Part III: Appendix
Glossary of Project Finance Terms
This glossary provides definitions of specialised terms related to investment evaluation and dividend determination in project finance from a capitalist’s perspective. Each term includes a definition/explanation and classification (Investment Evaluation, Dividend & CF, Contracts & Organisation, Financing Terms, Risk & Reserves).
Glossary of Project Finance Terms
| Term (English) | Term (Japanese) | Definition / Explanation | Classification |
| ADB | Asian Development Bank | Abbreviation for Asian Development Bank. An international development financial institution (MDB) supporting economic development in the Asia-Pacific region. In project finance, provides political risk guarantees, long-term financing (20-25 years), and local currency financing. ADB involvement improves financing terms, increasing financing ratios by 5-10% and reducing interest rate spreads by 0.5-1.0%. | Contracts & Organization |
| AfDB | African Development Bank | Abbreviation for African Development Bank. An international development financial institution (MDB) supporting economic development in Africa. In project finance, provides political risk guarantees, long-term financing, and technical assistance. AfDB involvement enables financing execution even in high-risk regions such as Sub-Saharan Africa. | Contracts & Organization |
| Arbitration Clause | International Arbitration Clause | A clause stipulating that contract disputes will be resolved by international arbitration institutions (ICC, LCIA, SIAC, etc.). In emerging country projects, due to concerns about independence and expertise of local courts, arbitration venues are set in neutral locations such as London or Singapore, with governing law being English law or New York State law. Arbitration awards are enforceable in over 160 countries under the New York Convention (1958). | Contracts & Organization |
| Asset Handover | Asset Transfer | Transfer of project assets (roads, power plants, etc.) to government or sponsor at concession expiration. In infrastructure projects such as toll roads and railways, free transfer is common, and in this case Project IRR calculation assumes zero SPV liquidation value (Definition 1). Asset transfer price can cause differences exceeding 3% in Project IRR. | Contracts & Organization |
| Assumptions | Assumptions Sheet | A worksheet in the financial model that aggregates all input values such as demand forecasts, prices, OPEX, interest rates, and exchange rates. Set in three scenarios: Base Case, Conservative Case (P90), and Optimistic Case (P10). Changes to assumptions are automatically reflected in all sheets, forming the basis for sensitivity analysis. Lenders make meeting minimum DSCR standards in Conservative Case a financing condition. | Dividend & CF |
| Base Case | Base Case | A scenario using the most probable assumptions in the financial model. For demand forecasts, uses P50 (50% probability of achievement); for construction costs and OPEX, uses standard estimates; for interest rates, uses market levels at contract time. The Base Case model agreed upon by all parties at Financial Close becomes the standard for subsequent contract management. Lenders monitor deviations from Base Case quarterly and determine covenant violations. | Investment Evaluation |
| Bespoke Contract | Bespoke Contract | An individually customised contract created from scratch to match project-specific conditions without using standard contracts (FIDIC, etc.). In large commercial projects (oil & gas, LNG, large power plants, etc.), investors commission lawyers to create Bespoke contracts, setting liquidated damages, design change procedures, force majeure definitions, etc. favorably to themselves. While FIDIC contracts have balanced risk allocation, Bespoke contracts favour investors. | Contracts & Organization |
| BOP | Balance of Plant | In solar power projects, a method where the plant owner (operator) procures major equipment (panels, inverters, etc.) themselves and separately contracts for detailed design, construction, and commissioning. Tends to have lower investment costs than EPC lump-sum contracts but increases operator management burden. In Japanese solar projects, EPC lump-sum contracts tend to have higher median investment amounts. | Contracts & Organization |
| BS | Balance Sheet | Abbreviation for Balance Sheet. A financial statement showing assets, liabilities, and net assets at each period-end. In financial models, tracks cash balances (including breakdowns of Restricted Cash, DSRA, etc.) and debt balances (including breakdowns of Senior Debt, Subordinated Debt, etc.). BS and P/L (income statement) are Mandatory (essential), while CF (cash flow statement) is treated as reference. Lenders detect BS abnormalities (e.g., excess cash accumulation, slow debt-reduction pace) even when DSCR meets standards. | Dividend & CF |
| CAFDS | Cash Available for Debt Service | Abbreviation for Cash Available for Debt Service. The amount obtained by deducting working capital increases and taxes from the sum of operating CF and investing CF. Indicates cash generation capacity that is the source of debt service. Formula: CAFDS = EBITDA – Working Capital Increase – Taxes. Or, CAFDS = Operating CF + Investing CF – Taxes. Used as the numerator of DSCR, with annual CAFDS exceeding annual principal and interest payments (DSCR>1.20) being a financing condition. During steady-state operations, CAFDS ≈ EBITDA holds (assuming CapEx ≈ Depreciation, ΔNWC ≈ 0). | Dividend & CF |
| CAPEX | Capital Expenditure | Abbreviation for Capital Expenditure. The initial investment amount of a project. Includes construction costs, equipment costs, development costs (site acquisition, design, permits), grid connection costs, and contingency reserves. For solar power, Japan has CAPEX of $1,300-1,500/kW, while overseas (Middle East, US, Australia) has $500-800/kW—approximately double the difference. Main causes of difference are land/site preparation costs (Japan 12%, overseas 1-2%) and project scale (Japan 10-20MW, overseas 100MW+). | Investment Evaluation |
