China Hydroelectric (NYSE:CHC)

NEW YORK, May 22, 2012 /PRNewswire-Asia-FirstCall/ -- 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 ("China"), today announced the Company has received tariff increases at four more of its hydroelectric power projects. These tariff increases are in addition to the recently announced tariff increases for two other power projects in Fujian province.

The Company has received substantial tariff increases for its Dazhaihe hydroelectric power project ("Dazhaihe"), one of its ten projects located in Yunnan province. Dazhaihe, acquired in April 2011, has 15 megawatts ("MW") of installed capacity and receives seasonally adjusted tariff rates. The new tariffs for each season represent an effective annual increase of 17% for Dazhaihe.

Furthermore, the Company has received a RMB 0.021 per kilowatt hour tariff increase for the Jinling complex which is located in Fujian Province and consists of three hydroelectric power projects: Dongguan, with 4.8 MW of installed capacity, Qianling, with 10.0 MW of installed capacity, and, Jinjiu, a 3.0 MW project. These three facilities received tariff increases of 7.5%, 8.8% and 7.5%, respectively.

Mr. John D. Kuhns, Chairman and Chief Executive Officer of China Hydroelectric, stated, "We are pleased to receive the increases in tariffs paid to these four projects, particularly because they became effective before the rainy seasons in both Yunnan and Fujian. We are especially pleased with the timing of the substantial seasonal increase for Dazhaihe for the June to October period since it corresponds with Dazhaihe's peak power generation period. Based on our current precipitation outlook, we expect to see a welcome revenue increase for Dazhaihe, as well as for Dongguan, Qianling and Jinjiu. These tariff increases follow our recent tariff increases for two other power projects in Fujian province, and we look forward to additional tariff increases of varying magnitudes for our other hydroelectric power projects to, among other things, generally keep pace with two tariff increases granted to thermal electric power producers in China in 2011," concluded Mr. Kuhns.

Fourth Quarter 2011 Results

• Revenues, net of value added taxes, from continuing operations for the three months ended December 31, 2011 were $10.7 million, an increase of 13%, or $1.2 million, from $9.5 million for the three months ended December 31, 2010.
• Non-GAAP net loss was $11.2 million, or $0.21 net loss per ADS, for the fourth quarter of 2011 compared to net loss of $4.8 million, or $0.09 net loss per ADS, for the fourth quarter of 2010.

Mr. John D. Kuhns, Chairman and Chief Executive Officer of the Company, reported that "2011 unfortunately proved to be a particularly difficult year due to a number of factors the Company could not control: the weather, the bank lending environment in China, off shore debt markets and the equity markets. We are, however, pleased to report that weather conditions thus far in 2012 have been very favorable, and that the Chinese government has taken steps to revitalize lending."

Business Outlook for First Quarter 2012 

As of the date of this release, rainfall in the first quarter of 2012 is well above that of the same period in 2011 and more in line with 2010's level, particularly in Fujian and Zhejiang, our higher tariff regions. We similarly expect revenues in the first quarter of 2012 to exceed revenues recorded in the first quarter of 2011.

Third Quarter 2011 Financial and Operational Results

Revenues

• Revenues, net of value added taxes, for the three months ended September 30, 2011 were $16.3 million, a decrease of 11%, or $2.1 million, from $18.4 million for the three months ended September 30, 2010.
• Gross profit was $7.6 million for the third quarter of 2011, a decrease of $4.4 million, from $12.0 million in the third quarter of 2010. The $4.4 million decrease in gross profit reflects a $4.6 million decrease by existing projects as of September 30, 2010, offset by a $0.2 million increase contributed by projects acquired in the last twelve months. Gross margin for the third quarter of 2011 was 46% compared to 65% in the same period of 2010 due principally to lower revenue and the fixed nature of expenses included in cost of revenues.
• Net loss attributable to China Hydroelectric shareholders was $4.1 million in the third quarter of 2011 compared to net income of $1.7 million in the same period in 2010. Net loss attributable to ordinary shareholders was $4.1 million, or $0.08 net loss per ADS, for the third quarter of 2011 compared to net income of $1.7 million, or $0.03 net income per ADS for the third quarter of 2010.
• Non-GAAP net loss was $3.2 million, or $0.06 net loss per ADS, for the third quarter of 2011 compared to net income of $3.0 million, or $0.06 net income per ADS, for the third quarter of 2010. For a reconciliation between GAAP and non-GAAP earnings, see the table entitled "GAAP Net Income / (Loss) to Non-GAAP Net Income / (Loss) Reconciliation."

