CHC China Hydroelectric Corp. American Depositary Share (Each Representing Three Ordinary Shares)

BEIJING, Aug. 15, 2013 /PRNewswire/ -- China Hydroelectric Corporation (NYSE: CHC, CHCWS) ("China Hydroelectric" or "the Company"), an owner, developer and operator of small hydroelectric power projects in the People's Republic of China, today announced its unaudited financial results for the second quarter ended June 30, 2013.

For the second quarter of 2013, revenues from continuing operations (net of value-added tax) declined 6.3% year over year to $29.8 million, due to a 7.6% decline in electricity sold. Despite the revenue decline, non-GAAP net income from continuing operations increased 18.2% year over year to $6.5 million. Non-GAAP net income from continuing operations per diluted ADS increased 33.3% year over year to $0.12. Precipitation during the quarter was 13% below the long-term average for the company, due to lower rainfall in the three main provinces in which the Company operates.

"Results this quarter again confirm the effectiveness of the Company's strategy to mitigate precipitation fluctuations through tight control of operating expenses," stated Mr. Amit Gupta, Chairman of China Hydroelectric. "In the second quarter of 2013, the Company increased its bottom line despite lower revenues, which are dependent on weather and beyond the Company's control. The strong Q2 results are a reflection of management's focus on operational efficiency, cost control, and debt reduction." 

Dr. You Su-Lin, interim Chief Executive Officer added, "This quarter represented a tough comparison with Q2 2012, due to the high rainfall last year and dryer conditions this year. Precipitation was 13% below the long-term average, versus being 10% above the long-term average last year. Nonetheless, non-GAAP net income increased by 18.2%. Our stronger balance sheet, which has more cash and lower debt, is noteworthy. We will continue to focus on operational excellence and improve profitability and our balance sheet."

Operating Highlights

Precipitation in Q2 2013 was approximately 13% below the long-term average, due to dryer conditions in the three main provinces in which the Company operates. In contrast, Q2 2012 precipitation was 10% above the long-term average. Due to less precipitation, electricity sold in Q2 2013 declined approximately 7.6% when compared to Q2 2012. The reduced rainfall resulted in a utilization rate of 49.8% in Q2 2013, compared to 54.3% in Q2 2012.

The following table presents precipitation levels for the Company's three main operating regions as a percentage of historical long term average for the periods indicated.

Precipitation – Percentage of Long-Term Average *+ 

The following table presents some key comparative financial and other information (in US$ millions, except for electricity sold, effective tariff, average effective utilization rate, per ADS data and percentages):

Precipitation levels are one of the principal factors affecting the Company's revenues, profitability and cash generated by operations. Other important factors include, but are not limited to: consistency of precipitation; upstream reservoir conditions; the cascading effects of multiple hydroelectric power projects on a single waterway; and upstream precipitation levels in the Company's river basins. The various provinces in which the Company operates are subject to different weather patterns or systems and precipitation fluctuates from region to region and quarter to quarter.

Second Quarter 2013 Financial Highlights

Revenues

Revenues, net of value added taxes, from continuing operations for the second quarter of 2013 were $29.8 million, a decrease of 6.3%, or $2.0 million, from $31.8 million for the second quarter of 2012. As previously noted, the decrease was principally due to reduced electricity sales. The lower electricity sales resulted from lower precipitation levels in all of the Company's three main operating regions.

The Company sold 563.2 million kWh from continuing operations in the second quarter of 2013, a decrease of 46.5 million kWh, or 7.6%, from the 609.7 million kWh sold in the second quarter of 2012. The effective tariff for the second quarter of 2013 was RMB 0.35/kWh, unchanged from Q2 2012.

