2018 Deloitte Renewable Energy Seminar Scaling new heights August 15-17, 2018

Transcription

1 2018 Deloitte Renewable Energy Seminar Scaling new heights August 15-17, 2018

2 Developing effective models from the ground up: Best practices and practical application for renewable energy Nick Richards, Manager, Deloitte Transactions & Business Analytics LLP Yomal Wijekoon, Senior Manager, Deloitte Transactions & Business Analytics LLP

3 Agenda Welcome and introductions 4 What is a financial model? 6 Features of financial models 13 Practical examples in the industry 25 Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 3

4 Welcome and introductions Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 4

5 Introduction Modeling team specialized in renewable energy Yomal Wijekoon Senior Manager New York Deloitte Transactions and Business Analytics LLP Yomal has worked with clients over a wide range of industries notably in renewable energy including assisting client though modeling of complex transactions involving US tax equity investments, sponsor investor structuring, tax benefit distributions, debt structuring and Hypothetical Liquidation at Book Value (HLBV) accounting. Nick Richards Manager San Francisco Deloitte Transactions and Business Analytics LLP Nick has been working with renewable energy clients for the past two years. His modeling experience includes integrated financial statement modeling, financial forecasting, driverbased scenario modeling analyses, US tax equity investments, sponsor investor structuring, debt structuring and HLBV accounting. MAP is Deloitte s 1 dedicated financial modeling team The Modeling Advisory Practice (MAP) is Deloitte s dedicated financial modeling team focused on providing marketleading modeling services in connection with transactions, business planning, and operational assessments. Critical business decisions are increasingly underpinned by complex, bespoke analysis. Modeling need is often heightened when the financial exposure is significant, the situation is complex, and where multiple stakeholders are involved. 1 As used in this document, Deloitte means Deloitte Financial Advisory Services LLP, which provides forensic, dispute, and other consulting services, and its affiliate, Deloitte Transactions and Business Analytics LLP, which provides a wide range of advisory and analytics services. Deloitte Transactions and Business Analytics LLP is not a certified public accounting firm. Please see for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 5

6 What is a financial model? Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 6

7 What is a financial model? A tool that supports a decision making process A financial model is: Predictive: Calculates projections Estimates values of assets and liabilities Based on a user defined set of assumptions Designed to achieve a specific objective or assist with decision-making Models typically comprise of: A spreadsheet is often: Simply a report or vehicle for presentation of outputs Recycled from prior files Built with several purposes in mind but typically only capable of performing a handful of calculations Common phrases we hear from our clients that deals with spreadsheet type of models : Inputs Calcs Output Assumptions Historical Projections I am worried about the impact that will have on the investors I m not confident in the numbers we are getting from our models What happens to the forecast if the input changes? We have many data sources and spreadsheets how do I know they are talking to each other? Where are the inputs? Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 7

8 A deal model is typically at the heart of a transaction Such models often serve double or triple duty and thus need to be efficient yet flexible Buyer / seller inputs Transaction rational and deal drivers Input from multiple departments: M&A, Finance, Tax, HR, Commercial teams, etc. Specific modeling requirements pre-transaction (SREC and other revenue or operating sensitivities, etc.) Deal Model Transaction advisors Bank/lenders Legal advisors Financial and tax diligence advisors Outputs and insights Business plan and P&L forecast: Deep appreciation for cash-flow and value drivers Likely P&L along with upside and downside scenarios Valuation indications and sensitivities Assessment of funding structures and funds flow Deal model evolution: Operational/planning tool Tracking models Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 8

9 Principles of financial modeling Complex deal structures in the industry emphasize the need for modeling leading practices The model is an integral component that combines cash distributions, taxable income allocations, and tax benefits utilization in complex structures that also require compliance with tax and GAAP rules. Financing Taxable Income Tax Credit Overall Financial Impact GAAP Accounting Construction PPE Considerations: State and federal tax laws Tax incentives GAAP accounting MACRS depreciation Outputs: Net returns (Posttax IRR, Cash IRR, etc.) Taxable income Allocations Capital accounts Sources and uses Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 9

10 Principles of financial modeling Failing to plan is planning to fail Planning Development Timing Objective and Use Planning and Design When do you need to build the model? What period does the model need to forecast? How does this business change from month to month, quarter to quarter, year to year? Who will use the model? What is the model for? How will they use the model? What approach will you take to solving the problem? What outputs is the client interested in? What outputs did the client overlook? Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 10

