Project Finance in the FertiNitro Company - Coursework Example

Introduction This project of the financial transaction that takes place in the FertiNitro Company which mainly deals in construction and fertiliser plant operations situated in Venezuela. The financing of the company is based on the sponsors’ contributions which will be further discussed in details in terms of risk and viability of the company. Polar is a passive sponsor of FertiNitro and is not directly involved in the business of construction and operation of the fertilisation plant. Polar is mainly a food and beverage company with present joint ventures in companies like Koch and Pequiven which are the major stakeholders of FertiNitro. The total revenue generated by Polar group is US $1.9 billion. More than 2% of the company goes to Venezuela’s non-oil GDP (Duff & Phelps, 1998, p.5). Impact of the Sponsors’ contribution on project in terms of viability as a stand-alone project financing The strategy adopted by Polar in the investment of export projects has generated profitable returns to Venezuela. The first project to invest for Polar is FertiNitro. The indirect involvement of Polar in the project of FertiNitro has resulted in being the important mitigant to it. PDVSA gas is the subsidiary company of Polar Group which contributes to the major portion of the gas requirement of the country made available by FertiNitro. The foreign exchange over the past decades has been favourable for PDVSA which gives FertiNitro another reason to make Polar group a part of its sponsors. The indirect participation of PDVSA in FertiNitro the foreign transfers and the risk convertibility gets minimised. PDVSA is also has the leading market in urea in South America along with Pequiven which is the petrochemical wing of PDVSA. PDVSA is also responsible for offsetting the risk of the volatile market by lowering the cost of the feedstock gas supply. PDVSA being the world second largest Oil and Gas Company contributes the most to the FertiNitro as the company both directly and indirectly invests to the company. Even the internal funds of Pequiven are sponsored by PDVSA. Thus the viability of FertiNitro based on the stand-alone project financing of the Polar Group will bring about remarkable results as the company in engages in both direct and indirect financial investment for the company. Both the cost overruns and the time overruns of the company will be under check in spite of the fact that as Polar the company contributes to the 10% of sponsorship to FertiNitro and is a passive sponsor. Following aspects of the project with relevant matters Off-taker The Polar Group has signed an off take agreement with both Pequiven and Koch Off takers which are both joint ventures. The Koch Off taker bears the obligation of 75% of the ammonia and 43% of urea of the company that is available for sale during the year. Similarly the rest of the obligation of the Polar Group’s off take agreement lies with Pequiven. Certain specification of the company related to the off taker agreement has to be abided by the mentioned companies like appointing an independent inspector regarding the approval of the off takers who will be in-charge of determining the quality of the product to be delivered. Based on the independent inspector’s assessment the rejection of the non-confirming products be made or availed at a discounted rate. At the initial level of agreement Koch will have the rights to sell the products and delivering the same in North America while Pequiven will follow a similar act in South America, Caribbean and the Central America. The off take agreement will be for a period of 20 years starting from the date of production made for sale and cab be renewed for one of more terms to the maximum of 5years. The price of the products which will be sold in parts of America (North and Latin) and Caribbean will be based on the market-based formula initiated for the off take agreement. Any disputes occurring under the off take agreement cannot be settled under the New York Government of United States but can be submitted for arbitration by the law laid down by the government of the country (FertiNitro Project, n.d., p-4-11). Supply The company deals with supply agreements such as Methane Gas supply, Electric Energy supply and Industrial water supply agreement. The supply of the methane gas is mainly tied up with FertiNitro. But a limitation witnessed related to the failure of liquid methane gas being delivered has led to the upheaval of this agreement. Electricity will be supplied on a continuous basis to Pequiven. This has been done on the agreement that the repair and maintenance charges of the same will be borne by both the companies under the agreement. However, the loss and damages of the supplied electricity will not be shared by Pequiven. Again the industrial water supply has been undertaken both by the company and Pequiven where the latter does not bear any liability for the failure of water supply. But any misconduct made wilfully needs to be undertaken by Pequiven. Risk Mitigation, Organisational Structure & Financial aspects The company by entering into the off take and supply agreement has mitigated the risk to a great extent so much so that all the liability of the mishap of the company need not be borne by Polar group alone. The company’s organisational structure is mainly based on the financial shareholding of fund. The company is form by joint venture with a chairman nominated every 2years.The major funding of the company is done by the various financial institutions. The accounting structure of the company is dealt under trustee account, financial institutions for debt obligations, senior debt reserve account and cash reserve account and restrictive payments. Positive/Negative aspect of the project The company is financially very sound as the company has the capability of diversifying the volatility of the market risks. The company has also been successful in the projects undertaken by it. Under the agreement with the FertiNitro the company has assigned its rights which are applicable. The security documents of the company need to be reassigned in case the company wants to get into another document. But the limitations of the company related to the off taking and supply agreements need to be well guarded before entering into any further agreements. References Duff & Phelps, 1998. FertiNitro Finance Inc. [Pdf]. Venezuela. Available at: . [Accessed on 20 June 2012]. FertiNitro Project, n.d. Offering Circular Summary. [Pdf]. Venezuela. 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