This decrease in revenue was due principally to less than average hydrological conditions in the current quarter compared to the prior year quarter, which experienced better than average hydrological conditions, and, to a lesser extent, a lower effective tariff rate due to the mix of revenue from the respective provinces. These factors were partially offset by incremental revenue contributed in the current quarter by projects acquired after September 30, 2010.

The $2.1 million decrease in revenue for the three months ended September 30, 2011 was primarily attributable to the net effect of (i) a $3.8 million, or 21%, decrease in revenue contributed by projects owned as of September 30, 2010, principally due to hydrological factors, and (ii) a $1.7 million revenue contribution by projects acquired in the twelve month period since September 30, 2010. Such projects have a total installed capacity of 70.4 MW as set forth below.

Business Outlook for Full Year 2011

Although Yunnan and Zhejiang experienced higher than normal precipitation in the current quarter, both have experienced below average precipitation for of the nine months ended September 30, 2011. The precipitation to be realized in the fourth quarter of 2011 will not affect the likelihood that 2011 will be a less than average year in terms of precipitation.

• Revenues, net of value added taxes, for the three months ended June 30, 2011 were $20.5 million, a decrease of 9%, or $2.0 million, from $22.5 million for the three months ended June 30, 2010. This decrease was due principally to less than average hydrological conditions in the current quarter compared to the prior year quarter, which experienced better than average hydrological conditions, and, to a lesser extent, a lower effective tariff rate due to the mix of revenue from the respective provinces. These factors were partially offset by incremental revenue contributed in the current quarter by projects acquired after June 30, 2010.
• The $2.0 million decrease in revenue for the three months ended June 30, 2011 was primarily attributable to the net effect of (i) a $5.4 million, or 24%, decrease in revenue contributed by projects owned as of June 30, 2010, principally due to hydrological factors, and (ii) a $3.4 million revenue contribution by projects acquired in the twelve month period since June 30, 2010. Such acquired projects have a total installed capacity of 133.3 MW as set forth below.
• The Company sold 463.2 million kWh in the three months ended June 30, 2011, a decrease of 5.9 million kWh, or 1%, from 469.1 million kWh sold in the three months ended June 30, 2010, attributable to a 104.8 million kWh contribution from projects acquired since June 30, 2010, offset by a 110.7 million kWh, or 24%, decline in power sold by existing projects.
• The consolidated effective utilization rate in the three months ended June 30, 2011 was 42%, compared to 55% in the three months ended June 30, 2011. The lower consolidated effective utilization rate was principally the result of below average precipitation in Zhejiang and Fujian provinces, compared to above average precipitation in those two provinces in the three months ended June 30, 2010.
• The effective tariff decreased from RMB 0.35/kWh in the three months ended June 30, 2010 to RMB 0.29/kWh in the three months ended June 30, 2011. The decrease was caused by a higher revenue contribution from projects located in Yunnan province, where tariffs are lower than in the two eastern provinces.
• Net loss attributable to China Hydroelectric shareholders was $1.4 million in the second quarter of 2011 compared to net income of $5.9 million in the same period in 2010. Net loss attributable to ordinary shareholders was $1.4 million, or $0.03 net loss per ADS, for the second quarter of 2011 compared to net income of $5.9 million, or $0.11 net income per ADS for the second quarter of 2010.
• Non-GAAP net loss was $0.2 million, or $0.004 net loss per ADS, for the second quarter of 2011 compared to net income of $7.1 million, or $0.14 per ADS, for the second quarter of 2010. For a reconciliation between GAAP and non-GAAP earnings, see the table entitled "GAAP Net Income (loss) to Non-GAAP Net Income (Loss) Reconciliation."

Weighted average American Depository Shares used in the second quarter 2011 and 2010 earnings per share calculation was 51.1 million ADS, representing 153.3 million ordinary shares.