11 Principles of financial modeling Everything should be as simple as possible, but no simpler A. Einstein Planning Development Simplicity Clarity Flexibility Consistency Robustness Well-structured User-friendly Not overcomplicated Clear, logical approach Transparent design and structure The ability to change assumptions and run alternative scenarios efficiently Layout of worksheets Consistent formulae across rows Model should maintain its accuracy when inputs are changed Controls should be used to provide comfort Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 11

12 Types of financial models utilized in the renewables industry Deal Model Dynamic models used to evaluate potential deals that are leveraged throughout the M&A lifecycle Enables users to flex assumptions and quantify the impact on valuation and tax Tracking models and reporting tools Post-acquisition models relied on for tracking historical data alongside forecasted projections Used by tax compliance teams, FP&A and operations management for tax compliance, reforecasting, and other financial analysis Structuring and sizing tools Dynamic, flexible, and scalable models that enables the user to assess the different types of structures suited for a potential deal and evaluate financing options Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 12

13 Features of financial models Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 13

14 1. Structure and formatting Model maps An illustrative representation of the sheets and data flows within a model can ease navigation and help users visualize what is included this is particularly helpful when there are lots of sheets Clear separation of inputs, calculations and outputs; with commitment to a broad logic structure Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 14

15 1. Structure and formatting (cont.) Worksheets A consistent look and feel makes models easy to develop and use Sheet description Checks shown on all sheet Consistent Column Start Downside Period 2018: Q1 2018: Q2 2018: Q3 2018: Q4 Section Forecast Forecast Forecast Forecast Start date Jan 1, 2018 Apr 1, 2018 Jul 1, 2018 Oct 1, 2018 End date Mar 31, 2018 Jun 30, 2018 Sep 30, 2018 Dec 31, 2018 Timeline Scenario Selector Merchant Price Curve Scenario Inputs 1 Retail - U.S. $ / MWh 2 Retail - EIA Forecast - United States $ / MWh 3 Retail - EIA Forecast - New England $ / MWh 4 Retail - EIA Forecast - Mid Atlantic $ / MWh 5 Retail - EIA Forecast - East North Central $ / MWh Input cells are color-coded Base case merchant price adjustment % Upside merchant price adjustment % Downside merchant price adjustment % 0.0% 2.5% (2.5%) % 2.5% 2.5% 2.5% (2.5%) (2.5%) (2.5%) (2.5%) Called up scenario inputs Active Merchant Prices Retail - U.S. Retail - EIA Forecast - United States Retail - EIA Forecast - New England Retail - EIA Forecast - Mid Atlantic Retail - EIA Forecast - East North Central $ / MWh $ / MWh $ / MWh $ / MWh $ / MWh Calculated active prices Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 15

16 1. Structure and formatting (cont.) Calculations If in doubt, break it out : Break out worksheets, following a logical flow down the sheet and consistent formula across rows Cost of goods sold As a % of Revenue Labor % 24.0% 24.0% 23.0% 23.0% Materials % 10.0% 10.0% 10.0% 10.0% Other % 5.0% 5.0% 5.0% 5.0% Total Revenue $ 253, , , ,643 Call up inputs Labor $ 60,720 62,665 62,000 65,928 Material $ 25,300 26,111 26,957 28,664 Other $ 12,650 13,055 13,478 14,332 Total COGs $ 98, , , ,924 Perform calculations Output financial statements Link to outputs Whenever possible, break out calculations into multiple steps. Avoid long and complicated formulae: =IF($D$381=1,IF(I179>0,MIN((H261*$F$385+H263*$F$386)/4*$E$343+IF(MAX($ E$108:H108)>0,(H238*$F$385+H240*$F$386)/4*$E$343,0),SUMPRODUCT($C$353 :$C$355,INDEX($D$52:$N$54,0,MATCH(INT(I62),$D$3:$N$3)))/4+IF(MAX($E$108: H108)>0,SUMPRODUCT($C$353:$C$355+1,INDEX($D$52:$N$54,0,MATCH(INT(I62), $D$3:$N$3)))/4,0)-I180),0),0) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 16

17 2. Presentation Significant outputs Outputs should meet the objectives. Agreeing the outputs required to the required level of detail is one of the keys to effective modelling. Outputs govern the rest of the model. Common outputs Integrated financial statements: Cash flows Profit and loss Balance sheet Financial statements for individual business units/divisions/legal entities and group consolidation Investment appraisal measures KPIs Charts Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 17

18 2. Presentation (cont.) Dashboards A dashboard is a dynamic executive summary Scenario switch Checks Alerts for the user when there is a failure in the model Scenario 1 Charts Display of significant outputs, providing instant feedback to sensitivity and scenario selections Project summary Display of important valuation assumptions and outputs by project Financials Display of important financial captions over time in the selected scenario and sensitivities Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 18