Cost of Revenues

Cost of revenues from continuing operations, for the second quarter of 2013 was $9.1 million, unchanged from the second quarter of 2012. Cost of revenues in the second quarter of 2013 primarily included (i) repairs and maintenance costs of $0.4 million, compared to $0.7 million for the second quarter of 2012; (ii) depreciation and amortization (non-cash expenses included in cost of revenues from continuing operations) of $5.8 million, compared to $5.7 million for the second quarter of 2012 and (iii) labor cost of $1.0 million, compared to $0.8 million for the second quarter of 2012.

Gross Profit and Margin

Gross profit from continuing operations for the second quarter of 2013 decreased by 8.8% to $20.6 million, from $22.6 million in the prior-year period. Gross margin for the second quarter of 2013 decreased to 69.1% compared to 71.1% in the same period of 2012 primarily due to decreased revenues and the fixed nature of certain expenditures included in cost of revenues.

Operating Expenses

General and administrative expenses for the second quarter of 2013 decreased 17.8% to $3.7 million, from $4.5 million for the second quarter of 2012. The decrease was primarily due to the closure of the U.S. office and reduction of professional service expenses.

Adjusted EBITDA and EBITDA Margin

Adjusted EBITDA decreased by 10.5% to $23.0 million in the second quarter of 2013 compared to $25.7 million in the same period of 2012. Adjusted EBITDA margin increased to 77% for the second quarter of 2013 compared to 76% in the same period of 2012.

As previously announced, the Company sold the Yuheng project in Q4 2012. Accordingly, the Q2 2012 results include the effect of that project. Management believes removing the financial impact of Yuheng from Q2 2012 results provides a more useful comparison of the change in continuing operations. On this continuing basis, Adjusted EBITDA decreased by 3.4%, or $0.8 million, to $23.0 million in the second quarter of 2013 from $23.8 million in the same period of 2012, and Adjusted EBITDA margin increased from 75% to 77%.

Interest Expenses, net

Net interest expense was $5.5 million in the second quarter of 2013, compared to $6.8 million in the same period of 2012. The decrease was primarily due to reduced interest accrual on loans owed to third party individuals. The reduced interest accrual was a result of a decrease in the balance of these third party loans, when compared to the Q2 2012 balance.

GAAP and Non-GAAP Net Income

Net income attributable to China Hydroelectric shareholders was $7.5 million in the second quarter of 2013 compared to net income attributable to China Hydroelectric shareholders from continuing operations of $6.8 million in the same period of 2012, which excluded $0.9 million net income attributable to China Hydroelectric shareholders from discontinued operations.

Non-GAAP net income attributable to China Hydroelectric shareholders was $6.5 million, or $0.12 per diluted ADS, for the second quarter of 2013, compared to Non-GAAP net income attributable to China Hydroelectric shareholders from continuing operations of $5.5 million, or $0.09 per diluted ADS in the prior year period. For reconciliation between GAAP and non-GAAP earnings, see the table below entitled "GAAP Net Income to Non-GAAP Net Income Reconciliation."

Weighted average American depository shares ("ADSs") used in the second quarter of 2013 and 2012 per share calculations were 54.0 million and 54.0 million ADSs, representing 162.1 million and 162.0 million ordinary shares, respectively.

Six Months Ended June 30, 2013 Financial Highlights

Revenues

Revenues, net of value added taxes, from continuing operations for the first half of 2013 were $48.1 million, a decrease of 9.1%, or $4.8 million, from $52.9 million for the first half of 2012. The decrease was principally due to lower precipitation levels in all of the Company's three main operating regions compared to the first half of 2012. The Company sold 892.4 million kWh from continuing operations in the first half of 2013, a decrease of 120.0 million kWh, or 11.9%, from 1,012.4 million kWh sold in the first half of 2012. The effective tariff for the first half of 2013 was RMB 0.36/kWh, compared to RMB 0.35/kWh in the same period of 2012.

