GLOSSARY

The following glossary covers terms frequently used terms in the field of project finance modelling.

A broader based glossary covering the field of project finance may be found in the Harvard Business School web site and Project Financing (Seventh Edition) by Peter Nevitt and Frank Fabozzi published by Euromoney Publications.

NOTE: we suggest that you look at the Flash demos in this website to get a better understanding of many of these terms.

Abandonment

The process of dismantling of wellhead, production and transport facilities and restoration of producing areas in accordance with licence requirements and/or relevant legislation. (also known as decommissioning)

Accounts Payable

Amounts owing by a company, also called creditors.

Accounts Receivable

Amounts owing to a company, also called debtors.

Annuity

A series of constant payments made over a continuous period.

Appraisal

Analysis of a proposed project to gauge its acceptability.

Appropriation Account

An account showing what has been done with the total funds available to a company. It shows the division of funds between retention of cash balances and distributions to shareholders.

ARR

An acronym for the Accounting Rate of Return. It is the ratio of the profit to the capital. The profit and capital figures can be defined in many ways and the ARR should always be qualified. Also known as the ROCE or return on capital employed.

Assets

Anything of value; but especially (a) physical assets such as plant and (b) monetary assets which can be used to finance the purchase of physical assets.

Balance Sheet

A statement showing the assets held by a company, their value and the sources of finance at a point in time.

Battery Limit

An imaginary boundary surrounding a process unit. The expression is commonly used in the downstream industries where a typical project will consist of one or more "battery limit" process units, supported by utility and other offsite facilities which are located outside of the battery limits.

BOO(T)

An acronym for Build, Own and Operate (or Build, Own, Operate and Transfer). BOO(T) projects are often infrastructure projects, promoted and financed by the private sector. The promoter builds, owns and operates the project, obtaining profits from charging the public a toll for using the facility. As in project finance, the lenders look to the cash flows as security. The facility is often transferred to the public sector after a specified number of years.

Break Even

The level of product sales (or price) at which financial revenue equals total costs of production. At higher volumes of production and sales (or product price) financial profits are generated.

Bullet Repayment

A loan in which repayment is made in one amount at maturity.

Capitalize

To capitalize is to spread the costs over a number of accounting periods through the use of a depreciation schedule. Generally, expenditures that will yield benefits to future operations beyond the accounting period in which they are incurred are capitalized.

Carried Interest

An arrangement whereby one or more members of a consortium are financed by other members during the exploration and/or development phase, with repayments only being required out of future production (if any).

Cash Sweep

The use of surplus cash to prepay debt or provide extra security for lenders instead of paying it out to shareholders. Read more on cash sweeps and how Promoter handles them...

Cash Trap

A clause in the loan documentation which restricts the payment of dividends when certain financial ratios are not reached. Read more on cash traps and how Promoter handles them...

Cash Waterfall

A clause in the loan documentation which describes the sequence of disbursements from the Escrow Account. Also known as Waterfall of Accounts. Read more on cash waterfalls and how Promoter handles them...

CIF

An acronym for Cost, Insurance and Freight. The CIF is the landed price of an import on the receiving country's dock including the cost of international freight charges and insurance, before the addition of domestic tariffs or other taxes and fees.

Commitment Fee

Fee payable by the borrower to the lender(s) in relation to funds committed by the latter but not drawn down.

Compensatory Approach

In airport projects: Landing fee calculation method in which the airport operator assumes the major financial risk of running the airport by setting fees annually in advance. See also Residual Cost Approach.

Concession

An arrangement in which a firm obtains from the government the right to provide a particular service under conditions of significant market power. In the oil and gas business, it is an agreement termed a lease or a licence that typically provides an oil company with the right to explore for, produce, transport and market hydrocarbons produced within a limited area for a fixed period of time in return for the payment of royalties, rentals, bonuses and taxes.

Corporate Income Tax

Tax levied on the income of the company. Sometimes known as "Income Tax", "Industrial Tax" or "Federal Tax".

Cost Oil

That part of crude oil production which under a production sharing contract has been set aside for the recovery of exploratory, development and operating costs.

Cost Recovery

A method of depreciation for exploration and development costs frequently used in production sharing contracts. The cost recovery, including operating costs, are limited to a percentage of the net operating revenues, with unrecovered costs carried forward to succeeding years.

Current Assets

Cash and other assets such as debtors and product inventories which can reasonably be expected to become cash within one year.

