Jun 15, 2015 key documents in project financing a brief tutorial june 15, 2015, 1. Incorporated joint ventures ijvs see typical equity. Hoffman, the law and business of international project finance 3rd edn cambridge university press, new york 2008 p 4. This supply and offtake agreement this agreement is made as of february 28, 2012 the effective date, between j. In order to ensure financing, the company signs an offtake agreement with. So as you put a project together, you will look at the cash flow available for debt service, which is the cash flow after the money has been available for paying expenses. Offtake agreements may only be one document in a package of dozens of critically important project finance documents offtake agreements may be the most critical in terms of securing project loan approval. Project finance is the financing of longterm infrastructure, industrial projects and public services based upon a nonrecourse or limited recourse financial structure, in which project debt and. Major participants operator n responsible for the operation and maintenance of the project in exchange of fee.
Few project sponsors fully realize the importance of the project finance documents or the offtake agreement, despite the fact that the offtake agreement may well be the most critical of the project documents. Phu my 22 bot power project ipp ida indemnity agreement brvt water supply co. Issues and considerationsby practical law finance related content maintained usa nationalfederalthis practice note discusses the importance of offtake agreements in project finance transactions and the issues project sponsors and lenders should consider when negotiating and drafting these agreements. A essentially a long term offtake agreement executed with a.
Current issues and future trends in renewable energy. You may also have a look at the following articles top corporate finance books. Power purchase agreements for renewable energy power projects a bankable power purchase agreement ppa is essentially a long term offtake agreement executed with a creditworthy offtaker and having a sufficient tenor to enable repayment of debt by providing an adequate and predictable revenue stream. This improves its chances of getting financing to buy the farmland and equipment. Limitedrecourse project finance with offtake agreement vietnam. Global trade funding project finance import finance. By doing so, company x gets some reassurance that its big investment will yield at least one customer. Jan 25, 20 12 hour mba in project finance the 12 hour mba in project finance is an introductorylevel online training course designed to bridge knowledge gaps. Apr 08, 2014 project development iron ore offtake agreements. Other examples of project finance include mining, oil and gas. Overall, while wellwritten, wellpresented project documents ensure that lenders will have a generally favorable impression of your project. Project finance may come into the picture if a company needs finance for the construction of public infrastructure on the basis of a contract or license, e. Project finance for renewable energy and clean technology.
Mar 07, 2014 memorandum of understanding for offtake agreement signed with chalieco, a member of the chinalco group under the mou, chalieco will buy 80,000100,000 tonnes of flake graphite and an amount of 98% v2o5 chemical powder or flake products to be determined. This agreement contains the details of project distribution along with the budget of the cost that would be incurred for accomplishing it. You will not get cle credit for listening to the replay. Project development iron ore offtake agreements lexology. Contractually establishing future revenue is an inducement most project lenders require to approve the project financing. Extfinancialsectorresources2828843327122200069ruster. The spv will be the borrower under the facilities agreement. Operate and transfer project bot the concession agreement will often module the offtake or payment arrangements and may.
An offtake agreement establishes the contractual framework for a longterm business arrangement between the project company and an offtaker. Offtake agreements and financing mine projects traditionally, offtake deals are concluded between fully operational mining companies looking to secure the sale of their mine output and buyers who are interested is satisfying their demand for a. This has been a guide to corporate finance vs project finance. Project documents go a long way towards successfully financing the project and provide a great deal of protection for the project. Project finance is a means of funding projects that are typically infrastructure heavy, capitalintensive or related to public utilities. Offtake agreement is the agreement to sell power from the project. Finance lease as a source of project finance introduction it is undeniable that finance is an important factor in any business venture and is crucial to its success or failure.
