Fitch Affirms Mission Economic Development Corp. (Dallas Clean Energy McCommas Bluff) at 'BBB-'
Fitch Ratings has affirmed at 'BBB-' the ratings on Mission Economic
Development Corporation's (Dallas Clean Energy McCommas Bluff LLC, or
'DCEMB') $40.2 million aggregate series 2011 revenue bonds due 2024. The
Rating Outlook is Negative.
The Negative Outlook reflects the ongoing landfill gas (LFG) production
shortfall and the uncertain timing of both the construction of a new
landfill cell and the potential reinstatement of the enhanced leachate
recirculation system. Restricted LFG availability has prevented DCEMB
from realizing the anticipated benefits of the recent capacity
expansion, and DCEMB has yet to demonstrate output levels consistent
with Fitch's rating case. Resolution of the Negative Outlook is based
upon DCEMB's progress toward improving production levels before 2017.
KEY RATING DRIVERS
Revenue Risk: Midrange
Fixed-Price, Long-Term Agreement: The project benefits from a long-term,
fixed-price gas sale agreement with Shell Energy North America that
provides price stability through the life of the contract. In addition
to these contracted revenues, the project is expected to earn
incremental revenues under base case conditions by selling excess LFG
production at market prices. The project does not earn merchant revenues
under Fitch's rating case.
Operating Risk: Midrange
Unproven Operating Cost Profile: The project has yet to establish a
history of stable operating costs. Since inception, operating costs have
increased compared to original projections due to ongoing maintenance
and repair efforts. The sponsor expects a normalization of costs going
Supply Risk: Weaker
Heightened Resource Risk: The project is highly dependent on the
accuracy of the LFG recovery forecast and the level of interference from
landfilling operations, which are currently restricting the project's
output. LFG recovery estimates have been revised several times since the
original projections due to drought, landfilling timing lags, and
fluctuating refuse placement within the project site. Resource risk is
partially mitigated by the active nature of a landfill site that is
permitted to remain open well beyond the tenor of the project debt.
Debt Structure: Stronger
Enhanced Liquidity, Standard Protections: The project benefits from a
12-month debt service reserve based on maximum annual debt service, a
$1.3 million operating reserve, and typical cash lock up provisions. The
debt structure is considered stronger due to the increased liquidity
compared to the typical six-month debt service reserve.
Uncertain Financial Profile: Financial performance continues to
underperform Fitch's rating case due to poor resource availability.
Fitch's rating case DSCRs average 1.79x with a minimum of 1.70x under
conditions that include reduced availability, lower output, and higher
O&M expenses versus the base case DSCRs.
Peer Comparison: DCEMB's credit quality is consistent with that of a
similarly-rated open-landfill LFG project with rating case DSCRs above
1.7x. Another investment-grade LFG project includes DSCRs below 1.5x but
benefits from sponsor guarantees. DCEMB's financial metrics are
relatively high compared to non-LFG investment grade thermal projects,
but Fitch views the additional cushion as appropriate given the
heightened level of long-term resource risk.
Negative - Resource Reductions: Failure to make substantive progress
toward achieving rating case production levels before 2017 and/or
continued delay in the completion of the new landfill cell could result
in negative rating action.
Negative - Volatile Cost Profile: The project's failure to demonstrate a
stable cost profile and margins consistent with rating case expectations
could reduce credit quality.
Positive - An improvement in credit quality is unlikely absent a
demonstrated ability to consistently achieve base case production levels
and a stable cost profile.
Interference from landfill operations has limited LFG production and
prevented the project from capitalizing on recently added capacity,
resulting in financial performance that continues to considerably lag
the Fitch rating case. The sponsor estimates a YE 2015 DSCR of 1.53x, or
1.38x if capital expenditures are subtracted from cash flow. The
anticipated 2015 DSCR falls well below the budgeted DSCR of 1.81x,
though it does represent an improvement from the previous two years.
Early in 2015, the City of Dallas (the City) shifted its landfilling
operations to the surface of the McCommas Bluff landfill's existing
cells, where the project's LFG collection equipment is located. This
change in landfill activity has forced off-line approximately 15% of the
project's wells in the active section of the landfill, greatly reducing
LFG output. The project's YTD Nov. 2015 average output of 4,986
MMBtu/day is nearly unchanged from the prior year when the project was
resolving ramp-up issues. The City frequently requires DCEMB to
temporarily relocate LFG gathering equipment to accommodate landfill
operations, and the project has borne the additional costs.
The City is planning to construct a new landfill cell, which would
alleviate LFG output constraints. The sponsor believes that current
operating restrictions will be resolved by Q3 2016 and has indicated
that the City is cooperating with the project to mitigate the negative
impact on LFG production. Recent operations support this expectation, as
October and November LFG production has risen to the 5,400 MMbtu/day -
5,500 MMbtu/day range. Nonetheless, Fitch believes that the timing of
the new landfill cell's completion, and any reinstatement of the
enhanced leachate program, is highly uncertain.
The project's operating profile has improved, notwithstanding weak LFG
production, with availability of 96.5% through November 2015. Elevated
operating costs remain largely unchanged but are expected to moderate in
part due to the sulfur removal system installed in Q3 2015 and the
thermal oxidizer installed in 2014. The thermal oxidizer has cut natural
gas buyback volumes in half for a savings of approximately $650,000 per
year after adjusting for lower natural gas prices.
The project is reliant upon the proposed construction of the new
landfill cell to relieve current operational constraints. The sponsor's
2016 budget projects a DSCR of 1.7x, inclusive of capital expenditures,
which would depend upon a resumption of normal landfill operations and
increased utilization of Train 2 capacity. Fitch's projections assume
construction of the landfill cell but are subject to revision if a
prolonged delay continues to limit LFG availability. Fitch's rating case
DSCRs average 1.79x with a minimum of 1.70x under conditions that
include a 5% reduction to availability, a 2% increase to treating loss,
a 15% reduction to resource availability, and a 15% increase to O&M
DCEMB is a 15.5 million scfd landfill gas project that converts LFG into
pipeline quality gas. Two private equity funds, jointly managed by
Energy Power Partners, maintain an aggregate 70% indirect ownership
interest in the project. The landfill is owned and operated by the City
of Dallas and covers 2,025 acres. Originally permitted in 1980, the
landfill takes in municipal solid waste and construction and demolition
waste from Dallas, Fort Worth, and the surrounding areas.
Additional information is available on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Thermal Power Projects (pub. 23 Jun 2015)
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