China Hydroelectric Corporation Announces Second Quarter 2011 Results

NEW YORK, August 16, 2011 /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 ("PRC"), today announced its financial results for the second quarter ended June 30, 2011.

"We experienced more cooperative weather patterns during the second quarter compared to the first as the level of the Company-wide shortfall from average precipitation levels decreased. However, overall year-to-date precipitation is still below the year ago period, which has impacted our financial results. Precipitation in Yunnan province was well above average last quarter, while we again experienced less than average precipitation in Fujian and Zhejiang, where the majority of our installed capacity is located. As previously reported, 2010 was an above average precipitation year, in contrast to a below average 2009. While average precipitation will work out over the longer term, quarter-over-quarter and even year-over-year fluctuations ranging from moderate to even significant should be anticipated. We are confident in the long-term benefits of our geographic diversification through the ownership of assets on both the eastern seaboard and western half of China, as each area is subjected to different weather patterns," reported Mr. John D. Kuhns, Chairman and Chief Executive Officer of the Company.

General

The following tables present data concerning precipitation levels for the regions and the periods indicated. Precipitation is the principal factor affecting revenue as it determines the amount of electric power produced and sold by the Company's hydroelectric facilities. The percentages by which actual precipitation varied above or below average levels in most of the indicated periods are greater than the +15% and -20% variation that would normally be expected based on long-term precipitation records.

The various provinces in which the Company operates are subject to different weather patterns or systems within any given quarter and from quarter to quarter.

The following presents some key financial and other information:

Second Quarter 2011 Financial and Operational Results

Revenues

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.

Cost of Revenues

Cost of revenues for the second quarter of 2011 was $8.1 million, as compared to $5.9 million for the second quarter of 2010, primarily due to an increase in our operating projects as a result of acquisitions since the second quarter of 2010. Cost of revenues as a percentage of revenues increased to 40% for the second quarter of 2011, from 26% in the second quarter of 2010, as a result of lower revenue contribution from the projects in Fujian and Zhejiang provinces in the second quarter of 2011 and the fixed nature of expenses included therein. Depreciation, a non-cash expense included in cost of revenues, was $5.7 million for the second quarter of 2011, as compared to $3.8 million for the second quarter of 2010.

Gross Profit and Margin

Gross profit was $12.4 million for the second quarter of 2011, a decrease of $4.3 million, from $16.7 million in the second quarter of 2010. The $4.3 million decrease in gross profit reflects $5.8 million decrease contributed by existing projects as of June 30, 2010, offset by $1.5 million increase contributed by projects acquired in the last twelve months. Gross margin for the second quarter of 2011 was 60% compared to 74% in the same period of 2010.

General and Administrative Expenses

General and administrative expenses ("G&A expenses") for the second quarter of 2011 were $5.1 million, or 25% of revenues, compared to $4.9 million, or 22% of revenues for the second quarter of 2010. Each period included non-cash employee stock-based compensation expense of $1.0 million. The minor increase in G&A expenses was due to acquisition costs and higher public company professional fees.

Adjusted EBITDA and EBITDA Margin

Adjusted EBITDA was $14.1 million for the second quarter of 2011 compared to $16.9 million for the second quarter of 2010. Adjusted EBITDA margin was 69% for the second quarter of 2011 compared to 75% in the same period of 2010.

Interest Expenses

Interest expense, net, was $5.9 million during the second quarter of 2011 compared to $3.3 million in the same period of 2010. The increase was primarily due to the much higher balance of the outstanding loan carried forward from our newly acquired projects after June 30, 2010.

GAAP and Non-GAAP Net Income

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.

Six Months Ending June 30 2011 Financial and Operational Results

Revenues

Revenues, net of value added taxes, for the six months ended June 30, 2011 were $32.0 million, a decrease of 16%, or $6.3 million, from $38.3 million for the six months ended June 30, 2010. This decrease was due principally to less than average precipitation in the first half of 2011 compared to better than average precipitation in the same period last year and, to a lesser extent, the result of a lower effective tariff rate due to project mix. These factors were partially offset by incremental revenue contributed in the current half year by projects acquired in the twelve month period since June 30, 2010.