| Cash Sweep | Cash Sweep | A clause that mandatorily applies part or all of planned dividends to debt prepayment when DSCR falls below a certain level (typically 1.25). Classified into three stages according to DSCR level: ①DSCR≥1.30: dividend possible, ②1.20≤DSCR<1.30: 50% of dividend to prepayment, ③DSCR<1.20: entire dividend to prepayment. Cash Sweep shortens the effective repayment period (e.g., contractual 18 years → actual 10 years). Functions as lender credit risk mitigation measure. | Dividend & CF |
| CF | Cash Flow Statement | Abbreviation for Cash Flow Statement. A financial statement showing cash increases and decreases through three sections: operating CF, investing CF, and financing CF. Theoretically treated as reference since derived from annual changes in BS, but in practice treated as a core sheet as it forms the basis for distributable amount determination. The final line of financing CF becomes the distributable amount, determined from both DSCR constraints and retained earnings (PL) aspects. | Dividend & CF |
| Change of Control | Change of Control | Transfer of SPV control through changes in sponsor shareholding ratios. Non-Financial Covenants in loan agreements require the lender’s prior approval for a Change of Control. Change of control without approval constitutes Event of Default (loss of benefit of time), and lenders acquire immediate loan recovery rights. Since sponsor creditworthiness is a premise of financing terms, change of control is a major concern for lenders. | Contracts & Organization |
| Completion Guarantee | Completion Guarantee | A contract where sponsors guarantee project construction completion (Commercial Operation Date achievement). When construction is delayed or interrupted due to construction period funding shortages, technical difficulties, Force Majeure, etc., sponsors bear the obligation to provide additional funding and achieve completion. For new technology projects (hydrogen, ammonia power generation, etc.), Completion Guarantee becomes a financing condition. | Risk & Reserves |
| Concessionaire | Concessionaire | The operator (SPV) granted project implementation rights in a concession agreement. In infrastructure projects such as toll roads, airports, and ports, governments grant Concessionaires business operation rights and toll collection rights for a certain period (25-40 years). At concession expiration, conditions typically involve free asset transfer to government. | Contracts & Organization |
| Conservative Case | Conservative Case | A scenario using unfavourable assumptions in the financial model. For demand forecasts, uses P90 (90% probability of achievement); for construction costs and OPEX, uses estimates +10-20%; for interest rates, uses market level +1-2%. Lenders make maintaining DSCR≥1.20 even in Conservative Case a financing condition. For solar power, assumes P90 generation forecast and 90% panel output decline after 10 years. | Investment Evaluation |
| Cost Overrun | Construction Cost Overrun | Construction costs exceeding initial estimates. Main causes of Cost Overrun include design changes, material price inflation, labour cost increases, and schedule delays. Loan agreements set Cost Overrun Reserve (construction contingency) at 5-10% of total investment, with sponsors providing additional equity for overruns. When Cost Overrun exceeds reserves, financing ratio declines and Equity IRR deteriorates. | Risk & Reserves |
| Covenant | Covenant | A clause in loan agreements stipulating conditions that the borrower (SPV) must comply with. Classified into Financial Covenants (financial pledges: DSCR standards, LLCR standards, Debt/Equity ratio ceiling) and Non-Financial Covenants (non-financial pledges: additional borrowing prohibition, asset sale restrictions, dividend constraints, Change of Control prior approval). Covenant violations constitute Event of Default, giving lenders immediate loan recovery rights. | Financing Terms |
| DAB | Dispute Adjudication Board | Abbreviation for Dispute Adjudication Board. A dispute resolution body incorporated into FIDIC contracts. Quickly adjudicates construction period disputes (design changes, schedule delays, additional costs, etc.). DAB decisions have provisional binding force, with parties continuing construction following DAB decisions. Final dispute resolution is through arbitration or litigation. | Contracts & Organization |
| Debt Schedule | Debt Schedule Sheet | A worksheet in the financial model calculates debt balance, principal repayment amount, interest paid, DSCR, and Cash Sweep for each period. Principal repayment uses two methods: Equal Principal Repayment or DSCR target-type repayment (Sculpted Repayment). Debt Schedule sheet calculation results are reflected in CF sheet and BS sheet. | Dividend & CF |
| Debt Service | Debt Service | The sum of principal repayment and interest paid for each period. A state where annual Debt Service exceeds annual CAFDS (DSCR<1.0) means default state. DSCR is calculated as CAFDS / Debt Service and becomes the core indicator of lender credit risk assessment. | Financing Terms |
| Debt/Equity Ratio | Debt/Equity Ratio | The ratio of financing amount (Debt) divided by equity contribution (Equity). In project finance, Debt/Equity = 70/30 (70% financing ratio) is standard. For high-risk projects (merchant energy, resource development), becomes 60/40 or 50/50. The higher the Debt/Equity ratio, the greater the tax savings through Tax Shield, with Equity IRR exceeding Project IRR. | Financing Terms |
