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April 22, 2020
Decrypt the asset profit model of hydropower station
General hydropower development has the characteristics of huge initial investment, long construction period, high leverage based on loan funds, low operating costs, long investment recovery period, and strong cash flow. After the hydropower station is completed, its operation is relatively simple.
The income of hydropower stations mainly depends on the amount of power generation (unit utilization rate), power structure (distribution between high and low peaks and valleys) and the price of Internet access. control. The unit utilization rate and power structure are basically dependent on the weather, but for those gradient hydropower plants with annual or multi-year adjustment capabilities, effective scheduling can not only improve the unit utilization rate, but also in the dry period of tight power and high electricity prices Distributing more power, such hydropower stations will have huge economic benefits. For example, the Xiaowan Power Station with adjustment capability on the Lancang River will bring huge compensation and adjustment benefits to the downstream Manwan, Dachaoshan and Jinghong Power Stations.
In the cost structure of hydropower stations, taxes and surcharges probably account for 1% -2% of the main revenue. The operating costs are mainly discounts and deferred expenses. Others include reservoir funds and water resources fees. Sales expenses are basically negligible, and management expenses account for about 5% of the main revenue. The most critical expense is financial expenses. Since 80% of the investment is loan investment, this expense is huge and sensitive to interest rates.
The income of a hydropower station depends objectively on the incoming water, and subjectively it depends on its own ability to regulate.
In the cost structure, the fixed costs are mainly depreciation and amortization and a large proportion of financial expenses, while the variable costs are extremely limited, which makes the profitability of the hydropower station extremely sensitive to changes in income (high marginal benefits). When revenue increases (increased power generation or percentage of electricity during dry periods), the cost corresponding to this newly added revenue is basically zero, and gross profit is converted to operating profit to the greatest extent, contributing to a substantial increase in net profit; when revenue When there is a decline, the cost of the hydropower station is basically unchanged, and the part of the revenue decline will also be converted to the greatest extent to a decline in profits or an increase in losses.
There are two cases that illustrate this problem.
First, due to better water supply and increased power generation at the Ertan Power Station in 2008, the company's revenue increased by 11%, while operating costs rose only slightly by less than 1%.
Second, in 2011, Yangtze Power acquired 12 units of the Three Gorges Underground Power Station for 12 billion yuan. Based on the average annual power generation of 3.511 billion kWh, the company will increase its net profit by 960,000 yuan per year, and each time it generates over 100 million The kilowatt-hour electricity can increase the company's net profit by about 17 million yuan. In other words, power generation increased by less than 3% and net profit increased by 17.7 times. However, the management of Changdian did not mention that on the basis of this power generation, when 100 million kilowatt-hours of electricity are generated less, then the underground power station, which was purchased for 12 billion yuan, will face losses.
Generally, the income of hydropower stations mainly depends on the weather. The income characteristics not only have seasonal fluctuations, but also have annual fluctuations, which leads to large fluctuations in the profitability of hydropower stations.
The older the asset, the higher the valuation
Among the costs of hydropower stations, the two largest parts, “depreciation and amortization” and “finance expenses”, are only relatively fixed. Assuming that the interest rate remains stable during a long repayment period, an independent hydropower station can repay the loan year by year through depreciation and the accumulation of profits, and its financial cost will also decrease year by year.
Depreciation and amortization are non-cash payment expenses. Hydropower stations generally adopt the average method of years, and the fees are very fixed. There are also very few hydropower stations that adopt the "workload method" because of the need to regulate profits. Source power. Hydropower plants use "depreciation and amortization" costs for loan repayment, rolling development or other investments, which will create "additional" value-added benefits for shareholders. Either way, a hydropower station can use very little capital (20 %) Through depreciation and the accumulation of profits, it takes about 20-25 years to repay the loan (see the discount policy of the hydropower station at a specific time), so that the full amount belongs to the shareholders, and then the cash flow generated by this hydropower asset is still It is at a stable level. Therefore, after the depreciation and deferred expenses of the hydropower station are paid, its revenue will show the characteristic of "sudden increase" due to the substantial reduction in expenses.
This can be seen from the Gezhouba Hydropower Station, which has been operating successfully for 30 years, and the depreciation and loans have been reset to zero. From the current situation, the dam can still be used normally for at least 100 years, and the unit can still survive after 30 years of wind and rain At full load operation, the cost electricity price is only 4-5 cents before it is injected into the Yangtze Power. According to the current on-line price, its profitability is extremely strong.
In fact, all hydropower stations will have this feature after 20-30 years of operation.
The above analysis shows that independent hydropower assets can maintain sustained endogenous growth capacity only by reducing financial expenses through "depreciation and repayment of loans"; at the moment when the loan is depreciated and returned to zero, the profitability will also be on a higher platform. The older the assets, the more profitable, the older the higher the valuation.