Overview of RELCOST Heatmap and Energy Project Financial Analysis Tools

1. Introduction to RELCOST HEATMAP and RELCOST Workshop Accra, Ghana May 13 to 15, 2009 Carolyn Roos, PhD Washington State University, Energy Program roosc@energy.wsu.edu Adapted from PPT by Jeff Ponseness

2. RELCOST Program • Owned by Washington State University (Washington, USA) • Developed by EnSight, a consultancy (Oregon, USA) • Evolved over past 15+ years • Original stand alone model (mid-1980s) • Embedded logic within WSU’s HeatMap program (mid-1990s) • Recently released; stand alone model using Microsoft Excel Spreadsheet template  multiple enhancements

3. Program Overview RELCOST for Financial Analysis of Energy Projects. • Evaluate financial viability of energy projects • Create financial statements needed for support • Quickly evaluate performance visually • Test sensitivity of viability to unknown factors

4. Program Overview Evaluate financial viability of energy projects • General purpose analysis tool • Multiple user-defined products and fuel-sources • Intended for a variety of energy projects • Power generation • District energy • Combined heat and power • Alternative energy • Wind, Solar, Biomass, Geothermal, etc.

5. Program Overview MS Excel spreadsheet template • Template facilitates input: • Rule-of-Thumb and preliminary input • Detailed, project-specific factors • Unprotected spreadsheet: • Create templates of common project types • Any user familiar with Excel can customize e.g country-specific tax structure • Easy integration with other tools • Excel used as output and input for many programs • Extends reporting, analysis, and integration with the tools you use.

6. Program Overview Produces forms stakeholders need to support a project • 20 year analysis period • Pro forma financial statements • Income Statement • Balance Sheet • Use of Funds • Cash Flow

7. Program Overview Quickly evaluate performance visually • “Financial Scorecard”: • Stoplight chart of financial indicators • User-defined thresholds • Plots from Pro Forma Statements

8. Program Overview Test sensitivity of viability to unknown factors • Palette of sensitivity factors • Multiply inputs across many sheets all in one place. • View results on same screen as palette • Easily perform: • Sensitivity analysis • Break-even analysis

9. Program Use Energy projects RELCOST Design and Analysis Programs Policy analysis

10. Program Use • Use in Design and Analysis with HEATMAP and other tools • Energy use, cost • Emissions calculation • Systems design • Plant simulation • Power generation • Renewable energy • Develop Policy analysis • Tax, production credits • Tax relief, incentives • Environmental credits • Evaluate energy projects • Ranking, prioritization • Bid evaluation • Contract negotiation • Funding needs • Sales price, valuation

11. Program Flow Results Model Inputs Calculations X=y/1*(1-d)^n Financial Scorecard Sensitivity Factors

12. Program Flow • Inputs • Plant Operating Factors • Capital Expenditures • Funding Plan • Purchased Fuels • O&M Expenses • Major expenses (overhauls) • Income, Sales • Taxes, Fees • Dividends (shareholder) • Cost escalation • Cash accounts • Results • Income Statement • Cash Flow Statement • Balance Sheet • Use of Funds Calculations X=y/1*(1-d)^n • Financial Scorecard • Life Cycle Cost • Margins • Ratios • Sensitivity Factors • Multipliers on inputs • Income • Fuels • Expenses • Operation • User-defined

13. Input • Plant Operating Factors • Capital Expenditures • Funding Plan • Purchased Fuels • O&M Expenses • Major expenses (overhauls) • Income, Sales • Taxes, Fees • Dividends (shareholder) • Cost escalation • Cash accounts

14. InputPlant Operating Factor RELCOST Tab of screen shot • Dispatch factor • How much of what can be generated occurs when there is demand for it? • Availability factor • How much of the time is the plant available to meet plant demands? • Planned maintenance outages are also modeled here • Operating factor • Combines both dispatch and availability factors. • Factor optionally used by other inputs; • e.g., purchased fuels, O&M expenses.

15. Capital Expenditures • Itemized inputs • 3 General Categories • Expenditures can occur in each project year • Inputs in current dollars, escalated values calculated

16. Capital Expenditures Contingency and overheads

17. Depreciation • “Recovery” of the cost of an asset whose value declines over time • Machinery, equipment, structures, etc. • Three classes of capital expenditures that can be accelerated at different rates. • Plant has longer depreciation life than office equipment.

