XYZ solar power Global IPO

A silent (so far) revolution has been pioneered for Indian renewable companies

  1. Varun Sethi
    A silent (so far) revolution has been pioneered for Indian renewable companies
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    XYZ solar power Global IPO
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    • 1. CAVarun Sethi [CA, B.Com(H), CISA] Key Skill Sets 1. Financial reporting under IFRS/US GAAP and India GAAP. 2. End to end life cycle management of several • M&A deals and • fund raising (IPO, and PE), • Project finance deals in sectors especially real estate, e- commerce/retail and FMCG. 3. Design and reviews of financial models, business plans, annual operating plans. 4. GL management,Internal and External audits, Process and risk management,banking and taxes. Expertise in Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 2. CAVarun Sethi 09899766487 Solar Industry – The Business models (Utilities/ IPP/NUG) 20156 Upstream segment •R&D •Manufacturing of Solar Cells, Modules and Panels Midstream segment • Racking and • Hardware • Inverters/ Batteries/ Storage systems Downstream segment •End to end Installation - Utility/Commercial/ Rooftop customers •Ownership,of Solar Energy Systems •Operations and maintenance 1. Yingli Solar 2. First Solar 3. Trina Solar 4. SunEdison 5. SunPower 1. Enphase Energy 2. NRG Energy 3. Exide and SuKam 1. Solar City 2. Vivint Solar 3. XYZ Power 4. RenewPower 5. InoxWinds BUSINESS MODEL GLOBAL AND INDIAN PLAYERS Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 3. CAVarun Sethi 09899766487 Solar (Power) Industry –The Indian Ecosystem 20157 Indian Solar (Power) Industry Ecosystem (Utilities/NUG/IPP) MNRE Electricity Act, 2003Regulators: CERC/ SERC Energy Exchanges (IEX, PEI) RPO/REC Renewable EnergyAct, 2015 National Power Grid (PGCIL) Regulators: DIPP, RBI, CCI Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 4. CAVarun Sethi 09899766487 Indian Solar (Renewables) Industry Regulation and Policy Investment and other subsidies Foreign Direct Investment (‘FDI’) Foreign Equity • India permits FDI up to 100 percent in the sector under the automatic route in Renewable Energy Generation and Distribution projects that are subject to the provisions of the Electricity Act of 2003. • Under the Act, no prior approval of regulatory authorities is required. External Commercial Borrowings/Medium term Notes/ FCCBs • RBI has expanded the definition of infrastructure to cover sector such as Energy which in turn covers sub-sectors such as Electricity generation/transmission/distribution,Oil pipelines,Oil/Gas/Liquefied Natural Gas (LNG) storage facilities,Gas Pipelines (includes city gas distribution network). • With a view to strengthen the flow of resources to infrastructure sector, RBI has also now permitted raising ECB for project use in SPVs in the infrastructure sector under the automatic route/approval route, as the case may be. 20159 Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 5. CAVarun Sethi 09899766487 Indian Solar (Renewables) Industry Regulation and Policy Under Indian Income tax Act, 1961 : Tax holiday under the domestic income tax law • Undertakings engaged in the generation and/or distribution of power has been offered a 10-year tax holiday for renewable energy plants if power generation begins before 31 March 2014.This date has not been extended as there was a vote on account budget. • However,the plants have to pay a minimum alternative tax at the rate of approximately 20 to 21 percent (based on the income),which can be offset in future years (6/10 years). 201510 Presentation for XYZ Power : CA Varun Sethi Private and Confidential Operating subsidies Feed-in tariff Generation Based Incentives (GBI) To attract foreign investors,the government has taken several initiatives such as introducing GBI schemes to promote projects under Independent Power Producers (IPP) mode for wind and solar power. Accelerated depreciation Under the domestic income-tax law, companies involved in renewable energy such as solar and wind was provided with accelerated depreciation at 80 percent. However, the government has restricted the accelerated depreciation of 80 percent to windmills installed on or before 31 March 2012.
    • 6. CAVarun Sethi 09899766487 Indian Solar (Renewables) Industry Regulation and Policy Jawaharlal Nehru National Solar Mission (JNNSM) The objective of JNNSM, which was launched in 2010, is to establish India as a global leader in solar energy and to deploy 100,000 MW of solar power capacity by 2022. Besides the national program, solar programs at the state level are also driving solar growth in the country. 201511 Presentation for XYZ Power : CA Varun Sethi Private and Confidential Quota obligations Renewable Purchase Obligation (RPO) The National Action Plan on Climate Change (NAPCC) has recommended renewable purchase obligation (RPO) target of 10 per cent by 2015 and 15 per cent by 2020 at the national level. To meet RPO targets, REC market has been introduced and RECs started trading in Feb 2011. Enforcement of RPO will create the volumes needed for the REC market.