Cost of Revenues

Cost of revenues from continuing operations for the first half of 2013 was $17.4 million, as compared to $17.3 million for the first half of 2012. Cost of revenues in the first half of 2013 primarily included (i) repairs and maintenance costs of $0.7 million, compared to $1.0 million for the first half of 2012; (ii) depreciation and amortization (non-cash expenses included in cost of revenues from continuing operations) of $11.5 million, compared to $11.4 million for the first half of 2012 and (iii) labor cost of $1.9 million, compared to $1.7 million for the first half of 2012.

Gross Profit and Margin

Gross profit from continuing operations for the first half of 2013 decreased by 13.5% to $30.8 million, from $35.6 million in the prior-year period. Gross margin for the first half of 2013 decreased to 64.0% compared to 67.3% in the same period of 2012 primarily due to decreased revenues and the fixed nature of certain expenses included in cost of revenues.

Operating Expenses

General and administrative expenses for the first half of 2013 decreased by 26.4% to $6.4 million, from $8.7 million for the first half of 2012. The decrease was primarily due to the closure of the U.S. office and reduction of professional service expenses.

Adjusted EBITDA and EBITDA Margin

Adjusted EBITDA decreased by 15.6% to $36.2 million in the first half of 2013 compared to $42.9 million in the same period of 2012. Adjusted EBITDA margin decreased to 75% for the second half of 2013, compared to 76% in the same period of 2012. On a continuing basis, Adjusted EBITDA decreased by 5.2%, or $2.0 million, to $36.2 million in the first half of 2013 from $38.2 million in the same period of 2012. On a continuing basis, Adjusted EBITDA margin increased from 72% to 75% year over year.

Interest Expenses, net

Net interest expense was $12.0 million in the first half of 2013, compared to $14.3 million in the same period of 2012. The decrease was primarily due to a decrease in interest accrual on loans owed to third party individuals due to a decrease in the balance of third party loans from the first half of 2012.

GAAP and Non-GAAP Net Income

Net income attributable to China Hydroelectric shareholders was $5.9 million in the first half of 2013 compared to net income attributable to China Hydroelectric shareholders from continuing operations of $5.7 million in the first half of 2012, which excluded $2.7 million net income attributable to China Hydroelectric shareholders from discontinued operations.

Non-GAAP net income attributable to China Hydroelectric shareholders was $6.8 million, or $0.12 per diluted ADS, for the first half of 2013, compared to Non-GAAP net income attributable to China Hydroelectric shareholders from continuing operations of $5.5 million, or $0.09 per diluted ADS, for the first half of 2012. For reconciliation between GAAP and non-GAAP earnings, see the table below entitled "GAAP Net Income to Non-GAAP Net Income Reconciliation."

Weighted average ADSs used in the first half of 2013 and 2012 per share calculations were 54.0 million ADSs, representing 162.0 million ordinary shares, respectively.

Balance Sheet

The Company's cash flow in the quarter resulted in a strengthened balance sheet. Cash and cash equivalents (excluding restricted cash) were $17.5 million as of June 30, 2013, compared to $9.2 million as of March 31, 2013. Long-term bank loans were $251.7 million (including the current portion of long-term loans of $41.2 million) as of June 30, 2013, a slight increase from $247.9 million (including current portion of long-term loans of $36.4 million) as of March 31, 2013. Short-term loans as of June 30, 2013 were $11.3 million, a decrease of $10.4 million from $21.7 million as of March 31, 2013.

As of June 30, 2013, the Company's working capital deficiency was $70.0 million. Up to the date of this release, the Company raised $8.8 million through borrowings from banks and other institutions. Investors should expect the Company to have a working capital deficit in the foreseeable future, due to the use of leverage to finance the construction and acquisition of hydroelectric projects, as well as the nature of hydroelectric power projects to utilize a low level of working capital assets. The Company regularly raises funds through various means, such as new borrowings from banks and other non-financial institutions. New borrowings are used for multiple purposes, such as daily operating liquidity, to fund new projects, and to refinance existing short-term loans into longer-term debt.

