By Kahlil Carmona, Corporate Finance Manager, AEV
We at the AEV Investments and Corporate Finance Group almost always look forward. We look for opportunities: deals and projects that can grow our business and uplift communities in the next 10, 20, or even 30 years. Each investment opportunity has many risks to look out for — will we get the tariff that we want? Will we be able to keep costs down? Will we even get to finish construction on time?
Part of what makes these business cases quite daunting is that we need to firmly believe that these expectations will materialize. And to get the Board’s buy-in, we need a robust plan to manage these risks either through getting more information, transferring the risk via insurance, or simply by better managing certain relationships.
We were about to embark on a corporate version of the infamous meme that compares expectations vs. reality.
But what if even after all that planning, our investments still underperform? Enter the Lookback Project — it’s time to diagnose. Here, we assisted Hedcor then-President and COO Carlos Aboitiz in answering the question,“Where is the cash that we expected in the last decade or so?” We were about to embark on a corporate version of the infamous meme that compares expectations vs. reality. It involved digging up archives for models and data that were formed at a time when perhaps half of our team were still in high school.
What made this project particularly challenging, at least back then, was that it started only a few days into the community quarantine last year, which meant that 100% of the project had to be done online, and it was. We found ourselves arranging several Hangouts calls, one after the other – with the previous modeler, colleagues from corporate, and even the grid managers who are hundreds of kilometers away, some of whom were kind enough to accommodate us while they were on the move.
By the end of the first week alone, we had an inkling that we would get used to these phrases that resembled a modern séance, “Are you there?” “Are you with us?” “Can you hear me?” It didn’t stop with Hangouts though. Slides and Drive also allowed us to seamlessly collaborate with teammates who aren’t even in the same region.
By the three-month mark, we were able to do a lookback analysis and present the results of six Hedcor plants, thanks in no small part to the many teams in the Hedcor Group from Finance to Corporate Services to Operations, as well as team leaders and members who have since transferred to other SBUs.
Hindsight is 20/20. From this project, it was clear what we could have done better.
As for the result of the project itself, it highlighted a smorgasbord of issues but we’ll discuss only three for brevity. For starters and perhaps the most prominent of them all: we should not have counted on FiT (Feed-in-Tariff) escalation. It was the Renewable Energy Act of 2008 that prescribed the rules on FiT. In a bid to avoid being too technical, all you need to know are these: (a) the initial rate was Php 5.900/kWh, (b) it was supposed to increase yearly following a prescribed formula driven primarily by inflation, and (c) payment should be prompt. We got A but not B and C: the best we were able to get was a one-time price hike last year and even then, we were able to collect only after months of delay. As to why – one is free to theorize.
The second one has more to do with on-the-job learnings or “tuition” as some of our colleagues in project development prefer to call it. Longer buffers for construction time and more funds set aside for contingencies should have been factored in so we can absorb the major inconveniences in the form of design changes, stakeholder conflicts, and unforeseen geotechnical conditions.
The third is currently ambiguous yet it is something that we wish we are able to forecast more precisely. Aside from tariff, hydrology directly impacts the top line. Too often have we seen insufficient water supply – as Hedcor parlance calls it – as the reason for low production. While it can be attributed to variations in weather, it did prompt a closer look into the way we forecast water levels. Not all of the findings were bad though. We were able to recover more VAT, we got taxed less, and we were able to manage some of the costs.
Hindsight is 20/20. From this project, it was clear what we could have done better. While we can no longer take back our decisions on these past investments, we have a better grasp on: (a) what challenges to look out for – just because government set the rules does not mean it will implement them, (b) how to address the problems we’ve seen – build in more generous contingencies, and (c) identifying what processes warrant improvement – we need to further scrutinize how we forecast renewable resources.
As for the lookback process that we developed, it can be easily and quickly replicated for other Hedcor plants and even in other BUs that require a similar analysis. It also paved the way for allowing them to come up with revised returns expectations on our investments for planning and budgeting.