19 2. Presentation (cont.) Dashboard examples dynamic dashboards that highlight financial metrics for the various scenarios and capital structures Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 19

20 2. Presentation (cont.) Dashboard examples dynamic dashboards that highlight financial metrics for the various scenarios and capital structures Flip date IRR breakdown of investors NPV of project without and with the tax equity partnership showing the efficiency of the structure in place Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 20

21 3. Controls Controls can enhance stakeholder confidence Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful? George Box (statistician) Errors Four main types of errors: Data errors Errors in application Errors of omission Errors of interpretation Risks Inherent risks of the project: Valuation techniques (NPV/IRR, etc.) Tax Financing Complexity of modeling required: Volume of data Interdependencies Risks of the business/industry: Complex entity structure Regulatory considerations Sharing risks: Multiple versions Superseded assumptions Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 21

22 3. Controls (cont.) Model development Prevention is better than cure; trap errors when they arise, not at the end Formula controls Development controls Minimize different formula to reduce risk of error Use control accounts and link to integrated financial statements Potential benefits Reduce the risk of errors in application Easier to identify errors when they do arise Checks Version control Include relevant checks as you go along Use a flexible tolerance level Link checks to dedicated check sheet Include a master check visible on each sheet Apply a clear and consistent naming convention with major and minor version numbers e.g. InvestmentAppraisal xlsm Maintain a change log Avoid external links to sources which may change Identify and trap errors as soon as they occur Maintain integrity in calculations All Checks OK ERROR - See Check Sheet Controls sharing risk, easy to identify what is the latest version and what has changed since model was last shared Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 22

23 3. Controls (cont.) Model review and analysis Detecting errors and focusing on specific risk areas Formula review Review controls Spreadsheet software Formulae review Potential benefits Helps to focus on significant areas (e.g., complex calculations) Identifies errors in application Documentation review Check to assumptions documentation Enables understanding of important assumptions and risks Identify errors of omission through cross check Analytical review Review of significant outputs and trends Flex Testing Benchmarking Drill down to understand what the significant risk areas are Sense check of the outputs and assumptions Provides insight into the operational drivers and relationships, using benchmarking to form expectations and challenge Experienced assistance Helps to understand and resolve errors in application or interpretation in complex areas Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 23

24 4. Scenario manager Craft custom scenarios for critical inputs Ability to toggle between scenarios, through tabs in the model What happens if the inputs are changed? Can we compare two production cases? These are some of the common questions that we hear, mostly due to the fact of using a static model where inputs are scattered and scenario analysis are virtually impossible. A scenario manager can provide flexibility in the model where multiple scenarios could be defined with different sets of assumptions. Bespoke scenario parameters Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 24

25 Practical examples in renewable energy modeling Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 25

26 Broad inputs structures For multiples with large number of projects input structure is crucial Projects listed across columns for quick comparison Data input checks to confirm assumptions Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 26

27 Aggregate different layers / structures using efficient and broad leading practices Model architecture is crucial for complex structures Complete lower tier partnership structure tabs (e.g., partnership flip, inverted lease, sale leaseback) Aggregation of lower tier structures into middle tier and upper tier structures Lower tier partnership calculations OpCo Calculation Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 27

28 Dynamic calculations and outputs can lead to informed decision making Scenario manager and production factor scenarios Active scenario and scenario inputs flow to calculations Toggle exists on tabs Bespoke scenarios for the specific target, market or circumstance Toggles to select which projects in a portfolio have uncertain SREC markets Dynamic results to outputs can lead to rapid and effective analysis Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 28

29 Dynamic calculations and outputs can lead to informed decision making Operating expense sensitivities Active expense inputs called up and flowed through calculations Scenarios neatly laid out for seller case, upside and downside Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 29

30 We maintain broad checks in the model to mitigate risk of errors and highlight areas of concern in inputs / outputs Checks and issues are shown through model tabs Integrity checks look for model errors / concerns Data checks highlight data that drive abnormal results or outputs that may require attention chlbv Check that total book income is completely allocated Check annual equals quarterly Ok Ok dhlbv Check outputs equal calculations Ok daccounts Check outputs equal calculations Ok dsourceuse Check that Sources = Uses OK dpartnershipfinancials Check balance sheet balances Ok DATA CHECKS Data 1 Reallocation of EBIT from Tax investor to Sponsor Reallocation of EBIT from Sponsor to Tax investor Check that net PP&E isn't over-depreciated Copyright 2017 Deloitte Development LLC. All rights reserved. 30 Ok Ok