    • 7. CAVarun Sethi 09899766487 Indian Solar (Renewables) Industry Regulation and Policy Carbon Credits and Clean Development Mechanisms (CDMs) The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol.The mechanism allows developed countries with a green house gas (GHG) reduction commitment to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. India is the second largest seller of carbon credits.The country is also a leading destination among non- Annex 1 countries with regards to CDM implementation. It has the highest rating of any CDM host country,with 32 percent of the world total of 1,081 projects registered with CDM EB. 201512 Presentation for XYZ Power : CA Varun Sethi Private and Confidential IndirectTax and fiscal incentives The Central Government has given various incentives on setting up the renewable energy power project which includes exemption from customs and excise duties on specific goods required for setting up the renewable energy projects. Furthermore,some of the state governments have provided the incentives in the form of aVAT at a reduced rate (5 percent) whereas the other states levy aVAT of 15 percent.
    • 8. CAVarun Sethi 09899766487 Indian Solar (Renewables) Industry Regulation and Policy Tax planning and structuring For investors based overseas, an entry strategy for India is highly important.To achieve tax efficiency with regard to taxability of gains on sale of shares, many companies opt to route the investments through an intermediate entity in a tax-friendly jurisdiction. In addition, the renewable energy sector is capital intensive, so investing companies need to carefully explore the options available for funding their projects and repatriating profits in a tax-efficient manner. 201513 Presentation for XYZ Power : CA Varun Sethi Private and Confidential EPC contracts The procurement of goods and supply chain structuring play a vital role in the solar power project costs, since the tax rates are different for procurement of goods from outside India, from other states or from the same state. Generally, the EPC contractor also undertakes the operation and maintenance of the power plant.The taxability of an Operation and Management (O&M) contract has been the subject of disputes in various decisions.
    • 9. CAVarun Sethi 09899766487 Solar Industry – Unique IFRS Accounting Issues for Renewable Energy Companies 201515 IFRS A/c for Unique Accounting Issues for Renewable Energy Companies 1. Significant Government Incentives / FIT/RPO/REC 2. Long term contracts for the sale of electricity 3. Viability Gap Funding (VGF)/ Financial closures 4. Long term contracts for the sale of electricity 5. Sale-Leaseback structures – Utility and Non Utility generators (IPP/NUG) 6. ARO: Obligations to remove plant and equipment at the end of contract. Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 10. CAVarun Sethi 09899766487 Understanding and identifying IFRS /US GAAP A/c issues Effective Yield / Tax Credit Accounting Consolidation A/c Equity Method (ASC 810/ FIN 46R) FairValue Accounting (ASC 825) LeaseAccounting Real Estate Accounting Numerous IFRS/ US GAAPA/c issues. 16 IFRS /US GAAP A/c for Investor Level GAAP Accounting Investor Level GAAP Accounting 1. Variable interest entities. 2. Presentation of non-controlling interest (liability vs. equity). 3. Equity methodVs. Hypothetical liquidation at book value (HLBV) methodology IFRS /US GAAP A/c for Project Level GAAP Accounting Project Level GAAP Accounting 1. Project finance structures. 2. Sources of financing (tax equity, RECs, grants, rebates, sponsor equity, debt, etc.). 3. Investor exit strategies (flip, put, call provisions). 4. Generation based Incentives/ Production based rebates Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 11. CAVarun Sethi 09899766487 Solar Industry – Revenue Recognition & other Key Accounting and IFRS considerations IFRS 15: Revenue Recognition New standard supersedes the industry-specific guidance on long- term power sales arrangements in ASC 980, Regulated Operations, ’NONUTILITY POWER GENERATION ENTITIES’ will apply the new standard to these arrangements. 1. The Company generates revenue through power purchase agreements,rebate incentives,solar renewable energy certificates (“SRECs”) sales and solar energy system sales. 2. The Company sells energy to customers through power purchase agreements or leases solar energy systems to customers through leases. 3. The Company has determined that these contracts should be accounted for as operating leases and, accordingly,solar energy systems are stated at cost, less accumulated depreciation and amortization. 