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Mobile Energy Service Company case Analysis

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  1. 1. Mobile Energy Service Company Analysis Submitted To: Mr. Ashish Kumar Amity Business School Submitted By: Sudheer Parashar MBA 3rd semester
  2. 2. Mobile Energy Service Company Issues: Main key issue is investor has to decide whether to go or not investment in the mortgage bonds. MESC issuing $255 million in mortgage bonds and $85 million tax exempt bond mortgage bonds had 8.665% coupon and 22 years maturity(january,2017) to paying bridge loan . The information is given by company sufficient to take decision of investment. Investor must consider the risk associated with energy complex due to integrated facility mills, investor want to know how much dependency of energy complex on other mobile mills, if any problems happen in mobile mills, than what level it affect its performance of mobile energy complex and capability of paying debt. So supporting bond offering MESC hired jaakko and Stone & Webster to review three mills and energy complex and bonds were rated by the Moody, Fitch and S&P. Scott paper Company Scott Company have 525000 acres of timberland, pulp mills, paper mills, tissue mills and energy complex in Mobile.Dunlap1 who is CEO of Scott Paper Company and he want to divest the noncore business for purpose of 1. Reducing capital intensity: 2. Strengthen balance sheet to reducing debt 3. Free up capital to invest in core business and 4. Help build the foundation to transition Scott to a global consumer product company; And making a contract with sold company to making a continue proceed operation among integrated company i.e. Pulp, Paper, Tissue mills and Power Complex. In 1994, Scott had sold mobile paper mill to Group of investor i.e. SD warren and sold Mobile energy Complex to Southern Company when it was hope to raise $340 million (255 million in noncourse project bond and 84 million in municipal bonds) to repay the bridge loan. The southern Company The Southern company financed 350 million(250 million cash and 85 million tax exempt bond, created MESC for managing energy complex. in 1995. MESC signed 25 operating contract (MOA & ESA) with Scott before control of energy complex
  3. 3. Research Report of Jaakko Tissue mill: 1. High efficiency level and current technology 2. Cost advantage: Low cost producer 3. Tissue demand grow annually: 2.2 through 2015 Paper mill 1. Production efficiencies standard but trending downward 2. Cost advantage 3. Paper demand grow annually through 2015 Risk: 1. Less role of Paper mill in the S.D. warren system and 2. Less secure market position of Paper Mills’s product make possible over the long term Pulp mill 1. Largest producer 2. Low to average cost producer 3. Remain competitive supplier in long term 4. Needed 150-200 million for some modification Risk: 1. Major environmental problems can cause supply of wood, shutdown or permanent curtailment of the pulp mill but it is economically viable because its have high capacity utilization 2. Cluster Rules Conclusion: Three mills have a high cost advantage and demand of their product increasing annually and environmental and chance of shutdown can be mitigated by long operating history of the mills and contract between mills Stone & Webster Evaluate the mobile energy complex efficiency, capacity, contracs and budgets. Energy Complex has DSCR Ration 1.15 Two conclusion
  4. 4. 1. Energy complex was capable of meeting the requirements of the ESA. The asset were industry standard, reliable and with regular maintenance had a useful life of 25 or more yrs. Annual downtime rate of 6% were acceptable and dood indicator of future 2. Developed a financial model to evaluate the energy complex’s projected revenues and costs Rating agencies Moody Moody’s assigned a BAA3 rating to the bonds, project has high degree of flexibility for the mill owners in term of their contractual obligation, allowing them to shutdown their mills or reduce demand charges payable to energy complex based upon historic production level.  Risks of mill shutdown or significant curtailment of production capacity are mitigated by the long operating history of the mills  Rating reflect the involvement of southern which has committed to retain at least 50% ownership in MESC and will operate the energy complex Fitch Fitch gave BBB- , citing the positive history of large scale integrated projects and the absence of completion risk  Risks associated with mill closure or reduction in processing service demand levels:  Other risks: the fact a mill owner could sell a mill without consent from the other mill owners or MESC the potential costs of environmental regulation and wareen’s high leverage ratio.  Joining cost advantage by integrated mills,  MESC’s financial structure and security provisions provide adequate stability for the project S&P Standard and poor also gave BBB-. MESC would able to adequately service its debt at the BBB- level under all scenarios. Southern has expertise in running energy plants and invested 117 million in the project including debt services Currently mills pay MESC an all in rate of 3.3 cents per kWh=lowest rate in state. Current steam processing charges to the mills is 4.48 per million btu and but mill owner want to provide at 5.76 per million btu. Risk: Mobile energy contracts can be terminated by the buyers if they choose to close the mills taking power and services: risk of such closure very low over the nest 10 yrs. Fairly low to the bonds maturity in 2017
  5. 5. As long mills are functioning the complex should be viable and profitable Decision The investor should be invest in mortgage loan because project economically viable and profitable. Do  Energy complex have a better cost advantage due integrated facility  Financial structure and security provisions give strength to project  Risk of termination contract is lower over next 10 years(2017)  DSCR Ratio is adequate(1.15) to pay Don’t  Mobile Energy contracts can be terminated by the buyers if they choose to close the mills taking the power and services  Environmental issues may be affect the entire mills i.e. Cluster Rules  Lack of information: estimation of Capital expenditure  Can’t take advantage of selling at international market price  Credit rating agencies are not experienced in this industry