FIN2014 Dahlby Maximizing Vls

Copyright 2012 PowerPlan, Inc. All rights reserved.CONFIDENTIAL AND PROPRIETARY.

Unauthorized use, disclosure, or reproduction is strictly prohibited.



Maximizing the value of all your assets to your advantage

March 18th, 2014





Agenda

Outlook on Capex

Financial Management and Information Flow in Asset-Centric Businesses

Property Taxes

Income TaxesTangible Property Regulations

Better Information and Easier Flow of Data Can Improve Your Leverage of SAP

1





Outlook on Capex

Capex Trends in Asset Intensive Industries:

Oil & Gas Mid- and Downstream increased capex spending by 60% from 2010 to 2013

Source: U.S. Census, Annual Capital Expenditures Survey

2

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

U.S. Capex in $Trillions





Financial Management in Asset-Centric Businesses

3

Financial ResultsStakeholder ImperativesBusiness Activities

Assets Self-construction Long-lived DD&A/ Retirements Wide geographic spread Complex

Self-construction Long-lived DD&A/ Retirements Wide geographic spread Complex

Continuous Production Large Services Footprint Capitalized Maintenance Contractor Labor Cost

Allocations

Continuous Production Large Services Footprint Capitalized Maintenance Contractor Labor Cost

Allocations

Operations

IRS: Income Taxes

Regulators: OSM, EPA, FERC, EHS, Permitting

Joint Interest & Ventures: Asset ownership

Debt Holders & Individuals: Cash flow; covenants; royalties

State Govts: Income & Property Taxes; PSCs and PSAs

Overall financial results come from simultaneously attempting to manage performance against multiple, often contradictory, incentives

Financials: Valuation; Compliance, US GAAP, IFRS, CGAAP





Financial Management in Asset-Centric Businesses

4

AssetsSupporting Business AreasStakeholders

IRS: Income Taxes

Regulators: OSM, EPA, FERC, EHS, Permitting

Joint Interest & Ventures: Asset ownership

Debt Holders & Individuals: Cash flow; covenants; royalties

State Govts: Income & Property Taxes; PSCs and PSAs

Financials: Valuation; Compliance, US GAAP , IFRS, CGAAP

Tax, Accounting, and Operations

Regulatory Accounting and Operations

Office of the CFO

Finance and Accounting

Finance, Income Tax, and Treasury

Real Estate, Operations, Engineering, Planning, Accounting and Tax





Capital and Cost Information Flow

IncomeTax

PropertyTax

Accounting

Regulatory

5

Operations & Engineering

Finance & Planning





Capital and Cost Information Flow


IncomeTax

PropertyTax

Regulatory

6

Finance & Planning

Accounting






IncomeTax

PropertyTax

Regulatory

7

Finance & Planning

In Most Organizations Multiple Data FeedsFlow Between Key Departments

Accounting





Accounting

Example Challenges from Information Flows


IncomeTax

PropertyTax

RegulatoryToo Much Accounting

In Operations

Difficult Cost SegregationGhost Assets

Limited Cost SegregationTangible Property Regulations

Slow to CloseLagging WIPComplexManual Spreadsheets

Difficultly GettingUpdated Forecasts

SeparateRegulatory

Books

8

Finance & Planning

Multiple Books(e.g. Local, GAAP, IFRS)





Accounting

Example Challenges from Information Flows


IncomeTax

PropertyTax

RegulatoryToo Much Accounting

In Operations

Difficult Cost SegregationGhost Assets

Limited Cost SegregationTangible Property Regulations

Slow to CloseLagging WIPComplexManual Spreadsheets

Difficultly GettingUpdated Forecasts

SeparateRegulatory

Books

9

Finance & Planning

Multiple Books(e.g. Local, GAAP, IFRS)





Trends in System Landscapes - Gartner

Gartner sees market trends shifting

PowerPlan is an example of a System of Differentiation adjacent to ERPs like SAP

10

Source: Gartner

Systems of Innovation

Systems of DifferentiationSystems of Record



ERP





Integrated Capital and Cost Information Flow


Accounting

IncomeTax

PropertyTax

Regulatory

11

Finance & Planning







ERP



Accounting

IncomeTax

PropertyTax

Regulatory

12

Finance & Planning







ERP



Accounting

IncomeTax

PropertyTax

Regulatory

13

Finance & Planning

Source of the Truth

+ SAP





WHY SHOULD A COMPANY CARE?