The $6.3 million decrease in revenue for the six months ended June 30, 2011 was primarily attributable to the net effect of (i) a $11.5 million, or 30%, decrease in revenue contributed by the projects owned as of June 30, 2010, principally due to hydrological factors, and (ii) a $5.2 million revenue contribution by the 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 708.8 million kWh in the six months ended June 30, 2011, a decrease of 75.8 million kWh, or 10%, from 784.6 million kWh sold in the six months ended June 30, 2010. Sales from existing projects decreased by 228.8 million kWh, or 29%, partially offset by the sale of 153.0 million kWh produced by projects acquired since June 30, 2010.

The consolidated effective utilization rate in the six months ended June 30, 2011 was 29%, decreased from 47% in the same period of 2010. The decrease was principally the result of below average precipitation in Zhejiang and Fujian provinces, compared to above average precipitation in those two provinces in the six months ended June 30, 2010.

The effective tariff decreased from RMB 0.36/kWh in the six months ended June 30, 2010, to RMB 0.30/kWh in the six months ended June 30, 2011, which was caused by a higher revenue contribution from projects located in Yunnan province, where tariffs are lower than in the two eastern provinces.

The Company's equipment availability was excellent throughout the six months ended June 30, 2011 and 2010, and, therefore, had no negative impact on utilization rates. Similarly, the Company experienced no material grid connectivity or transmission constraints negatively impacting the delivery of power to customers in the current and prior year periods.

Cost of Revenues

Cost of revenues for the six months ending June 30, 2011 was $15.5 million, as compared to $11.1 million for the same period of 2010, primarily due to the acquisition of operating assets since June 30, 2010. Cost of revenues as a percentage of revenues increased to 48% for the six months ending June 30, 2011, from 29% in the same period of 2010, as a result of lower revenue contribution from the projects in Fujian and Zhejiang provinces in the first and second quarter of 2011 and the fixed nature of expenses included therein. Depreciation, a non-cash expense included in cost of revenues, was $11.2 million for the six months ending June 30, 2011, as compared to $7.6 million for the same period of 2010.

Gross Profit and Margin

Gross profit was $16.5 million for the six months ending June 30, 2011, a decrease of $10.7 million, from $27.2 million in the same period of 2010. The $10.7 million decrease in gross profit reflects $12.3 million decrease contributed by existing projects as of June 30, 2010, offset by $1.6 million increase contributed by projects acquired in the last twelve months. Gross margin for the six months ending June 30, 2011 was 52% compared to 71% in the same period of 2010.

General and Administrative Expenses

General and administrative expenses ("G&A expenses") for the six months ending June 30, 2011 were $10.2 million, or 32% of revenues, compared to $9.2 million, or 24% of revenues for the same period of 2010. G&A expenses in the six months ending June 30, 2011 included an employee stock-based compensation expense of $1.9 million, compared to $1.6 million in 2010. The increase in G&A expenses was also due to acquisition costs and higher professional fees associated with being a public company.

Adjusted EBITDA and EBITDA Margin

Adjusted EBITDA was $20.2 million for the six months ending June 30, 2011 compared to $27.5 million for the same period of 2010. Adjusted EBITDA margin was 63% for the six months ending June 30, 2011 compared to 72% in the same period of 2010.

Interest Expenses

Interest expense, net, was $11.4 million during the six months ending June 30, 2011 compared to $6.5 million in the same period of 2010. The increase in the interest expenses was primarily due to the increase bank loan balance carried forward from the projects acquired since June 30, 2010.

GAAP and Non-GAAP Net Income

Net loss attributable to China Hydroelectric Corporation shareholders was $7.0 million in the six months ending June 30, 2011, compared to a net income of $8.2 million in the comparable period in 2010. Net loss attributable to ordinary shareholders was $7.0 million, or $0.14 net loss per ADS, for the six months ending June 30, 2011 compared to a net loss attributable to ordinary shareholders of $7.6 million, or $0.17 net loss per ADS for the same period of 2010.

Non-GAAP net loss was $4.6 million, or $0.09 net loss per ADS, for the six months ending June 30, 2011 compared to a net income of $9.7 million, or $0.22 net income per ADS, for the same period of 2010. For reconciliation between GAAP and non-GAAP net income/loss, see the table entitled "GAAP Net Income (loss) to Non-GAAP Net Income (Loss) Reconciliation."

Weighted average American Depository Shares used in the earnings per share calculation was 51.1 million ADS, representing 153.3 million ordinary shares, for the six months ended June 30, 2011 and 2010.

