Documentation of Project Finance Model for Wind Projects 9/14/20151.

Documentation of Project Finance Model for Wind Projects

04/21/23 1www.edbodmer.com

Contents

1. Introduction2. Model Modes3. Simple Mode4. Detailed Mode5. Risk Analysis6. Interpretation of Outputs7. Partnership and Flip Structure8. Alternative Power Contracts


Introduction

• Philosophy of the model is to allow users to make changes if necessary. The formulas are not hidden so you the model can be modified in the future

• Attempt to allow users to use the same detailed calculations under alternative model modes and either make a relatively simple analysis or a complex.


Problems with Model

• Works better in Excel 2007 than Excel 2003 because of Multiple Drop Down Boxes

• Model is Large and Slow• Occasionally when you save in 2003 there is a

problem with the dates (this is because of Microsoft)

• If you find glitches (errors) in the model please call or e-mail immediately and don’t be afraid to be mean.– [email protected]– www.edbodmer.com– 1-630-886-2754


mailto:[email protected]

Other Resources

• Exercises

• Other actual models

• Theory of modeling and valuation

• Project Finance Articles

• Monte Carlo Simulation

• These can be found on the website www.edbodmer.com


Documentation Objectives

• Show how to enter data

• Show how to check models and interpret the results

• Show examples of how the model works on a technical basis


A Couple of Excel Basics in Working with the Model

• Use CNTL, PgUp and CNTL, PgDn to flip from page to page

• Use the + and – boxes next to the columns and the rows to show details.

• You can change code number (on the initial structuring page) without running the macros for the model modes


Model Modes


Model Modes

• The notion of model modes is to provide alternative ways to enter data.– In some cases it is not necessary to work through all

of the details about different categories of capital expenditures, power contracts, hybrid structures, warranty periods and property tax details.

– You can use the simple mode to quickly get an idea of the feasibility of a project and even some sophisticated finance and tax items.

– You can change the codes of the model modes directly and then the macro which hides sheets does not run


Model Modes – Technical Notes

• The different modes work with macros that:– Hide sheets that are not

used in the mode– Create a code number that

defines where inputs come from

– Certain numbers in sheets are adjusted depending on the model mode.

1 MODEL MODE:need to go to the simple inputs sheets and you do not have to be concerned with any other input sheet EXCEPT the f inancing inmodel with simple inputs and use multiple dif ferent transaction structures. To see whichsheets expand the sheet to see the dif ferent values of inputs. In technical terms, the model chooses f rom the relevant inputyou select a particular mode, the input sheets that are not used are hidden. If you would like to unhide all of the sheets,

If the simple mode is selected, it still uses the construction prof ile f rom the capital cost sheet and the f inancing assumpti

ALTERNATIVE METHODS OF RUNNING MODEL:wind project, the model is structured to use fundamentally dif ferent approaches in modeling cash f lows and measuring value.

In this sheet, you design the basic structure of the model, including whether you want to use simple inputs or detailed inputs apublic ownership of the turbine will be structured.

Model Mode

Simple Mode

Detailed Mode

Code Number that drives calculations


Cells that are Affected by Model Mode

In the model, there are some important inputs in the detailed sheets that can come from the simple mode


Private Mode Options

• The model can be run under different ownership structures. • Sometimes the model will be only owned by a municipality and

sometimes it will only be owned by a private entity.– In this case use the all private option

• In other situations, the project can be jointly owned by a municipality and a private company in a partnership. In this case use the second option

• In yet other situations, the project can initially owned by a private company and then sold to the municipality. This is called a flip structure.

• This document first describes the all municipality option or the all private option.

1PRIVATE MODE:ownership is assumed. If any of the options is selected, revenues are assumed to be derived f rom a power contract between thprivate entity. If the f irst option is selected, then the private entity operates the project over its entire life. If one then a hybrid structure is assumed, where a private investor owns the project for the f irst portion of its life and the town portion of the life. If the partnership structure is assumed, then the town has an interest f rom the outset. If the f lip stsold mid life.

Private Mode

All Private

Hybrid - Partnership

Hybrid - Flip


Power Contract Options

• If the private option is used for a project that is developed in part by a municipality, there can be a contract between the municipality and the private entity. This contract can involve capacity fixed prices, fixed energy prices or shared savings.

• The effects of the different power contract are discussed separately below.

• IMPORTANT – If you are running the model for a private company and you want to use net metering rates then use the third option named private analysis/shared savings

3

POWER CONTRACT:of contract can have important ef fects on the risks of the project accepted by a town. If the f irst contract type is selecterisk and all of the energy price risk is retained by the town. If the second and most typical contract type is selected, theaccepted by the private investor, but the energy price risk is retained by the town. If the third contract type is chosen, trisk and the energy price risk is accepted by the private investor. The sensitivity analysis and the scenario analysis shoul

Power Contract Option

Fixed Capacity Price

Fixed Energy Price

Private Analysis/Shared Savings

Private Rev = Town Savings04/21/23 13www.edbodmer.com

Town versus Private Model

• Model creates financial financing assuming that the project is financed either by a town or by a private company.

• The town model can be useful even if you are concentrating on evaluating the economics of a private model because it shows what the economics would be with no taxes.


Unhide Sheets

• If you are working on changing the model or if you are working on the simple mode and would like to trace your data, you can run the button to unhide all of the sheets.

• Sometimes you may also want to unhide the control sheets and the individual sheets

• If you press the simple mode or another mode, the normal sheets will show


Simple Mode


Notion of Simple Mode

• The idea is to enter the operating data in a simple sheet to make a quick analysis of a project without making an excessively detailed analysis

• If you are entering data in the simple mode, you need to enter data in two sheets:– All of the operating data is entered in the Simple

Inputs sheet– Financial data is entered in the Financing

Assumptions sheet


Data Issues in Simple Inputs Sheet

• Dates– Often assume that the construction start and the commercial operation

dates are the same – then there is no interest during construction. If you enter different dates, make sure the operation date is after the start of the construction.

• Operating Data– Enter the data in the various entry points including prices, the cost of the

project and operating costs. Use the net metering rate for the contract rate.

