Conformed Copy - L2919 - Fertilizer Sector Loan - Amendment 1

Page 1 September 26, 1989 Mr. Enrique Vilatela Director General de Captacion de Credito Publico Secretaria de Hacienda y Credito Publico Palacio Nacional 06066 Mexico, D.F. Mexico Mr. Arturo Ortiz Hidalgo Director Internacional Direccion Internacional Nacional Financiera, S.N.C. Plaza NAFINSA Insurgentes Sur 1971 Torre Sur, 9o. Piso Col. Guadalupe Inn, Del. Alvaro Obregon CP 01020 Mexico, D.F. Mexico Mr. Manuel Cadena Morales Director General Fertilizantes Mexicanos, S.A. Calle la Morena 804, Piso 11 03020 Mexico, D.F. Mexico Dear Sirs: Re: Loan No. 2919-ME (Fertilizer Sector Loan) Amendment Please refer to the Loan Agreement between International Bank for Reconstruction and Development (the Bank) and Nacional Financiera, S.N.C. (the Borrower) dated June 13, 1988, to the Guarantee Agreement of even date therewith between the United Mexican States (the Guarantor) and the Bank, and to the Project Agreement of even date therewith between the Bank and Fertilizantes Mexicanos, S.A. We are pleased to inform you that, pursuant to your request and our recent discussions on the subject, the Bank agrees to amend the Loan, Guarantee and Project Agreements, as follows: I. Loan Agreement (1) Section 1.02 (i) of the Loan Agreement is amended to read in its entirety as follows: "(i) "Plant Closure Program" means the program referred to in Section 2.10 (a) of the Project Agreement and includes the 1988 Plant Closure Program and the 1989 Plant Closure Program; "1988 Plant Closure Program" means the program of closings the following plants during 1988: Tecun Uman Complex Fertilizer Plant and Coatzacoalcos Phosphoric Acid Plant; and "1989 Plant Closure Program" means the program of closing the Monclova Phosphoric Acid Plant during 1989." (2) A new paragraph 4 is added to Schedule 1 of the Loan Agreement to read as follows: "4. No withdrawal shall be made and no commitment shall be, entered into to pay amounts to, or on order of, the Borrower in respect of expenditures to be financed under the First Tranche unless the Bank shall be satisfied, after an exchange of views as described in Section 3.09 of the Guarantee Agreement and Section 2.05 of the Project Agreement, based on evidence satisfactory Page 2 to the Bank, that the actions described in Schedule 1 to the Guarantee Agreement have been taken." (3) The former paragraph 4 of Schedule 1 to the Loan Agreement is renumbered as "5" and is amended by deleting the words "the Schedule" in clause (ii) thereof and substituting the words "Schedule 2" therefor. (4) The former paragraph 5 of Schedule 1 to the Loan Agreement is renumbered as "6" and is amended (i) by deleting the word "paragraph" in the first line thereof and substituting the words "paragraphs 4 and 5" therefor; and (ii) by deleting the words "paragraph 4" in the fourth line thereof and substituting the words "such paragraphs 4 and 5" therefor. (5) The words "and 1989" are added after "1988" in paragraph 1 of Part C of Schedule 4 to the Loan Agreement. II. Guarantee Agreement (1) Section 3.06 (a) of the Guarantee Agreement is amended to read in its entirety as follows: "Section 3.06. (a) The Guarantor shall cause the prices for domestically produced ammonia paid by FERTIMEX to PEMEX to increase in order to achieve the following percentages of the export price for ammonia, by the dates listed below: Percentages of Export Price for Ammonia By (i) 40% January 1, 1990 (ii) 42.5% March 31, 1990 (iii) 50% December 31, 1990 (iv) 60% December 31, 1991 (v) 70% December 31, 1992 (vi) 80% December 31, 1993 For purposes of this paragraph "export price for ammonia" means the average of prices prevailing during the previous twelve months preceding a price increase, for ammonia exported by PEMEX (F. O. B. Coatzacoalcos) , of if PEMEX does not export ammonia in a particular month, the price prevailing for such month f or ammonia purchased at United States Gulf ports (F. 0. B. U. S. , Gulf Coast Price) minus ten dollars." (2) Section 3.06 (b) (ii) of the Guarantee Agreement is amended to read in its entirety as follows: "(ii) such fertilizer prices to be increased by at least 18.8% in nominal peso terms no later than September 30, 1989;" (3) Section 3.06 (b) (iii) of the Guarantee Agreement is amended by deleting the reference to the year 1988 in the second line thereof and substituting the year "1989" therefor. (4) Section 3.09 (a) of the Guarantee Agreement is amended by deleting the words "the Schedule" therefrom and substituting the words "Schedule 1 and Schedule 2" therefor. (5) A new Section 3.10 is added to the Guarantee Agreement to read as follows: "Section 3.10. The Guarantor shall: (i) no later than September 30, 1989, cause the prices for domestically produced sulfur paid by FERTIMEX to domestic suppliers to be increased to the level of the export price of sulfur; and (ii) thereafter cause such prices to be maintained at such level. For purposes of this Section the term "export price of sulfur" has the same meaning as so defined in Section 2.10 (c) (iii) of the Project Agreement adjusted, Page 3 however, for differences in quality." (6) A new Schedule 1 is a added to the Guarantee Agreement to read as follows: "SCHEDULE 1 Actions to be taken Prior to Availability of the First Tranche 1. That the Guarantor shall have complied with the obligations of Sections 3.06 (b) (ii) and 3.10 of the Guarantee Agreement. 