4. The Company considers upfront rebate incentives earned from such systems to be minimum lease payments which are recognized on a straight-line basis over the life of the long-term customer contracts 5. The Company applies for and receives SRECs in certain jurisdictions for power generated by its solar energy systems.The Company typically sells them to other companies directly, or to brokers,to assist them in meeting their own mandatory emission reduction or conservation requirements.The Company recognizes revenue related to the sale of these certificates upon delivery. 201517 Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 12. CAVarun Sethi 09899766487 Solar Industry – Key Accounting and IFRS considerations IFRS A/c for Deferred Financing Costs Costs incurred in connection with obtaining debt financing are deferred and amortized utilizing the straight-line method, which approximates the effective- interest method, over the term of the related financing. IFRS A/c for Deferred offering costs Deferred offering costs, which consist of direct incremental legal, consulting, banking and accounting fees relating to the anticipated initial public offering (“IPO”),are capitalized.The deferred offering costs will be offset against IPO proceeds upon the consummation of the offering. IFRS A/c for Government and other incentives IAS 20 : Deferred revenue includes rebates and incentives received from utility companies and various government agencies which are recognized as revenue over the related lease term of 20 years. 201518 IFRS A/c for Asset Retirement Obligations Asset retirement costs must be capitalized as part of the related property, plant, or equipment when a liability for an asset retirement obligation is initially recognized. IFRS A/c for Stock-Based Compensation Stock-based compensation expense for equity instruments issued to employees is measured based on the grant-date fair value of the awards.The fair value of each employee stock option is estimated on the date of grant using the Black-Scholes- Merton option-pricing valuation model. Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 13. CAVarun Sethi 09899766487 Solar Industry Key Operating Metrics and Non-IFRS measures SolarGridandNonGrid - KeyOperatingMetrics • Solar Energy System Installations, incremental and cumulative Number of solar energy systems installed on customers’ premises/Self owned. as an indicator of historical growth and as an indicator rate of growth from period to period. • Megawatts Installed and Cumulative Megawatts Installed Megawatts installed represents the aggregate megawatt nameplate capacity of solar energy systems that have been installed during the applicable period. Cumulative megawatts installed represents the aggregate megawatt nameplate capacity of solar energy systems that have been installed. • Estimated Nominal Contracted Payments Remaining Estimated nominal contracted payments remaining equals the sum of the remaining cash payments that our customers are expected to pay over the term of their agreements with us for systems installed as of the measurement date. • Estimated Retained Value (under energy contract + Renewal) Estimated retained value represents the net cash flows, discounted at 6%, that we expect to receive from customers pursuant to long-term customer contracts net of estimated cash distributions to fund investors and estimated operating expenses for systems installed as of the measurement date. 201520 Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 14. CAVarun Sethi 09899766487 Solar Industry –The technology and cost 201522
    • 15. CAVarun Sethi 09899766487 Solar Industry –The Falling costs – Grid parity Source: International Renewable Energy Agency,World Energy Future conference in Abu Dhabi Jan 2015. Cost of Panels and Modules Panels to fall in price to $US0.50/watt • Companies like SunEdison have publically targeted $0.40 cent per watt panels by the end of 2016, and manyTier 1 Chinese manufacturers are achieving sub $0.50/w already in 2014. Installation Costs Installation costs will fall by one third in the US • Cost reduction on the installation side will come primarily from scale benefits, and could fall from $0.65/w to $0.45/w. Energy storage costs Inverter and racking cost are also declining • Inverter prices typically decline 10-15 per cent per year, Deutsche Bank says, and it expects this trend to continue into the future. • Racking and other balance of system costs given ongoing efficiency improvements, streamlining, and potential advances in materials will lead to incremental improvements, from around $0.25/w to around $0.17/w. 201523 CAC Sales/Customer Acquisition Cost will fall even further • Deutsche Bank sees substantial room for improvement over the longer term in cost per watt terms – from $0.50/w to $0.20/w – as solar gains mainstream acceptance, Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 16. CAVarun Sethi 09899766487 Solar Industry –The technology http://reneweconomy.com.au/2015/graph-day-plunging-cost-renewables-49704 201524 Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 17. CAVarun Sethi 09899766487 Solar Industry – Global Experiences and Learnings United States of America Rooftop Solar Energy: American view 1. According to the Solar Energy IndustriesAssociation's (SEIA) Q3 2014 U.S. Solar Market Insight Report, the U.S. residential solar market exceeded the 300 MW in a quarter for the first time in history. 