14






Reduced Risk Fewer Spreadsheets


Operations Focused On Work/Costs/Assets Not Accounting

Regulatory Automated Regulatory TransformationImproves Credibility with Regulators

PropertyTax

Detailed Assets Drives Property Tax Minimization

IncomeTax

Detailed Assets and Automated Processing Yields Income Tax Optimization

Accounting Automated Reporting for All Stakeholders/Books (i.e. IFRS)

Finance & Planning

Up to Date Forecasts Aligned with Business Objectives

Business Outcomes

15





EXAMPLE 1: PROPERTY TAXES

16





Property Taxes 101

Annual tax based on valuation

Exemptions and exclusions help drive down the cost of property taxesVary from State to State, even County to CountyChange Frequently

Tangible Personal Property (TPP) Tax is based on companies reporting to the taxing authority

Valuation Methods vary as wellCost ApproachMarket Value ApproachIncome Approach

Not uncommon for customers to have from thousands to 40,000+ property tax bills in the U.S.

17





It Can Make a Huge Difference

Example in Practice:

Company ABC had only one asset class for tracking pipe assetsPipe assets in this state could reported as plastic or steel pipeDepreciation schedule for property tax on plastic pipe was much fasterBreaking down the one asset class into different asset categories saved this company >$5M annually

18





Property Tax Challenges: Asset & Cost Information

Many property tax returns require or allow reporting of historic original cost

Did you ask for original cost the last time you acquired assets from another company?Where is the information about historic cost being maintained, how did purchase accounting impact it?

Data requirements vary by locationHow do you set accounting policy when your assets span multiple tax jurisdictions?Is it like fractions ?Use the lowest common denominator

19





Property Tax Challenges: Ghost Assets

Does your company have Ghost Assets?

Historically, a range of 15% to 25% of tangible personal property costs need to be removed from the property record in order to expunge ghost assets.

Source: The CPA Journal, Property Record-Keeping and Section 404 Certification, By Thomas M. Brown and Gerald J. Mehm

20





Final Thoughts on Property Taxes

Higher Quality and More Granular Data is Key

Property Taxes are Annual If you miss retiring an asset this year, youll pay property tax every year in the future

Property Taxes are Above the LineDirect impact to EBITDA and EPS

Property Taxes are Cash out the Door

21





EXAMPLE 2: INCOME TAXES

22





Hot Topic: Tangible Property Regulations

IRS issued Final Regulations issued in September 2013, effective 1/1/2014

Significant update in how the IRS views capitalizationPotential to impact Financial Capitalization RulesNot optional: All business tax payers must do somethingFocus on consistency between all tax payers

Since nearly all businesses have some kind of fixed assets, virtually every business is affected by the new regulations. - Scott B. Kaplowitch, CFO.com

23





History of Tangible Property Capitalization Regulations

24

Proposed Regulations Issued in 2008

IIRs Released: Rev. Proc. 2002-65 (Railroad Track Assets) 75% Track

Maintenance Allowance provided Rev. Proc. 2011-27 (Wireline Network Assets) 12% Network Asset

Maintenance Allowance Rev. Proc. 2011-28 (Wireless Network Assets) 5% Network Asset

Maintenance Allowance Rev. Proc. 2011-43 (Electric T&D Assets) 10% linear asset safe

harbor Rev. Proc. 2013-24 (Electric Generation Assets) UOPs and Major

Components Definitions Provided

In September 2013, the IRS issued final regulations.