| Default | Default | Debt default. A state where Debt Service (principal and interest payments) is not performed by the due date. When DSCR falls below 1.0, or when loan agreement Covenant violations occur, Event of Default (loss of benefit of time) is established, and lenders acquire immediate full loan recovery rights. In practice, avoided through sponsor additional equity injections or Waiver (violation exemption) negotiations before Default occurs. | Financing Terms |
| Depreciation | Depreciation | Accounting treatment that allocates fixed asset acquisition costs over useful life as expenses. In project finance, straight-line method is common. Depreciation expense is a non-cash expense that does not affect cash flow but has the effect of reducing taxable income. EBITDA is profit before depreciation and is used as a proxy indicator for cash generation capacity. | Investment Evaluation |
| Direct Agreement | Direct Agreement | A contract that lenders conclude directly with SPV’s major contract counterparties (Offtaker, EPC contractor, O&M operator, etc.). When SPV Defaults, lenders secure the right to take over major contracts and continue project operations (Step-in Right). Through Direct Agreement, lenders ensure project continuity and enhance recoverability. | Contracts & Organization |
| Distributions | Distributions Sheet | A worksheet in the financial model calculating distributable amount. Distributable amount is determined by MIN(retained earnings, post-waterfall cash remaining, DSCR constraint ceiling). Distributions sheet output becomes input for CF sheet’s financing CF section and Equity IRR calculation. | Dividend & CF |
| DSCR | Debt Service Coverage Ratio | Abbreviation for Debt Service Coverage Ratio. The ratio of CAFDS (Cash Available for Debt Service) divided by annual principal and interest payment. The most important indicator measuring project debt service capacity. Formula: DSCR = CAFDS / (Principal Repayment + Interest Paid). Industry-specific minimum standards: toll roads 1.15-1.20, power plants 1.20-1.25, LNG terminals 1.25-1.30, oil & gas development 1.30-1.50. DSCR<1.20 triggers complete dividend prohibition (Lock-up), DSCR<1.25 triggers Cash Sweep as standard contract conditions. Min DSCR (minimum DSCR) becomes the criterion for financing approval. | Dividend & CF |
| DSRA | Debt Service Reserve Account | Abbreviation for Debt Service Reserve Account. A dedicated account accumulating reserves to be applied to debt service. Usually targets accumulating 6 months or 12 months of principal and interest payments. DSRA guarantees debt service during revenue declines and mitigates lender credit risk. DSRA accumulation shortfall constitutes dividend prohibition grounds. For emerging country projects, 12 months is required. | Risk & Reserves |
| EBITDA | Earnings Before Interest, Taxes, Depreciation and Amortisation | Abbreviation for Earnings Before Interest, Taxes, Depreciation and Amortisation. A profit indicator that adds depreciation back to operating profit. EBITDA is used as a proxy indicator for cash generation capacity since it excludes non-cash expenses (depreciation). However, strictly speaking it is a profit indicator on P/L (income statement), not cash flow. Under steady-state operation assumptions (CapEx≒Depreciation, ΔNWC≒0), EBITDA ≈ CAFDS holds. Recognised as industry practice in the World Bank PPP Guide (2017) and Moody’s rating methodology (2022). | Investment Evaluation |
| ECA | Export Credit Agency | Abbreviation for Export Credit Agency. A government agency providing export finance and political risk guarantees to support domestic company exports. Representative examples: Nippon Export and Investment Insurance (NEXI), US Export-Import Bank (US EXIM), UK Export Finance (UKEF). ECA involvement improves financing terms (financing ratio +5-10%, interest rate -0.5-1.0%, repayment period +3 years) and mitigates political risk. | Contracts & Organization |
| EPC Contract | Engineering, Procurement and Construction Contract | Abbreviation for Engineering, Procurement and Construction. A contract where the EPC contractor undertakes all of design, procurement of materials and equipment, construction, and commissioning in a lump sum. Fixed Price Lump Sum is common, with EPC contractor bearing construction cost risk. EPC contractor bears responsibility for Liquidated Damages (delay penalties) and Performance Guarantee. | Contracts & Organization |
| Equity | Equity | Capital that sponsors contribute to the SPV. The amount after deducting Debt (financing amount) from total investment. When Debt/Equity = 70/30, Equity ratio is 30%. Equity is subordinated capital, holding rights to receive dividends but bearing loss risk if the project fails. Equity IRR is the IRR on Equity contribution and becomes the investment decision criterion for capitalists. | Investment Evaluation |
| Equity IRR | Equity IRR | Internal rate of return on shareholder (sponsor) equity contribution (Equity). Calculated with contribution time as negative cash flow and dividend receipt as positive cash flow. Generally 3-5% higher than Project IRR, with the main cause of difference being Tax Shield (interest payment tax deduction effect). As an investment decision criterion for capitalists, must exceed cost of capital (typically 8-12%). Equity IRR = Cost of Capital + Risk Premium. For high-risk projects, 15-20% is required. | Investment Evaluation |
| Event of Default | Event of Default | Grounds in loan agreements for lenders to acquire immediate full loan recovery rights. Major Events of Default: ①Non-payment of principal and interest, ②Covenant violations (DSCR standard failure, additional borrowing, etc.), ③False representations and warranties, ④Unauthorized Change of Control execution, ⑤Bankruptcy filing. When Event of Default occurs, lenders have rights to seize SPV assets and sell the project. | Financing Terms |