Legal Proceeding

In 2009, the Company entered into a capital injection agreement with Henan Lantian Group ("Lantian") to acquire a certain equity interest in Henan Wuyue Storage Power Generation Co., Ltd. ("Wuyue"). The Company completed the first capital injection of RMB 32.5 million (US$ 4.8 million) in 2010. Thereafter, the project has been largely at a standstill and the investment in Wuyue was written off as of December 31, 2011. In 2012, the Company initiated the negotiation with Lantian to terminate the original agreement. In May 2013, Lantian filed an arbitration claim against the Company at China International Economic and Trade Arbitration Commission for the penalty of late capital injection in Wuyue, in a total amount of RMB25.74 million (US$4.2 million), and the bearing of arbitration fees. No hearing date has been set as of the date of this press release.

Business Outlook

As of the date of this release, rainfall in the third quarter of 2013 has been lower than that of the same period in 2012. Fujian and Zhejiang, regions in which the Company receives higher tariffs, continue to experience average to slightly below average levels of precipitation. Please note that all precipitation updates are offered as of the date of this release, and may be materially different when actual precipitation results are reported.

A severe flood in Sichuan province on July 18, 2013 damaged our tailrace concrete apron, spillway gates, power generation plant, auxiliary equipment and the 35KV substation of our Liyuan hydroelectric power project. All of the Company's staff and personnel were safely evacuated. The cost to repair damages is undetermined as of the date of this release. As such, the Company does not know if its existing insurance coverage will adequately cover both the cost to repair damages and economic losses. As of the date of this release, the Company does not expect the Liyuan hydroelectric power project to generate electricity for the remainder of the year.

Conference Call

China Hydroelectric will host a conference call at 6:00 am (Pacific Time) /9:00 am (Eastern Time) / 9:00 pm (Beijing/Hong Kong Time) on Friday, August 16, 2013 to discuss its second quarter financial results and recent business activities. To access the live teleconference, please dial (U.S.) +1-888-505-4375 or (International) +1-719-325-2177, and enter pass code 1788005. This call is being webcast by ViaVid Communications and can be accessed by clicking on this link: http://public.viavid.com/index.php?id=105698, or at ViaVid's website at http://www.viavid.com.

A playback will be available through August 30, 2013, by dialing (U.S.) +1-877-870-5176 or (International) +1-858-384-5517 and entering the pass code 1788005.

About China Hydroelectric Corporation

China Hydroelectric Corporation (NYSE: CHC, CHCWS) ("China Hydroelectric" or "the Company") is an owner, developer and operator of small hydroelectric power projects in the People's Republic of China. Through its geographically diverse portfolio of operating assets, the Company generates and sells electric power to local power grids. The Company's primary business is to identify, evaluate, acquire, develop, construct and finance hydroelectric power projects. The Company currently owns 25 operating hydropower stations in China with total installed capacity of 517.8 MW, of which it acquired 21 operating stations and constructed four. These hydroelectric power projects are located in four provinces: Zhejiang, Fujian, Yunnan and Sichuan. Hydropower is an important factor in meeting China's electric power needs, accounting for approximately 22% of total nation-wide capacity.

For further information about China Hydroelectric Corporation, please visit the Company's website at: http://www.chinahydroelectric.com.

Cautionary Statements Regarding Liquidity

Historically, the Company relied on the ready availability of credit in China to fund its operations and expansion. Commencing in the second quarter of 2013, the Company's ability to obtain financing from its principal lenders in China was constrained by restrictions on bank lending imposed by the central government in an effort to end the funding of speculative investments. The Company started exploring wider forms of financing and is currently in various stages of negotiations with a number of financial institutions that may provide refinancing packages to extend the duration of the Company's debt obligations. Of the short-term loans and current portion of long-term loans outstanding as of June 30, 2013, $39.8 million will become due in the next six months.

