Cascade County, Montana, to sell bonds for waste-to-diesel plant

Cascade County, Montana, will price $250 million in green revenue bonds Tuesday for Montana Renewables, LLC.

The county is the conduit issuer for the tax exempt solid waste disposal and sewage facilities revenue bonds, subject to the alternative minimum tax, that will be repaid by Montana Renewables, a company that converts waste products into transportation fuels. The private activity bonds have a bullet maturity on Oct. 1, 2053 and a seven-year mandatory tender with a call option at six years.

It’s a big deal by the standards of Montana, where only $453 million of municipal bonds were issued last year.

Citigroup as broker-dealer, PFM as financial advisor and Dorsey & Whitney as bond counsel comprise the finance team.

The deal would use up the bulk of the state’s $350 million in private activity bond issuance, but it was timed to use capacity rolled over from prior years, said Adam Gill, executive director of the Montana Facility Financing Authority. The state doesn’t typically hit the PAB cap, Gill said.

That Cascade County was willing to give us $250 million of PAB capacity “is a nice commitment by Montana that we are a good business to back,” said Bruce Fleming, president and CEO of Montana Renewables.

The county, which has little long-term debt, was willing to be the conduit issuer because the debt doesn’t have to repaid by the county, and it’s good for economic development, said Cascade County Commissioner Joe Briggs.

The $580 million project, which started production in November, converted half of NASDAQ-listed Calumet Specialty Products Partners’ Great Falls oil refinery for use by its new subsidiary Montana Renewables.

“We looked at all of the risks, opportunities and rewards and determined the energy transition occurring will continue,” Fleming said of the decision to convert half of the plant to producing renewable transportation fuels. “The world uses 100 billion gallons a day of petroleum products; that will not change overnight.”

The bonds will pay to finance, refinance or reimburse a portion of the costs of conversion of the existing hydrocracker unit, hydrogen plant and feedstock pre-treatment unit, all supporting infrastructure needed to produce renewable transportation fuels.

It will also fund a $25 million debt service reserve account and pay costs associated with the issuance of the Series 2023 bonds.

Montana Renewables converted the existing hydrocracker into a renewable fuel unit, so it can process a mix of renewable feedstocks, such as seed oils, tallow and used cooking oil, to produce lower-emission sustainable alternatives to fossil fuels, including renewable diesel and sustainable aviation fuel. The company is currently producing 15,000 barrels a day, but aims to increase that to 18,000 barrels per day in 2024, according to bond documents.

“We’re not a project, per se, but more of a going concern,” Fleming said on an online investor presentation.

S&P Global Ratings assigned a speculative grade B-minus rating to the deal.

“While there are significant structural separations between the two entities, we do not believe it is enough to delink the ratings at this time,” the rating agency said. “As a result of Calumet’s control, MRL cannot be rated higher than Calumet.”

S&P cited MRL’s advantageous location close to both feedstock and renewable markets in a rating report.

“We expect the company to contract up to 90% of its offtake capacity with highly rated counterparties,” S&P analysts wrote. “We also expect MRL to contract approximately 50% of its feedstock requirements acquiring the remaining 50% on the open market. MRL will be able to process multiple feedstocks including canola oil, camelina oil, and tallow all of which are available via truck and rail.”

The company self-certified the deal as green bonds, Fleming said, but it did get a second opinion from S&P on its green financing framework, which the rating agency said is aligned with green bond principles.

S&P’s opinion doesn’t apply to specific bond sales, just the framework. But the rating agency said the green bond principles are aligned with the International Capital Market Association’s green bond principles.

“The stable outlook reflects our expectation that MRL’s production will continue to ramp up as it completes conversion of the plant in the first quarter of 2023. Based on our conservative assumptions on margins, we expect adjusted debt to EBITDA of about 8x in 2023 will improve to about 4.5x-5x in 2024,” S&P analysts wrote.

“It’s the biggest value-added agricultural investment in Montana’s history,” said Brett Doney, president and chief executive officer of the Great Falls Montana Economic Development Authority. “It’s having a structural change by increasing interest in growing more oil seed, which is a wonderful rotation crop with wheat and the other things we grow.”

“The construction jobs have had a tremendous impact on the hotels, restaurants and retailers as they were coming out of the pandemic,” Doney said. “Not only is it a fantastic project, but it couldn’t have come at a better time.”

The deal represents the second time the county has acted as a conduit in order to extend the life cycle of an existing employer, Briggs said. In 2007, it issued $3.5 million in debt for Montana Milling, an organic milling company, which created a new market for local farmers, he said.