2. Residential continues to be the most reliable market segment,now growing 18 out of the 19 quarters. 3. GTM Research forecasts it to exceed the non-residential segment in annual installations for the first time in more than a decade. Utilities too in the race! Several utilities in US, Germany andAustralia offer to supply solar deployment / lease schemes to their consumers Virgin/High growth market According to GTM Research, an industry research firm, the U.S. residential solar energy market is expected to grow at a compound annual growth rate, or CAGR, of approximately 37% from 2012 through 2018.Residential distributed solar has currently penetrated less than 1% of its total addressable market in the United States. 201525 Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 18. CAVarun Sethi 09899766487 Solar Industry –Latest Solar news (2013 & 2014) (Solar project so large (4,000 mw),it would dwarf all others A deal was signed between the Indian Ministry of New and Renewable Energy, the Ministry of Heavy Industries and Public Enterprises,and the Ministry of Power to set up what they call an "ultra mega solar power project" in Rajasthan.At 4,000 MW of capacity, it would be by far the world's largest. 7500 MW solar project • Record-shattering 5,000 megawatt & 2,500 megawatt solar projects get green light in Indian state of Jammu and Kashmir • 7,500 MW is about three-fourths of the entire solar power capacity in the United States at the end of the 3rd quarter of 2013. China China added more solar capacity in 2013 than any other country ever has in a single year (12GW) The country expects to install 14 gigawatts in 2014. 201526 First global solar plane flight to stop in India, Myanmar,U.S Swiss pilots Bertrand Piccard and Andre Borschberg announced the Solar Impulse 2 aircraft will depart the United Arab Emirates on their historic adventure in late February or early March, 2015 making a total of 12 planned stops. Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 19. CAVarun Sethi 09899766487 Solar Industry – Emerging trends and latest Solar news (2013 & 2014) World Energy Future Conference 2015,Abu Dhabi. The cost of solar was competing with traditional sources of energy, and would not be derailed by the plunge in the oil price. Cleantechnica. com (Accessed jan 2015) Solar could extend its reach of “grid parity” to 80 per cent of global markets within the next two years, assuming a 40 per cent cut in solar costs by the end of 2017. China China added more solar capacity in 2013 than any other country ever has in a single year (12GW) The country expects to install 14 gigawatts in 2014. 201527 First global solar plane flight to stop in India, Myanmar,U.S Swiss pilots Bertrand Piccard and Andre Borschberg announced the Solar Impulse 2 aircraft will depart the United Arab Emirates on their historic adventure in late February or early March, making a total of 12 planned stops. Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 20. 29 CAVarun Sethi 09899766487 Public Company Transformation Preparedness – Pre IPO and Post IPO Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 21. SoX Act/ JOBS Act SEC/PCAOB/FINRA 30 CAVarun Sethi 09899766487 Public Company Transformation US IPO – Governing legislation/ regulators Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 22. IFRS Reporting SoX Certifications Form 10Q/ 6K Form 10K/ 20F FPI – Foreign private issuer EGC - Emerging growth company 31 CAVarun Sethi 09899766487 Public Company Transformation Concepts, Compliances and Reporting obligations Pre and post IPO Presentation for XYZ Power : CA Varun Sethi Private and Confidential
    • 23. CAVarun Sethi 09899766487 TYPICAL IPO TIMETABLE Appointmentof(Aug) IPOpreparednessteam 1.Realisticbusinessplan 2.Corporatepresentation Month X, 15 X+3 1.AppointmentofInvestment/Merchant bankers,meetingResearchanalyst,Org.meet etc. 2.Lawyers(DiscussiononVDRetc) 3.IFRSAuditors SuccessfulFloatation X+5 X+7 1.IFRSAuditFY13,14,FY15 2.ESoPteam 3.DueDiligencebybankersand lawyers 4.CorporateGovernance(CG) compliances Appointmentof (Sept.) 3.Transaction structuring(FPIs) 4.IFRSconsulting • END TO END PROJECT MANAGEMENT including setting up strong reporting function/ dealing with regulators • Pre IPO and Post IPO: Financial Reporting and Investor relations support IFRS financial reporting support. CG support X+8 KeyActivities: 1.RegistrationStatement/ DRHPFiling 2.SEC/SEBIqueries 3.Investorrelations 4.Investormeetings •Investor Roadshows •Timingthe market •DRHP amendments •IPOPricing X+9 32 Presentation for XYZ Power : CA Varun Sethi Private and Confidential
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