ABSTRACT
Once a development approach and form of entity have been chosen by the sponsor, the next step is to prepare a more thorough forecast of expected revenues and expenses of the project during its operational life (often called a “pro forma projection”). This financial model can be prepared once the sponsor has made some preliminary assumptions about the size of the project, its efficiency, its expected utilization factor (often referred to as “capacity factor” in the power industry [which connotes how many of the 8,760 hours in a year the facility is expected to operate]), its budgeted capital cost (plus some allowance or “contingency” for cost overruns-in most industries between 5 and 10 percent of the construction cost of the project) and the amount, tenor and interest rate to be associated with the portion of the project’s capital costs that will be funded by loans or preferred equity. By far the largest operating costs are generally fuel and repayments of the loans (so-called “debt service” payments) or preferred equity capital. These costs, combined with operating and maintenance costs, will determine whether the undertaking can be expected to be profitable.
