Documentation of Project Finance Model for Wind Projects

1. Documentation of Project Finance Model for Wind Projects www.edbodmer.com

2. Contents • Introduction • Model Modes • Simple Mode • Detailed Mode • Risk Analysis • Interpretation of Outputs • Partnership and Flip Structure • Alternative Power Contracts www.edbodmer.com

3. 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. www.edbodmer.com

4. 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. • edbodmer@aol.com • www.edbodmer.com • 1-630-886-2754 www.edbodmer.com

5. 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 www.edbodmer.com

6. 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 www.edbodmer.com

7. 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 www.edbodmer.com

8. Model Modes www.edbodmer.com

9. 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 www.edbodmer.com

10. 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. Code Number that drives calculations www.edbodmer.com

11. 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 www.edbodmer.com

12. 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. www.edbodmer.com

13. 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 www.edbodmer.com

14. 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. www.edbodmer.com

15. 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 www.edbodmer.com

16. Simple Mode www.edbodmer.com

17. 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 www.edbodmer.com

18. 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. www.edbodmer.com

19. 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. www.edbodmer.com

20. 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). www.edbodmer.com

21. 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. www.edbodmer.com

22. 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. www.edbodmer.com

23. 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. www.edbodmer.com

24. 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 www.edbodmer.com

25. Financial Inputs First set the target coverage and then press the set private button www.edbodmer.com

26. 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) www.edbodmer.com

27. 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. www.edbodmer.com

28. 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 sign www.edbodmer.com

29. 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. www.edbodmer.com

30. 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. www.edbodmer.com

31. 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) Date for the start of inflation www.edbodmer.com

32. 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. www.edbodmer.com

33. 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. www.edbodmer.com

34. 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. www.edbodmer.com

35. 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 www.edbodmer.com

36. 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. www.edbodmer.com

37. 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 www.edbodmer.com

38. 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 www.edbodmer.com

39. Detailed Mode www.edbodmer.com

40. 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 www.edbodmer.com

41. Contents for Detailed Mode • Project Phases • Development Expenditures • Construction Expenditures • Depreciation Expense • Revenue Inputs • Expense Inputs • Tax and Incentive Assumptions • Financial Inputs www.edbodmer.com

42. 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 www.edbodmer.com

43. 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. www.edbodmer.com

44. Section 2: Development Expenditures • Discussion • Entering Development Expenditures • Timing of Development Expenditures • Exercise of Development Timing and Amount www.edbodmer.com

45. 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 www.edbodmer.com

46. 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 www.edbodmer.com

47. 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. www.edbodmer.com

48. Section 3: Construction Expenditures Outline • Entering the cost and quantity data • Entering the construction profiles • Entering alternative depreciation profiles • Notes on entering other expenditures • Adding categories • Exercise www.edbodmer.com

49. 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 www.edbodmer.com

50. 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 www.edbodmer.com