Energy & Infrastructure Insight - Issue 3

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18 KEY ISSUES – SELLER 1. Security of access/supply – exclusive or priority use The seller's primary concern will be the security of access (for transportation/storage type infrastructure) or supply (for infrastructure providing energy/utility supply) in the service contract between the investor/operator and InfraCo. Some sellers may, subject to their own access/supply being secure, allow third-party access/supply on a capacity rights basis, particularly given the advantage of shared fixed operating and maintenance costs. Oil and gas pipelines have historically been operated on this basis, with the infrastructure being made available to third parties to the extent there is additional capacity within the pipelines. On the other hand, some assets may have been designed and built on the basis that the seller's retained operations would be the only user (e.g., rail routes and ports connecting mines to market) and therefore third-party access may raise strategic considerations for the seller. 2. Security of access/supply – termination rights InfraCo's ability to terminate the service contract with the seller (and InfraCo's remedy upon termination) is likely to be a key issue. While termination is undesirable for both parties, they will need to decide the outcome of certain material default scenarios (principally, the seller group's material payment default/insolvency and InfraCo's material underperformance or prolonged force majeure/shutdown). Where the seller is the sole/primary user of the asset, the logical solution is simply for the asset to be transferred back to the seller. Where the seller is in default, InfraCo would seek to be compensated through a termination payment that puts InfraCo (and therefore the investor/operator) in the position it would have been in had the returns from the service contract continued. Where InfraCo is in default, the seller would seek to withhold or significantly reduce any termination payment. Where access/supply is permitted to third parties, and alternative sources of services/supply are available to the seller, InfraCo may prefer avoiding the buy-out mechanism in favor of terminating the service contract with the seller and then operating solely for the benefit of the third parties. To avoid disruption to access/supply, the seller will likely seek to limit InfraCo's ability to terminate and/or build in appropriate remedy periods. 3. Ensuring operational performance To incentivize operational performance post transfer a key performance indicator (KPI) regime would usually be introduced, with financial penalties if certain targets are not met. The investor/operator will want to ensure this regime is appropriate and achievable. Rather than a full disposal, InfraCo could be structured as a joint venture between the seller and the investor/operator. The seller could then retain a level of operational control or, if the investor/operator wished to be purely passive, the seller could continue to operate as it had before the carve-out. Monetizing Embedded "Non-core" Infrastructure Assets (cont.)

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