MESC Case study
Mobile Energy Services Company
1) What are the most important risks facing the MESC bondholders?
a) Potential decline in the demand level of the mills. The source of revenue is coming from the mills at a predetermined rate setup in the contract But as per Jaakko Poyry, the demand needs of Paper mill and the tissue mill will increase 3% and 2.2% annually through 2015, respectively. As a result of the demand, it is likely that the mills will remain open during the duration of the bonds lifecycle.
b) Another risk is if one of the Mills shuts down, but in that scenario the mill needs to provide a six month notice to the other mills and to MESC.
c) EPA regulation changes. EPA might change the regulation regarding waste water and air pollution that will incur expenses. But one of the agreement between the mills and MESC is to spread out any impact between the parties to reduce the effect.
2) Analyze the contractual structure. Will it last for 25 years? What could go wrong? The contractual structure is as follows:
a) Contractual obligation on Pulp Mill to supply all of its biomass and black liquor to MESC, which amounts to 85% of MESC fuel need for 25 years.
b) Contractual right to MESC to pass on all of its remaining fuel cost directly to the mills.
c) MESC charges each mill with a fee based on the demand levels and actual service use (demand charges and processing charges). The demand rate and processing rate are subject to inflation adjustment.
d) In case, the mills demand needs decreases MESC is contractually empowered to sell its services or product to any Third party.
e) Since MESC is an “inside the fence” generating plant, it is not regulated by Federal Energy Regulatory Commission (FERC) or Alabama Public Service Commission.
f) All parties (MESC, Scott Paper, S.D. Warren) are contractually obligated to work together to protect each other against any environmental violation.
Will it last 25 years
Revenue is driven by the power demand from the 3
1) What are the most important risks facing the MESC bondholders?
a) Potential decline in the demand level of the mills. The source of revenue is coming from the mills at a predetermined rate setup in the contract But as per Jaakko Poyry, the demand needs of Paper mill and the tissue mill will increase 3% and 2.2% annually through 2015, respectively. As a result of the demand, it is likely that the mills will remain open during the duration of the bonds lifecycle.
b) Another risk is if one of the Mills shuts down, but in that scenario the mill needs to provide a six month notice to the other mills and to MESC.
c) EPA regulation changes. EPA might change the regulation regarding waste water and air pollution that will incur expenses. But one of the agreement between the mills and MESC is to spread out any impact between the parties to reduce the effect.
2) Analyze the contractual structure. Will it last for 25 years? What could go wrong? The contractual structure is as follows:
a) Contractual obligation on Pulp Mill to supply all of its biomass and black liquor to MESC, which amounts to 85% of MESC fuel need for 25 years.
b) Contractual right to MESC to pass on all of its remaining fuel cost directly to the mills.
c) MESC charges each mill with a fee based on the demand levels and actual service use (demand charges and processing charges). The demand rate and processing rate are subject to inflation adjustment.
d) In case, the mills demand needs decreases MESC is contractually empowered to sell its services or product to any Third party.
e) Since MESC is an “inside the fence” generating plant, it is not regulated by Federal Energy Regulatory Commission (FERC) or Alabama Public Service Commission.
f) All parties (MESC, Scott Paper, S.D. Warren) are contractually obligated to work together to protect each other against any environmental violation.
Will it last 25 years
Revenue is driven by the power demand from the 3