Capstone Solar Professionals DOO Solar Webinars for Developers, Owners, and Operators: How to Value Solar Energy Assets Ken Kramer Managing Director and co-founder, Rushton Atlantic, LLC Ken Kramer has more than 30 years’ experience building businesses and consulting on valuation and banking for clients on techniques that support finance, investment, insurance, taxation and financial reporting requirements. Kramer has served in industries that include manufacturing, transportation, telecommunications, power & energy, and infrastructure. Why do you need to know? ? ? If you are building a solar PV system, you don’t need an appraisal to determine costs, but… For financing, you must document asset value (and debt service coverage) for: ? ? ? ? Sec. 1603 cash grants Bank & bond debt Sale/leaseback financing Tax equity ? ? If acquiring an existing facility, you are primarily concerned with its earning power. Also … What could possibly go wrong? What is Value? Types of Value ? Scrap Value ? ? Auction Value Orderly Liquidation Value Fair Market Value in Exchange Fair Market Value in Place Fair Market Value in Continued Use ? ? ? What is Value? Fair Market Value Fair Market Value is the estimated amount at which the appraised property might be expected to exchange between a willing buyer and a willing seller, neither being under compulsion, each having reasonable knowledge of all relevant facts. What is Value? Fair Market Value W hen fair market value is established on the premise of continued use, it is assumed the buyer and the seller would be contemplating retention of the property at its present location for continuation as part of the current operations. An estimate of Fair Market Value arrived at on the premise of continued use does not represent the amount that might be realized from piecemeal disposition in the open market or from an alternative use of the property. Approaches to Value ? Cost Approach ? Depreciated Replacement Cost New (RCN) Net present value of projected after-tax cash flows Based on comparable market transactions, if available ? Income Approach ? ? Market Approach ? Approaches to Value Reconciliation ? ? ? ? Must consider all approaches to value Must consider all facts and circumstances surrounding each asset: ? Age ? Operating history ? Contracts Reason for weighting must be substantiated The market drives value more than any other approach to value. Residual Value ? Net present value, as of residual date, of subsequent after-tax cash flows ? ? Deinstallation, transport and reinstallation of equipment Extension of PPA at existing location Cash Flow Model Inputs ? ? ? ? ? ? ? ? ? ? ? ? ? Capacity 1,250 KW Capital cost $6,400,000 Solar power production 1,482,000 KWH Degradation 0.5% p.a. PPA Pricing $0.12/KWH SREC pricing $0.475/KWH Operating Expenses $52,649 (O&M, Insurance, Monitoring) Inflation 3% p.a. 1603 Cash Grant 30% Depreciation – 5-years MACRS w/ 15% basis reduction Tax Rate 40% Residual Value @ year 20 (inflated) $1,292,800 Discount Rate (After tax) 5.75% Discount Rate Weighted Average Cost of Capital ? WACC = [Kd x %D x (1-T)] + [Ke x %E] – – – – – Kd %D T Ke %E = = = = = cost of debt capital proportion of debt to total capital marginal tax rate cost of equity capital proportion of equity to total capital 5.5% 52% 40% 8.3% 48% ? Ke = Rf + (ß x Rp) + Ru – – – – Rf ß Rp Ru = = = = risk-free rate of return beta common stock risk premium unsystematic or additional risk premium 3.8% 0.9 5% 0 Sample Discounted Cash Flow Model Sample Discounted Cash Flow Model (cont’d.) Sample Discounted Cash Flow Model (cont’d.) Sensitivities - “what if?...” ? ? ? ? ? ? ? Loss of residual Change in PPA rate Change in SREC revenue Less creditworthy offtaker – higher discount rate Bonus vs. standard MACRS depreciation NOL carryforward Maintenance / Reserve / Insurance NPV Impact of Pricing Changes Base Case Without residual Reduced PPA Rate Reduced SREC Revenue Years 6-10 reduced by 50% Higher Discount Rate Weaker off-taker WACC =10% Bonus Depreciation All depreciation claimed in first year Tax Loss Carryforward Project must absorb its own tax losses Cost to move is not economic PPA reduction from $0.12 to $0.11/kwh $8.398 $7.975 (5%) $8.271 (2%) $7.744 (8%) $7.120 (15%) $8.555 2% $8.301 (1%) Questions and Discussion Please enter your questions into the Chat window Ken Kramer Managing Director and co-founder Rushton Atlantic, LLC (646) 290 - 5069 ken.kramer@rushtonatlantic.com Questions John: Discuss valuations for 3 types of solar players 1. Equipment manufacturers like GT Solar 2. Panel manufacturers 3. Installers like principal solar Ken Kramer: ? I would not analogize a big public company to a solar PV installation, but a factory making panels or inverters would be analyzed similarly to what was done here. A solar system is an “electron factory”, with capital costs, operating costs, and revenue streams – no different conceptually from a widget factory in terms of setting up a cash flow model. Questions Scott: Renewable vs. Renewable, I read this morning about the Bonneville Power Authority in Washington state issued a new set of rules governing when they would buy hydropower preferentially over wind – thus re-writing the contracts and revenue estimations that many wind generators were relying on. How can you account for something of this nature when valuing an asset with a 2-decade + life span? KK: The Bonneville situation shows that "stuff happens," and there may be greater (and less predictable) risks in selling power under a "binding" PPA than market participants currently realize. Not having seen this PPA, I would expect legal challenges due to what appear to be unilateral contract changes by Bonneville, but in general you need a cushion to handle the unknown, and there is apparently more unknown out there than we thought. If the world is a more complicated place, the discount rates used to analyze these transactions should be higher to reflect a higher levels of risk. Questions ? Michael: How expensive is an official appraisal like you discuss here, who is typically paying that fee in the PV solar industry, and how often do you need a new appraisal? ? KK: Appraisals are typically done to support financings and acquisitions, generally upfront, but in some cases for periodic portfolio reviews as well. Price is typically a flat fee based on scope of work, calculated from man-hour estimates. The American Society of Appraisers does not allow fees as a percentage of appraised value, because of the obvious potential conflict of interest. Questions ? Ken: Typically, what size of systems need appraisals? In kW or $ ? KK: We are not involved in the residential market, more in inside-the-fence commercial/industrial installations, starting in the hundreds of KW, up to utility-scale plants. Really depends on who is paying for the appraisal and what kind of financing is being used. Questions ? Ken: What impact on valuation does the risk of losing the SREC income carry. This market is unstable and relies on local politics? ? KK: The finance world prefers to see the long-term contracts in SRECs, similar to long-term PPAs. Even if spot SREC markets are higher than long-term markets, it is difficult to base long-term project finance on the assumption those relationships will continue.