MESC Case study
What are the most Important risks facing the MESS 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 Kazoo Poorly, 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 lifestyle. ) Another risk is if one of he Mills shuts down, but In that scenario the mill needs to provide a six month notice to the other mills and to MESS. C) EPA regulation changes. EPA might change the regulation regarding waste water and alarm pollution that will Incur expenses.
But one of the agreement between the mills and MESS 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
MESS, which amounts to 85% of MESS fuel need for 25 years. B) Contractual right to MESS to pass on all of its remaining fuel cost directly to the mills. C) MESS 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 MESS is contractually empowered to sell Its services or product to any Third party. E) Since MESS Is an “Inside the fence” generating plant, It Is not regulated by Federal Energy
Regulatory Commission (FORCE) or Alabama Public Service Commission. F) All parties (MESS, 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 mills. More importantly, the 3 mills are obligated to buy power from MESS and to provide pulp to MESS at no cost. Also the tissue mill growth Is at 2. 2%, and the paper mill growth Is at 3% and the pulp mill Is a low cost producer. So the likely hood of closure Is low.
Also historical production level seems to be stable. What can go wrong: If the pulp mill close, which could lead to a dramatic increase of input cost. Also any changes in EPA regulations might impact the mills’ operation. 3. How might you change the deal to mitigate the project’s contract risk and make the MESS bonds more attractive to investors? Which of your proposed changes are most feasible? A) Begin repairs on the paper mill to spread out the cost overtime to decrease the risk of shutting down. B) Create a fund in case of an EPA changes to spread out the cost mongo the mills and MESS.