• Depreciation and Construction Timing– These inputs are similar to inputs in the detailed data sheets. The

depreciation rate depends on the assumption related to the tax code.• Finance Data

– Go to the financing page and work in the private column only. Make sure the mode is set to the private mode.


Depreciation and Construction Profile on the Simple Inputs Page

• The model requires inputs for the pattern of construction expenditures and for the type of depreciation. These are entered on the simple input page.

Tax Depreciation Method

Construction Timing

20 Year Straight Line

Equal Percentages


Note on Sensitivity Analysis

• On the Simple Inputs page as well as on other pages there are some sensitivity inputs.

• To operate the sensitivity analysis, the risk analysis must be set to the sensitivity analysis.

• You can change the risk analysis to the base case or a scenario analysis and see what happens to all of the sheets. For example you can run a downside case and then look at the financial statements (see the risk analysis discussion).


Entering the Financial Inputs

• When entering the financial inputs, you can enter details about all of the fees and credit spreads or simply enter the interest rate and zero for all of the complex items.

• If you are making a private analysis, then the inputs that matter are in the middle column

• You should make sure the mode is set to private if you are running a private analysis.

• You can directly set the debt level in the debt amount cell or you can run the macro.


Finding a Target Price

• There is a button on the simple input sheet that is named find price

• This button runs a goal seek the sets the price according the target rate of return by changing the price. (You can run the goal seek without the macro by yourself.) The price that changes depends on the inputs that you make.

• You can use the button on the simple inputs page to find the price that will produce an equity IRR or a project IRR.


Model Verification

• The simple and input sheet and other sheets show internal tests made by the model. It the model is not verified, you should check the inputs.

• This is most often a problem when you are modelling a hybrid structure. If the debt cannot be paid, there will often be a problem

• If there is a problem, you can go to the model verification page and then examine where the error comes from. After that, go the page which is the source of the error.

Model Mode SimpleModel Verified TRUE

No Problems Identified04/21/23 23www.edbodmer.com

Finance Data in Simple Mode

• Data Entry in the Financing Assumptions Sheet– You do not need to enter all of the fees, and other

factors. Instead, you can simply enter the interest rate in the year by year slots. (Shown in the example below)

– Be careful with the debt tenor – it must be shorter than the flip year, otherwise the model is attempting to pay off debt in a shorter time period than the ownership period

Annual Interest RatesLIBOR/ Private Interest Rate 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Base Municipal Rate 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%Interest Rate Earned on Cash Reserves 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%


Financial Inputs

First set the target coverage and then press the set private button


Inspecting Results in the Simple Mode – Construction Page

• The Construction page shows the period by period construction expenditures (generally monthly)

• The distribution of expenditures depends on the assumption you entered on the simple input page (e.g. equal percentages).

• The construction category named “other costs” is adjusted so that the total cost corresponds to the costs in the input page.

• If the operation date is the same as the construction start date, all of the construction occurs on the day before the commercial operation (in the previous month)


Checking Operating Data

• To see how the assumptions are affecting cash flows, you can check the Operations sheet.

• This sheet shows the detailed calculations of all of the revenues, operating expenses, property taxes and depreciation.

• If you run the model under the private mode, the municipal revenues are the same as the private revenues.

• If you run the model under the hybrid mode with a partnership or the partnership mode with a future sale transaction, then the private mode are driven by contracts and not the prices in the simple input sheet.


Working with the Operations Sheet

• In general you probably only want to see this sheet for the operating period. You can adjust the periods by using the drop down box.

• When examining the specific items, you can use the plus and minus signs to show detail.

• If you press the number 1 at the top left hand side of the sheet all of the detail is closed

Plus sign04/21/23 28www.edbodmer.com

Period Definitions in Operations Sheet

• There are a series of definitions for the contract lengths, the length of the production tax credit period, the length of the warranty period, the length of the contract period and other factors. The switches should correspond to the inputs.

• You can press the minus sign to not show all of the period definitions – the general idea of the operations sheet is to all you to see all of the gory details, but also to focus on the key numbers if you want to.


Revenues in Operations Sheet

• Revenue categories are separated between revenues from the sale of electricity, renewable energy credits and other possible revenues from incentives

• Revenues are set-up by splitting the volume of electricity sold by the project into various categories.– After the volumes are separated (e.g. net

metering versus wholesale revenues) the volumes are multiplied by the relevant price.


Inflation of Revenue and Operating Costs

• It seems like inflation is not a big deal, but with different start dates and semi-annual periods, it is a real pain.

• When you expand rows with the plus sign, many of the calculations involve inflation.

• To compute inflation, the rate is converted to a daily inflation rate and the inflation is started from the year defined in the project phases sheet (this defaults to the first year of commercial operation shown below)

Input Oper Life

OperatingLife

Project Life/Retirement 20.0 yrs 20.00

Applied Fiscal Year End 31-Jul

Base Year for Computing Escalation 01-Jan-10

Periods in Annual Graph 21.0 yrs

Construction Years in Graph 1.0 yrs

Date for the start of inflation


Inflation Index Explanation Continued

• The inflation index is computed in three steps:– Step 1: Get the inflation rate from the relevant place

in the simple input sheet or detailed sheet. (Ignore inflation rates before the defined start of inflation)

– Step 2: Convert the inflation rate into a daily rate using the formula (1+annual rate)^(1/365-1)

– Step 3: Compute an inflation index using the number of days since the defined start of inflation

– Step 4: Multiply the real rate by the inflation index to determine the inflated rate.


Operating Expenses in Simple Mode

• To examine the operating expenses in the simple mode, go to the part of the Operations sheet and expand the data. This shows how the operations expenses are inflated.

• The property taxes are computed in a similar way. In the municipal model the property taxes are not included.