Current Liabilities

Liabilities which are expected to be paid within one year from the date on the balance sheet (e.g. trade creditors, proposed final dividend, current taxation).

Current Terms

Figures that have not been adjusted or deflated to eliminate general price inflation. Sometimes referred to as nominal terms.

Debt Service

Payments of Principal and Interest due on a loan.

Debt Service Cover Ratio (DSCR)

DSCR = x/y where x = Cash flow before debt service or Profit / Debt service.

Declining Balance Depreciation

(or reducing balance) - method of depreciation in which the periodic amount written off decreases over the life of the asset by a fixed percentage of the written down value.

Decommissioning

The process of dismantling of wellhead, production and transport facilities and restoration of producing areas in accordance with licence requirements and/or relevant legislation. (also known as abandonment)

Deferred Tax

Taxation arising from timing differences between accounting profit and taxable income.

Depreciation

An accounting convention designed to emulate the cost associated with the reduction in value of an asset over a period of years.

Deterministic

A calculation based on a single set of numbers.

Discount Rate

A rate of interest used to adjust future values to present values. Discounting a future value to the present is the exact opposite of compounding a present value forward to a future value.

Dividends

The money paid out of profits to shareholders.

Downstream

In Promoter, refers to projects for the treatment and subsequent processing of oil and gas. It includes refineries, petrochemicals, LNG, fertilizers and power projects.The capital cost estimate may contain up to four process units in parallel, series or in any combination of these two, together with the associated utilities and offsites. The production rate usually builds up to a peak then remains constant.

Draw Down

The point when funds due to the borrower are actually taken by him for the purpose prescribed. This may take place in one sum, or in several instalments fixed in the loan agreement or may be taken at the borrower's discretion.

EBIT

An acronym for Earnings Before Interest and Tax. Also known (in the UK) as Operating Profit.

EBITDA

An acronym for Earnings Before Interest, Tax, Depreciation and Amortization..  It is calculated as Earnings - Expenses (excluding tax, interest, depreciation and amortization).

EBT

An acronym for Earnings Before Tax.

ECA

Acronym for Export Credit Agency.

EOR

Acronym for (upstream) Enhanced Oil Recovery; (downstream) End of Run. Enhanced Oil recovery encompasses such projects as gas or water injection. End of Run conditions describe plant performance based on low catalyst and machine efficiency immediately before they are renovated or replaced in a plant turnaround.

Equity

The sum of issued share capital, capital reserves and revenue reserves. It is also known as shareholder's funds, or net worth.

Evaluation

The review of a project's progress either during or after implementation to determine whether it is being (or was) carried out according to plans and to assess its development impact.

Expense

To expense is to charge costs incurred in a given accounting period against revenues in the same period. The opposite is to capitalize the cost and recover it through a depreciation schedule in more than one year.

Export Credit

Export Credits are loans financed by banks backed by insurance cover. The terms of the credit usually require that the greater part of the supply comes from the suppliers country.

FC

An acronym for Foreign Currency, covering all foreign currencies which are not the local currency.

FEU

An acronym for Forty Foot Equivalent Unit. Industry standard 40 foot container. External measurements are 40 ft x 8 ft x 8 ft.

Field

An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Flat Royalty

a Royalty imposed at a single rate throughout the life of the concession or other form of petroleum agreement.

fob

An acronym for "Free On Board". The fob price of an export loaded in the ship or other conveyance that will carry it to foreign buyers.

Free Cash Flow

The earnings after corporate tax, capital expenditures and increase in working capital but before interest payments.

Full Costs

In Oil and Gas projects, a method for accounting for unsuccessful exploration costs in which these costs are capitalized and recovered over the life of the field. See also Successful Efforts.

GAAP

Acronym for Generally Accepted Accounting Principles

Government Take

The total government share of profit oil or revenues not associated with cost recovery.

Grace Period

Period of the loan between the date when draw down can take place and the beginning of any repayment schedule.

HHV

An acronym for Higher Heating Value. The HHV is the heat produced by the complete combustion at specified standard conditions and when the water vapour is condensed.

IAS

An acronym for International Accounting Standards.

IFRS

Acronym for International Financial Reporting Standards.

Interest during Construction

Interest charges occurring during project execution and normally capitalized up to the time when the plant starts commercial production.

IRR

An acronym for the Internal Rate of Return. The IRR is defined as the discount rate which produces a net present value of zero.

