Hi, guys. Today we take into consideration another important aspect of capital budgeting, meaning the construction of the budget during the operational phase. It is fundamental to estimate correctly the cash flows during operations because cash flows are essential to repay all of the debt and all of the dividends to the shareholders that are provided money to the vehicle. So it is absolutely essential, first of all to identify the items that must be included into the budget of the operational phase and quantify it best every amount of money that is involved in the project. So, again, let's do sort of sort of a round table in order to understand which could be the items that we can include into the budget of a project that has already completed the construction phase and now is up and running. I would, I will open the discussion and I would really welcome any kind of suggestion. >> Well I guess first of all we have to estimate the revenues from sale. >> Absolutely. >> So a bunch of power sold and for what price? >> Mm-hm. Exactly. Take for example, Valentina you are mentioning the power that is sold. So you are referring, for example, to an industrial project operating in the power generation. The most important thing, they define it the top line, we must identify how much power you will produce and at what prices you will sell the output and this is essential. So the first item to be estimated is revenues from sales, okay? Of all the product and services that the product is generating. >> Yes that, if, a revenue is resulting profit we have to consider also the taxes as a potential outflow of money. >> Exactly. Taxes are important and we will have to estimate the tax burden because if you generate positive earnings, you will have to pay taxes and taxes are fundamental in the estimation of the cash flows. >> Well, so raw materials and the operating costs. >> Exactly. Raw materials and operating costs are important. We have seen for example that in the metro five case, raw materials are not present. But, for example in an industrial project like the one Valentina was mentioning, raw material is essential. If I produce power using methane, I will have to buy methane throughout the operational life. So, operational costs and raw materials, the second important element on the cost side. Then we also have to consider insurance cost insurance cost is fundamental. We have seen that insurance premiums are paid during construction and they must be paid also during the operational phase. This is a specific requirement by banks. Banks want that everything is insured in order to avoid any possible risk. >> I would also suggest operation maintenance fees. >> Operation and maintenance fees, absolutely important. We have seen data, O&M is paid in terms of O&M fees to an O&M agent. And so, throughout the life of the project, you will have to take into account this important item. So guys, you are very correct. We have identified, just to summarize, revenues from sales minus cost of raw materials and other operating costs. The cost of insurance during the operational phase, the cost of the O&M contractor during the operational phase and taxes. This basically returns you the value of the EBITDA margin. Net of taxes the the good project will be able to generate. Let me just add, a couple of things. The first one together with the EDITBA, you must take into account eventually the fluctuations in the working capital items. Essentially inventories, accounts receivables, accounts payables, that sometimes can be triggered by the day by day activity of the SPV. Compared with corporate finance you don't have to include the cost of CAPEX because the capital expenditure has already been spent during the construction phase, and so from this point of view, typically capital expenditure is zero. The only case where economic expenditure is not zero is when you foresee there to be an extraordinary maintenance cost from time to time. So, taking the EBITDA of taxes deducting the change in your working capital or summing the changing in working capital, if you are reducing working capital. And deducting capital expenditure for extraordinary maintenance over the project, you get an important item that is the unlevered free cash flow of the project. Unlevered free cash flow is fundamental because it must be positive, because our leveraged free cash flow is the essential base of the cash that the project is able to generate. And this value must necessarily be positive. >> This with a positive leveraged free cash flow can we pay then that interest on debt and also dividends. >> Correct. And the true sequence is unleveraged free cash flow positive, must first pay creditors and so first pay interest, second, pay principle, and I would say, Jim, that after having paid the creditors if hopefully something remains left on the bottom of our cash flow cascade, we should pay dividends. In reality, sometimes this is not the amount paid in terms of dividend. And that's why I prefer to, define the difference between the unlevered free cash flow, the payment of interest and the payment of principal as cash flow available for sponsors and not the dividends. The reason is very simple, and this is another of typical characteristic of structured finance compared to corporate finance, bear it in mind. Creditors are very skeptical in allowing the sponsors to withdraw all the available cash from the vehicle because they are risking too much. Particularly, in the very early phase of the operational phase. The reasoning that creditors are making is, there is some cash still left in the vehicle. This cash can be withdrawn by project sponsors. So the vehicle will have zero cash after this distribution. I prefer to ask sponsors to keep a portion of this cash inside the vehicle. So that in case of difficulty, we still have some cash that can be used in order to repay creditors first. So Jim going back to your question, the sequence of the cascade is unleveraged free cash flow pays interest. Based on the principle of debt, you have still cash flow left for project sponsors. A portion of this is set aside for a provision of a special cash reserve that is called debt service reserve account. In addition to this and other provision is typically required for extraordinary operation and maintenance costs. If you foresee that some costs will be born in the future, credit is preferred to keep some cash inside the vehicle so that you have sufficient cash to bear such kind of costs. Once you have set aside this money, you can now really redistribute dividends to sponsors.