Total Operating Expenses in Simple ModeTotal Operating Expense

Operating Expense - Real $850,000.00 $850,000.00 $850,000.00 $850,000.00 $850,000.00

Operating Expense - Periodic 425,000.00$ 425,000.00$ 425,000.00$ 425,000.00$ 425,000.00$ Operating Expense - Annual Inflation Rate 2.00% 2.00% 2.00% 2.00% 2.00%

Operating Expense - Daily Inflation Index 0.0054% 0.0054% 0.0054% 0.0054% 0.0054%Operating Expense - Inflation Index 1.0100 1.0200 1.0302 1.0404 1.0508

Operating Expense - Inflated 429,240.60$ 433,500.00$ 437,825.42$ 442,170.00$ 446,581.92$

Total Property Tax ExpenseProperty Tax Expense - Real $0.00 $0.00 $0.00 $0.00 $0.00

Property Tax Expense - Periodic -$ -$ -$ -$ -$ Property Tax Expense - Annual Inflation Rate 0.00% 0.00% 0.00% 0.00% 0.00%Property Tax Expense - Daily Inflation Index 0.0000% 0.0000% 0.0000% 0.0000% 0.0000%Property Tax Expense - Inflation Index 1.0000 1.0000 1.0000 1.0000 1.0000

Property Tax Expense - Inflated -$ -$ -$ -$ -$

Total Operating Expense - Simple Mode 429,240.60$ 433,500.00$ 437,825.42$ 442,170.00$ 446,581.92$


Property Taxes

• Property taxes are included as a deduction to the projects whether the projects are municipally owned or privately owned.

• However, the property taxes are assumed to accrue to the municipality, so that in the overall calculation of net benefits to the town, the property taxes are added back.


Depreciation Sheet

• Introduction– The depreciation only makes a difference in the private model

because the effect of depreciation in a project finance model is to reduce the income for taxes.

• Interest During Construction– The basis for computing depreciation is the amount of money

spent on the plant plus the interest during construction.

• Changing the Depreciation Assumption• Changing the Depreciation Rate• Interpretation of Depreciation Rates• ½ Year Convention


Note on Simple Mode for Private Company

• You can run the simple mode for a private company. To do this make sure:

– On the structuring page, the mode is set to private rather than to a hybrid structure

– For the contract option, use the shared savings option

– You can use the private revenues = town revenues

– Make sure the inputs in the debt sheet are set to the plant life.


Simple Mode Case Study

• Capacity/Number of turbines – 17 turbines, currently estimating them at 2 MW each

• Costs – we are early on, so I am running sensitivities with $2500/kW up to $3500/kW all-in cost (including development and EPC)

• RECs – assuming that the spot market REC price is $20/MWh • Power off-take – This project will require a PPA as current ISO-NE prices could not

help a project with these costs. I am running sensitivities to see what the contract price should be for energy in order to make this project profitable. I’m using a 10% discount rate to get my NPV values. I’m shooting for rates of return from 10% to 14%.

• D/E ratio – I am assuming a 65/35 split • interest rates – I am assuming a rate of 8% • Life – 20 years • Taxes – I am assuming that there will be some kind of PILOT agreement set-up to

pay taxes to the local community. There is the additional task of figuring out what kind of benefits to bring to the members of the military that currently occupy the site, and that will continue to do so once the project begins operation

• O&M – I am assuming a price of about $50K per year per turbine • No residual value and no decommissioning cost – this is probably a bad idea, but

I’m not sure yet


Exercises

• Input the basic parameters without inflation and without debt or taxes

• Change the construction and the inflation rates and see what happens.

• Change the revenues and check the operation sheet. Use different percentages of net metering and different inflation rates.

• Change the financing of the wind project using either a direct input or by changing the target coverage ratio.

• Run in private mode with different debt financing assumptions– Enter the amount of debt directly– Enter the target coverage ratio


Detailed Mode


Reasons for Detailed Mode

• Varying Inflation Rates and Varying Prices over Time• Different Contract Terms for REC Contracts and for

Power Contracts• Detailed analysis of operating expenses with warranty

and post-warranty costs• Different Depreciation Rates for different types of

equipment in Private Mode• Differentiating Development Costs from Other

Construction Costs• Varying construction profiles depending on the type of

equipment


Contents for Detailed Mode

1. Project Phases2. Development Expenditures3. Construction Expenditures4. Depreciation Expense5. Revenue Inputs6. Expense Inputs7. Tax and Incentive Assumptions8. Financial Inputs


Beginning to Work with Detailed Mode

• Set the model to the detailed mode instead of the simple model

• It is a good idea to leave debt out of the analysis when initially working in the detailed mode– Simply enter zero in the

loan amount and zero in the target debt inputs

Permanent Debt FinancingDebt Sizing

Investment to be Financed at COD 44,175,000 44,275,000 - Target Debt - -

Loan Amount in Model -$ - -$ PLCR for Debt Sizing - 1.40PLCR in Model N/A #####

Loan RepaymentLevel, Annuity, Sweep Sweep Annuity SweepLoan Tenor (years) 20.00 20.00 10.00

Other

Credit Spread 0.00% 0.00% 0.50%Debt Service Reserve 0 months 0 months 0 monthsAmortization Period for Fees (Years) 5.0 years 20.0 years 7.0 yearsCash Sweep Percent 100.00% 100.00% 100.00%

Debt Financing FeesLender's Upfront Fee 0.00% 0.00% 1.00%Letter of Credit Fee 0.00% 0.00% 1.00%

Direct Entry of Target Ratios 0 0 0

Size Debt Size Private

Sweep AnnuitySweep Sweep

Size Town

Annuity


Section 1: Project Phases

• In the detailed mode, enter key dates for the project in the project phases sheet

• The project phases can include a development phase as well as a construction phase and an operating phase

• The project phases include the option to change the periods of the operating period and the construction period. – Many project finance models are structured to use

monthly analysis before operation and semi-annual periods after construction.

PeriodicModelingMonthlyMonthly

Semi-Annual


Section 2: Development Expenditures

1. Discussion

2. Entering Development Expenditures

3. Timing of Development Expenditures

4. Exercise of Development Timing and Amount


Development Phase Discussion

• In projects, the development expenditures can range from 5% to 10% or more of the total projects. Development expenditures include things like feasibility studies, legal costs for contracts, financial advisors etc.

