2019 Deloitte Renewable Energy Seminar...notably in renewable energy including assisting client...

2019 Deloitte Renewable Energy SeminarPowering a bright futureOctober 2-4, 2019

Enhancing tracking

models and

processes for

financial, tax and

asset management

reporting purposes

Haris Khan, Manager, Deloitte & Touche LLPYomal Wijekoon, Senior Manager, Deloitte Transactions and Business Analytics LLP

Copyright © 2019 Deloitte Development LLC. All rights reserved. 32019 Deloitte Renewable Energy Seminar

Agenda

•Welcome and introductions 3

•What is a financial model? 5

• Features of financial models 12

• Modeling leading practices for Hypothetical Liquidation at Book Value (HLBV) reporting 21

• Other practical examples in renewable energy 34 modeling


Welcome and introductions


Yomal Wijekoon – Senior Manager – Los AngelesDeloitte Transactions and Business Analytics LLP

Haris Khan – Manager – Washington DC Metro AreaDeloitte Transactions and Business Analytics LLP

Modeling team specializing in renewable energyIntroduction

• 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 HLBV accounting.

• Haris has worked with clients in a wide range of industries, notably in Renewable Energy and Financial Services industries. His experience is in building financial models and conducting financial analysis to determine valuations and returns. His experience includes integrated financial statement modeling, debt structuring, reviewing deal documents, and assessing the financial and accounting impacts of alternative scenarios.

MAP is Deloitte’s1 dedicated financial modeling team

• The Modeling Advisory Practice (MAP) is Deloitte’s dedicated financial modeling team focused on providing market-leading 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 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 www.deloitte.com/us/about 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.


What is a financial model?


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

A tool that supports a decision making processWhat is a financial model?

Historical Projections

Inputs

Calcs

Output

/

Assumptions___________________________

Common phrases we hear from our clients that deals with spreadsheet type of “models”:

I’m not confident in the numbers we are getting from our models.

We have many data sources and spreadsheets…how do I know they are talking to each other?

What happens to the forecast if the input ‘__’ changes?

I am worried about the impact that ‘__’ will have on the investors.

Where are the inputs?


Such models often serve multiple purposes and thus need to be efficient, yet flexibleA “model” is typically at the heart of a transaction

Transaction advisors

Outputs and insights

• Bank/lenders• Legal advisors• Financial and tax diligence advisors

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 (revenue or operating sensitivities, etc.)

Model

• 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


Complex deal structures in the industry emphasize the need for modeling leading practices

Principles of financial modeling

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.

Tax Credit

Taxable Income

GAAP Accounting

Construction

Overall Financial Impact

PPE

Financing

Considerations:• State and federal tax

laws• Tax incentives• GAAP accounting • MACRS depreciationOutputs:• Net return (Post-tax

IRR, Cash IRR, etc.)• Taxable income

Allocations• Capital accounts • Sources and uses


“Failing to plan is planning to fail” -Benjamin FranklinPrinciples of financial modeling

DevelopmentPlanning

Timing

Planning and Design

Objective and Use•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?

•When do you need to build the model?•What period does the model need to forecast?• Does the business change from month to month, quarter to quarter, year to year?


“Everything should be as simple as possible, but no simpler” –A. EinsteinPrinciples of financial modeling

DevelopmentPlanning

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 help mitigate the risk of error


Types of financial models utilized in the renewables industry

Deal Model Tracking models and reporting tools

Structuring and sizing tools

• 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

• Post-acquisition models used 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

• 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


Features of financial models


Model maps1. Structure and formatting

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 many sheets

Clear separation of inputs, calculations and

outputs; with commitment to a broad

logic structure


Worksheets1. Structure and formatting (cont.)

A consistent look and feel makes models easy to develop and use

Timeline

Input cells arecolor-coded

Scenario InputsScenario Selector

Consistent Column Start

Sheet description

Checks shown on sheets

Called up scenario inputs

Downside

Calculated active prices


Calculations1. Structure and formatting (cont.)