2. That FERTIMEX shall have initiated, and made progress satisfactory to the Bank in carrying out, the studies under Parts C (1), C (2) and C (3) of the Project. 3. That FERTIMEX shall have initiated the process of withdrawing from retail and consignment operations." (7) The Schedule to the Guarantee Agreement relating to the Actions to be Taken Prior to the Availability of the Second Tranche is renamed as "Schedule 2" and is amended as follows: (i) Paragraph I is amended to read as follows: "1. FERTIMEX shall have implemented the 1988 Plant Closure Program and the 1989 Plant Closure Program." (ii) Paragraph 3 is amended to read as follows: "3 (i) FERTIMEX shall have implemented the Investment Program for 1989; and (ii) the Bank is satisfied that the Investment Program for 1990 meets the investment criteria stated in Section 2.09 of the Project Agreement." (iii) Paragraph 4 (a) is amended by deleting the reference to "Section 3.06 (a) (i)" and substituting "Section 3.06 (a) (ii)" therefor. III. Project Agreement (1) Section 2.05 (a) of the Project Agreement is amended by deleting the words "the Schedule" therefrom and substituting the words "Schedule 1 and 2" therefor. (2) Section 2.06 of the Project Agreement is amended to read in its entirety as follows: "Section 2.06. FERTIMEX in conjunction with the Guarantor, shall: (a) by December 15, 1989, complete the first phase of the study described in Part C.1 of the Project, under terms of reference satisfactory to the Bank, and promptly thereafter discuss the results thereof with the Guarantor and the Bank; (b) initiate the process of withdrawing from consignment and retail operations by no later than October 15, 1989; (c) by March 15, 1990, complete the second phase of such study, under terms of reference satisfactory to the Bank, and based on the results of such study, propose a plan of action, acceptable to the Bank, to withdraw from fertilizer retail and consignment operations, and complete the carrying out of such plan of action by no later than December 31, 1992; and Page 4 (d) by February 28, 1990 cease fertilizer consignment and retail operations with aggregate sales volume equivalent to no less than 10% of all FERTIMEX sales of solid fertilizers in 1987." (3) The dates set forth in paragraphs (a), (b), (c), and (d) of Section 2.07 of the Project Agreement are deleted and replaced by the following: "September 15, 1989" in paragraph (a); "January 15, 199011 in paragraph (b); "February 28, 1990" in paragraph (c); and "July 30, 1990" in paragraph (d). (4) The date set forth in Section 2.08 of the Project Agreement is deleted and replaced by "November 30, 1989." (5) Section 2.10 of the Project Agreement is amended to read in its entirety as follows: "Section 2.10 (a) FERTIMEX shall carry out the Plant Closure Program in accordance with a time schedule acceptable to the Bank. (b) (i) FERTIMEX shall, for each of its ammonium sulfate plants located at Guadalajara, Queretaro and Coatzacoalcos, calculate, for each month beginning in February 1989, the ratio of the import price of ammonium sulfate to the aggregate of the cost of sulfur and the cost of ammonia used in the production of ammonium sulfate in each such plant, and provide to the Bank, at three months intervals beginning in April 1989, the results of such calculation, including all documents, records and other evidence in support of such calculation as the Bank may reasonably request. (ii) If the ratio for any month calculated pursuant to the provisions of subparagraph (i) of this Section falls below the following limits: 1.00 for the Guadalajara ammonium sulfate plant; 0.94 for the Queretaro ammonium sulfate plant; and 0.97 for the Coatzacoalcos ammonium sulfate plant; FERTIMEX shall undertake from such month onward and every month thereafter, until such time as agreed by the Bank, a detailed analysis, under a methodology acceptable to the Bank, of the costs and benefits of operating each such ammonium sulfate plant for the purpose of determining the net benefit of each such plant. (iii) Subject to the provisions of subparagraph (v) of this paragraph, if the net benefit for any of the Guadalajara, Queretaro or Coatzacolacos ammonioum sulfate plants is negative by more than 7.5 percent of the import cost of ammonioum sulfate for four consecutive months, FERTIMEX shall, within eight months thereafter, stop operating such plant. If, however, after taking all necessary actions to improve operating results within this eight-month period, the net benefit becomes positive, or negative by less than 7.5 percent of the import cost of ammonium sulfate during three consecutive months, according to evidence satisfactory to the Bank, FERTIMEX shall not be required to stop operating such plants. Page 5 If operations of any of such plants have been stopped, FERTIMEX shall not restart operation until it provides the Bank with evidence satisfactory to the Bank that such plant shall attain positive net benefit for a continuous period of a least three months. (iv) If pursuant to the application of subparagraph (iii) of this paragraph, any of the