31 Tracking models Side-by-side historical and forecasted data Actual/historical data from ERP Period Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Length Monthly Monthly Monthly Monthly Monthly Monthly Section Actual Actual Actual Forecast Forecast Forecast Start date Mar 1, 2018 Apr 1, 2018 May 1, 2018 Jun 1, 2018 Jul 1, 2018 Aug 1, 2018 End date Mar 31, 2018 Apr 30, 2018 May 31, 2018 Jun 30, 2018 Jul 31, 2018 Aug 31, 2018 Fiscal year end Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Year index Relative Period Period index Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 31

32 Tracking models Side-by-side historical and forecasted data Calculation driven forecast Period Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Length Monthly Monthly Monthly Monthly Monthly Monthly Section Actual Actual Actual Forecast Forecast Forecast Start date Mar 1, 2018 Apr 1, 2018 May 1, 2018 Jun 1, 2018 Jul 1, 2018 Aug 1, 2018 End date Mar 31, 2018 Apr 30, 2018 May 31, 2018 Jun 30, 2018 Jul 31, 2018 Aug 31, 2018 Fiscal year end Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Year index Relative Period Period index Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 32

33 Tracking models (cont.) Tracking models aligned to tax return compliance Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 33

34 Bespoke models create efficient tax and compliance reporting Tracking models aligned to tax return compliance Tracking models should reflect reported financials and returns Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 34

35 Common renewable energy modeling issues Breaking circularities Breaking the inherent circularity in the 731(a) gain, 734 basis adjustment and 734 amortization by sliding the adjustment into the following quarter. 731(a) Gain and 734 Adjustment 731(a) Gain Sponsor $000s TEI $000s 6,977 1, ,422 - Total $000s 7,133 1, , Adjustment Sponsor $000s TEI $000s 6,915-1, ,408 Total $000s 7,133-1, ,422 Amortization life (years) Years 15 Amortization life (Quarters) Quarters Amortization Balance b/fwd $000s - - 1,418 1,394 1,370 1,347 Additions $000s 7,133-1, ,422 Amortization $000s (7,093) - - (24) (24) (24) (24) Balance c/fwd $000s - 1,418 1,394 1,370 1,347 2, Amortization - allocated Sponsor $000s (4,210) - - (0) (0) (0) (0) TEI $000s (2,883) - - (23) (23) (23) (23) Macros are another option. Modeling in the industry has inherent trade-offs. Macros can provide accuracy while reducing transparency and flexibility. Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 35

36 Common renewable energy modeling issues Flexible cash waterfalls for various cash distribution rules Sponsors often encounter multiple potential financing structures and options for their portfolio An effective financial model should allow for flexible financing structures with dynamic outputs that enable the to user to quantify the impact on cash flows and tax impacts For example, a cash waterfall that allows either partner in a partnership flip structure to have preferential cash distributions Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 36

37 Common renewable energy modeling issues Debt sizing based on target DSCRs Period 2018: Q2 2018: Q3 2018: Q4 2019: Q1 2019: Q2 Section Forecast Forecast Forecast Forecast Forecast Start date Apr 1, 2018 Jul 1, 2018 Oct 1, 2018 Jan 1, 2019 Apr 1, 2019 End date Jun 30, 2018 Sep 30, 2018 Dec 31, 2018 Mar 31, 2019 Jun 30, 2019 Debt Terms Flags are triggers for calculations Amortization type Selection DSCR Drawdown date Date 06/30/ Post drawdown flag Flag Required DSCR Ratio 1.50x Debt term (years) Years 15 Debt term (quarters) Quarters 60 Debt period flag Flag Cumulative debt periods # DSCR Approach Debt Sizing Cash flow available for debt service $000s 78, ,097 2,475 Required DSCR Ratio 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x Target maximum debt service $000s (49,554) - (299) (613) (1,398) (1,650) Interest rate for discount factor % 0.5% 0.5% 0.5% 1.0% 0.5% Discount factor using floating interest rate # Present value of maximum debt service cash flows $000s (42,094) - (297) (604) (1,364) (1,603) Issuance fee $000s 5.0% (2,105) Present value of maximum debt service cash flows $000s (44,199) Present value of maximum debt service sculpts debt payments to cash flow profile Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 37

38 Project engine Useful tool when working with a large portfolio of projects Project-level operational inputs Net capacity Project calculation engine uses a macro to cycle through up to hundreds (or could be thousands) of project-level inputs and calculate using a calculation template which produces specific metrics and paste the values in a consolidated index Degradation Seasonality Starting prices Price escalation curves Operating expenses Debt assumptions Macro Calculation template Stored index of pasted values Tax equity Partnershiplevel calculations Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 38

39 This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2018 Deloitte Development LLC. All rights reserved.