Publicprivate partnership ppp project finance transactions. Eligibility criteria shall be set out in the project implementation manual based upon the project feasibility study and as agreed between the borrowerrecipient and the fund. Asx market update carbine tungsten off take agreement carbine tungsten limited cnq is very pleased to announce that following discussions with mitsubishi corporation unimetals ltd mcu, mcu has provided cnq with a letter of intent to purchase all concentrates produced from the mt carbine tailings retreatment project subject to the product being acceptable. Project finance primer for renewable energy and clean tech. Although financing can come in many different forms for wind, solar, and other renewable energy projects, the various types. How to manage a project financing offtake agreements youtube. Project financing of the lng supply chain presentation to the japan institute for overseas investment june 1, 2009. That decision holds significant implications for the allocation of risk.
Corporate finance vs project finance top differences. Offtake agreements and financing mine projects canadian. Global trade funding provides project finance, trade finance, contract finance and monetization services worldwide, and with each our inexorable commitment to make every client deal more profitable. Power purchase agreement an overview sciencedirect topics. Financial modelling of project financing transactions for more info on this topic. This paper aims to explain the two main models for a project agreement, which are offtake agreements and concession agreements. Ichthys lng the biggest, ever, pfi project finance international. An offtake agreement is normally negotiated prior to the construction of a facility such as a mine in order to secure a market for the future output of the facility.
The wharton school project finance teaching note 3 there is no singular definition of project finance. And after the project expenses, there is a cash flow available to debt service. Notes for the payment of project costs set forth in exhibit b of this financing agreement. An off take agreement is an agreement between the project company and the offtaker the party who is buying the product service that the project produces delivers. Key features of a power and energy purchase agreement ppa a power purchase agreement ppa secures the payment stream for a buildown transfer bot or concession project for an independent power plant ipp. Project finance the term project finance is often interpreted incorrectly as the generic financing of a project.
However, project financing is a specialised funding structure that relies on the future cash flow of a project as primary source of repayment, and holds the project s assets, rights and interests as collateral. We then make adjustments based on our construction phase business assessment, which looks at financial. Accordingly, it enters into an offtake agreement with company x, whereby company y agrees to purchase all of company xs production of purple popcorn next year. On the basis of these contracts, commercial banks and institutional. Glossaryofftake agreementrelated contentas used in project financing, an agreement to purchase all or a substantial part of the output or product produced by. Contractually obligated to offtake purchase product or service produced by the project.
The paper will further compare and contrast offtake agreements and concession agreements. Similar to a supply agreement, offtake contracts are typically for a preagreed. Project finance, project agreement, offtake agreement and. A essentially a long term offtake agreement executed with. An offtake agreement is a contract between an ethanol producer and the buyer of the ethanol or ethanol production coproducts, such as distillers grains. May 18, 2015 power purchase agreement ppa financing. This paper contributes a qualitative and quantitative analysis of the determinants of the debt ratio in project finance, using data on 26 liquefied natural gas lng export and import projects. The agreement should provide that if the ppa is terminated for any reason, then in case of transfer of the facility to the offtaker, the offtaker shall provide a termination payment at least equal to the full amount of the power. Finalising financing is now one of the key hurdles to development of the hpa project, with the company making considerable progress in this regard. Payment and credit shall be made without discount, deduction, withholding, setoff or counterclaim in united states dollars by wire transfer of immediately available funds on or before the payment due date, as set forth in the main document, to the bank and account designated by seller.
An offtake agreement is an arrangement between a producer and a buyer to purchase or sell portions of the producers upcoming goods. Offtakers are bound via an offtake agreement to mandatorily purchase a certain minimum quantity of produce from the selling party. Offtake strategy is critical for project financing project finance. Other lng offtake agreements as revenue support for debt. An agreement between a producer of a resource and a buyer of a resource to. Whereas, the borrowerrecipient, in accordance with its national legislation, has completed a project feasibility study which is acceptable to the fund. The project finance agreement is signed between financier and producer. Financial modelling of project financing transactions robert j lawrence bschons, msc jasmine lee fiaa.
