2019 Deloitte Renewable Energy Seminar...notably in renewable energy including assisting client...
Transcript of 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
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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
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Welcome and introductions
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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.
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What is a financial model?
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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?
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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
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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
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“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?
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“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
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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
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Features of financial models
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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
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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
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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)
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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
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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
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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
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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
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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
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Modeling leading practices for HLBV reporting
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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
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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
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Import data from ERP systems
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
Import data from ERP systems
Reconciliation and analytical review
Export data to upper tiers
Leverage outputs from model reports
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
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Reconciliation and analytical review
Import data from ERP systems
Reconciliation and analytical review
Export data to upper tiers
Leverage outputs from model reports
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
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Reconciliation and analytical review
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
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Reconciliation and analytical reviewSide-by-side historical and forecasted data Actual/historical
data from ERP
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Reconciliation and analytical reviewSide-by-side historical and forecasted data Calculation
driven forecast
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Export data to upper tiers
Import data from ERP systems
Reconciliation and analytical review
Export data to upper tiers
Leverage outputs from model reports
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
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Leverage outputs from model reports
Import data from ERP systems
Reconciliation and analytical review
Export data to upper tiers
Leverage outputs from model reports
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
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Leverage outputs from model reportsTracking models aligned to tax return compliance
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Leverage outputs from model reportsTracking models aligned to tax return compliance
Tracking models should reflect reported financials
and returns
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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
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Other practical examples in renewable energy modeling
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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
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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
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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
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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
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