Guadalajara, Queretaro or Coatzacolacos ammonium sulfate plants stops operating, FERTIMEX shall also simultaneously stop operating the respective Guadalajara, Queretaro or Coatzacolacos plants producing sulfuric acid for such ammonium sulfate plant unless financially viable alternative uses and markets shall have been found and contracts for the sale of such sulfuric acid for such alternative uses have been entered into. For the purposes of this subparagraph, the term "financially viable" means that the Bank has been provided with evidence, satisfactory to the Bank, that net revenues from projected sales of sulfuric acid produced by such plants for the alternate uses and markets found, are at least equal to the sum of all expenses related to operations; the terms "net revenues" and "expenses related to operations" have the same meanings as defined in Section 4.02 of this Agreement. (v) Notwithstanding the provisions of subparagraph (iii) of this paragraph, FERTIMEX shall not be required to stop operating the Coatzacoalcos ammonium sulfate plant pursuant to the application of such paragraph within the eight- month period therein indicated if FERTIMEX provides the Bank with evidence, satisfactory to the Bank, within such period, that it has entered into a long-term contract for the purchase of by- product sulfuric acid at a price such that the net benefit of producing ammonium sulfate at such plant is positive, or negative by less that 7. 5 percent of the cost of importing ammonium sulfate. If the Coatzacoalcos ammonium sulfate plant does not stop operating as a result of the application of this subparagraph, FERTIMEX shall nevertheless be required to stop operating the respective sulfuric acid plant pursuant to the provisions of subparagraph (v) of this paragraph. (c) For the purposes of this Section: (i) the term "import price of ammonium sulfate" for any month means the average of FOB US Gulf Coast prices for ammonium sulfate quoted for the preceding six months in international publications, acceptable to the Bank; provided, however, that if FERTIMEX presents evidence, satisfactory to the Bank, that quotations obtained by FERTIMEX on the international market for the corresponding months are above the import price of ammonium sulfate, such quotations obtained by FERTIMEX shall be taken into account; (ii) the term "cost of sulfur" means the quantity of sulfur used in the production of one metric ton of ammonium sulfate times the export price of sulfur; (iii) the term "export price of sulfur" for any month means the average of FOB Coatzacoalcos prices for sulfur quoted in international publications, Page 6 acceptable to the Bank, for the preceding six months; should there be no quotations for that location, the export price will be taken as the price FOB US Gulf less US$5 per metric ton; (iv) the term "cost of ammonia" means the quantity of ammonia used in the production of one metric ton of ammonium sulfate times the export price of ammonia; (v) the term "export price of ammonia" for any month means the average of FOB Coatzacoalcos prices for ammonia quoted in international publications, acceptable to the Bank, for the preceding six months; should there be no quotation in that location, the export price will be taken as the price FOB US Gulf less US$10 per metric ton; (vi) the calculation of the cost of producing ammonium sulfate shall be based on the export price of sulfur and the export price of ammonia as herein defined, provided, however, that where sulfuric acid is purchased under a long-term contract pursuant to the provisions of paragraph b (v) of this section, the price of sulfuric acid under such contract shall be taken into account; (vii) the term "import cost of ammonium sulfate" means the sum of the import price of ammonium sulfate and the cost of transporting such ammonium sulfate to major distribution points; and (viii) the term "net benefit" means the difference between the import cost of ammonium sulfate and the aggregate of the cost of producing ammonium sulfate and the cost of transporting such ammonium sulfate to major distribution points. Please indicate your agreement to the foregoing amendments by signing and dating the duplicate original of this letter enclosed herewith and returning the same to us. The provisions of this amendment will become effective on the date the Loan Agreement is declared effective, or on the last date a party confirms its agreement to this amendment, whichever is later. Sincerely yours, By /s/ Rainer B. Steckhan Director Country Department II Latin America and the Caribbean Region UNITED MEXICAN STATES By /s/ Act. Enrique Vilatela Riba Authorized Representative Director General de Captacion de Credito Externo Date Octubre 6, 1989 NACIONAL FINANCIERA, S.A.C. By /s/ Arturo Ortiz Hidalgo Authorized Representative Director Internacional Page 7 Date: Octubre 4, 1989 FERTILIZANTES MEXICANOS, S.A. By /s/ Ing. Manuel Cadena Authorized Representative Director General Date: Octubre 3, 1989 cc. Mr. Alfredo Elias Ayub Subsecretario de Minas e Industria Basica Secretaria de Energia, Minas e Industria Paraestatal Insurgentes Sur 552 - Piso 4 Colonia Roma Sur Mexico D.F. Mr. Luis Nava Nacional Financiera, S.N.C. 1615 L Street, NW, suite 310 Washington DC 20036