The management remains confident in the Company's ability to secure capital in order to fund its liquidity needs, debt obligations and growth plans, but obtaining financing cannot be guaranteed. In the event that the Company fails to raise funds sufficient to meet its liquidity needs, the Company may be forced to substantially curtail its operations or otherwise take measures that would materially and adversely affect its current operations and business prospects.

Cautionary Note Regarding Forward-looking Statements and Weather Data

Statements contained herein that address operating results, performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. The forward-looking statements include, among other things, statements relating to the Company's business strategies and plan of operations, the Company's ability to acquire hydroelectric assets, the Company's capital expenditure and funding plans, the Company's operations and business prospects, projects under development, construction or planning, the Company's ability to meet its liquidity needs, the availability of restructuring measure or of lending by financing sources, including banks in China, the regulatory environment, and the business outlook. The forward-looking statements are based on the Company's current expectations and involve a number of risks, uncertainties and contingencies, many of which are beyond the Company's control, which may cause actual results, performance or achievements to differ materially from those anticipated. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the factors that could cause actual results to materially differ include: supply and demand changes in the electric markets, changes in electricity tariffs, hydrological conditions, the Company's relationship with and other conditions affecting the power grids we service, the Company's production and transmission capabilities, availability of sufficient and reliable transmission resources, our plans and objectives for future operations and expansion or consolidation, interest rate and exchange rate changes, the effectiveness of the Company's cost-control measures, the Company's liquidity and financial condition, environmental laws and changes in political, economic, legal and social conditions in China, the availability of financing from lenders in China due to bank restrictions or otherwise, and other factors affecting the Company's operations that are set forth in the Company's Annual Report on Form 20-F for the year ended December 31, 2012 filed with the Securities and Exchange Commission (the "SEC") on April 18, 2013 and in the Company's future filings with the SEC. Unless required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This release also contains statistical data and estimates that we obtained from provincial and national meteorological recording stations. Although we believe that this data is reliable and consistent with our experience, we have not independently verified it.

About Non-GAAP Financial Measures

To supplement China Hydroelectric consolidated financial results presented in accordance with GAAP, China Hydroelectric uses non-GAAP net income attributable to China Hydroelectric shareholders and adjusted EBITDA, which are non-GAAP financial measures. Non-GAAP net income attributable to China Hydroelectric shareholders for the second quarter and the first half of 2013 and 2012 excludes the following non-cash charges: stock-based compensation expenses, exchange gains or losses and the change in fair value of warrant liabilities. A reconciliation of GAAP and non-GAAP items is provided in the table entitled "GAAP Net Income to Non-GAAP Net Income Reconciliation." Adjusted EBITDA is defined by the Company as earnings before interest, taxes, depreciation and amortization and excluding certain non-cash charges, including: stock-based compensation expenses, exchange losses, and change in fair value of warrant liabilities. For further details, see the table entitled "Net income to adjusted EBITDA reconciliation." The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the tables captioned "Net Income to Adjusted EBITDA Reconciliation" and "GAAP Net Income to Non-GAAP Net Income Reconciliation" below.

China Hydroelectric believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance and liquidity by excluding certain expenses that may not be indicative of its operating performance and financial condition from a cash perspective. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company's performance and when planning and forecasting future periods. These non-GAAP financial measures also facilitate management's internal comparisons to China Hydroelectric historical performance and liquidity. China Hydroelectric has computed its non-GAAP financial measures using methods consistent with the Company's annual report on Form 20-F. We believe these non-GAAP financial measures are useful for investors because they permit greater transparency with respect to supplemental information used by management in its financial and operational decision making. A limitation of using these non-GAAP financial measures is that they exclude certain charges that have been and may continue for the foreseeable future to be significant expenses in the Company's results of operations.

Statement Regarding Unaudited Financial Information

The financial information set forth in this press release is unaudited and subject to adjustments. Adjustments to the financial statements may be identified when our annual financial statements are prepared and audit work is performed for the year end audit, which could result in significant differences from this unaudited financial information.

SOURCE China Hydroelectric Corporation