Lang Exponent

The exponent used in scaling the cost for different plant capacities. Promoter calculates the cost of the project facilities from the reference plant by applying the following formula:
C = Cb x [Qa / Qb] pow ( x)
where
Ca = Cost of the Plant, Cb = Base Case Cost, Qa = Capacity of the Plant, Qb = Base Case Capacity, x = the Lang cost capacity exponent.
The Lang exponent is usually between 0.6 and 0.7 and can vary from one process to another.

LC

An acronym for Local Currency, the currency of the country in which the project is located.

LHV

An acronym for Lower Heating Value. The LHV is the heat produced by the complete combustion at specified standard conditions and when the water vapour remains in the vapour phase (not condensed).

Liabilities

The financial obligations of a company, which can be to shareholders, but are more usually to other providers of debt finance, trade creditors and other creditors.

Loan Life Cover Ratio (LLCR)

LLCR = (Present Value of cash flows before debt service over the life of the loan) / (Loan Amount).Read more on cover ratios and how Promoter handles them... (Login to view Flash movies)

Management Fee

An initial fee charged by the manager to the borrower, some of which is passed on to the co-managers. It typically ranges from 0.5 to 1.5 percent of the amount of the loan.

Margin

Financial Use: The difference between the costs of funds to the lending bank and the interest charged to borrowers.
Refinery Use: The value of the refinery products minus the cost of the crude oil.
There are other definitions which include one or more of the operating cost, depreciation, debt service and loan interest.

Netback

The price of the product at the factory fence or well head. The price at the point of sale will include the cost of transportation.

NPV

An acronym for Net Present Value. The NPV is the sum of discounted future benefits and costs at the stated rate of discount. An absolute measure of project merit.

Operating Profit

Profit before the deduction of interest or tax. Also known (in the USA) as earnings before interest and tax or EBIT.

Parametric Cost Estimate

A parametric cost estimate model is made up of one or more algorithms or cost estimating relationships that translate technical and/or programmatic data (parameters) about a product or asset into cost results.

Pari Passu

The expression means "equally and simultaneously".

Payback

The period in years over which the investment is recovered.

PFI

An acronym for Private Finance Initiative.

Port

A geographical area where ships are brought alongside land to load and discharge cargo - usually a sheltered deep water area such as a bay or river mouth.

PPP

An acronym for Public Private Partnership.

Prepayment

Repayment of a loan made in advance of the agreed schedule, sometimes subject to a penalty.

Principal

A sum on which interest accrues; capital, as distinguished from income.

Production Payment Loan

Repayment in which the sum of the principal and interest are calculated as a percentage of the net operating revenues.

Production Sharing Contract

An agreement whereby the oil company bears production as well as exploration costs and is entitled to recoup its costs only out of a stipulated percentage of production set aside for that purpose or out of its fixed production share, depending on the agreement

Profit and Loss Account

A statement showing what profit has been made over a period and the uses to which the profit has been put.

Profit Oil

That portion of the crude oil production that, under a production sharing agreement, remains after the contracting oil company has received its cost oil share to cover exploration, development and operating costs.

Project Finance

The financing of an identifiable project for which the lender looks initially to the cash generated by that project, net of production costs, as the source of repayment and to the assets of that project as principal security for the financing.

Project Life Cover Ratio (PLCR)

PLCR = (Present Value of cash flows before debt service over the life of the project) / (Loan Amount).).Read more on cover ratios and how Promoter handles them... (Login to view Flash movies)

Promoter

Promoter is the name of this Project Finance Software used for evaluating projects in the Upstream and Downstream oil, gas petrochemical, power generation and related Industries Promoter is copyright of Promoter Software Ltd (1990-2007) The Promoter name and logo are registered In the United Kingdom as a Trade Mark (1994).

Raw Materials

Unprocessed stock, which form part of the input to the production process for conversion to finished stock.

Real Terms

Figures that have been adjusted to remove general price inflation. Sometimes referred to as Constant Terms.

Repayment Schedule

A stipulated timetable according to which repayments of the loan principal are to be made.

Reserves

Part of equity capital and consisting of retained profits.

Reservoir

A porous and permeable underground formation containing a natural accumulation of producible oil or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Residual Cost

In airport projects: Landing fee calculation method in which the airlines collectively assume significant financial risk by agreeing to pay any costs of running the airport that are not allocated to other users or covered by non airline sources of income. See also Compensatory Approach.