• The development expenditures are entered in a separate category in the capital expenditure page.

• The development profile can be changed as with the profile for other costs – see the discussion of profiles below.

• Check the way the development costs are translate into the financial model by first looking at the operating summary, then construction sheet and then the financing sheets – look in the sources and uses statement


Exercises with Development Phase

• Change the development expenditures in the capital expenditure page – vary from 2% to 10%

• Change the timing of the development in the phase page.

• Change the profile of the development expenditures

• Examine what happens to the project IRR• Look at the construction sheet


Data Entry for Development Phase

• The figure below shows the section of the capital expenditures sheet that deals with development expenditures

• The percentage shown below the subtotal shows the development expenditures as a percent of the total capital costs.

• For purposes of the financial model, it does not matter which specific category is used for the development expenditures.

Development CostsPre-Development Consulting $4,000,000 4,000,000$ 205.1$ Permits & Licenses $200,000 200,000$ 10.3$ Legal Costs 0.5 $0 -$ -$ Land Purchase Costs 1.0 acres $0,000 /acre -$ -$ Environmental Studies 0 -$ -$ -$ Meteorological Tower & Wind Resource Study 0 -$ -$ -$ Civil, Electrical & Communications Design $0 -$ -$

Subtotal 4,200,000$ 215.4$ Development Percent 8.66%04/21/23 47www.edbodmer.com

Section 3: Construction Expenditures Outline

1. Entering the cost and quantity data

2. Entering the construction profiles

3. Entering alternative depreciation profiles

4. Notes on entering other expenditures

5. Adding categories

6. Exercise


Entering Construction Cost Amounts

• Entering the amounts is simple– Enter the number of turbines– Enter the number of units and the amount per unit for

other items– The column labeled total is used to determine the

amount of construction– You can change the titles and the way units are

multiplied by the cost per unit in any of the slots (this is better than adding new categories and working through the other parts of the model).

– This total column is spread over various periods in the construction or development period to determine the periodic capital expenditures


Definition of Construction Profile

• The construction profile defines how period by period (generally month by month) expenditures are made given the total amount of expenditure for each category.– For example if $1,000 is to be spread and it takes 6 months to

build the project, the amount may be 167 per period, summing up to $1,000.

• The way in which the expenditures are made depends on the contracts for purchasing equipment, the schedule of construction etc. The assumption that expenditures are made at an even level is a simplifying one. In real projects some expenditures may come all at one time and some may be spread using different patterns.

• Sometimes the pattern of expenditures is called the S-Curve


Construction Profile

• Options for Capital Expenditure Patterns (S-Curve)– You can change the timing of construction using a few methods.– The simplest is to use the assumption of the same percentage

each month– If you use alternative method, the expenditures are all made at

the beginning and the end of the construction period.• If this method is used you can enter different percentages for the

beginning and end of the period (see the illustration below)

– You can directly enter the profile percentages in two ways• The easiest way is simply to over-write the percentages next to the

categories

• The other way is to use the expenditure inputs below

Construction Profile Code Num 2 Pct in First Period 80.00%

Development Profile Code Num 2 Pct in First Period 80.00%

80.0% First Period 20.0% Final

80.0% First Period 20.0% Final


Construction Profile – Level Expenditures

• Entering specific expenditures for each month is a real pain and you may not have information on how the expenditures are made.

• If the level expenditure method is chosen, then the expenditures are assumed to occur on an equal basis for each month of the period of development or the period of construction defined by the construction phase.– Development Expenditures

• The development category is simply divided by the number of months of development and the percent is shown adjacent to the development

– Construction Expenditures• A similar assumption is made for construction expenditures except

they occur after the development phase is finished


Construction Profile – First and Last Percentages

• This comes from the earlier version of the model where there the only option was to put ½ of the construction in the first period and then the other ½ of construction in the final period of construction.

• This method was adjusted so that you can vary the percentage in the first and the last period.


Construction Profile – Fixed Method

• Either over-write formulas or enter details in the yellow slots. – If you over-write the formulas, then you cannot go

back and use the method where construction is spread evenly over or the first and last period method.

• Three step example when you want to only change selected items and use default for others.– First, put in default numbers– Second, copy and paste special as values into the

yellow slots– Third, adjust the specific categories by hand


Other Expenditures and Contingency

• The other expenditures category is used for establishing the total amount of cost in the simple mode. If the detailed mode is used the amount in the other cost from the simple mode should be zero.

• The other cost (not simple mode) can be used to enter other types of costs

• The contingency factor computes additional development expenditures and construction expenditures depending on the percentage input. The percentage is applied in each period for the construction and development expenditures.


Construction Expenditure - Exercises

• Change the profile method from level method to alternative method and see what happens to project IRR.

• Change the percentage in the first and last method so that all is at beginning and then all is at the end. See what happens to IRR and examine the construction sheet.

• Apply the fixed method by copying and pasting all of the profiles to the yellow slots below the base input and changing selected inputs by hand.

• Change the contingency factor and examine the construction page and the financing pages.


Section 4: Depreciation Rates

1. Discussion of depreciation

2. Alternative depreciation rates

3. New depreciation rates

4. ½ year convention

5. Depreciation exercises


Discussion of Depreciation

• For cases in which the wind project is owned by private entities, the timing of the depreciation is an important item.

• In some cases, not all of the costs may qualify for the same depreciation write-offs.

• There is a default method for depreciation equipment and also a way to change the depreciation rate for different types of equipment.

• Use of default depreciation versus different depreciation assumptions for different types of equipment.

• Alternate depreciation rates that can be adjusted


Alternative Depreciation Rates

• In entering depreciation rates, a default depreciation rate is applied. This depreciation rate is applied to the equipment unless an alternative rate is specifically defined.

• To define an alternative depreciation rate, go to the alternative depreciation column and select a depreciation rate.

• To apply the default depreciation rate, use the first selection which is blank


Illustration of Use of Alternative Depreciation Rates

• The figure below shows the application of alternative depreciation rates to different types of equipment.


