop-loss insurance limiting the amount of self-funded exposure for any single loss |
| We are dependent on the availability and satisfactory performance of subcontractors for our design and build operations and the insufficiency and unavailability of and unsatisfactory performance by these unaffiliated third party contractors could have a material adverse effect on our business, financial condition and results of operations |
| We participate in design and build construction operations usually as general contractor |
| Virtually all design and construction work is performed by unaffiliated third-party subcontractors |
| As a consequence, we are dependent on the continued availability of and satisfactory performance by these subcontractors for the design and construction of our facilities |
| Further, as the general contractor, we are legally responsible for the performance of our contracts and/if such contracts are underperformed or nonperformed by our subcontractors, we could be financially responsible |
| Although our contracts with our subcontractors provide for indemnification if our subcontractors do not satisfactorily perform their contract, such indemnification may not cover our financial losses in attempting to fulfill the contractual obligations |
| Fluctuations in fuel costs could increase our operating expenses and negatively impact our net income |
| The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns and environmental concerns |
| Because fuel is needed to run the fleet of trucks that service our customers, our incinerators, our dryers and other facilities, price escalations or reductions in the supply of fuel could increase our operating expenses and have a negative impact on net income |
| However, we are not always able to pass through all or part of the increased fuel costs due to the terms of certain customers’ contracts and the inability to negotiate such pass through costs |
| If we fail to properly estimate the cost of completing a project, and we cannot pass additional costs through to our customers, we may not generate sufficient revenue from the project to cover the operating costs of such project, which would adversely affect our net income |
| Our customer contracts involve performing tasks for a fixed cost (in total or on a per unit basis), and if actual costs end up exceeding anticipated costs, our net income would be adversely affected |
| Due in part to the technical 21 _________________________________________________________________ [61]Table of Contents imprecision inherent in estimating the volume of residuals, we may misestimate the volume of residuals, which may increase our costs |
| To the extent that unexpected costs may arise in connection with work done pursuant to contracts that do not allow us to fully transfer such costs to our customers, our operating costs would increase and our net income would in turn be negatively affected |
| We are not able to guarantee that our estimated remaining contract value, which we call backlog, will result in actual revenues in any particular fiscal period |
| Any of the contracts included in our backlog, or estimated remaining contract value, presented herein may not result in actual revenues in any particular period or the actual revenues from such contracts may not equal our backlog |
| In determining backlog, we calculate the expected payments remaining under the current terms of our contracts, assuming the renewal of contracts in accordance with their renewal provisions, no increase in the level of services during the remaining term, and estimated adjustments for changes in the consumer price index for contracts that contain price indexing |
| However, part or all of our backlog may not be recognized as revenue or earnings |
| If we lose the pending lawsuits we are currently involved in, we could be liable for significant damages and legal expenses |
| In the ordinary course of business, we may become involved in various legal and administrative proceedings, including proceedings related to permits, land use or environmental laws and regulations |
| We are currently subject to several lawsuits relating to our business |
| Our defense of these claims or any other claims against us may not be successful |
| If we lose these or future lawsuits, we may have to pay significant damages and legal expenses, and we could be subject to injunctions, court orders, loss of revenues and |