| FCFF | Free Cash Flow to Firm | Abbreviation for Free Cash Flow to Firm. Cash flows attributable to the entire enterprise (creditors + shareholders). FCFF = EBIT×(1-Tc) + Depreciation – CapEx – ΔNWC. FCFF is used when discounting by WACC to calculate enterprise value (EV). In project finance, CAFDS is emphasised more practically than FCFF. | Investment Evaluation |
| FIDIC | International Federation of Consulting Engineers | Abbreviation for Fédération Internationale Des Ingénieurs-Conseils (French). An international organisation publishing standard forms for construction contracts. Major contracts: Red Book (traditional construction, employer design), Yellow Book (design-build), Silver Book (EPC turnkey). In public infrastructure projects involving MDBs (World Bank, ADB, etc.), use of FIDIC contracts is made a financing condition. FIDIC contracts have balanced risk allocation (employer-contractor even). | Contracts & Organization |
| Financial Close | Financial Close | The point when loan agreements, equity contribution agreements, and all major project contracts (PPA, EPC, O&M, etc.) are concluded and financing execution conditions are met. Construction begins after Financial Close. Achieving Financial Close typically requires 1-2 years from bidding. The Base Case model agreed upon at Financial Close becomes the standard for subsequent contract management. | Contracts & Organization |
| Financial Covenants | Financial Covenants | Clauses in loan agreements stipulating financial ratios that the borrower (SPV) must comply with. Major Financial Covenants: DSCR standards (e.g., DSCR≥1.20), LLCR standards (e.g., LLCR≥1.30), Debt/Equity ratio ceiling (e.g., 70/30 or less). Financial Covenant violations constitute Event of Default. Lenders monitor financial statements quarterly and confirm Covenant compliance status. | Financing Terms |
| Force Majeure | Force Majeure | Contract obligation performance becoming impossible due to events beyond parties’ reasonable control. Typical examples: war, civil unrest, earthquakes, floods, strikes. When Force Majeure occurs, contract parties are exempted from performance obligations but also exempted from damages liability. In project finance, risks are mitigated through Force Majeure insurance or Force Majeure Reserve. | Risk & Reserves |
| Grace Period | Grace Period | A period during construction when principal repayment is deferred. Uses either the interest-only payment (Pay-as-you-go) or the interest capitalisation (Capitalised Interest) method. Not included in Repayment Period (principal repayment period). Example: Loan disbursement 2024, Grace Period 3 years, Repayment Period 18 years means principal repayment 2027-2044. Longer Grace Period stabilises construction period cash flow but increases total interest paid. | Financing Terms |
| Hedging | Hedging | Mitigating foreign exchange risk, interest rate risk, and commodity price risk through financial derivatives (currency swaps, interest rate swaps, futures contracts, etc.). In emerging country projects, eliminates currency mismatch between local currency-denominated PPA revenue and US dollar-denominated debt through Hedging. In resource development projects, oil price or copper price Hedging becomes a financing condition. Hedging costs are deducted from distributable amount. | Risk & Reserves |
| ICC | International Chamber of Commerce | Abbreviation for International Chamber of Commerce. ICC arbitration is widely used as a dispute resolution method in international projects. Paris is a common arbitration venue, but neutral locations such as London and Singapore are also selectable. ICC arbitration awards are enforceable in over 160 countries under the New York Convention (1958). | Contracts & Organization |
| IE | Independent Engineer | Abbreviation for Independent Engineer. A third-party technical expert appointed by lenders in large projects (investment $500 million or more). IE verifies the validity of demand forecasts, construction cost estimates, construction schedules, O&M systems, and technical specifications. Financial Close cannot be established without IE Final Report approval. Verification costs are 0.1-0.3% of total investment ($0.5-1.5 million for a $500 million project). | Contracts & Organization |
| Indexation | Indexation Clause | A clause in PPA contracts that revises electricity tariffs linked to price indices (CPI, etc.) or exchange rates. In emerging country projects, Indexation clauses are important to mitigate currency mismatch between local currency-denominated PPA revenue and US dollar-denominated debt. Without Indexation clauses, there is risk that DSCR fails to meet standards when local currency depreciates 20%. | Contracts & Organization |
| IRR | Internal Rate of Return | Abbreviation for Internal Rate of Return. The discount rate that makes investment NPV (Net Present Value) zero. In project finance, two types are used: Project IRR and Equity IRR. IRR calculation seeks the discount rate where NPV = 0, with initial investment as negative cash flow and subsequent revenue as positive cash flow. When IRR exceeds cost of capital, investment is judged economically sound. | Investment Evaluation |
| ISDA | International Swaps and Derivatives Association | Abbreviation for International Swaps and Derivatives Association. An industry organization publishing standard contracts (ISDA Master Agreement) for derivative transactions such as interest rate swaps and currency swaps. In project finance, ISDA contracts are used for interest rate risk and foreign exchange risk Hedging. | Contracts & Organization |
| LCIA | London Court of International Arbitration | Abbreviation for London Court of International Arbitration. Widely used alongside ICC arbitration as a dispute resolution body in international projects. London is the standard arbitration venue. LCIA arbitration awards are internationally enforceable under the New York Convention. | Contracts & Organization |