How to Enter New Depreciation Rates

• Federal tax policy has changed tax depreciation rates over time

• Can use default depreciation rates

• Can also enter new depreciation rates– Go to depreciation page– Select one of the depreciation categories– Change the depreciation rates that are

applied on an annual basis


½ Year Convention

• Tax depreciation has something known as a ½ year convention which means the if a project is completed in December or January, it still is allowed the same depreciation rate.

• This depreciation rate is one half of the rate for a full year.• The depreciation amount depends on the start date, since a

calendar year is applied and it is allocated to a period.– For example, if the project starts in July, then the first year depreciation

is allocated to on a six month basis.– Since it is already allocated then the full year depreciation should be

used.– In another example, if the project is completed in January, then the

depreciation for the whole first year is split in two and a ½ year assumption should be used.

• Possible Revision


Depreciation Exercises

• Change the Default Depreciation– Examine the depreciation sheet

• Change depreciation in the alternative depreciation column

• Go to the depreciation page and change one of the depreciation categories– Change the title– Change the percentages


Revenues – Detailed Mode


Section 5: Revenues

1. Variable Types/Introduction

2. Availability and Degradation

3. Energy Disposition by Period

4. Wholesale/Spot Prices

5. Net Metering Prices

6. Contracts

7. Renewable Energy Credits


Introduction

• To begin the analysis in this section, set the following inputs– Set the commercial operation date to January 1st of a year– Contract percent zero– Net Metering Zero– Inflation Rates all to Zero– Set the Model to run on 100% spot rates– Put in $200/MWH as the spot rate– Make sure availability is 100% and the degradation is zero– Set all of the expenses to zero

• When working through the cases, one can then isolate the effect of each issue

• Hide the output sheets with all of the graphs except the operating sheet


Variable Types

• Input Variables• Variables that can come from simple mode or

the detailed mode– Variables in black– Should not put inputs

• Variables that can be over-written– Blue or light blue

Availability Factor (If 100%, Then C.F. is NET) From To AvailabiltyAvailability for First Period 1-Apr-13 30-Sep-13 50.00%Availability for Second Period 30-Sep-13 31-Mar-14 75.00%Availability for Remaining Periods 31-Mar-14 30-Apr-33 100.00%

Section 2: Power DispositionDispostion of Energy to Alternative Sources - Town Input Pct Applied Pct

Annual Degredation Factor 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%Pct of Power Output Applied to Net Metering 58.0% 58.0% 58.0% 58.0% 58.0% 58.0%Pct of Power Output Sold under Contracts 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Pct of Power Sold Under Spot Rates 42.0% 42.0% 42.0% 42.0% 42.0% 42.0%

Total 58.0% 58.0% 58.0% 58.0% 58.0% 58.0%

Dispostion of Energy to Alternative Sources - Private Input Pct Applied PctPct of Power Output Applied to Net Metering 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Pct of Power Output Sold under Contracts 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Pct of Power Sold Under Spot Rates 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

The inputs in black should not be changed

Variables that can be under-written


Availability and Degradation

• You can change the availability of the turbines or make the turbines have degradation in the revenue assumptions page.

• The availability factor applies to the first periods of operation (this is how the previous model handled availability)

• The degradation factor has a similar effect as the different availability rates.– The degradation factor can be changed by year (e.g. there can be no

degradation in the first three years and then 5% after year three and then 10% after year ten.

– To change the degradation factor for different years, • you first enter the zero that applies for the first few years• then you over-write the formulas in the annual degradation factor row – put

5% in year 5.• Then put another 5% in year 10.

– If you would like to reset the formulas, simply copy the formulas from the first year (Shift, CNLT, and then CNTL, R)


Degradation Case Exercise

• Enter a constant degradation factor that is ½ of 1 percent per year and then examine the outputs and then re-set the factor to zero.

• Assume the availability of the plant declines by 5% in year 5 and then by another 5% in year 10.

• Overwrite the degradation factor in year 5 and in year 10 – this demonstrates how you can create detailed year by year accounts.

• Inspect the operating analysis, the operations sheet and the annual model to see the effect of changing the degradation.

• Re-set the degradation factor to zero.


Spot Price Options

• The model includes various different options for modeling the spot price.

• The default method is entering a spot price and then entering inflation as with the degradation factor. The inflation rate is entered in the set of inflation rates at the bottom of the revenue inputs page.

• Alternative spot prices can be entered in a similar way. This allows you to retain different spot pricing scenarios.– Expand (use the plus sign) near the revenue inputs– Choose a different spot revenue scenario on the top of the page

• The final way to enter spot prices is to directly enter different prices rather than entering inflation rates.– Choose the annual input selection at the top of the revenue

inputs page.


Calculation of Revenues Using Different Price and Energy Disposition

• The diagram below illustrates how the model applies different pricing assumptions depending on whether spot pricing, net metering pricing or contract pricing is chosen.

• The prices are always placed in the various rows, but the energy used in the calculation changes depending on the assumption of energy disposition.

• In the case below, only the contract price is used.


Spot Price Exercise

• Make sure the power disposition is set to 100% spot• Use the default method and enter different inflation rates to see how

the inflation rate affects cash flows– Try 10% and make sure the prices increase from 200 to 220 in the first

year.– Note that if the project does not start on Jan 1st, the inflation begins at

the calendar year and not at the project commencement• Set the spot method on the top left combo box to the annual method

and input very volatile prices. Then inspect the operating sheet to make sure the prices are consistent.

• Change the other spot price scenarios and inspect the project IRR– Note that the reason for the different format of the inflation rates is so

that inflation rates from the simple mode can be incorporated into the analysis


Net Metering Rates

• Net metering rates are entered through entering different assumptions for various rate components– One can lump all of the net metering into one rate as

in the simple mode and just change the title.• As with spot generation prices, the generation

component of net metering rates can be varied with different scenarios including an option to directly enter rates. As with the spot price analysis, this allows you to save different scenarios without re-typing the data for each case.


Net Metering Exercise

• Change the power disposition to net metering for BOTH the private and the town assumption.

• Enter different generation rates and inflation rate scenarios and inspect the operating sheet

• Expand the generating rate scenarios and try different generation rates and inspect the resulting IRR’s.

