Project Finance

A $10 billion energy company that builds a $4 billion LNG plant on its balance sheet increases leverage significantly and limits its corporate borrowing capacity. To avoid this, the project is often placed in a separate project company that owns only the asset. This company raises non-recourse debt, meaning lenders can be repaid only from the project’s cash flows. The parent typically provides equity and certain support agreements, but its other assets remain legally separate.

Lenders analyze the project based on the stability of its future revenue. Projects with long-term contracted or otherwise predictable cash flows qualify most readily: power plants with 15–20-year power purchase agreements, pipelines with take-or-pay contracts, toll roads with regulated tariffs, and mines with proven reserves and defined operating plans. Corporate balance sheets may support 30–40% leverage; project structures commonly support 60–75%. Standard lender protections include cash-flow waterfalls, debt service reserve accounts, completion guarantees, etc.

Financing is separated into construction and operating phases. During construction, the project has no revenue and is exposed to delays, cost overruns, equipment issues, and contractor performance. Banks usually provide this phase of debt at higher spreads. Once the project passes completion tests and begins generating stable revenue, the profile becomes more predictable. The project often refinances into long-tenor, lower-cost debt from insurers, pension funds, and infrastructure debt funds. These operating-phase debt tenors often match the contracted revenue period, usually 15–25 years.

Sponsors frequently sell part or all of their equity after the asset becomes operational. Equity buyers typically include infrastructure funds seeking long-duration, contracted cash flows. Equity return targets differ by stage: during construction, sponsors usually target low- to mid-teens returns because of the higher risk; once the asset is operating, long-term infrastructure equity investors often target high single-digit to low-double-digit returns, depending on contract length, jurisdiction, and asset type.

Nuclear Finance

Nuclear plants are financed differently from most power projects because they require very large spending for many years before they earn revenue. A single unit can cost US$6–10 billion and construction can last a decade. Because of this long and uncertain construction period, banks almost never lend to nuclear projects on a pure project-finance (non-recourse) basis.

In regulated utility systems, the financing sits directly on the utility’s balance sheet. The utility raises corporate debt and provides equity, and regulators allow the utility to recover its investment through customers’ electricity bills. The regulator sets an allowed return, often 8–10% on equity, and the utility earns this return once the plant enters the rate base. Some states and provinces also allow “construction work in progress,” meaning that the utility can begin recovering costs during construction, which lowers borrowing needs and reduces the strain on the utility’s credit metrics.

In countries with state-owned utilities, most nuclear projects are funded through the government. The state utility receives capital injections, issues bonds with a sovereign guarantee, or uses loans backed by export-credit agencies from countries that supply reactor technology. In these cases, the government carries most of the construction and political risk. Lenders view these projects as government-backed infrastructure, similar to major dams or national rail lines.

In markets seeking private investment, governments introduce mechanisms that give the project stable cash flow before completion or guarantee a long-term price after completion. The U.K.’s “regulated asset base” (RAB) model is the clearest example: the project receives regulated payments during construction, indexed to inflation, which reduces the cost of capital and allows pension funds and insurers to lend long-term money. Other countries use 30–40-year contracts-for-difference (CfDs) that guarantee a fixed “strike price” for electricity, which does not solve construction cash flow but makes post-completion refinancing straightforward because lenders see a predictable revenue stream. Some markets also use government support packages—such as loan guarantees, completion guarantees, or government-backed contingency facilities—to limit the size of overruns borne by private capital.