take-or-pay contracts

A contract whereby one or more purchasers agree to accept the products produced from the project at a fixed or predictable price. Many project financings are based on long-term, take-or-pay contracts. If the purchaser’s credit is sufficient and the project goes well, there is a market for the produce and cash flow occurs. However, competition, changes in technology, or changes in demand might decrease the value of the take-or-pay contracts.

Take-or-pay contracts in the utility industry often are used in conjunction with bonds to finance new facilities. A take-or-pay contract says the purchaser of the power will take it from the bond issuer. If construction isn’t completed, the bond issuer will pay back bondholders their investment. The best known instance of utility take-or-pay contract was the contract signed by the Washington Public Power Supply System (WPPSS) to build nuclear plants. The Washington State Supreme Court voided the take-or-pay contracts that many utilities had signed to support the construction. That caused WPPSS to default on some of its bonds.