INTRODUCTION

In a power project, a power sales agreement, or power purchase agreement as the purchaser calls it, is the linchpin of an energy project financing. This agreement sets forth the obligation of the project company to produce power for sale and for the power purchaser to buy it. It is from this transaction that the funds flow to pay debt service, operating costs, and an equity return. It must fulfill, therefore, the dual role of financing document and operating document.

The funds, of course, will not flow unless the power purchaser is creditworthy; that is, the power purchaser must have sufficient cash to pay its bills, as proven by past, present, and expected future financial performance. To the extent that this is not present, credit enhancement, such as a guarantee by a creditworthy central government or multilateral support, is needed.

REVENUE CONTRACTS IN TRANSNATIONAL PROJECTS

In some countries, a project financing, which is based on the underlying cash flow from the revenue-producing power contracts of the project is a new concept. Project finance contract provisions that are standard in the United States and Great Britain are either not yet developed, or relatively recent in concept, in these countries. An example of this type of provision, considered essential to a successful energy project financing, is a definitive obligation for a utility's purchase of the project's energy output at a defined price.