• As with the spot wholesale rates, the inflation is in a different place for the default scenario than for the other scenarios due to incorporation of inflation and base rates from the simple mode.

• Run the model in simple mode and observe how the distribution and transmission components are set to zero.


Power Contracts

• Power contracts come into play in two ways in the model.– First, the power contract may simply be a way of modeling a

private power project.– Second, the power contract may be a way of structuring a

municipal project. Here the municipality must set the power contract not to give too much of the benefit away to a private developer.

• IMPORTANT: In terms of revenues, the only thing that causes revenues to be different in the private mode from the municipal mode is the treatment of contracts. If the model is run as all spot or all net metering in both the town mode and the private mode, the revenues are the same.


Structure of Power Contracts

• The method used in setting contract prices can have an important effect on the risk of the project.– A contract with fixed capacity prices removes capacity

factor risk and market risk– A contract with fixed energy prices removes price risk

but not capacity factor risk– A shared savings contract leaves the project with both

capacity factor risk and spot energy price risk

• The model is structured to evaluate all three types of contracts


Note on Simple Mode versus Detailed Mode in Modeling Contacts

• In the simple mode there is no direct input for power contracts, however, if the power contact mode is set to fixed energy prices or fixed capacity prices, then the power contracts are used by default.

• If the town purchases power from a private company, then the power contract is for the private entity and not for the town – the driver is the revenue earned not the cost paid in the revenue input sheet.

• If the town sells power under a contract rather than under spot energy pricing or net metering, this is assumed to be an energy price contract.

• Unlike spot pricing or net metering, the contract prices are differentiated between the private scenario and the town scenario


Contract in Private Mode

• In the private mode, the three types of contracts can be implemented while in the town model the contract is assumed to be on the basis of energy ($/MWH) (Recall it is rare that a town will have a contract to sell (not to buy) if it constructs a wind project

• To change the contract type, go to the contract mode portion of the model structure spread sheet and manually change the code.– The $/kW method simply multiplies the $/kW amount by the capacity of

the turbines.– The $/MWH method multiplies the energy produced by the turbine by

the $/MWH price input (this is used in the structuring sheet)– The shared savings method works by multiplying the town revenues by

the shared savings percent and plugging the result in the private revenues cells

• IMPORTANT: Make sure the private revenues = town revenues switch is not clicked.


First and Second Contract in the Town and Private Model

• The idea of having two contracts came from the original model. In this scenario one somehow assumes that one knows what the price of a subsequent contract will be. (This makes little sense as if the price is already known, the contract is already signed).

• The two contract scenario demonstrates how the alternative dates translate into the model as the length of the contracts must be evaluated.

• Note that the inflation in the second contract begins at the start date for the inflation and not at the start date of the contract (a possible area for changes)


Power Contract Exercises (1)

• Change the power contract switch to 1 and make sure the town revenues = private revenues is not clicked

• Change the $/kW/year capacity charge and inspect changes in the rate of return. Also, add inflation to the contract.

• Change the capacity factor and the IRR should not change (as long as the REC prices are set to zero)

• Change the switch to shared savings for the private mode and change the energy disposition in the town mode to spot or net metering.– With no taxes, the IRR of the private and the town should be the same.– Adjust the shared savings percent so that the private entity just earns

10%.• Note: Inspecting the operating analysis is no longer relevant

because this shows the municipal analysis and not the private analysis


Power Contract Exercises (2)

• Change the power contract mode to number 2 in the structuring sheet. (This is the most common method of structuring and the default used in the structuring mode)

• Make each contract last for different lengths (make the first something like 5.4 years), and make the prices different for the two contracts and then inspect the IRR’s

• Go to the operating sheet and make sure that the dates at which the contracts change correspond to the input dates on the revenue inputs sheet.

• Adjust the first year contract price to meet the target IRR – this is the idea behind using the model to find the correct price level of a contract between a municipality and a private company


REC Prices

• The Renewable Energy Credit (REC) Prices are modeled in a similar manner as the spot and contract prices:– You begin by entering the percentages of REC credits

that are modeled as contracts and the percentage that is modeled using spot REC prices

– You can enter different spot prices with different inflation rates or fixed annual year by year prices

– In the contracts, you can enter two different contracts with varying escalation rates as with the contracts for selling energy


How To Enter Varying REC Percentages

• As with the degradation discussion above and with any inflation rate or other variable that extends over years, you can over-write the formulas.

• For example, if you would like the a REC contract to last for 5 years after which spot prices are assumed, then you would enter percentages over the formulas starting after the first year. Then, you can re-copy the existing formulas to re-set the automatic equations.


Alternative Ways to Enter Spot Rates for REC Contracts

• As with spot prices for selling energy, the spot REC prices can be modeled in different ways driven by the drop down box at the top left of the revenue inputs sheet.

• The default method is to use an initial price and inflation• The alternative method is to enter year by year rates

directly– In the simple mode, the initial method is used

• Entering Contracts is similar to inputs for contracts for selling energy – there can be two contracts with different escalation rates

• You can also use a year by year assumption to apply the REC contracts


Illustration of Alternative REC Pricing Methods

• The figure below illustrates how to implement year-by-year pricing for the REC spot pricing assumptions and the REC contract assumptions.

The drop down box for REC contracts has two options

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REC Exercises

• Set the Revenues to spot prices and take out any inflation to keep things simple

• Enter two contracts without inflation (e.g. the first is for three years)

• Then make the model switch from contract to spot by over-writing the percentages.

• Reset the percentages to remove over-written formulas

• Reset the REC prices to zero to analyze the operating expenses


Operating Expenses – Detailed Mode


Section 6: Operating Expenses

• Warranty and post warranty expense

• Insurance and other expenses

• Electricity Expenses

• Land Lease and Payment in Lieu of Tax

• Property Taxes

• Decommissioning Costs

• Working Capital


Pre-Paid Warranty

• Pre-paid Warranty– The pre-paid warranty is assumed to be a cost that

occurs at the very end of the construction period.– To see how the pre-paid warranty works, examine the

private financing sheet– The pre-paid warranty is amortized to operating

expenses (and deducted for taxes) over the period the warranty applies.