| LCOE | Levelized Cost of Electricity | Abbreviation for Levelized Cost of Electricity. Unit generation cost obtained by dividing total costs over the entire period of a power generation project by total generation volume. Formula: LCOE = Σ(Depreciation + Maintenance Costs)/(1+r)^t ÷ Σ(Generation Volume)/(1+r)^t. Japan’s solar power (PPA) LCOE is approximately $80/MWh, overseas (Middle East, US, Australia) is $30-45/MWh. Main causes of LCOE difference are CAPEX difference and capacity factor difference. | Investment Evaluation |
| Liquidated Damages | Liquidated Damages | In EPC contracts, damages that the EPC contractor pays to sponsors when Commercial Operation Date is delayed beyond the contractual due date. Usually set at 0.05-0.10% of contract amount per day of delay. Liquidated Damages compensate for lost revenue from delays and suppress Equity IRR deterioration. Cap is generally 10-20% of contract amount. | Contracts & Organization |
| LLCR | Loan Life Coverage Ratio | Abbreviation for Loan Life Coverage Ratio. The ratio of future CAFDS present value over the entire financing period divided by current debt balance. LLCR = Σ(Future CAFDS)/(1+r)^t ÷ Current Debt Balance. LLCR measures repayment capacity over the entire financing period. Industry-specific minimum standards: toll roads 1.30-1.40, power plants 1.40-1.50. LLCR<1.30 triggers dividend prohibition and Cash Sweep activation as standard contract conditions. While DSCR is a single-year indicator, LLCR is a multi-year indicator. | Dividend & CF |
| LMA | Loan Market Association | Abbreviation for Loan Market Association. An industry organization for Europe’s syndicated loan market. LMA publishes standard loan agreement documents (Investment Grade Agreement, Leveraged Finance Documentation), shortening loan agreement negotiation periods. LMA documents formulate standard clauses for Financial Covenants, Events of Default, and Representations and Warranties. In European project finance markets, practice is established of adding individual modifications to LMA documents as base. | Contracts & Organization |
| Lock-up | Lock-up | A clause completely prohibiting dividends when DSCR falls below minimum standards (typically 1.20). During Lock-up period, all planned dividend amounts are accumulated in reserves. When DSCR recovers to standards, Lock-up is released and accumulated funds are paid as dividends. Lock-up is a mechanism that mitigates lender credit risk and prioritizes debt service. | Dividend & CF |
| Major Maintenance Reserve | Major Maintenance Reserve | Reserves applied to major overhauls of power generation equipment (overhaul, turbine replacement, etc.). In power plant projects, since major maintenance is required in years 10 and 20, 2-5% of annual EBITDA is accumulated. Major Maintenance Reserve accumulation shortfall constitutes dividend prohibition grounds. For merchant energy (merchant power plants), accumulation rates are higher (5-10%). | Risk & Reserves |
| MDB | Multilateral Development Bank | Abbreviation for Multilateral Development Bank. International financial institutions funded by multiple countries. Representative examples: World Bank Group (IFC, MIGA), Asian Development Bank (ADB), African Development Bank (AfDB). MDBs provide long-term financing (20-25 years), political risk guarantees, and technical assistance for infrastructure projects in developing countries. MDB involvement improves financing terms (financing ratio +5-10%, interest rate -0.5-1.0%, repayment period +3 years) and mitigates country risk. | Contracts & Organization |
| Merchant Power Plant | Merchant Power Plant | A power plant without PPA that sells electricity in the wholesale electricity market (Spot Market). Since revenue depends completely on market prices, financing terms become significantly stricter. DSCR standards 1.35-1.50, financing ratio 50-60%, principal repayment period 12-15 years. In dividend constraints, in addition to DSCR standards, increased accumulation of Major Maintenance Reserve and Working Capital Reserve is required. Lenders require maintaining DSCR>1.20 even in P10 price scenarios based on standard deviation of market prices over the past 5 years. | Contracts & Organization |
| MIGA | Multilateral Investment Guarantee Agency | Abbreviation for Multilateral Investment Guarantee Agency. The World Bank Group’s political risk guarantee agency. MIGA provides Political Risk Insurance (PRI) covering four major risks: expropriation, war/civil unrest, currency exchange restrictions, and breach of contract. In MIGA-guaranteed projects, since host country governments have incentives to avoid defaulting to MIGA, it functions as a de facto sovereign guarantee. | Contracts & Organization |
| Model Auditor | Model Auditor | A third-party expert appointed by lenders in large projects (investment $500 million or more). Model Auditor verifies financial model calculation logic, macro/VBA code, Tax calculation tax law consistency, Debt Schedule Cash Sweep logic, sensitivity analysis validity, and assumption source document consistency. Financial Close cannot be established without Model Auditor Sign-off (approval letter). | Contracts & Organization |
| NEXI | Nippon Export and Investment Insurance | Abbreviation for Nippon Export and Investment Insurance. Japan’s export credit agency (ECA). Provides political risk guarantees and export finance for overseas projects involving Japanese companies. NEXI involvement improves financing terms for Japanese commercial banks. | Contracts & Organization |
| Non-Financial Covenants | Non-Financial Covenants | Clauses in loan agreements stipulating non-financial conditions that the borrower (SPV) must comply with. Major Non-Financial Covenants: additional borrowing prohibition, asset sale restrictions, dividend constraints, Change of Control prior approval, insurance obligation, environmental regulation compliance. Non-Financial Covenant violations also constitute Event of Default. | Financing Terms |