18. Tax Depreciation • Accelerated depreciation provides a tax incentive and improves economic feasibility, especially in early years Depreciation schedule library • US tax system • Country-specific depreciation methods can be defined

19. Funding Plan • Three fund source types • Multiple types can be used in same project period • Up to 10 sources for each type • Any project year • Multiple investors, lenders • Monthly calculation used for borrowed funds • Short duration loans • Construction financing or working capital. The funding plan indicates the mix and timing of resources used to finance the project.

20. Purchased Fuels Applies operating factors to all project years • Multiple fuel types in same year • Separate inputs for each project year • Energy units can be changed for country-specific standards • Inputs in current dollars, escalated values calculated

21. Operation & Maintenance Applies plant operating factors to all project years for this expense category • Multiple expense categories • Selling & Admin • Overhead • Operating Labor • Insurance, property Taxes Itemized inputs

22. Operating Reserve Deposits & Withdrawals • See “Cash Accounts” • Current account • Operating Reserve account • Save up for major expenses • Major Overhaul, bond payment

23. Major Expenses • Up to 10 expenses • Equipment overhaul • Repeating or one-time • Planned maintenance • Every 3 years shown • Inputs in current dollars • Escalated values calculated

24. Income from Sales Applies operating factors to all project years • Nine sales income types • Can be user defined for specific project needs • Products • Power sales • Heat, cool sales • Co-products • Direct use by-products such as greenhouse for flowers, plants, vegetables • Units can be user defined for country standards • Inputs in current dollars • Escalated values calculated

25. Environmental Credits • Carbon Offset, Renewable Energy Credits, Production Incentives • Four types can be defined • Treated as a source of income • Subject to income taxes • User defined units • Incentive type • Country-specific standards • Inputs in current dollars, • Escalated values calculated

26. Income Taxes and Fees • Tax rules for multiple countries can be included in same template • US tax configuration provided • US tax system features: • Refundable credits • Tax credit carry forward • Multi-jurisdictional • Federal, state, local • Tax rates can vary by project year

27. Dividends • Dividends are annual cash distributions made to investors (shareholders) • After-tax profits are used as the basis for dividends • Retained Earnings = After-tax profit – dividend distributions • Dividend payout policies vary greatly • User defined logic can be created for specific projects.

28. Cost Escalation Forecasts • Escalated costs are calculated using factors from a forecast • Forecast values are user defined • Forecasts enable rapid “what if” sensitivity evaluation • Four (4) forecast types • None – costs are not escalated • Conservative – lowest cost escalation • Likely – most probable escalation • Aggressive – highest cost escalation

29. What if Analysis • Enables risk evaluation of key project factors • Are estimated input values to high? Too low? • Break-even analysis • Threshold analysis • Financial Scorecard improvement • Multi-factor scenarios • Examples: • Capital cost estimation accuracy • Environmental and production incentive impacts • Power, heat sales price impact • Funding plan impacts (cost of capital)

30. Financial Scorecard • User defined performance rules determine stoplight indicators • Investor, financial institution targets • Threshold analysis • Visual project economic health check

31. Results • Pro Forma Statements • Cash Flow • Use of Funds • Income Statement • Balance Sheet • Financial Ratios • Levelized Costs • Life Cycle Cost Analysis • Net Present Value • Internal Rate of Return

32. OutputPlots of Data from Pro Forma Statements New graphs and charts easily added by user

33. Reports - Pro Forma Statements • Cash flow statement • Shows how the project makes a profit for each project year • Income Statement • Shows the project’s financial performance for each project year • Balance Sheet • Shows the project’s financial position for each project year • Use of Funds Statement • Shows how fund sources are used for each project year Using reports: • Gain understanding of modeled results • Supporting data for project proposals • Project prioritization, funding decision support

34. Cash Flow Statement How the project makes a profit Inflows & Outflows • Operations • Financing Activities

35. Income Statement Project’s Financial Performance • Gross Income • Earnings before interest and taxes • Net profit before taxes • Net profit after taxes • Retained Earnings

36. Balance Sheet Project’s Financial Position • The Balance • Assets =Liabilities

37. Use of Funds Statement How Fund Sources Are Used • Sources of funds • Uses of funds

38. Questions ?