It must have been a long summer for Midwest Fertilizer Company, which has been attempting to wrangle ThyssenKrupp into a new EPC contract while mounting a challenge to the IRS. Both efforts are essential if the project is to have any chance of moving forward. Nonetheless, Midwest recently announced a revised budget along with its new groundbreaking and start-up schedule.
2017: IRS examination of the tax status of the bonds
In January 2017, Midwest Fertilizer Company disclosed that the IRS was investigating its $1.259 billion bond issue, saying that the bonds had been “selected for examination to determine compliance with federal tax requirements.”
(This is not unusual activity for the IRS: it recently ran a similar examination into the tax-exempt bonds issued by OCI for its greenfield in Wever, IA. For those bonds, the IRS found no cause to rescind their tax-free status.)
However, in July 2017, Midwest disclosed that the IRS had sent a Notice of Proposed Issue, stating that interest paid on the bonds should be taxable after all. This would have severe consequences for the financing of the Mount Vernon plant.
To be clear: this is not yet a final decision by the IRS, and Midwest is trying to convince it to reverse its findings. According to Midwest’s disclosure:
The IRS has contended that the Bonds … do not meet certain requirements of the Internal Revenue Code … and are therefore not valid tax-exempt bonds and the interest paid to the holders thereof is not excludable from gross income …
The Company is responding to the IRS. While the outcome of discussions cannot be predicted, the Company and counsel continue to be confident that there should be no change to the tax-exempt status of the Bonds or the Refunded Bonds.
Electronic Municipal Market Access, Disclosure by Midwest Fertilizer Company, 07/27/2017
That last statement is not technically correct: the outcome of discussions can be predicted (albeit without any guarantee of accuracy). Let me show you: it is my opinion that Midwest will fail in its challenge of the IRS’s decision. I might be wrong, but my prediction is that the IRS is unlikely to be swayed by Midwest’s pleas.
Therefore, I’ve downgraded my opinion of the project’s likelihood of moving forward – now “unlikely.”
I do not know how long it takes to challenge the IRS’s proposed decision but I assume that Midwest will not attempt to re-market the bonds while this is unresolved. The Mount Vernon project is effectively stalled, therefore, as it cannot reach financial close without this debt in place, and construction cannot begin without financing.
Status of the EPC agreement
According to a MFC statement via e-mail in July 2017, “We continue to work on an EPC contract with TKIS [ThyssenKrupp Industrial Services] and we are making good progress. We estimate a start date for construction in Q2 2018.” However, in March 2017, the project sponsor, Pakistani tycoon Arif Habib, said in an interview in Bloomberg that they are currently (still) “looking for a partner to start work.”
Schedule for construction and start-up
MFC’s latest guidance, from July 2017, is that it hopes to break ground in Q2 2018, with “operations expected to begin in 2022.” Of course, this depends on securing a new EPC contract. 2022 is a plausible start-up date, but only if Midwest signs a new EPC agreement and closes financing soon: Q2 2018 is only six months away …
Project CapEx Estimates
The latest cost estimate is $2.8 billion, cited in the July 2017 press release from the local economic development agency. This is less than the previous sum, given by Midwest in its July 2016 press release, of $3 billion, but up from the $1.8 billion first announced.
Permits, permit extensions
Because of all the delays, Midwest has had to extend the terms of its 2014 air permit repeatedly (permits generally require construction to begin within 18 months, but extensions are readily given). It did so in September 2015 and again in May 2017.
Midwest’s current deadline to begin construction, therefore, is September 23, 2018.
This and more is in the Research Note for Mt Vernon, IN.