Pivotal180 Glossary of Terms Project Finance Training

By Alison Leckie | October 6, 2020

Please find a list of terms we use in our videos and model walk throughs in all our courses. 

Back Leverage: debt incurred by a project sponsor at a holding company level to finance its equity contributions to a project, which is often structurally subordinated, or “back-levered,” to another financing. In Renewable Energy projects it has become common for the term Loans to be back levered to a tax equity financing.

Base Case Model: a financial model is used to reflect the assumed operating and financial performance of a project. Base Case Projections are used to run sensitivity analyses to analyse downside and upside scenarios for the project and to size the debt.

Balloon Repayment: instead of just paying the interest we also pay some principal before the maturity date of the loan. That is the final debt instalment is substantially larger than the preceding payments.

Bullet repayment: when the entire principal of a loan is due and payable on the maturity date.

Construction Loan: a loan that the Borrower borrows in periodic disbursements over a specified availability period to fund construction of a project and then pays back in a single payment at the end of the construction period or, more typically, converts into a Term Loan.

Capacity Payments: Capacity is the theoretical maximum production capability of an output facility. Off takers sometimes pay for Capacity apart from actual output. A capacity payment is important for facility owners because they must pay fixed costs regardless of whether the facility is in operation. capacity is important for off takers because they might be subject to rules or contractual obligations that require them to have available capacity even if it is never used

Cash Flow Available for Debt Service (CADS): is a measure of the cash flow available to pay debt service (principal, interest, and fees). CADS is often calculated by subtracting the operating expenses (operating costs deposits in reserve accounts, capital expenditure and taxes) paid in the applicable period from the project revenues earned in that period. CADS is often used in Project Finance to calculate financial ratios such as a DSCR or an LLCR.

Cash Sweep: an application of funds that takes all or a specified percentage of actual cash after debt service (excess cashflows) and applies it to the prepayment of the loan rather than allow cash flow into equity Cash Sweeps may be part of the deal structure or may apply only when something bad has happened or is projected to happen, and  provide lenders with additional protection in ensuring debt is repaid.

Conditions Precedent (CPs): are all the requirements that must be met before the borrower is permitted to draw the money under the loan. These include delivery of a signed PPA, EPC and O&M agreement. Receipt of all approvals and evidence that insurance is in place.

Contingency: extra money in a construction budget that is not earmarked for any particular use at the time of closing. Depending on the stage of development and construction, the certainty of various Project Costs, the experience level of the contractors, and other factors, contingency might be anywhere between 5% and 15% of the overall Project Costs.

Debt: is a form of investment that is provided by lenders. What they receive is a set of payments that is fixed according to a schedule of repayment and a specified interest rate. Debt is often referred to a leverage or gearing

Debt Service: is interest expense plus agency fees plus principal amortization

Debt Service Coverage Ratio (DSCR): the ratio of cash flows from a project that remain available to pay debt service after payment of operating costs. DSCR is cash available for debt services (CADS) divided by debt service. In Project Finance It is the most used ratio in project finance. It is typically used for debt sizing, debt sculpting, and to monitor project performance against the loan documentation.

Debt Service Coverage Ratio (DSCR) sculpting is the most common form of project finance debt repayment.  Debt repayments are sculpted to the DSCR. Once we size our debt, our debt repayments each period can be calculated under this sculpting method. They will then be fixed and recorded in the loan agreement.

Debt Service Reserve Account, or DSRA: is a cash account that retains money for when CADS (cash available for debt service) is too low to service debt? This account provides cash security for the lenders. It is almost always sized at six months’ worth of debt service.

Debt Size Drivers: The main three drivers of debt size are CADS ( including the tenor of the loan), DSCR and Interest.

Developer: is the party who assembles all the pieces of the project. They will identify the site, secure the land leases, negotiate the contracts, select the equipment and vendors, and typically negotiate debt with the lenders.

EPC Contract (EPC): A form of building contract used for a large or otherwise complex project under which the builder (the EPC contractor) will deliver a completed project on a turnkey basis. EPC contract is an abbreviation for engineering, procurement, and construction contract.