| NPV | Net Present Value | Abbreviation for Net Present Value. The value obtained by discounting future cash flows to present value at a discount rate and deducting initial investment. NPV = Σ(CF_t)/(1+r)^t – Initial Investment. When NPV>0, investment is judged economically sound. In project finance, IRR is emphasized more practically than NPV. | Investment Evaluation |
| O&M | Operations and Maintenance | Abbreviation for Operations and Maintenance. Operations (operation, monitoring, management) and maintenance (inspection, repair, parts replacement) of the project. In O&M contracts, O&M operators provide Availability Guarantee. O&M costs constitute the major part of OPEX. For power plants, O&M costs are 2-5% of electricity sales revenue (renewable energy) or 15-25% (thermal power). | Contracts & Organization |
| Offtaker | Offtaker | In PPA (Power Purchase Agreement), the entity purchasing electricity from the power plant. Typical Offtakers: electric utility companies, major electric power companies, large consumers. Since Offtaker creditworthiness determines project revenue stability, it directly affects financing terms. When Offtaker rating is BBB or below, DSCR declines and financing ratio drops. | Contracts & Organization |
| OPEX | Operating Expenditure | Abbreviation for Operating Expenditure. Costs incurred during project operation period. Includes O&M costs, insurance premiums, property taxes, land lease fees, and personnel costs. Solar power OPEX is 2-3% of electricity sales revenue, gas-fired power OPEX is 30-40% (including fuel costs). OPEX forecast errors significantly affect Project IRR and Equity IRR. Sensitivity analysis verifies OPEX ±10% variation. | Investment Evaluation |
| P10/P50/P90 | Probability Levels | P10: Optimistic Case achieved with 10% probability. P50: Base Case achieved with 50% probability (Base Case). P90: Conservative Case achieved with 90% probability. Used in demand forecasts and generation forecasts. Lenders make meeting minimum DSCR standards in P90 case a financing condition. | Investment Evaluation |
| Payback Period | Payback Period | Period until initial investment is recovered. Calculated when cumulative cash flows exceed initial investment. For merchant energy (merchant power plants) and resource development projects, due to high revenue uncertainty, Payback Period is emphasized more than IRR. Lenders make Payback Period within 70% of principal repayment period under Base Case scenario (e.g., recovery within 8 years for 12-year repayment) a financing condition. | Investment Evaluation |
| Performance Guarantee | Performance Guarantee | In EPC contracts, the EPC contractor guaranteeing project equipment performance (generation capacity, thermal efficiency, etc.). When guaranteed performance is not met at Commercial Operation Date achievement, EPC contractor pays performance shortfall as Liquidated Damages. For new technology projects (hydrogen, ammonia power generation, etc.), Performance Guarantee becomes a financing condition. | Contracts & Organization |
| P/L | Profit and Loss Statement | Abbreviation for Profit and Loss Statement. A financial statement showing revenue, expenses, and profit for each period. P/L and BS (Balance Sheet) are Mandatory (essential), while CF (Cash Flow Statement) is treated as reference. Net income on P/L accumulated as Retained Earnings becomes the legal source of dividends. Distributable amount is determined by MIN(Retained Earnings, post-waterfall cash remaining, DSCR constraint). | Dividend & CF |
| PPA | Power Purchase Agreement | Abbreviation for Power Purchase Agreement. A long-term electricity sales contract concluded between a power plant and Offtaker (electricity purchaser). PPA consists of fixed Capacity Payment and variable Energy Payment. Many PPAs include Take-or-Pay clauses, where as long as the power plant is available, capacity payments are made regardless of actual generation volume. Standard PPA period is 20-25 years. | Contracts & Organization |
| Preferred Creditor Status | Preferred Creditor Status | MDBs (World Bank, ADB, etc.) having priority status in debt repayment from host country governments. Since host country governments have strong incentives to avoid defaulting to MDBs, MDB-involved projects have country risk significantly mitigated. Commercial banks can enjoy de facto Preferred Creditor Status by co-financing with MDBs. | Contracts & Organization |
| PRI | Political Risk Insurance | Abbreviation for Political Risk Insurance. Insurance covering four major political risks: expropriation, war/civil unrest, currency exchange restrictions, and breach of contract. Provided by MIGA and ECAs. PRI-covered projects have country risk mitigated and financing terms improved (financing ratio +5-10%, interest rate -0.5-1.0%). | Risk & Reserves |
| Project IRR | Project IRR | Internal rate of return on initial investment for the entire project (creditors + shareholders). Four definitions coexist—Definition 1 (excluding liquidation value), Definition 2 (including liquidation value), Definition 3 (calculated for period until debt repayment completion), Definition 4 (SPV sale price base)—with differences exceeding 3% for the same project. Standard definitions differ by industry. Contracted infrastructure (toll roads): Definition 1, Contracted energy (PPA power plants): Definition 4. | Investment Evaluation |
| Red Book | FIDIC Traditional Construction Contract | A standard construction contract form published by FIDIC. For traditional construction projects where the employer provides design and the contractor performs construction. Risk allocation is balanced (employer-contractor even). Widely used in MDB projects. Payment is measurement-based (Measurement Contract). | Contracts & Organization |
