Energy Project Financing : Resources and Strategies for Success

48 Energy Project Financing: Resources and Strategies for Success

Entity (SPE) is constructed. The SPE serves as a special bank account.

All funds are sent to the SPE, from which all construction costs are

paid. Then all savings cash flows are also distributed from the SPE. The

SPE is essentially a mini-company, with the sole purpose of funding a

project.

Secured Loan

Loan that pledges assets as collateral. Thus, in the event that the

borrower defaults on payments, the lender has the legal right to seize

the collateral and sell it to pay off the loan.

True Lease or Operating Lease or Tax-Oriented Lease

Type of lease, normally involving equipment, whereby the contract

is written for considerably less time than the equipment’s life, and the

lessor handles all maintenance and servicing; also called service lease.

Operating leases are the opposite of capital leases, where the lessee

acquires essentially all the economic benefits and risks of ownership.

Common examples of equipment financed with operating leases are of-

fice copiers, computers, automobiles and trucks. Most operating leases

are cancelable.

WACC (Weighted Average Cost of Capital)

The firm’s average cost of capital, as a function of the proportion of dif-

ferent sources of capital: Equity, Debt, Preferred Stock, etc. For example,

a firm’s target capital structure is:

Capital Source Weight (wi)

Debt 30%

Common Equity 60%

Preferred Stock 10%

and the firm’s costs of capital are:

before tax cost of debt = kd = 10%

cost of common equity = ks = 15%

cost of preferred stock = kps = 12%

Then the weighted average cost of capital will be:

WACC= wdkd(1-T) + wsks +wpskps

where wi = weight of Capital Sourcei