December 18, 2015 - 2:53 PM EST
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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 forward.

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.

Financial Metrics

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.

RATING SENSITIVITIES

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.

CREDIT UPDATE

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 expenses.

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

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Thermal Power Projects (pub. 23 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997079

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997079

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Christopher Joassin
Director
+1-312-368-3166
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Yvette Dennis
Senior Director
+1-212-908-0668
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]


Source: Business Wire (December 18, 2015 - 2:53 PM EST)

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