NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has affirmed the ratings of Mission Economic Development Corporation's ('Dallas Clean Energy McCommas Bluff, LLC' or 'DCEMB') $40.2 million aggregate series 2011 revenue bonds due 2024 at 'BBB-'. The Rating Outlook is Stable.
--Strong Revenue Agreement: The project benefits from a long term, fixed-price gas sale agreement (GSA) with Shell Energy North America that provides revenue stability through the life of the contract. The GSA was amended in 2012 to increase the amount of gas purchased by Shell which reduces exposure to excess gas sales at market prices. The possible nine-month tail on the Shell contract is mitigated by a fully funded twelve-month debt service reserve sized at $4.75 million.
--Resource Risk: The project is highly dependent on the accuracy of the landfill gas (LFG) recovery forecast. The LFG recovery estimates have been revised downwards twice since the original projection due to drought and reduced collection efficiency at the project site. The result is LFG collection efficiency reduction of 15% over the life of the debt.
--Uncertain Cost Profile: The project has yet to establish a history of stable operating costs under revised projections provided by Clean Energy as the operator. 2012 operating costs have fallen in line with these projections; however, the expansion phase will not be completed until February 2013, and so the true cost profile may differ from actual experience.
--Adequate Financial Profile: The revision to the resource assessment is offset by the increased gas sale commitments under the GSA. Debt service coverage ratios (DSCR) remain consistent with the current rating with over 2.0 times (x) coverage in 2011 and 2012 per Fitch's calculation. Under Fitch's rating case, which incorporates stresses to availability, operating costs and resource availability, average DSCR is 1.82x with a minimum of 1.36x.
What Could Trigger a Rating Action
--A material change to actual LFG recovery compared to forecast;
--Decreased availability of the Project below historical levels;
--A change to the cost profile that significantly impacts cash flow.
The security package consists of a first priority lien on the assets of the project company including the lease with the City of Dallas, sponsor's ownership interest in the project company, all project contracts including the lease, rights, construction agreements, the GSA and the Gas Transportation Agreements. The collateral does not include the landfill site.
Fitch believes construction risk is minimal despite a substantial delay in completion. The estimated completion date has been revised to Feb. 28, 2012. All of the equipment for the expansion in on-site and installed, reducing the risk of cost overruns. The project is owed liquidated damages (LDs) pursuant to the contract for late completion. However, the project is not reliant on these LDs to meet final completion or scheduled debt service payments.
Following a reduction to the LFG curve in 2011, the sponsor has further lowered the collection system coverage percentage (a measurement of collection efficiency). The reduction was due to a timing issue with the sequence of landfilling the garbage and the efficiency of how well installation was proceeding. Overall collection efficiency was reduced to a cap of 80% from 95% over the project life as originally estimated.
Offsetting this collection reduction is an increase to the production caps purchased by Shell under the GSA as amended in March 2012. The new schedule increases the amount of natural gas to be purchased by Shell through 2034 assuming the lease with the City of Dallas is extended. Additionally, due to the improvements at the facility being more effective than anticipated, actual inlet capacity will be increased to 15.5 million standard cubic feet per day (scfd) compared to the 14.8 million scfd assumed for previous ratings.
The project has covered debt payments at more than 2.0x for 2011 and 2012 while fully funding the debt service reserve at $4.75 million and O&M reserve at $1.3 million. The project has maintained availability of 90% for 2012 with most down time related to the expansion project. In addition, the project has met operating expenses as budgeted last year apart from sulfur removal expenses which have increased compared to the prior year budget. As a response to this increase, the sponsor budgeted for an additional $1 million in equipment to extend the life of the sulfur removal media which would extend the replacement cycle from three months to two years. This is expected to reduce the sulfur removal costs to original projections. The expense has already been paid out of the construction budget.
DCEMB is a 15.5 million scfd landfill gas project that converts landfill gas into pipeline quality gas. The landfill is owned and operated by the City of Dallas and covers 2,025 acres in Southeast Dallas, of which 1,029 acres are designated for buffer, roads and utilities and 996 acres are designated for waste disposal. Originally permitted in 1980, the landfill takes in MSW and construction and demolition waste from Dallas, Fort Worth and the surrounding areas. It is the 11th largest landfill in the U.S. from a total of approximately 6,000 per Environmental Protection Agency estimates.
DCEMB is largely (70%) controlled by Clean Energy Fuels, a small-cap publicly traded company. The project was originally conceived, entered into a lease with the City of Dallas in 1994 and commenced operations in 1999. The lease and gas plant developed by the original leaseholder have passed through hands of various leaseholders.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Thermal Power Projects' (June 18, 2012);
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Thermal Power Projects
Rating Criteria for Infrastructure and Project Finance
- Government Agencies
- City of Dallas
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