"Operationally in the second quarter, we are pleased to report that all our facilities were online and continued to generate electrical power in accordance with their production specifications, that no material problems occurred with respect to grid connectivity and power transmission and our expenses that are classified as cost of revenue or general and administrative expenses were in line with expectations," Mr. Kuhns stated.

Liquidity

The Company's cash and cash equivalents as of June 30, 2011 amounted to $10.1 million compared to $33.5 million as of December 31, 2010, a decrease of $23.4 million. This decrease was principally attributable to the excess of cash flow used in investing activities of $21.4 million, principally consisting of acquisition-related payments, over cash provided by financing activities of $1.3 million. Cash provided by financing activities was adversely impacted by central government policy in effect during the current year period that effectively delayed new bank financing. Cash flow used in operating activities was $3.2 million for the six months ended June 30, 2011, which compares favorably to cash flow used in operating activities of $9.9 million in the prior year period. Cash flow provided by operating activities in the current period was unfavorably impacted by a $7.3 million decrease in adjusted EDITDA that resulted from lower revenue and profitability due to our relatively fixed expense levels, as well as working capital requirements.

Historically, the Company has partially relied on the ready availability of credit in China to fund its operations and expansion. However, during the first half of 2011, the Company's ability to obtain financing from its principal lender in China has been constrained by restrictions on bank lending imposed by the central government in an effort to contain inflation. While Management is of the view that this policy will likely end in the near term, there is no assurance that this will occur. As a result, as a precautionary step to best assure that it will be in a position to continue to meet working capital and debt service requirements through cash flow from operations, Management has commenced discussions with lenders about restructuring certain near term principal payments. Based on discussions to date, Management believes that the Company's lenders will agree to such a restructuring. In addition, assuming bank lending in China does not become less restrictive in the near term, Management expects to explore the possibility of raising additional debt and/or equity financing from alternative sources.

First Quarter Results:

• Q1 revenue decreased by 27% to $11.5 million.
• Q1 gross profit decreased by 61% to $4.1 million. Gross margin decreased by 31% to 36%.
• Q1 adjusted EBITDA (see reconciliation table) decreased by 44% to $6.0 million. Adjusted EBITDA margin was 52% vs. 68% first quarter last year.
• Q1 GAAP net loss attributable to ordinary shareholders was $5.6 million, or $0.11 net loss per American Depository Share ("ADS") (each representing three ordinary shares) compared to a loss of $13.5 million in Q1 2010, which included $15.8 million in non-cash charges.
• Q1 non-GAAP net loss (see reconciliation table) decreased to $4.4 million, or $0.09 net loss per ADS, from a non-GAAP income of $2.6 million in Q1 2010.

"Although as a result of differing weather conditions during the first quarter of 2011 versus the unusually favorable weather conditions during the first quarter of 2010, revenue and profitability are down from the prior year period, we are extremely pleased with our results for this period and are equally pleased to report all of our equipment is performing within designed utilization rate ranges in anticipation of the second and third quarters, which traditionally experience more rainfall than the first and fourth quarters. As a hydroelectric power producer, we are subject to seasonal variations in precipitation at each of our 26 operating projects spread across four different PRC provinces. In order to mitigate the possible risk of low rainfall in one region and to take advantage of two different weather systems in the PRC, we own and operate hydroelectric power projects in the eastern and western parts of China. Overall, our projects for the first three months of 2011 experienced less than average rainfall in Fujian and Zhejiang, while our projects in Yunnan and Sichuan experienced average rainfall, whereas in the first quarter of 2010 each province experienced better than average precipitation. While 2010 benefited from better than average rainfall, 2009 was adversely affected by below average rainfall," commented Mr. John D. Kuhns, Chief Executive Officer and Chairman of the Board of Directors of the Company. The impact of hydrological conditions, whereby precipitation in any given year could vary by about 25% above or below the mean, is something beyond the control of the Company.

