Fitch Affirms Mission Economic Development Corp. (Dallas Clean Energy Mccommas Bluff) at 'BBB-'

Fitch Ratings has affirmed the 'BBB-' 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. The Rating Outlook is Stable.

KEY RATING DRIVERS

Long-Term 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. In addition to these contracted revenues, the project is expected to earn incremental revenues by selling excess gas production at market prices. The possible nine month tail on GSA is mitigated by a fully funded 12-month debt service reserve based on the maximum annual debt service (MADS) amount of $4.75 million. (Revenue Risk: Midrange)

Material Resource Risk: The project is highly dependent on the accuracy of the landfill gas (LFG) recovery forecast. The LFG recovery estimates have been revised several times since the original projections due to drought, landfilling timing lags, and refuse placement within the project site. These revisions highlight the project's exposure to resource risk, which is partially mitigated by the active nature of the landfill gas site. The sponsor expects the landfill to accept waste through at least 2040, reducing the risk of a decline in resources. (Supply Risk: Weaker)

Uncertain Operating Cost Profile: The project has yet to establish a history of stable operating costs under revised projections provided by the sponsor. Recently, operating costs have increased compared to original projections due to ongoing completion efforts, though the sponsor anticipates that these costs will normalize beginning in 2014. (Operation Risk: Midrange)

Strong Debt Structure: The project benefits from a 12-month debt service reserve based on MADS, a $1.3 million operating reserve, and typical cash lock up provisions. Projected debt service coverage ratios (DSCR) under Fitch's rating case average 1.82x with a minimum of 1.70x. The relatively high coverage helps to mitigate resource risk over the long term. (Debt Structure: Stronger)

RATING SENSITIVITIES

--A 15% or greater reduction in actual LFG recovery compared to forecast due to inefficiency or degraded landfill content;

--A sustained decrease in availability below 90%;

--Any permanent changes to the cost profile that significantly impact cash flow.

SECURITY

The security package consists of a first priority lien on the assets of the project company including the lease with the City of Dallas, the 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.

CREDIT UPDATE

Following extensive completion delays, the project is nearly complete with demonstrated ramp up during the expansion phase. The sponsor has provided operating reports that highlight production per train and gas processing capability at levels near the contracted capacity for each train. While the project has yet to reach the full capability of 15.5 standard cubic feet per day (scfd) based on the current output from the landfill, the addition of refuse over the short term should improve production volumes in order to allow the project to operate at full capacity.

On April 8, 2013, the contractor, VM Energy, provided notice of substantial completion; however, the project was not able to pass performance tests required under the construction contract. The contract with VM Energy was terminated in June 2013 and the sponsor utilized affiliate resources and hired additional contractors to assist with the completion of the project. DCEMB has completed the necessary repairs and design modifications to meet performance testing requirements for the output of the combined plant and the sponsor anticipates that the project should operate as designed. The sponsor and VM Energy went through mediation and are now going through arbitration due to the liquidated damages that the sponsor believes are due to DCEMB under the contract.

The project is substantially complete following delays and underperformance during the original commissioning period. Final commissioning began in the fourth quarter 2013 compared to an original completion estimate of August 2012. Fitch views positively the sponsor support provided to the project in order to meet final completion despite substantial delays. The sponsor has foregone roughly $1.3 million in distributions from project cash flow in order to complete the project to design specifications, with an incremental $351,000 in costs outstanding related to flare and emissions control updates. Additional sums of distributed cash from project operations may also be required to enable upgrades to existing equipment. These upgrades do not impact project output; however, the underperformance of the equipment has resulted in increased operating expenses for 2013. The upgrades seek to reduce these expenses over the project life and the funding of the upgrades should not impact debt service coverage for 2014.

The project incurred additional costs and lower availability due to the delay in start-up and the additional work required to meet design specifications. Labor costs increased by 33% from original estimates in 2012 and by 12% in 2013 and plant capacity declined to 79.2% in 2013 from 91.4% in 2012. Following project ramp up, the sponsor expects that direct labor costs and the project capacity factor will normalize to original expectations.

Fitch has revised its financial projections based on an updated LFG curve that reflects the actual amounts, positioning, and composition of waste deliveries. The sponsor has reduced collection efficiency assumptions in the updated curve due the inability to expand the wellfields at the site as initially planned. The concentration of refuse and sequencing of placement has reduced the sponsor's ability to increase collection efficiency to 80% as previously assumed. The current LFG curve caps collection efficiency at 65% through 2030. Favorably, the waste received over the last two years has been deposited in the area that benefits from a leachate program with high moisture content while waste deliveries have increased overall. Thus, the sponsor believes that projected long-term LFG recovery has increased compared to prior year projections.

Due to increased production levels compared to the original contract estimates, the project has begun to purchase natural gas to flare residual waste gases produced during LFG processing. The project is capable of utilizing its own green gas to power flaring; however, cash flow is improved using favorably priced natural gas. An incremental fuel cost of roughly $1.4 million per year has been included in Fitch's updated projections.

Fitch calculated 2013 DSCR decreased to 1.32x due to the ongoing downtime associated with construction combined with the increased labor costs to meet completion. The sponsor expects 2014 cash flows to ramp up as the LFG curve increases and plant capacity returns to the higher levels seen in 2012. Positively, the project has fully funded the debt service reserve at $4.75 million and the operating reserve at $1.3 million.

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. Originally permitted in 1980, the landfill takes in municipal solid waste and construction and demolition waste from Dallas, Fort Worth and the surrounding areas. It is the 11th largest landfill in the U.S. according to Environmental Protection Agency estimates. DCEMB is largely (70%) controlled by Clean Energy Fuels, a small-cap publicly traded company.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Thermal Power Projects' (June 17, 2012);

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Thermal Power Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710786

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816092

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