Issue link: https://digital.shearman.com/i/1300408
19 KEY ISSUES – INVESTOR/OPERATOR The investor/operator's principal concern will be the continued revenue stream over the life of the service agreement at a reasonable level of return on investment. The service contract will therefore likely include a tariff structure on a use-or-pay or a take-or-pay arrangement and a form of credit support. 1. Tariff structure The investor/operator will likely favor a "cost plus" arrangement, whereby the seller agrees to cover certain of InfraCo's capital and operating costs and pay an agreed margin above such costs. The seller will be on risk for any unknown costs (e.g., those arising from a change of law or unbudgeted capital expenditures). Sellers typically favor a fixed tariff for access/supply. In this case, the new investor/operator may ask that unknown costs above a certain threshold are passed back to the seller through an increase in the tariff. 2. Take-or-pay A use-or-pay or take-or-pay arrangement means the seller is committed to use or pay/take or pay for a minimum level of access/supply during a prescribed period of time under the service agreement. An infrastructure investor's pricing of the initial acquisition is likely to reflect the output of a discounted cash flow model that assumes these payments. The seller is unlikely to object to the use-or-pay or take-or- pay arrangement but will need to consider the level at which and on what basis payment commitments are set. The parties also need to determine if the take-or-pay should apply during periods of force majeure and shutdown affecting the infrastructure asset. As its counterparty is an equity investor, the seller will typically seek to push such risks to InfraCo. This may be complicated, however, where the seller maintains a level of control over the asset. 3. Creditworthiness The investor/operator will be concerned with the creditworthiness of the seller group entity (user) entering into the service agreement with InfraCo. The investor/operator will likely not want its cash flows to be linked to the performance of the user's business and may therefore look for credit support from the wider seller group (e.g., a parent company guarantee from a seller group entity whose financial status is not linked solely to the user's business). The seller will likely want to limit InfraCo's ability to call on any credit support provided to certain circumstances (e.g., the user's insolvency) and push all other risk of underperformance by InfraCo to the investor/operator on the basis it should take some level of equity risk on the cash flows. Monetizing Embedded "Non-core" Infrastructure Assets (cont.)