24/06/2026
If you can read a cash flow waterfall, you understand project finance.
If you can't, you're guessing.
Here's the whole thing, top to bottom.
In a project, cash doesn't just "flow to the company." It moves through a strict, contractually-defined order of priority, the waterfall. Every dollar the project earns gets allocated in sequence, and you can't skip a step.
The order (simplified, but this is the real shape):
1. Revenue comes in from the offtake contract, the toll, the tariff.
2. Operating costs paid, O&M, fuel, insurance, admin. What's left is roughly your CFADS.
3. Taxes.
4. Senior debt service, interest first, then scheduled principal. This is sacred. It gets paid before anyone sees a cent of profit.
5. Reserve accounts topped up, most importantly the DSRA (Debt Service Reserve Account), usually holding 6 months of upcoming debt service in cash, locked away as a buffer.
6. Lock-up test, if DSCR is below the lock-up level, cash stops here. It gets trapped in the project. No distributions.
7. Equity distributions, only now, last in line, do the sponsors get paid.
That order is the entire risk structure of the deal, drawn as a flowchart.
Why it matters for your model:
— Equity is residual. Sponsors get whatever survives every senior claim. That's why equity IRR is so sensitive to small changes, it's the bottom of the waterfall, absorbing all the volatility.
— The reserve accounts and lock-up tests are not optional decoration. They're the lender's protection, and if your model doesn't include them, your equity cash flows are overstated and your IRR is a fantasy.
The mistake I see most:
People model "Cash to Equity = CFADS − Debt Service" and stop. They skip the reserves, skip the lock-up, skip the tax timing. Then they wonder why the real deal returns less than their model promised.
The waterfall isn't a formatting choice.
It's the legal and economic spine of the transaction.
So here's the real question:
In your project model, can you point to the exact line where cash gets trapped before it reaches equity? If not, you're modeling a structure that doesn't exist.