“If in doubt, break it out”: Break out worksheets, following a logical flow down the sheet and consistent formula across rows

Call up inputs

Perform calculations

Link to outputsOutput financial statements

Whenever possible, break out calculations into multiple steps. Avoid long and complicated formulas:

=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)


Significant outputs2. Presentation

Outputs should meet the objectives. It is best approach to agree the outputs to the key objectives, to ensure the model is built for its purpose. 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


Dashboards2. Presentation (cont.)

A dashboard is a dynamic executive summary

FinancialsDisplay of important

financial captions over time in the selected

scenario and sensitivities

Scenario switch

Charts Display of significant outputs, providing instant feedback to

sensitivity and scenario selections

ChecksAlerts for the user when there

is a failure in the model

Scenario 1

Project summaryDisplay of important

valuation assumptions and outputs by

project


Controls can enhance stakeholder confidence3. Controls

“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 Risks

Four main types of errors:

• Data errors

• Errors in application

• Errors of omission

• Errors of interpretation

• 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


Model development3. Controls (cont.)

Prevention is better than cure; trap errors when they arise, not at the end

Development controlsPotential benefits

Formula controls

• Reduce different formula to reduce risk of error• Use control accounts and link to integrated

financial statements

• Reduce the risk of errors in application• Easier to identify errors when they do

arise

Checks

• 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

• Identify and trap errors as soon as they occur• Maintain integrity in calculations

Version control

• Apply a clear and consistent naming convention with major and minor version numbers e.g. InvestmentAppraisal.002.001.xlsm• Maintain a change log• Avoid external links to sources which may change

• Controls sharing risk, easy to identify what is the latest version and what has changed since model was last shared


Model review and analysis3. Controls (cont.)

Detecting errors and focusing on specific risk areas

Review controls

Formula review

• Spreadsheet software• Formula review

• 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

Potential benefits

• Knowledgeable and qualified assistance


Modeling leading practices for HLBV reporting

Copyright © 2019 Deloitte Development LLC. All rights reserved.

Value adders

AutomationAutomated data transfer between models and with ERP systems; and dynamic dashboards to enhance financial analysis and reporting

Standardized reporting models

Consistent and standardized templates create efficiencies, allows scalability for new investments; reduces reporting work papers

Accuracy

Reliability

Efficiency

Client challenges

• Issues regarding controls for ad-hoc and manual adjustments to calculations

• Issues confirming data is consistent across multiple models and systems

• Increased investment, cost and inefficiencies and new projects come on

Upper tier trackers

ERP data systems

Reforecasting assumptions Tax reports

HLBV Tracking and forecasting

DATA Model ecosystem REPORTS

Lower tier trackers

IRR/ performance reports

Proper HLBV tracking models increase process efficiencies and mitigate reporting risks

Risk mitigationIntegrated model ecosystem to create a centralized source of truth with feedback loops for error identification and resolution.

Scalability

• Manual updates for actual data every reporting period

Introduction to tracking models

Copyright © 2019 Deloitte Development LLC. All rights reserved. 24

Typical HLBV reporting process overview

Import data from ERP systems

• Leverage trial balance data from ERP systems and asset models into HLBV calculation work papers

Reconciliation and analytical review

• Perform data reconciliation checks• Perform analytics reviews of tax and HLBV calculations

Export data to upper tiers

• Metrics to be consolidated into upper level entities as required, sometimes resulting in additional HLBV calculations

Leverage outputs from model reports

• Use output metrics for reporting and business decision purposes



Client challenges• Reliability- Data inconsistency with multiple work papers, stale data, • Accuracy- Human errors in data entry • Efficiency- Inconsistencies in the update process across different

files; multiple files for different reporting periods

Value Proposition• Streamlining of data transfers (pushing information between models

and ERP systems.) using data interfaces (reduce manual/ ad-hoc updates)

