What is a take-or-pay contract?

Take-or-pay terms are common in power, gas, pipelines and other long-lived assets. They move volume risk from the owner to the customer, so the customer’s credit quality matters a great deal. Contracts often run for many years, and lenders look closely at how much of an asset’s revenue they cover.

Say a utility commits to buy $10 million of power a year from a plant. If it uses only $6 million, it still pays $10 million.

It gives an infrastructure asset predictable revenue that does not depend on demand, which helps owners borrow against it.