EPC Contractor stands for engineering procurement and construction. This is the firm that provides all the design and engineering work and will procure the equipment and materials. EPC will construct and commission the project.

Equity: typically referred to as shareholders’ equity (or owners’ equity‘ for privately held companies), it represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off.

Equity Hurdle Rate:  the hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. Hence the hurdle rate is also referred to as the required rate of return or target rate. In order for a project to be accepted, its internal rate of return must equal or exceed the hurdle rate Note riskier projects normally will have higher hurdle rates.

Equity Investors: project sponsor or the developer, the people who actually create the energy project and will often invest in it. And then there are more passive investors, institutional investors, or purely financial investors who are not actively involved in the development or day to day operation.

Feathering: a method of controlling torque on a Wind Turbine Rotor by decreasing the area of the blade surface exposed to the wind.

Financial Closing:  is the time when Lenders make their initial loans. This is the time the borrower signs the loan documents and starts to draw money on the loan. At this point of conditions precedents must have been fulfilled.

Flip Structure: a structure that allows developers to monetize tax credits and depreciation currently by-passing tax benefits to Tax Equity Investors in exchange for cash payments. The “flip” is the point when the Tax Equity Investors have earned an agreed-upon after-tax return on the investment, taking into account cash flow, tax savings from tax credits and tax losses, and the tax cost of pass-through income. Before the flip, virtually all the tax benefits and a large part of the cash flow go to the Tax Equity Investor, while after the flip almost all cash and tax attributes go to the other owners.

Force majeure: refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling obligations.

Future value (FV): means the amount of money in the future discounted by an interest rate to equate the buying power of the future dollar with the present dollar is one of the most important concepts in finance, and it is based on the time value of money. Investors need to know what the FV of their investment will be after a certain period of time, calculated based on an assumed growth rate.

Grace Period: An extended period of time after the loan is first drawn down but before the first principal repayment is due. It can also be referred to as interest only period

Grid: the whole interlocking system of electricity delivery, from generator to customer. The three main parts of the Grid include: generation (creation of the power), transmission (high voltage), and distribution (low voltage transmission from a substation to the customers.

Internal Rate) of Return (IRR): is the Discount Rate at which the NPV of all cash flows (both positive and negative) is $0

Investment Tax Credit (ITC): is the predominant tax incentive for solar projects in the US, but wind projects can also choose to choose ITC in lieu of a PTC.  ITC like the PTC is a dollar of dollar offset of taxes due. The ITC is an upfront credit, and the credit is received when the project is placed in service.

Kilowatt / kW: a unit of energy equal to 1,000 watts of electrical power.

Kilowatt-hour / kWh: a unit of energy equal to 1 kW generated per hour

Lender: a bank, financial institution, or other entity that makes loans to a borrower. Lenders are senior to the owners, so debt is repaid before any distribution made to the equity investors.

Leverage is the use of debt (borrowed capital) in order to undertake investment or project. When one refers to a company, property, or investment as “highly leveraged,” it means that item has more debt than equity.

Limitation of Liability (LOL): is a cap on the damages one party to a contract could have to pay to the other party. The LOL can apply to any other kind of contract breach, damages, or both. Usually, the cap is a fraction of the contract price or a fraction of the profit under the contract of the party limiting its liability

Limited Liability: is a type of legal structure for an organization where a corporate loss will not exceed the amount invested in a partnership or limited liability company (LLC). In other words, investors’ and owners’ private assets are not at risk if the company fails. Liability is limited to whatever they invest.

Loan Life Coverage Ratio (LLCR):  measures the ability of the risk-adjusted cash flow to repay the debt over the tenor of the loan.(for a lender, am I going to get all of my money back?).A LLCR of 1.0x means we have exactly risk-adjusted cash to repay the total loan over the tenor. A higher LLCR means there is cash left over for equity and a lower LLCR than 1.0x means default!

