S&P Rts Village of Hodgkins, Ill., $54M Bnds 'A+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

Nov. 7, 2001--Standard & Poor's today assigned its single-'A'-plus rating to Village of Hodgkins, Cook County, Ill.'s, $54 million tax-exempt revenue bonds issued for Metropolitan Biosolids Management (the project) due 2023.

The outlook is stable.

The rating reflects the credit strength of Vivendi Environment's (Vivendi; triple-'B'-plus/Positive/'A-2') guaranty and the stand-alone credit quality of the project of triple-'B'.

The assigned rating is above both the stand-alone project rating and the Vivendi rating because for the bonds to default, two events would have to happen at the same time--the project fails on its own and Vivendi defaults on its performance guaranty.

The transaction monetizes Metro Water Reclamation District of Greater Chicago (district; double-'A'-plus/Stable) contract payments to the project for treating 150 dewatered ton/day of wastewater sludge under the district service agreement (service agreement). The bonds are issued to fund facility construction. Once in operation, the facility will receive wastewater sludge from the district via a conveyor belt and then will bake the sludge into dry pellets. The dry pellets are then marketed and sold as a soil additive. U.S. Filter Operating Services Inc. (U.S. Filter), a wholly owned subsidiary of Vivendi, will construct and operate the facility, and all its performance obligations will be guaranteed by Vivendi.

If the transaction had been evaluated without the benefits of the Vivendi guaranty, the project would be rated triple-'B'. The triple-'B' rating reflects the project's stand-alone economics based on project finance rating methodology.

According to a project finance evaluation, the main risks in the transaction are construction risk and operating risk. Demand risk and other market risks are allocated to the district. Offtake risk is small because the district is a highly rated entity, and the facility provides an essential service to the district that cannot be easily replaced. Force majeure risk in this transaction is considered to be de minimus.

Standard & Poor's considers the level of construction risk and operating risk to be acceptable for a triple-'B' rating level due to the following mitigating factors:

-- The technology in use is commercially proven and demonstrated and the construction and operation of the facility is not technically difficult.

-- As one of the largest water/wastewater firms in the world, Vivendi and its subsidiary, U.S. Filter, should to able to construct and operate the facility competently.

-- Facility completion is secured by a fixed-price, turnkey engineering, construction, and procurement contract with U.S. Filter that is backed by Vivendi.

-- The facility can be operated without one of its four treatment trains and still have enough capacity to meet the 135 dry ton/day contractual performance requirement.

-- Project operating cost is subordinated to debt service and guaranteed by Vivendi.

-- Projected contract revenue can comfortably cover debt service, with minimum and average debt service coverage ratios of 2.16 times (x) and 2.55x, respectively.

If the transaction were rated solely as a structured finance transaction, the debt rating would be triple-'B'-plus. The structured rating methodology incorporates the weak link approach, which requires the debt to be rated at the lower of Vivendi's rating or the district's rating.

The transaction structure is designed to account for all circumstances such that either the district or Vivendi will be providing cash flow to the project. If the project is performing and operating as planned, the district will be providing the cash flow under the service agreement. In the event the project fails to be completed on time or fails to meet contract performance requirements as specified in the service agreement, Vivendi will pay under its guaranty and keep the project whole by either restoring project economics or paying off the bonds. The guaranty is absolute and unconditional. It requires Vivendi to pay even in the event of a force majeure or a dispute with the district. The only time that the Vivendi guaranty does not apply is when the district defaults on its payments. If Vivendi merges or is acquired by another entity, the surviving entity must assume Vivendi's obligations. If the surviving entity's rating is lower than Vivendi's original rating, the surviving entity must provide enough credit enhancements to restore the project's rating.

OUTLOOK: STABLE

The limited construction risk and the stable revenue expected after completion allow Standard & Poor's to conclude that the outlook is stable. Should problems develop during construction, the rating could be lowered, but not below Vivendi's rating because of the Vivendi guaranty.