| Repayment Period | Repayment Period | Period for repaying loan principal. Does not include Grace Period. Example: Loan disbursement 2024, Grace Period 3 years, Repayment Period 18 years means principal repayment 2027-2044. Japan’s PPA-type solar power has standard Repayment Period of 15-17 years, overseas 18-22 years. Longer Repayment Period reduces annual principal repayment, improves DSCR, and expands dividend capacity. | Financing Terms |
| Representations and Warranties | Representations and Warranties | Representations and warranties of facts that the borrower (SPV) makes to lenders in loan agreements. Typical examples: ①Accuracy of financial statements, ②Non-existence of litigation, ③Completion of permit acquisition, ④Environmental regulation compliance. False representations and warranties constitute Event of Default. | Financing Terms |
| Residual Value | Residual Value | The value of SPV or project assets at project termination. In concession projects such as toll roads, residual value is zero since assets are freely transferred to government. In PPA-type power plants, when sold to sponsors after loan repayment, sale price becomes residual value. Presence or absence of residual value causes Project IRR to vary by more than 3%. | Investment Evaluation |
| Restricted Cash | Restricted Cash | Cash that SPV cannot freely use. Cash accumulated in dedicated accounts such as DSRA (Debt Service Reserve Account), Major Maintenance Reserve, and Working Capital Reserve. Restricted Cash does not become dividend source. Displayed as cash balance breakdown in BS sheet. | Risk & Reserves |
| Retained Earnings | Retained Earnings | Cumulative amount of net income from P/L (income statement). Under company law, becomes the legal source of dividends. During construction and early operation, retained earnings are negative due to accumulated deficits (Accumulated Deficit), making dividends impossible. Distributable amount is determined by MIN(Retained Earnings, post-waterfall cash remaining, DSCR constraint). | Dividend & CF |
| Returns | Returns Sheet | A worksheet in the financial model calculating Equity IRR, Project IRR, and NPV. Equity IRR calculates IRR from Equity contribution and dividend receipts. Project IRR calculates IRR from total investment and all-period cash flows (CAFDS + residual value). Returns sheet provides final decision-making indicators for investment decisions. | Investment Evaluation |
| Revenue | Revenue Sheet | A worksheet in the financial model calculating revenue for each period. For PPA-type power plants, calculates Capacity Payment and Energy Payment. For toll roads, calculates Traffic × Toll. Revenue sheet output is reflected in P/L sheet and CF sheet. | Dividend & CF |
| Sculpted Repayment | Sculpted Repayment | A repayment method that adjusts principal repayment schedule to maintain target DSCR (e.g., 1.30). Increases principal repayment during revenue increase periods and reduces principal repayment during revenue decrease periods. Sculpted Repayment levels DSCR and maximizes distributable amount. Contrasted with Equal Principal Repayment. | Financing Terms |
| Sensitivity Analysis | Sensitivity Analysis | Analysis in the financial model that quantifies the impact of single variable (demand, price, OPEX, interest rate, etc.) changes on indicators (Equity IRR, DSCR, etc.). Important practical principle: OPEX variation and revenue variation have greater impact on capitalists than CAPEX variation. Reason is that OPEX and revenue affect cumulatively throughout operation period (20-25 years), while CAPEX is one-time construction period (2-5 years) expenditure. Sensitivity analysis verifies variation ranges of ±10% or more for OPEX/revenue and ±20-30% for CAPEX. | Investment Evaluation |
| Severe Stress | Severe Stress Scenario | An extreme scenario in the financial model where multiple adverse factors occur simultaneously. Example: Demand -10%, Price -5%, OPEX +10%, Construction Cost +10% occurring simultaneously. Even when Severe Stress causes Equity IRR to fall far below cost of capital and DSCR to fall below 1.0, financing is approved if occurrence probability is 5% or below. Lenders require Severe Stress to be as severe as or more severe than past worst cases (Lehman Shock, COVID-19, etc.). | Investment Evaluation |
| Shareholders’ Agreement | Shareholders’ Agreement | A contract among sponsors stipulating SPV management, dividend ratios, share transfer restrictions, additional equity obligations, etc. When multiple sponsors contribute, contribution ratios and dividend ratios may not match (e.g., technology sponsor 30% contribution, 40% dividend). Shareholders’ Agreement coordinates interests among sponsors. | Contracts & Organization |
| SIAC | Singapore International Arbitration Centre | Abbreviation for Singapore International Arbitration Centre. Widely used as a dispute resolution body in Asian international projects. Singapore is the arbitration venue. SIAC arbitration awards are internationally enforceable under the New York Convention. | Contracts & Organization |
| Silver Book | FIDIC EPC Turnkey Contract | A standard contract published by FIDIC for EPC turnkey projects. Contractor handles all of design, procurement, and construction and delivers to employer after completion. Risk allocation favors employer (contractor bears most risks). Fixed Price Lump Sum is standard. Used in commercial projects, but employers tend to prefer Bespoke contracts. | Contracts & Organization |
| SPV | Special Purpose Vehicle | Abbreviation for Special Purpose Vehicle. A legal entity established solely for project implementation. Isolates (ringfences) risks from sponsor’s other businesses, enabling non-recourse finance secured only by project assets and revenue. SPV dividends are only possible from post-waterfall cash remaining, determined from both DSCR constraint and retained earnings constraint aspects. | Contracts & Organization |
