Midwest Fertilizer Company continues to juggle progress and setbacks on its $3 billion greenfield nitrogen plant in Indiana, following the December 2016 termination of its EPC contract with ThyssenKrupp. In the last few weeks, we’ve seen updates on the EPC contract, air permits, debt financing in Pakistan, and the $1.259 billion tax-exempt bond issue in the US.

EPC contract
While TKIS has released no recent information on the status of this contract, which imploded in scandal following a November 2016 exposé in Der Spiegel, MFC claimed in late January 2016 that the parties are actively engaged in renegotiations:

Midwest Fertilizer Company is working collaboratively with TKIS on a new EPC contract and continues to develop other aspects of the project concurrently so that it can close quickly when the EPC contract is finalized.
Midwest Fertilizer Company statement, 01/26/2017

Air permit
One of these other aspects is the project’s air permits. In March 2016, MFC applied for a “Significant Modification,” perhaps as a result of more detailed planning and design work done by TKIS under its EPC contract. The revised Title V and PSD permits, drafts of which were published in December 2016, will give MFC another 18 months to begin construction, starting from the date of final permit approval. The public comment period ended a few days ago, so the new, revised permit could be issued within a few weeks. MFC will have a new deadline to begin construction of at least June 2018.

The modified draft permit (2016) describes the scope of these changes as “the removal of several emission units, changes in location and stack heights of some of the existing emission units, construction and operation of new emission units.” It appears that granular urea is the only product whose capacity will be affected by these modifications, reducing slightly, from 1,440 mtpd to 1,320 mtpd.

Equity financing
In Pakistan, Fatima Fertilizer Company has spoken for years about contributing $300 million USD equity to the project, which it planned to raise by issuing a foreign currency bond for that amount.

It hasn’t done this yet but, in December 2016, Fatima Fertilizer Company did issue a local currency bond, in the form of an ijarah sukuk (a form of debt acceptable under Islamic law). The prospectus for this 10,500 million Pakistani Rupee sukuk, roughly equivalent to $100 million USD, states that “the principal purpose of the Sukuk Issue is to repay an existing long term loan of the Company.” So, while this isn’t directly related to Midwest Fertilizer Company, I would note that it should improve Fatima’s financials and may therefore make it easier for the company to find an international market for the bigger, $300 million USD bond necessary to provide equity for MFC.

The sukuk prospectus includes an organizational chart for the broader Arif Habib empire, which illustrates the chain of ownership for the various entities behind this project. Its simplicity fails to capture the circularity of ownership within the group, because many of the subsidiaries own chunks of the others’ equity, or finance each other through long-term loans. For those that are publicly traded, like Fatima Fertilizer Company, only about 10-15% of the shares were floated to the public during the IPOs.

Tax-exempt bonds
We’re also still waiting for “one of the tax-exempt market’s largest-ever junk-bond sales,” when MFC remarkets the $1.259 billion bonds issued by Posey County. In January 2017, however, MFC disclosed that the IRS was investigating the bond issue.

The bonds have been “selected for examination to determine compliance with federal tax requirements … While the outcome of these audits cannot be predicted, the Company believes that the IRS examinations should close with no change to the tax-exempt status of the Bonds.”

While this does increase the riskiness of the bonds, at least until the IRS concludes its examination, I should mention that this appears to be a normal activity for the IRS, which recently opened a similar examination into the tax-exempt bonds issued by OCI for its greenfield in Wever, IA. The IRS does not provide any indication of the how long it takes to conclude its examination but, presumably, MFC would not attempt to market the bonds while they remain under examination.

In any case, neither MFC nor Fatima will be able to make any real progress until they can announce a new EPC contract. You can find all these details and others in my Research Note for Mt Vernon, IN.