– In the simple mode the pre-paid warranty is turned off.

– Note that the number of turbines is driven by the number input in the capital expenditure page


Warranty Period and Expenses

• To model expenses under a warranty that are paid on a period by period basis:– Set the pre-paid warranty amount and the length of

the pre-paid warranty period to zero.– Enter the warranty expense on an annual basis and

the term of the warranty expense – inspect the end date of the term to make sure it confirms precisely to the term of the warranty contract. (See the subsequent slide to see how the contract term works)

– Enter an escalation rate if there is an escalation rate that applies to the warranty contract.

• By switching on and off the warranty term, the effects of having a warranty can be evaluated.


Illustration of Contract Length in the Operations Sheet

• The figure below shows how you can check that the term of the warranty expense is working correctly.

Shows the dates of the contracts and then whether the contract is outstanding during the date of the model


Illustration of Computation of Operating Expenses

• The figure below shows the details of operating expenses that can be inspected in the operating sheet. – To see this,

expand the rows around the operating expenses.

The detail shows how the annual inflation rate is computed on an equivalent daily basis and then applied to the appropriate category


Inflation and Pro-ration of Operation Expenses

• Each expense is entered on an annual basis in real terms – the dollar amounts are inflated from the date in the project phases.

• After the annual expenses are entered into the operating sheet of the model, they are pro-rated to the number of months modeled by the model.

• Next, the pro-rated expenses inflated by first creating a daily inflation rate and then applying the daily inflation rate to the number of days in the period.

• The procedure for inflating expenses is illustrated in the figure below.


Warranty Expenses Exercise

• Make sure the switches are set to true and that REC revenues are set to zero

• Enter a 3 year term for the pre-paid warranty, a 5 year term for the subsequent warranty and expenses for the post warranty expenses– Inspect the treatment of warranty expenses that are capitalized in the

town and private financing pages.– Inspect the operations sheet to see how the contract terms work.– Inspect the operations sheet to see how the inflation is applied to

each category.

• Take out the warranty through using false and setting the terms to zero


Insurance and Other Expenses

• For insurance and other expenses, enter the annual amount per turbine on in the expenses page.

• There are separate inflation categories for the insurance expenses and the other expenses.

• As with other insurance that varies on a year by year basis, you can vary the inflation rates year by year (note however that all of the expenses other than insurance are applied the same inflation rate).

• The amount of the insurance expense and the other expense is shown next to the inflation rate.


Electricity Costs

• The costs of electricity can be modeled either as a reduction in load or as a direct expense.

• Enter TRUE if you would like to reduce the electricity load rather than have the project separately for electricity

• If you enter FALSE, then the amount of electricity used by the project is multiplied by the electricity rate and then inflated at the inflation rate input.

• Mini Exercise: Examine the project IRR with the two different methods of computing electricity costs.– Examine the paracetic load in the operating sheet– Examine the electricity costs in the operating sheet


Land Costs

• Unlike the warranty costs, other costs and the electricity costs, the costs for property taxes, land and right of way can be modeled differently in the private scenario from the town scenario.

• The land lease costs can be modeled as a percent of revenues or as a cost per MWH of production.– The expenses must be switched on with the TRUE/FALSE

switch– If both the percent and the $/MWH are entered, then both costs

are added.– If the rates are the same for the private and the town inputs, the

expenses will be the same as long as the revenues are the same.


Payment in Lieu of Taxes

• The model has provision for payment in lieu of taxes for either the town mode or the private mode, although it would almost always apply to the town mode.

• The payment in lieu of taxes is modeled as a contract with possible escalation and an expiration date.


Property Taxes Discussion

• Property taxes are allowed in the town model or the private model (although they would only really be applicable in the private model)

• The property tax analysis has been derived from the earlier model developed by MTC

• Property taxes work by first computing the value of the assessed property– This is the same as the tax basis of the plant which can be found on the

depreciation sheet– The assessed valuation can be inflated

• Once the assessment is established, a factor is used to reduce the assessment. This factor may be reduced from year to year implying that the assessed value declines.– The reduction in the assessed value has a limitation which is an input

• Next a property tax rate is multiplied by the adjusted assessed value


Property Taxes - Mechanics

• To implement property taxes in the private model (occasionally in the town model) first set the switch to true.

• The assessed valuation shown in the property tax inputs comes from the total value of the plant including IDC.– You can adjust the valuation using the expandable rows at the bottom of

the section• An inflation rate can be applied to the assessed valuation which can

be adjusted year by year as with any of the other inflation rates• The value of the assessment can be reduced by a factor and in turn

reduced year by year subject to a minimum amount• Adjust property taxes and other factors and evaluate the effect on

the private versus town IRR


Decommissioning Expenses

• Decommissioning expenses are accumulated in a fund that earns interest expense.

• The decommissioning works by:– First establishing the total accumulated

decommissioning expenditure at the end of the project life (by inflating the expenditure estimated at the date of commercial operation (the COD).

– Once the total amount of the decommissioning is established, the future amount is divided by the total periods of operation to determine the periodic amount paid to the fund

– The fund is built-up and earns an interest income rate.


Structure of Decommissioning Inputs

• The structure of decommissioning inputs is somewhat different than the other inputs since there is a provision to accept simple inputs– For all of the other expenses, the simple input expenses are

directly adjusted in the operations sheet.– Decommissioning requires inputs for the amount of estimated

decommissioning at the date of commercial operation (COD), the inflation rate, and the interest rate on the fund.

– The interest income rate on the fund comes from the annual interest income rate earned on cash reserves that is entered on a year by year basis in the financing inputs sheet.

• Exercises– Enter decommissioning amount and varying inflation rates– Find the decommissioning calculations in the operations sheet

and in the town and private financing sheets


Working Capital

• Working capital is the amount of money that is not realized because of a delay in payments or amount of money that must be put aside for spare parts or the amount of money that is not yet paid out for expenses.