London Interbank Offer Rate (LIBOR): is not the actual borrowing cost of any individual bank, but rather an approximation for all banks to use as a base rate for simplicity. Due to the financial strength of the London banks who managed it, LIBOR was adopted as a global benchmark rate for loans. It is expiring in Dec 2022. https://pivotal180.com/libors-expiry-warning-your-existing-borrowing-costs-may-rise-2/

MCP: Measure Correlate Predict is the standard forecasting methodology for wind forecasting. It involves five steps Measure; correlate predict optimize and sensitize.

Net present value (NPV): Present value of cash flows generated by a project. This is an indicator of the incremental wealth produced by the initiative. A positive net present value demonstrates the project’s capacity to generate enough cash to pay off initial expenses, compensate capital utilized in the initiative, and have residual resources for other uses.

Offshore Wind: Windfarms constructed in bodies of water offshore, where higher wind speeds are able to generate greater electric energy. Wind turbine generators (WTG) s in any marine environment count as “offshore,”

Off taker: the purchaser under a PPA, Offtake Agreement, or any other commodity contract. The off taker is the counterparty to the project company because they are taking the energy off the project and putting tit to some use.

Offtake Agreement: an agreement between a project company as seller and an Off taker as buyer for the sale and purchase of a product that is produced by the project

Operations and Maintenance Agreement (O&M) Agreement: an agreement between the project company and the O&M contractor to provides labour and manage the day to day operations of the project. Ideally this will include a fixed price and include guarantees for performance.

P99, P50: a value that refers to the probability of an outcome. The higher the “P” factor, the more likely that a certain outcome will be met or surpassed. Commonly used in wind or solar resource studies, a P factor may represent the minimum number of kWh that WTGs or Panels of a certain nameplate rating at specified places will generate, at a probability of 99% or 50%, etc. For a P99 probability, there would be only a 1% chance that WTGs placed in those locations would generate less than the stated number of kWh. Lenders and other investors use these factors for various purposes, including to determine the amount of debt a project can support.

Partnership Flip: a tax equity financing structure that uses a special allocation tax partnership (which may in form be a limited liability company) to pass a disproportionate amount of the tax benefits (generally, ITCs, PTCs, and MACRS deductions) generated by a Renewable Energy project to the Tax Equity Investor. Typically, the Tax Equity Investor is allocated up to 99% of the tax benefits until a “flip point,” after which the Tax Equity Investor generally reverts to a minority investor and may be bought out. Cash flow from the project often is shared in different ratios than the tax benefits.

Power Curve: is a graph showing the capacity of a wind turbine to generate energy at different wind speeds. By taking the forecast of wind speed as measured in hours per year and aligning it with the power curve as measured in kilowatts, we can easily forecast the total kilowatt hours per year that can be generated by the turbine

Power Purchase Agreement (PPA): is the most important contract in the entire constellation of parties and contracts. The reason is that it typically governs 100% of the project revenue. It is a key instrument of project finance

Present Value (PV): is a financial calculation that measures the worth of a future amount of money or stream of payments in today’s dollars adjusted for interest and inflation. In other words, it compares the buying power of one future dollar to purchasing power of one today

Production Tax Credit (PTC): is the predominant tax incentive for wind projects in the US, and it’s available for the first 10 years after the wind farm is placed in service, but unlike depreciation, which is an expense that reduces our taxable earnings, tax credits directly offset our taxes due.

Project Finance: is about non -recourse obligation. A debt is incurred by a project developer (known as the project company or special purpose vehicle which is formed by a Sponsor) and, in combination with Equity contributed by the Sponsor, is used to finance the development and construction of a capital-intensive project, such as a power plant, pipeline, or toll road, typically by means of Construction Loans that later convert to Term Loans upon completion of the project. A primary feature of Project Finance is that the Lenders advance debt based on their evaluation of the projected revenue-generating capability of the project, rather than the credit quality of the project Sponsor. The Equity of the project company and the project assets, including the Project Documents and other cash flows, are pledged as Collateral for the debt.

