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. 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. 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. 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