Residual Value

The amount expected to be obtained from the disposal of a fixed asset at the end of its useful life.

Retained Profits

Profits kept in the company after all commitments have been met and the shareholders paid a dividend.

Risk Register

A body of information containing all the risks identified for the project with explanations of the nature of each risk, its assessment and its management.

ROCE

An acronym for Return On capital Employed. The ROCE is the ratio of the profit to the capital. The profit and capital figures can be defined in many ways and the ROCE should always be qualified. Also known as the ARR or the accounting rate of return.

Royalty

Sometimes known as "Severance Payment" or "Barrelage Tax".

Sensitivity Analysis

This is a method used to interrogate risk and uncertainty which may often be used in capital investment appraisal, where input variables are changed to determine their effect upon a project's economic desirability.

Sinking Fund

A reserve fund established or set aside for the purpose of payment of a liability anticipated to become due at a later date.

Sliding Scale/Progressive Royalty

A Royalty varying in amount, depending on the amount of production.

Source and Application of Funds

A statement showing the sources of money in a company during a period and the uses to which that money has been put.

Stochastic

A result produced by carrying out a large number of calculations based on a randomly generated input.

Straight Line Depreciation

Obtained by dividing the cost less the estimated scrap/salvage value of an asset by its estimated economic life.

Subordinated Loan

A loan in which the principal, and usually the interest as well, rank below the other (senior) loans in the payment hierarchy.

Successful Efforts

In Oil and Gas projects, a method for accounting for unsuccessful exploration costs in which these costs are expenses rather than capitalized. See also Full Costs.

Supply or Pay

A contract in which the supplier agrees to provide goods or services to a project over a period of time for a negotiated fee. If it is unable to do so, it must either provide the goods or services from an alternate source at its own expense or pay damages to the project for expenses incurred by the project in securing the goods or services itself.

Sustaining Capital

Additional annual investments which are capitalised and written off in future years.

Take and Pay

A contract that requires the buyer to take and pay for the good or service only if it is delivered.

Take or Pay

A contract that creates an unconditional obligation on the part of the buyer (off-taker) to pay for the good or service even if it is not produced or available from the seller.

Terminal

A section of a port consisting of one or more berths devoted to a particular type of cargo.  Terminals may be owned and operated by the port authority or by a shipping company which operates the terminal for its exclusive use.

TEU

An acronym for Twenty Foot Equivalent Unit. The FEU is an industry standard 40 foot container. External measurements are 20 ft x 8 ft x 8 ft.

Throughput Agreement

A throughput agreement is a hell-or-high-water contract to put and pay for material through a facility.

Tolling Agreement

An agreement under which a project company imposes tolling charges on each project user as compensation for processing raw material.

Tornado Chart:

A horizontal bar chart which displays the effect of changing a number of key variables on a selected key result. The chart displays the most sensitive input variables at the top and the overall effect can be likened to a tornado.

Turnover

Revenue from the sale of goods or services. Promoter calculates the figure at the well head or factory gate price, net of marketing costs.

Unit of Production Depreciation

A method of calculating depreciation, in which the assets are written off in accordance with the amount of oil or gas produced in the given year, divided by the total anticipated production over the expected operating life of the field.

Upstream

In Promoter, refers to projects for the exploration, development and production from oil and gas fields. The capital cost estimate may contain elements for a jacket (if the field is offshore), drilling of wells, equipment for treatment of the oil and gas, pipelines and terminal. The production rate usually builds up to a peak then gradually falls away.

VAT

An acronym for Value Added Tax. VAT is a tax on consumer expenditure. It is collected on business transactions and imports.

WACC

An acronym for the Weighted Average Cost of Capital. The WACC is often used as a suitable discount rate in calculating Net present values.

Waterfall of Accounts

A clause in the loan documentation which describes the sequence of disbursements from the Escrow Account. Also known as Cash Waterfall. Read more on the waterfall of accounts and how Promoter handles them...

Withholding Tax

A deduction sometimes made by governments on interest paid to non-resident lenders and on dividends remitted.

Working Capital

The capital available on a day-to-day basis for the operations of the business. It consists of the current assets less current liabilities.

Working Interest

The operating interest obtained in a concession (lease), joint venture or other arrangement in which the party being granted the same has an expense bearing interest in the exploration, development or operation of the resource

XBRL

Acronym for Extensible Business Reporting Language