| Step-in Right | Step-in Right | Lenders’ right to take over major contracts (PPA, EPC, O&M, etc.) and continue project operations when SPV Default or Event of Default occurs. Secured through Direct Agreement. Through Step-in Right, lenders can sell the project to third parties and achieve loan recovery. | Contracts & Organization |
| Take-or-Pay | Take-or-Pay Clause | A clause in PPA contracts where the Offtaker (electricity purchaser) bears the obligation to pay Capacity Payment as long as the power plant is available, regardless of whether electricity is actually taken. Take-or-Pay clause significantly mitigates power plant revenue risk and improves financing terms (DSCR standards 1.20-1.25, financing ratio 70-75%). | Contracts & Organization |
| Tax | Tax Sheet | A worksheet in the financial model calculating tax amounts for each period. Calculates corporate tax, value-added tax, and withholding tax. Considers Tax Loss Carryforward and Tax Holiday (tax incentives). To accurately calculate Tax Shield present value, must accurately reflect loss carryforward consumption timing. Tax sheet output is reflected in P/L sheet and CF sheet. | Dividend & CF |
| Tax Holiday | Tax Holiday | A system where emerging country governments exempt or reduce corporate tax for a certain initial period (typically 5-10 years) to attract foreign investment. Tax Holiday improves early operation cash flow and increases Equity IRR. However, since Tax Shield (interest payment tax deduction effect) is also not realized during Tax Holiday period, IRR improvement effect is limited. | Financing Terms |
| Tax Shield | Tax Shield | The effect where the interest cost actually borne by the enterprise is reduced from the nominal interest rate through interest payment tax deduction. Tax Shield = Interest Paid × Corporate Tax Rate (Rd × Tc). In project finance, since financing ratios reach 70-80%, Tax Shield effect is extremely large. Example: Financing $70 million, interest rate 7%, corporate tax rate 25%: annual Tax Shield is $1.225 million, 20-year present value (7% discount rate) is $13 million. Through this effect, Equity IRR exceeds Project IRR by 3-5%. | Investment Evaluation |
| Technology Reserve | Technology Reserve | Reserves in renewable energy projects (solar, wind) applied to panel replacement costs, inverter renewal costs, and wind turbine failure repair costs. For solar power, assuming panel output declines to 90% of initial value after 10 years, accumulates 2-3% of annual EBITDA. Technology Reserve accumulation shortfall constitutes dividend prohibition grounds. | Risk & Reserves |
| Traffic Study | Traffic Study | A specialized study forecasting future traffic volume in toll road projects. Forecasted in three scenarios: P10 (optimistic), P50 (standard), P90 (conservative). Lenders make meeting minimum DSCR standards in P90 case a financing condition. Since Traffic Study accuracy determines project success or failure, Independent Engineer verifies validity. | Investment Evaluation |
| US EXIM | US Export-Import Bank | Abbreviation for United States Export-Import Bank. US export credit agency (ECA). Provides export finance and political risk guarantees for overseas projects involving US companies. US EXIM involvement improves financing terms and mitigates political risk. | Contracts & Organization |
| WACC | Weighted Average Cost of Capital | Abbreviation for Weighted Average Cost of Capital. Capital cost by weighted average of Debt and Equity. Formula: WACC = Rd×(1-Tc)×D/(D+E) + Re×E/(D+E). Rd is debt cost, Re is equity cost, Tc is corporate tax rate, D/E is debt/equity ratio. WACC is used as the discount rate when discounting FCFF (enterprise-wide cash flow) to calculate enterprise value. Through Tax Shield, WACC declines as debt ratio increases. | Investment Evaluation |
| Waiver | Waiver | When loan agreement Covenant violations occur, lenders not triggering Event of Default (loss of benefit of time) and exempting violations. Waiver conditions require sponsor additional equity, DSCR improvement plan submission, dividend prohibition period extension, etc. Through Waiver, Default is avoided and the project continues. | Financing Terms |
| Waterfall | Waterfall | A mechanism that allocates cash generated by the project according to priority order. Priority 1-3: CAFDS generation through operating CF/investing CF. Priority 4: Tax payment. Priority 5: Principal and interest payment (Debt Service). Priority 6: Reserve funding (DSRA, Major Maintenance Reserve, etc.). Priority 7: Cash Sweep (prepayment). Priority 8: Reserve withdrawal. Priority 9: Dividend (after comparison with PL determination). Distributable amount is determined from both post-waterfall cash remaining and DSCR constraint aspects. | Dividend & CF |
| Working Capital Reserve | Working Capital Reserve | Reserves responding to short-term funding shortages during operation (accounts receivable collection delays, fuel cost prepayment, etc.). Usually accumulates 1-3 months of monthly OPEX. For merchant energy (merchant power plants), since revenue is unstable due to market price volatility, 6 months accumulation is required. Working Capital Reserve accumulation shortfall constitutes dividend prohibition grounds. | Risk & Reserves |
| Yellow Book | FIDIC Design-Build Contract | A standard contract published by FIDIC for design-build projects. Contractor handles both design and construction. Risk allocation is balanced. Lump Sum payment is standard. Widely used in MDB projects. Positioned between Red Book (employer design) and Silver Book (EPC turnkey). | Contracts & Organization |
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