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.

Business Updates

In the second quarter of 2011, the Company completed one acquisition on April 10, 2011, an operating hydroelectric power project with 15 megawatts ("MW") of installed capacity. As of June 30, 2011, the Company's installed capacity was 563.8 MW as compared to 430.5 MW as of June 30, 2010 and 548.8 MW as of March 31, 2011.

The following table shows the operating projects acquired since the end of the second quarter of 2010.

In addition to our 563.8 MW capacity as of today, we have signed an MOU for the remaining two Taiyu Projects in Fujian, Yangkou, a 48 MW project and Huangtangjia, an 11 MW project. Consummation of these two acquisitions is expected to occur this year and depends, among other things, on our ability to secure necessary financing for these acquisitions.

Business Outlook for Full Year 2011

Although Yunnan experienced normal rainfall during the first half of 2011, less than favorable rainfall was realized in Fujian and Zhejiang as a result of fewer typhoons than normal. The net impact of this year's rainfall on the Company's full year results remains uncertain at this time.

Non-GAAP Net Income Figures

Non-GAAP net income for the second quarter of 2011 and the second quarter of 2010, excludes the following non-cash charges: stock-based compensation expenses; non-cash cumulative dividends and beneficial conversion features on convertible redeemable preferred shares; exchange gains or losses; and, the change in fair value of warrant liability. A reconciliation of GAAP and non-GAAP items is provided in the table entitled "GAAP Net Income (Loss) to Non-GAAP Net Income (Loss) Reconciliation."

Net Income (Loss) to Adjusted EBITDA 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, change in fair value of warrant liability. For further details, see the table entitled "Net income (loss) to adjusted EBITDA reconciliation."

Conference Call

China Hydroelectric will host a conference call at 6:00 am (Pacific) / 9:00 am (Eastern) / 9:00 pm (Beijing/Hong Kong) on Tuesday, August 16, 2011 to discuss its second quarter 2011 financial results and recent business activities. To access the live teleconference, please dial (US) +1-877-941-8416 or International +1-480-629-9808, and enter pass code 4465985. This call is being webcast by ViaVid Broadcasting and can be accessed by clicking on this link: http://viavid.net/dce.aspx?sid=00008B8C, or at ViaVid's website at http://www.viavid.net.

A replay of the conference call will be available from 12:00 pm (Eastern) on August 16, 2011 to 11:59pm (Eastern) on August 30, 2011, by dialing (US) +1-877-870-5176 or (International) +1-858-384-5517 and entering the pass code 4465985.

About China Hydroelectric

China Hydroelectric Corporation (NYSE: CHC, CHCWS) ("China Hydroelectric" or "the Company") is an owner 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. Led by an international management team, the Company's primary business is to identify, evaluate, acquire, develop, construct and finance hydroelectric power projects. The Company currently owns 27 operating hydropower stations in China with total installed capacity of 563.8 MW, of which it acquired 23 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.

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 and the regulatory environment. 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, 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, 2010 filed with the Securities and Exchange Commission (the "SEC") on April 4, 2011 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.

Interim Financial Information

This release contains unaudited financial information which in the opinion of management includes all adjustments and normal accruals necessary for a fair presentation of financial position and the comparative results of operations and cash flows which are subject to year-end audit adjustments which could be significant. Results of operations for interim periods are not necessarily indicative of those to be achieved or expected for the entire year. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), have been condensed or omitted.

About Non-GAAP Financial Measures

To supplement China Hydroelectric consolidated financial results presented in accordance with GAAP, China Hydroelectric uses non-GAAP net income (loss) and adjusted EBITDA, which are non-GAAP financial measures. 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 (loss) to adjusted EBITDA reconciliation" and "GAAP Net Income (Loss) to Non-GAAP Net Income (Loss) 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.

Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization and certain non-cash charges including exchange loss, change in fair value of warrant liability and stock-based compensation. We believe that EBITDA is widely used by other companies in the power industry and may be useful to investors as a measure of the Company's financial performance. Given the significant investments that we have made in net property, plant and equipment, depreciation and amortization expense comprises a meaningful portion of the Company's cost structure. We believe that EBITDA will provide a useful tool for comparability between periods because it eliminates depreciation and amortization expenses attributable to capital expenditures and business acquisitions. The presentation of EBITDA should not be construed as an indication that the Company's future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business.