A high level overview and explanation june 21, 2017 1 presentation to the center for american and international law. Financial modelling of project financing transactions. An offtake agreement is an agreement between the project company and the offtaker the party who is buying the product service that the project produces delivers. Depending on the nature of the project, this agreement can take the form of a purchase agreement or a service contract. Generally speaking, there are four types of ppas or offtake agreements. Again, up front agreement on important project contracts and undertakings required from project contractors could save time here. The offtake agreement provides the revenue stream supporting a project financing. This primer provides an overview of project finance for renewable energy investors, with a focus on the pros and cons. It also includes capital needed to be involved and contingency plans. Seller shall have the right to assess finance charges at the libor rate as reported in the wall street journal for any month in which a balance is past due hereunder plus two percentage 2% points against all past due amounts and all accrued but unpaid finance charges, but not to exceed the maximum finance. Project finance is longterm financing of an independent capital investment, which are projects with cash flows and assets that can be distinctly identified.
Security agreements project finance is premised on the basis that the lenders will be able to take control of and transfer all material project assets in the event of a problem with the project financing. The purpose of this essay is to examine the efficiency of direct agreements used in private public partnerships and project financing in general, relating to largescale infrastructure projects, in the light of swedish law, particularly with regard to the project companys. Project finance documents critical project documents. The following three contract terms are important to a good offtake agreement. The key advances have been on the debt funding side, and comprise agreements with kfw ipexbank, euler hermes eca cover and an offtake agreement with mitsubishi for all of. Important features of bankable power purchase agreements. Apr 29, 2019 a concession agreement is a contract between a company and a government, or other property owner, to operate a business in a particular location. Offtake agreements are generally negotiated long before construction of the facility begins, because securing a market for the output is often necessary to secure financing for the facility. How to manage a project financing offtake agreements.
Offtaketake or pay agreements charltons natural resources. This note also discusses the different types of offtake agreements that may be. Advising resource companies off take take or pay agreements. With continued depressed commodity prices putting pressure on projects and their financing, the offtake agreement is contenting to be one of the most important documents in a project finance transaction. Project financing of the lng supply chainfinal426942 1. Project finance definition, parties involved, advantages. Offtake agreements offtake agreements in project finance. Excellent progress on the finance and offtake front. Compare and contrast offtake agreements and concession agreements. Feedstockofftake contracts are a key area of lender. Project appraisal is the due diligence conducted on sponsors, technical, market, environmental, financial, legal, and risk aspects, among others, of the proposed project.
Project component each respective item or part of an item in the appropriation act that has been approved to be financed with proceeds of the notes, as described in exhibit a of this financing agreement. First, it is important to clarify whether the offtake agreement is a buysell agreement or a marketing agreement. Key documents in project financing a brief tutorial law360. Utilityscale solar projects, due to their peak period production, high marginal costs, and lack of demonstrated merchant capabilities, are generally not viewed as project financeable without ppas that cover all or. Overview uk least partly, operational, the project company will likely not be able to repay the lenders.
Now therefore, the parties hereto hereby agree as follows. In a project financing the revenue is often contracted rather than being sold on a merchant basis. Detailed facilities agreement which deals with both the construction and operation phases of the project. A bankable power purchase agreement ppa is essentially a long term offtake agreement executed with a creditworthy offtaker and. Documenting, drafting and negotiation techniques september 2630, 2016 washington, dc 6. An offtake agreement is an agreement between a producer of a resource and a buyer of a resource to purchase or sell portions of the producers future production. Financing based on the expected cash flow of the project, rather than the balance sheet of its sponsors offtake agreement is the revenue agreement for a project. Downstream issues in lng project finance two examples. Offtake agreements are crucial for many mining companies. Current issues and future trends in renewable energy offtake agreements and project finance webcast replay. A common terms agreement is an agreement by and between the project lenders and the project company which calls out the terms that are common to all of the project finance documents as well as the relationship between them, with definitions, conditions, the order of drawdowns, and voting powers for waivers and amendments. The nature of credit risk in project finance1 in project finance, credit risk tends to be relatively high at project inception and to diminish over the life of the project. Here we discuss the top differences between corporate finance and project finance along with the career opportunities. Offtake agreements are typically used to help the selling company acquire financing for future construction, expansion projects, or new.
