OVERVIEW

This chapter reviews the main building blocks of information and assumptions used for projections that are assembled to create inputs for a project financial model (cf. 12.1, 12.3 12.6), the basic structure of, and outputs produced by, the model (cf. 12.2), and how the project and the financial model are affected by accounting and taxation issues (cf. 12.7).

The chapter also covers how the financial model is used by investors to evaluate their returns (cf. 12.8) and by lenders to calculate the level of cover for their loans (cf. 12.9) and to create a Base Case (cf. 12.10) and sensitivity calculations (cf. 12.11).

The ways in which investors establish their return requirements, and how these may change over time, or because of the effect of a later sale of the investment or restructuring of the debt, are also considered (cf. 12.12).

An adequate financial model is an essential tool for financial evaluation of the project. It serves several purposes:

• Pre-Financial Close

  • Initial evaluation and reevaluation of the project's financial aspects and returns for the Sponsors during the development phase

  • Formulating the financial provisions of the Project Contracts (including use as a bidding model to calculate a Tariff if the Sponsors have to bid for the project, checking LD calculations, etc.)

  • Structuring the finance and reviewing the benefits to the Sponsors of different financial terms

  • As part of the lenders' due-diligence process

  • Quantifying critical issues in the finance negotiations

  • Providing the Base Case (cf. 12.10)

• Post-Financial Close

  • As a budgeting tool

  • As...