• Working capital is established by first establishing the level of working capital and then the movement in working capital which affects the cash flow


Working Capital Mechanics

• To understand the mechanics of working capital you should grow the revenues, assume expenses with inflation and enter inflation into the spare parts.

• Try different working capital assumptions and inspect the IRR calculations

• Go to the operations sheet and examine the working capital levels and the working capital movements

• Go to the private financing and the town financing pages and inspect the cash flow statements and the balance sheets.– In the private financing sheet, the EBITDA is adjusted for the

working capital changes.


Working Capital Illustration

• The diagram below shows the working capital calculations in the operations sheet


Tax and Incentives


Tax and Incentive Sections

• Tax Rates

• Production Tax Credits

• Investment Tax Credit

• Carryforward Switch


Tax Rates

• You can either enter a federal and state tax rate separately or enter the combined state and federal tax rate.

• The combined rate is calculated using the formula:– Combined rate = State rate + Federal Rate x (1-State Rate)

• To see how the taxes are computed, go to the Financing private sheet and to the income statement

• Enter a tax rate and see how the private versus municipal IRR is affected

• The model assumes that a project can be structured to take immediate advantage of negative taxes.


Illustration of Tax Calculation

• The figure below illustrates the tax calculation.


Production Tax Credit

• The production tax credit directly reduces taxes meaning that it is a credit rather than a deduction.– It is allow to escalate at the general rate of inflation– It lasts for 10 years– You must establish the rate for the initial year that

depends on the year the project goes into service.– Inflation in the PTC rate begins at the first day of the

operation.– Examine the effect of the PTC in the operations sheet


Investment Tax Credit

• The investment tax credit is assumed to apply to expenditures made during construction.

• The mechanics of the investment tax credit are shown on the private financing sheet in the sources and uses statement

• The investment tax credit is assumed to not affect the basis of the tax depreciation

• The accounting for investment tax credit involves recording it as a deferred credit and amortizing it to income over the life of the project.


Capital Grant

• The capital grant is a direct funding of the project that is paid during the construction period

• The capital grant is assumed to be paid on an equal level for all periods of construction.


Financing


Interpretation of Summary Outputs


Different Outputs

• The model contains different outputs for different types of analysis– Operating Analysis– Municipal Financing– Private Analysis– Tax Analysis– Flip Analysis– Partnership Analysis


Operating Analysis

• The page named operating analysis shows the effects of the capital expenditure and the operating expense assumptions.

• You should review it to make sure the patterns of expenses, revenues and cash flows are consistent with what you expect

• The analysis is most relevant for a municipality financed project – it does not have the effect of various tax depreciation and other factors


Risk Analysis


Contents

• Risk Variables

• Sensitivity Analysis

• Scenario Analysis

• Spider Diagram

• Tornado Diagram


Risk Variables

• Definition of Risk Variables– Example: Capacity Factor and P99, P90, P55

Cases

• Application of Risk Variables

• Risk Analysis Sheet


Sensitivity Analysis with Spinners

• You have probably seen a bunch of spinner boxes all over the place.

• To apply the spinner boxes, the risk method in the drop down box must be set to sensitivity

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Sensitivity Analysis

• On the sensitivity analysis sheet you can enter variables in different formats and then see how sensitive various outputs are to the range in value of inputs

• This is just like using data tables in excel if you are used to creating data tables

• The reason data tables do not work is because the inputs are in different sheets


Sensitivity Analysis Continued

• The best thing to do with the sensitivity analysis is just to mess around with the macro buttons and try different scenarios

• Do not be afraid to try.

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Scenario Analysis

• The scenario analysis allows you to add various different scenarios to your analysis. It gives you various financial statistics for different combination of inputs.

• To run the scenario analysis– First, enter the sensitivity factors for the various inputs– Second, collect the outputs that you would like to see– Third, run the scenario by pressing the button.– Fourth, change various parameters such as the debt

leverage, the contract rate or other factors to evaluate how they affect the sensitivity table


Updating Scenario Analysis

• To update the scenario analysis– Simply enter new numbers for the sensitivity

factors– Run the UPDATE macro – it should already

be set-up with the range names unless you want to change the output variables or add scenarios etc.


Using the Drop-Down Box in Scenario Analysis

• Once the risk method is set to the scenario method, you can change the selection in the drop down box and the variables will change.


Running Spider Diagram

• The spider diagram works by entering ranges of possible outcomes of various variables, moving up or down from the base case.

• To update the spider diagram with different ranges in value or a different base case or a different structure such as different debt leverage, just press the update button.


Running a Tornado Diagram

• The tornado diagram works in a similar way as the spider diagram – you enter values for the downside and upside case that are appropriate and then you press the update button.


Running Data Tables


Hybrid Modes – Partnership or Flip Structure


Complex Structures and the Simple Mode

• Complex structures can be operated either in the simple mode or the detailed mode.


Printing Reports


Summary

• Use project IRR to evaluate risks with break-even analysis and scenario analysis – Risks of electricity price changes are very different than risks of wind

speed varying from year to year• Understand the perspective of private investors if considering using

private ownership– Return earned by private investors– Debt capacity of private model

• Run similar risk analysis with private ownership and municipal ownership to understand the effect of risk allocation

• Consider the variation in key financial variables and review other studies

• Carefully consider risk allocation in private analysis • Focus on the town savings components in the flip analysis


Changes

• Fixed date entry• Fixed REC percent• Generation on 360 day yr• Tests of Entering 100%• Fix the Decommissioning Bug• Period bug• Contract bug• Contingency bug• Revenue items – shared savings


Future Changes

• Tax depreciation that is calendar year dependent

• Decommission expense split in hybrid mode

• Separate working capital in the private and hybrid mode

• Check scenario analysis


• Check the financing percent in financing page

• Alert if not always a formula

• Fix REC Contract/Spot

• Overhaul Cost and Down time

• Fix the Debt Sizing


• Assumptions and Summary Sheet

• Hiding rows when print summary


Documentation of Project Finance Model for Wind Projects 9/14/20151.

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Transcript of Documentation of Project Finance Model for Wind Projects 9/14/20151.