Off take agreement financing renewable energy world. Which party should assume the risk and liability for. Massimo novo, in project finance in theory and practice third edition, 2018. It is between the purchaser offtaker often a stateowned electricity utility and a privately owned power producer. Jun 01, 2014 offtake agreements and financing mine projects traditionally, offtake deals are concluded between fully operational mining companies looking to secure the sale of their mine output and buyers who are interested is satisfying their demand for a particular commodity, such as refiners. The offtake contract may take the form of a power purchase agreement for a. Project finance project accounting accounting financial management finance.
In order to mitigate risk, most project finance lenders insist that offtake agreements be a condition of loan approval. Power purchase agreements ppas and energy purchase. During challenging financial environments, funding from alternative. The practice of solar project financing has emerged from several independent and overlapping strains of transactional practice, including traditional project finance secured lending, tax equity partnership and lease structures, development financing from earlystage investors, joint ventures, and the frequent acquiring and flipping of projects that goes on among a wide variety. The offtake agreement is the agreement pursuant to which the offtaker buys all or a substantial portion of the output from the facility and provides the revenue stream supporting a project financing. An offtake agreement is normally negotiated prior to the construction of a production facilitysuch as a mine or a factoryto secure a market for its future output. Corporate finance transactions can be arranged much faster than project finance. Financing lng projects and the role of longterm salesand. Corporate finance career path top 9 jobs you must explore.
The above is not a typical project finance limited recourse structure and the value of the relevant field interests will appear on the consolidated accounts of each sponsor. For example, a power plant would have a power purchase agreement. Construction agreement means the agreement dated the same date as this pfa between the limited partnership and hydro, as project manager, whereby hydro, either directly or indirectly through subcontractors will plan, design, engineer, construct and commission the keeyask project. This note also discusses the different types of offtake agreements. The replay will be available until november 12, 2020. Legal aspects of project finance documenting, drafting and. These can be concluded in months whereas project finance transactions can take years to conclude time taken to conclude requisite agreements, applications for any required licences andor permits etc. Offtake agreements as alternative financing options. The key provisions are the term, price and creditworthiness of the offtaker. Project finance and obtaining sufficient funding for the successful completion of your project. Real estate project finance know different funding types. Hence, longermaturity loans would be cheaper than shorterterm credits. Issues and considerationsby practical law financerelated contentthis practice note discusses the importance of offtake agreements in project finance transactions and the issues project sponsors and lenders should consider when negotiating and drafting these agreements.
The project should drive the financing point forward, not the other way around. Offtake agreements are only one document in a package of dozens of critically important project finance documents, but offtake agreements are often the most important in terms of securing approval of your project finance loan. Offtake agreements represent attractive financing options for mine development. We depend on wellwritten, wellpresented project documents because they are essential for creating an in toto tenor of. Financing options in the oil and gas industry, practical law. As used in project financing, an agreement to purchase all or a substantial part of the output or product produced by a project. Charltons is experienced in the negotiation and drafting of mining off take agreements off takes, including off takes between chinese stateowned enterprises and international miners. It is the assessment of the viability of proposed longterm investments in terms of shareholder. Offtake risk eg electricity purchase in a power project market risk eg traffic. Project finance for solar projects stoel rives llp. Project finance, as a specialized form of debt finance, thereby has become a wellestablished financing tool.
The risk attached to counterparties supplying feedstock or offtaking project product are. The creditworthy, fixedprice, longterm offtake agreement is the bedrock of project financing. An offtake agreement is a frequently resorted to in mining. Government guarantee ida guarantee prg water supply agreement bot contract ida project agreement investment license gas supply agreement land lease agreement loan agreements loan agreement pri.
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