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come with strings attached, because the debt is secured only with the assets of the project. This approach is known as non-recourse financing. Under this approach lenders require a time consuming, expensive, and elaborate due diligence process, before committing any funds. Within this report, "Project Finance" projects are assumed to be project financed with equity, provided with a 17% required after-tax nominal return to equity investors in the first 15 years of the project life, and non-recourse debt, provided at 7.5% over 10 years with a required minimum Debt-Service-Coverage-Ratio (DSCR) of 1.5, and an average DSCR of 1.75. The debt interest rate compares to the 30-year U.S. Treasury bond rate plus 2.0%. Corporate Finance On the other hand, if the developer is a corporation with a large financial capability and is willing to secure debt against corporate assets, then the project can be financed using a corporate finance approach. In this approach, project debt is secured against the assets of the entire company. Because the company's assets are at risk, debt funds for projects that are financed in this manner generally have favorable debt terms. In this report, "Corporate Finance" projects are assumed to be financed by a large corporation with both corporate equity, provided with a 17% required after-tax nominal return to equity investors in the first 15 years of the project life, and corporate debt, provided at a 6.5% interest rate with a 10-year maturity.5 The corporate debt interest rate compares to the 30-year U.S. Treasury bond rate, which was approximately at 5.5% in August 2001, plus a 1% spread. Within both the Project Finance and Corporate Finance cases, projects are assumed to be financed with an optimal combination of debt and equity that minimizes the project's LCOE. Both financing approaches are summarized in Table 1. Table 1: Financial Arrangements Financing Approach Project Finance Corporate Finance Equity Terms Required 17% after-tax nominal internal rate of return (IRR) for equity percentage of capital structure. IRR calculated on the first 15 years of the project life. Required 17% after-tax nominal internal rate of return (IRR) for equity percentage of capital structure. IRR calculated on the first 15 years of the project life. Debt Terms Debt is non-resource (project specific) financed over 10 years at an annual nominal interest rate of 7.5% (U.S. Treasury bond rate plus 2.0%). Debt is corporate, (lenders have recourse through corporate assets) financed over 10 years at an annual nominal interest rate of 6.5% (U.S. Treasury bond rate plus 1.0%). Constraints There are three constraints: (1) the required equity IRR; (2) the minimum DSCR of 1.50; (3) and the average DSCR of 1.75. There are two constraints: (1) the required equity IRR; and (2) no negative after-tax cash flows. Executive management is mindful of the DSCR, but willing to accept very low values in order to retire debt within 10 years. 5 Project debt terms are generally 60-80% of the length of the PPA contract (Owens 2001b). 3PDF Image | An Economic Valuation of a Geothermal Production Tax Credit
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