Tolling Agreement Financing

ORLANDO – As gas prices rise and electricity prices rise, more and more companies are turning to tolls to finance and share the risk of building new commercial power plants, traders say. With regard to the restructuring of electricity supply contracts and the calculation of returns on equity, the value of volatility is an effective buffer from the cash reserves needed to cover debt servicing. While lenders may require different forms of security, guaranteeing the source of revenue from the sale of LNG and by-products is essential not only for banks, but also for other project participants. It is typical that a loyalty agreement (often offshore, for investments in developing countries) is created and a paying body is designated. This gives banks and project participants a guarantee on revenues. The use of a secure trust contract gives banks the comfort of having control of the project`s debt proceeds, (ii) the toll company guarantees that their toll is paid, and (iii) project participants ensure that payment is made for the liability of a toll company. Unlike other provisions of a toll agreement, the royalty structure may not be consistent between projects. To achieve project success, fiscal sustainability is essential and the ability to generate sufficient cash flow to support project debt and other lenders` needs is essential. The economic model behind a liquefied natural gas (LNG) project is fundamental because it will determine the risk profile of the project as a whole and hence the nature of the funding required. The choice will ultimately depend on a number of factors, including risk-taking, tax and financing issues, and their interest in investing in one or more segments of the LNG chain.

(For more information on the LNG value chain, please see the handy note: LNG – an introduction.) Squadron Energy Group`s Australian Industrial Energy Group has signed a long-term lease agreement with NSW Ports for a port site in Port Kembla, 112 km south of Sydney, for the development of the company`s LNG import terminal project. This paper highlights (i) a number of findings that need to be addressed during the structuring phase of the development of the project and (ii) the need for consistency of documents in toll agreements with different parties. It is not an exclusive list of important considerations; it merely illustrates the complexity and importance of previous decision-making issues in the process of structuring and properly documenting the toll system.

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