IIRs in Process: Natural Gas T&D Assets Retail Industry Assets





Summary of Tangible Property Regulations

IRS guidelines look to defines the Unit of Property for tax reporting purposes

Building have seven specific units of propertyPlant Equipment generally looks for functional interdependence of assetsOther industry specific guidance

Tax payer reviews expenditures to determine the impact on unit of property

Betterment, Adaptation, or Restoration Significance and Facts and CircumstancesDoesnt matter if capital or expenseof financial reporting

Several safe harbors exist

25





Key Considerations for Tangible Property Regulations

CapEx for Book &

Repair for Tax

Compliance & Work PapersOther Tax Interactions

Full Asset Life Tracking & Retirements

26





2014 Key Initiative

Most Tax Payers are adopting a strategy in 2014 for the first time

IRS requires filing a change of accounting method for 2014Which safe harbors are strategic?

Compliance RequirementsWork papersCalculationsDont double count anything

27





Better Information Flow Can Have a Real Impact

Support Tangible Property Regulations

Cost SegregationExample of 3.52% NPV using 6% discount rate

28

Source: http://www.costsegs.com/





Benefits of a Cost Segregation Study with New Regs

Source: AICPA, The Tax Advisor, Temporary Regulations Create New Applications for Cost-Segregation Studies http://www.aicpa.org/publications/taxadviser/2012/september/pages/clinic-story-03.aspx

Example 1: Alice replaced 30 windows to her office building for which she previously engaged a cost segregation study. Under the final regulations, Alice must determine whether the expenditures constitute improvements to the building system. She refers to the cost segregation study to find there are 300 windows in the building. Based on her analysis of the guidelines, the overall physical building structure; therefore, the replacement does not constitute an improvement to the office building. Alice may deduct as repair and maintenance costs any expenditures not otherwise required to be capitalized under other provisions of the Code or regulations.

29





Benefits of a Cost Segregation Study with New Regs

Example 2: Brian builds a new office building for $10 million and enlists an engineering firm to perform a cost segregation study. Brian eventually renovates the office building and capitalizes its expenditures based on the improvement guidelines in the final regulations. The scope of this renovation includes the disposal of 4,500 square feet of interior walls, 1,000 square feet of ceiling tiles, and 500 linear feet of electrical wiring. The previously issued cost-segregation report includes details listing the unadjusted depreciable cost per unit of each retired component. Brian uses the specific identification method to identify to which capital accounts the disposition applies. Based on the details provided in the study, Brian calculates the loss he may recognize on the retired assets.

Source: AICPA, The Tax Advisor, Temporary Regulations Create New Applications for Cost-Segregation Studies http://www.aicpa.org/publications/taxadviser/2012/september/pages/clinic-story-03.aspx

30





OTHER IMPACT AREAS

31






Accounting

IncomeTax

PropertyTax

Regulatory

32

Finance & Planning

Property Tax and Income Tax are just two of the stakeholders in the new paradigm of Capital





CONCLUSIONS

33





Key Take Aways

Capex is Growing

Information is required from and for a large group of internal and external stakeholders, each with unique requirements

Challenges of Asset-Centric Businesses include: Property Tax, Income Tax, Regulatory, etc.

Gain the most from your SAP solution with PowerPlan: Improve information flow Address the information requirements of your internal and external

audiences Leverage available tools to increase the value of SAP for your company

For More Information: http://www.powerplan.com http://www.irs.gov/pub/irs-irbs/irb13-43.pdf

34





Jim DahlbyVice President, PowerPlan, Inc.

[email protected]

Questions?

35





Disclaimer

SAP, R/3, mySAP, mySAP.com, SAP NetWeaver, Duet, PartnerEdge, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. All other product and service names mentioned are the trademarks of their respective companies.Wellesley Information Services is neither owned nor controlled by SAP.

Documents

FIN2014 Dahlby Maximizing Vls