Over the last few weeks, Iowa Fertilizer Company and its parent, OCI NV, have been busy with the commissioning phase of their major greenfield at Wever, IA. However, they’ve also been restructuring bond payments, which was necessary “to ensure the successful completion of construction and first year of operations.”
In the process, we’ve seen the bond rating downgraded, the IRS launch an examination, disclosures of project costs rising further, and hints at future mergers & acquisitions.
OCI has successfully refinanced the project. They hope to start producing ammonia soon but, if history is any guide, defining “soon” may be difficult.
Start up schedule
I’m now assuming that, even if the plant begins producing ammonia in 2016, we’ll be waiting until Q1-2017 for the announcement of a proper start-up, with consistent operations at the ammonia plant.
Back in September, OCI’s H1-2016 earnings announcement described Wever as “now in commissioning phase and start of production is imminent.” But by late November, in its 3Q Trading Update, we’re still being told that “start-up is imminent, first product expected in December 2016.”
Two important issues relating to the start-up schedule are disclosed in the highly detailed Consent Solicitation and Exchange Discussion Materials that OCI published for its bond holders in mid-November 2016.
Second, financial responsibility for the failure of the plant to start up in 2016 now belongs squarely to the EPC contractor, OCI’s sister company OEC, thanks to the “new delay damage regime.” If Wever hasn’t begun producing ammonia by the end of December, OEC will be liable for payments of “$100,000/day until 500 metric tons of ammonia are produced, with 45 day grace period.” And, for the balance of the plant, if it isn’t done by mid-April, OEC will be liable for “$150,000/day until Provisional Acceptance of entire project is achieved, with 45 day grace period.” These delay damages are capped at $30 million.
I have no information to indicate how long the “imminent” start-up process will take. These Discussion Materials begin by stating that “Overall EPC Progress is 98.5% complete, where project has largely shifted to the pre-commissioning and commissioning activities associated with startup.” This 98.5% completion figure “includes completion of pre-commissioning and commissioning activities,” but this figure is accurate “as of September 30, 2016,” so it’s hard to know precisely what’s been achieved over the last few months.
In last week’s update, OCI stated:
Introduction of feed gas and steam to the primary reformer is expected this week and the downstream plant is in commissioning phase. The start of ammonia production is expected in December 2016, shortly afterwards followed by downstream products (UAN, DEF and urea).
OCI press release, 3Q Trading Update, 11/21/2016
Cost escalations
I now estimate that the Wever plant will end up costing about $3 billion.
Following disclosures in OCI’s 2015 Annual Report, in April 2016, I estimated total capex on the Wever greenfield at between $2.25 billion and $2.35 billion. But in the Discussion Materials, OCI discloses that “to complete construction, OCI and OEC will have funded about $1.2bn in excess of what was expected at 2013 construction commencement.”
Adding these up we get an “original” capex budget of $1.766 billion (the first original capex, when the project announced in September 2012, was $1.4 billion).
The excess $1.2 billion spent by OCI and OEC means that project capex has ballooned by roughly 68% during construction, to a total of around $2.966 billion.
Bond consent solicitation and IRS examination
As The Bond Buyer reported a few weeks ago, OCI and IFCo needed to change the debt payment schedule of its bond issue, in order “to help get the project up and running.”
Partly because of that, Fitch downgraded the bond rating to B-minus from B-plus, and “put the bonds on negative watch” as a result of the project’s “construction and cash flow troubles.” Shortly afterwards, however, presumably anticipating the tender’s likely success, S&P Global Ratings offered an improved outlook on the same bonds, when it “removed its ‘B’ rating … and revised its outlook to ‘positive.'”
On November 28, OCI “announced the successful completion of its previously announced consent solicitation and exchange offer.” It paid the affected bondholders a consent fee of 0.375% for “reducing debt service by $95m” through June 2017. In the longer term, this refinancing will “reduce its third party debt obligations over the next 18 months by $142 million, providing a significantly improved liquidity profile as the facility begins operations.”
The other part of Fitch’s rationale for downgrading the bond ratings, as explained in the Bond Buyer article, is the news that the IRS is launching an examination into the tax-exempt status of the bonds. While the IRS does this from time to time, and OCI assures bondholders that their legal counsel “believes that the IRS examination should close with no change to the tax exempt status,” and an adverse outcome would be “unprecedented,” the risk to bondholders was increased.
As OCI explained in its disclosure to bondholders:
The IRS has indicated that it has some concerns that it is continuing to investigate and evaluate regarding the timing of the issuance of the 2012 Bonds shortly before the expiration of certain provisions of the Internal Revenue Code of 1986 (the “Code”), the manner in which the proceeds of the 2012 Bonds were restricted for an initial period of several months from expenditure for the project financed by the 2012 Bonds and the 2013 Bonds (the “Project”), the fact that the proceeds of the 2012 Bonds prior to expenditure served as security for the payment of debt service on the 2012 Bonds, and the refunding of the 2012 Bonds by the 2013 Bonds.
Iowa Fertilizer Company notice, 11/18/2016
Notwithstanding its assurances that “it believes that the IRS examination should close with no change to the tax exempt status,” OCI’s consent solicitation provided protection for its bondholders. In the unlikely event that the IRS moves against OCI, “bondholders can put their bonds at 108% of par,” and OCI will “pay a 50% step up in interest rate six months after the IRS issues a notice of proposed adverse determination letter.”
IFCo’s financial outlook
To reassure shareholders after all these cost escalations and delays, the CFO recently stressed that OCI has “no plans to initiate new projects over the next 18 to 24 months.”
“Starting 2017, we expect to enter a phase of consolidation, where all operational cash flows from the step-up in product volumes will be used to deleverage the balance sheet. We may also seek disposal of non-core assets and / or seek partnerships in certain stakes to accelerate the strengthening of our balance sheet, with the objective to achieve investment grade ratings by 2018 / 2019.”
OCI press release, 1H-2016 Earnings Results, 09/06/2016
The notion that OCI might seek – or need – to sell the Wever plant once it’s been built has certainly been rumored, especially since the CF Industries merger fell apart.
I was therefore particularly interested to note in the Consent Solicitation Discussion Materials that, as a condition of the refinancing, the bondholders agreed to “allowing sale of project to creditworthy sponsor to facilitate potential M&A transactions.”
Specifically, the bondholders have now agreed to allow OCI to:
Amend the change of control default to permit the immediate parent of the Company to be sold to anyone that has experience in the fertilizer or petrochemical industry and is investment-grade rated or has a net worth of at least $4 billion.
OCI’s Consent Solicitation and Exchange Discussion Materials, 11/18/2016
UPDATE 12/07/2016: OCI NV yesterday announced its intention to buy out the remaining minority owners of OCI Partners LP, in an all-stock merger transaction.