Project Life Coverage Ratio (PLCR): measures the ability of the risk-adjusted cash flow to repay the debt over the life of the project.  It is typically higher than the LLCR. ( this is only measured over term of the loan).

Public Private Partnership deal (PPP): or P3 for those in the US is an arrangement between government and private sector for the provision of public assets and/or public services. Public-private partnerships allow large-scale government projects, such as roads, bridges, or hospitals, to be completed with private funding

Renewable Energy: energy created by technology that takes advantage of energy renewed by nature, such as biomass wind, geothermal, solar thermal, wave motion, and tidal motion.

Renewable Energy Tax Credit: a type of Investment tax credit available in the US for certain types of qualifying property, including solar, gas microturbine, Cogeneration, and fuel cell equipment.

Repayments DSCR Sculpting:  repayments are sculpted to match the cash flow profile such that the DSCR is equal in every period. Debt service is maximised to the DSCR limit in every single period. It is the most efficient form of repayment for project finance.

Repayments Linear Principal Amortisation: Where the principal repayment is exactly the same in every period so over time as the loan is repaid the interest expense in each period is reducing meaning the debt service is reducing over time.

Repayments Mortgage Style: Where debt service being interest and principal is identical every period. As debt is repaid, the balance decreases and so our interest is reduced, and our principal component increases over time.

Revolving Loan: This is a working capital facility which can be used to fund receivables and inventory or other short term uses of capital.

Scenario: A structuring case used to optimize the project (i.e. determine a sales price required to achieve a target hurdle rate, size debt, and to calculate debt repayments over the life of the project)

Sensitivities: Testing the project’s response to variations in non-fixed items (i.e. to variable costs or the sales price if that is not fixed via contract). Debt size and structure is assumed fixed.

Sensitivity Analysis: Technique used to grasp the responses of project cash flows with respect to basic project variables and consequent repercussions on the debt service capacity.

Take-or-Pay Contract: a contract under which an Off taker pays its supplier for a given volume regardless of whether the Off taker accepts that volume. A Take-or-Pay Contract allows the supplier to cover its fixed costs and thereby be ready to supply in the future. It is similar to a contract under which the Off taker makes a Capacity payment (i.e., a payment designed to cover fixed costs).

Tax Equity: a preferred Equity investment in a Renewable Energy project, such as wind or solar. Tax Equity investments come in various forms but are generally structured as Equity investments in a partnership with a developer, for which the investor’s return comes primarily from tax benefits, such as the PTC or ITC.

Tax Equity Investor: an entity invested in Renewable Energy or other projects that qualify for tax benefits. The entity has tax liability from other operations that it is seeking to offset using the tax benefits. The investment is made to look like an Equity investment because the tax benefits are only available to owners, but it often includes loan-like features as well.

Tenor or Term: This is the time between financial close and loan maturity. Maturity refers t0 the final schedules repayment of the loan.

Term Loan: Also called the take-out financing. The proceeds of the loan are to repay the construction lender and to take out or retire the construction loan.

Waterfall: the order of application of revenues of a project. Think of the funds in question as a waterfall water (money) cascades from the top to the bottom and certain obligations are met in that order. The Waterfall is generally ordered: (i) operating costs; (ii) costs of administering the credit facility; (iii) interest and Interest Rate Swap payments; (iv) principal; (v) reserves; (vi) Subordinated debt or Cash Sweep to a targeted debt balance (if any); and (vii) Equity distribution A Waterfall is also known as a “cash flow Waterfall.”

Weighted Average Cost of Capital ( WACC): is the  blended cost of capital across all sources. It is the rate at which a company’s future cash flows need to be discounted to arrive at a present value for the business WACC is used in financial modeling to calculate the net present value of a business.

Wind Turbine Generators (WTG): A wind turbine is a rotating machine that transfers kinetic energy from the wind into mechanical energy. .If the mechanical energy is instead converted to electricity, the machine may be called a wind turbine generator (WTG

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