Fourth Quarter Results:

• Q4 revenue increased by 75% to $10.0 million.
• Q4 gross profit increased by 2500% to $2.6 million. Gross margin increased by 25% to 26%.
• Q4 adjusted EBITDA (see reconciliation table) increased by 420% to $2.6 million. Adjusted EBITDA margin was 26% vs. 9% last year.
• Q4 GAAP net loss attributable to ordinary shareholders was $ 6.2 million, or $ 0.12 net loss per American Depository Share ("ADS") (each representing three ordinary shares) compared to a loss of $32.5 million in Q4 2009, which included$12.3 million in non-cash charges.
• Q4 non-GAAP net loss (see reconciliation table) decreased to $4.8 million, or $0.09 net loss per ADS, from a loss of $6.5 million in Q4 2009.

"We made significant progress from both an acquisition and operational perspective during 2010. We expanded our geographic diversification by acquiring five operating projects in Yunnan province plus five operating projects in Fujian, bringing a total of 172.2 MW of new capacity online, an increase of 46% year over year," commented Mr. John D. Kuhns, Chief Executive Officer and Chairman of the Board of Directors of the Company.

Third Quarter 2010 Financial and Operating Highlights

• Revenue increased by 42% to $18.4 millionfor the third quarter of 2010 compared to $13.0 million for the third quarter of 2009.
  
• Gross profit increased by 41% to $12.0 millionin the third quarter of 2010 compared to $8.5 million for the third quarter of 2009. Gross margin remained at 65% for the third quarter of 2010, the same as the third quarter of 2009.
  
• Operating income increased by 17% to $7.4 millionin the third quarter of 2010 compared to$6.3 millionin the third quarter of 2009.
  
• GAAP net income attributable to ordinary shareholders of $1.7 million, or $0.03 per American Depository Share ("ADS") (each representing three ordinary shares) for the third quarter of 2010 compared to GAAP net loss attributable to ordinary shareholders of $7.5 million for the same period in 2009. Net loss attributable to ordinary shareholders in the third quarter of 2009 was impacted by a non-cash charge of $8.8 million in cumulative dividends on the redeemable preferred shares outstanding in that period that were converted into ordinary shares at the time of the Company's IPO in January 2010.
  
• Non-GAAP net income (see the table entitled "GAAP Net Income (loss) to Non-GAAP Net Income (loss) Reconciliation" for detailed information) of $3.0 million, or $0.06 per ADS for the third quarter of 2010 compared to $1.5 million for the same period in 2009.

"We are pleased with the progress we continued to make in the third quarter of this year towards meeting our operational and acquisition goals for the year. The first half of 2010 saw favorable rainfall in most of our catchment areas, producing excellent runoff and a high level of reservoir storage at many of our projects. The third quarter continued to see favorable rainfall at our Fujian and Yunnan projects, while our Zhejiang projects saw slightly less than favorable rainfall. However, due to our geographic diversification, less than favorable rainfall in one region does not significantly impact our operations. However, the latter half of the year promises to be much drier than the first half."

"In the first nine months of this year, we expanded our geographic diversification by completing three acquisitions in Yunnan province of four operating projects, with a combined installed capacity totaling 116.8 MW," said Mr. John D. Kuhns, Chief Executive Officer and Chairman of the Board of Directors of the Company.

"For the remainder of 2010, we continue to expand our geographically diverse portfolio through the evaluation and acquisition of operational, construction and development hydroelectric projects in the PRC. We seek to continue to utilize our IPO proceeds, cash generated from operations, and funds expected to be available under the loan framework arrangement we have with the Bank of China's Fujian Branch to further expand our asset base."

Business Outlook for Full Year 2010

Although Yunnan and Fujian continued to experience favorable rainfall during the third quarter of 2010, less than favorable rainfall was realized in Zhejiang as a result of fewer than normal impacting typhoons. However, the impact that fourth quarter results will have on the Company's full year results remains uncertain at this time.

In addition to our 493.4 MW capacity as of September 30, 2010, as of today, we have signed definitive agreements to acquire the first five of seven Taiyu Projects, totaling 55.4 MW, as well as the Dazhaihe project, a 15 MW facility in Yunnan. Consummation of these two acquisitions is expected to be completed in November of 2010. Due to the length of bank financing processes, the remaining 44 MW to complete our overall 607.8 MW post IPO capacity target will likely be delayed until December 2010 or possibly the first quarter of 2011.