• Ability to import multiple reporting periods into one file• Change logs to document updates and timestamps of data transfers

along with version control





Save time in the update process by determining the availability of desired data in a timely manner than can be incorporated effectively into consistent model template







Specific reconciliations built throughout the model that provide risk mitigation over data and model integrity

Client challenges• Efficiency- manual and inconsistent reconciliation processes in multiple

work papers• Accuracy:

• Analytical review take extended periods of time• Limited visibility in HLBV profile due to lack of forecast functionality

• Reliability- Large volumes of workpapers creates auditing and risk issues

Value Proposition• Consistent and standardized templates in increase efficiencies and

increase analytical review time• Forward and historical looking HLBV calculations assist analytical review• One file that is the centralized source of truth• Data checks to assist with reviews• Checks and reconciliations to determine alignment of multiple models on

a continuous basis

Reconciliation confirmed

Fund model

ERP system

Asset level model

P&L items

Balance Sheet items

Cash flow items

Tax and other items



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


Reconciliation and analytical reviewSide-by-side historical and forecasted data Actual/historical

data from ERP


Reconciliation and analytical reviewSide-by-side historical and forecasted data Calculation

driven forecast







Standardized flexible interfaces allows for the addition of new investments as the portfolio grows

Client challenges

• Scalability:• Inconsistent lower level models creating inefficiencies in consolidation• Volume of data and projects difficult to manage

Our Value-add

• Standardized flexible interfaces, coupled with macro driven import/export functionality for efficiency

• Ability to efficiently add new investments for easy scalability• Standardized HLBV waterfall calculations in one template for multiple use

Flexibility to add new investments which

can be integrated in the model allowing for scalability as

desired







Readily available dashboards and outputs help with informed decision-making, data visualization, and rapid error identification

Client challenges

• Efficiency- Timely availability of select outputs• Reliability- Limited Ability to analyze portfolio level information and visibility

to future reporting periods

Our Value-add

• Interactive and informative dashboards• Specific outputs for Asset Managers (e.g., variance reports), Tax Equity

Partners (e.g., HLBV outputs), Internal Accounting (e.g., journal entries) and Tax Compliance

• Integrated forecast and historical tracking functionality into one model

HLBV Historical and Projected


Leverage outputs from model reportsTracking models aligned to tax return compliance


Leverage outputs from model reportsTracking models aligned to tax return compliance

Tracking models should reflect reported financials

and returns


Specific considerations for onboarding new projects

We deploy consistent templates and calculation summaries for P&L and cash flow waterfalls, and interfaces between models to help outputs stay aligned.

We deploy flexible input and calculation structures to accommodate differing project economics, various deal assumptions and tax equity types in one template

Our consistent template creates economies of scale. For funds with similar partnership and HLBV terms, one tracking model based on our template can be repurposed efficiently

Consistent Outputs


Other practical examples in renewable energy modeling


Dynamic calculations and outputs can lead to informed decision making Scenario manager and production factor scenarios

Toggle exists on tabs

Toggles to select which projects in a

portfolio have uncertain SREC

markets

Bespoke scenarios for the specific

target, market or circumstance

Dynamic results to outputs can lead to rapid and effective analysis

Active scenario and scenario inputs flow to calculations


Broad inputs structuresFor multiples with large number of projects input structure is crucial

Projects listed across columns for quick

comparison

Data input checks to confirm

assumptions


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


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

Project engine

Project-level operational inputs

Net capacity

Degradation

Seasonality

Starting prices

Operating expenses

Price escalation curves

Debt assumptions

Calculation template

Stored index of pasted values

Tax equity Partnership-

level calculations

Macro

Useful tool when working with a large portfolio of projects

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 DeloitteDeloitte 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 www.deloitte.com/about for a detailed description of DTTL and its member firms. Please see www.deloitte.com/us/about 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 © 2019 Deloitte Development LLC. All rights reserved.

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2019 Deloitte Renewable Energy Seminar...notably in renewable energy including assisting client...

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