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China Hydroelectric Corporation (NYSE:CHC)

Q3 2013 Results Earnings Call

November 26, 2013, 09:00 AM ET

Executives

Scott Powell – Investor Relations and Corporate Communications

You-Su Lin – Interim Chief Executive Officer

Liya Chen – Chief Financial Officer

Analysts

Andrew Bose – High Valley Capital

Operator

Good day, everyone, and welcome to the China Hydroelectric Corporation Third Quarter 2013 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Scott Powell, Investor Relations and Corporate Communications. Please go ahead.

Scott Powell

Thank you. And we appreciate everyone who has taken the time to join today’s China Hydroelectric Corporation third quarter 2013 earnings conference call. Also joining us today are Dr. You-Su Lin, the company’s Interim CEO and Ms. Liya Chen, the company’s CFO.

Before management’s presentation, I would like to refer to the Safe Harbor statement in conjunction with today’s conference call. This call will contain certain statements that address operating results, performance, events or developments that we expect or anticipate will occur in the future.

These forward-looking statements include among other things statements relating to our business strategies and plan of operations, our capital expenditure and funding plans, our operations and business prospects, projects under development, construction or planning and the regulatory environment.

The forward-looking statements are based on our current expectations and involve a number of risks, uncertainties and contingencies many of which are beyond our 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, our relationship with, and other conditions affecting the power grids we service, our 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 our cost control measures, our liquidity and financial conditions, environmental laws and changes in political, economic, legal and social conditions in China and other factors affecting our operations that are set forth in the company’s Form 20-F for the fiscal year ended December 31, 2012 and filed with the Securities and Exchange Commission, the SEC on April 18, 2013 and in our 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. Following management’s discussion, you will have the opportunity to ask questions.

As previously disclosed in the company's filings with the SEC, the Board of Directors has received a preliminary non-binding proposal letter dated September 4, 2013, from NewQuest Capital Partners, whereby NewQuest has expressed interest in acquiring all of the company's outstanding ordinary shares including ordinary shares represented by the company's ADS'. The Board of Directors has formed a Special Committee consisting of three independent directors that has the exclusive authority to consider and negotiate the proposal. The Special Committee has retained independent legal and financial advisors to assist it in such evaluation and negotiations and the company will disclose developments on the going private transaction as and when appropriate and required to do so.

I would now like to turn the call over to Dr. You-Su Lin, Interim Chief Executive Officer of China Hydroelectric Corporation. Dr. Lin, you may begin.

You-Su Lin

Okay. Thank you, Scott and thank you, everyone for joining our conference call. I am Dr. You-Su Lin, Interim CEO of China Hydroelectric Corporation. I will first briefly discuss the elements of our business that are not under our control, in particular the rainfall and how it impacted us. I will then focus on the elements we can control, our operating practices, expense controls and the capital structure.

This was a drier quarter for us, which reduced our electricity sold. We sold 406.7 million kWh, which was down 14.1%, from the third quarter of last year. The drier condition principally affected our projects in Zhejiang and Fujian provinces. Rainfall in Zhejiang was only 61% of the long term average, while Fujian was 83% of long term average. Fortunately, Yunnan [contribution] third quarter was 106% of the long term average.

We noted in our last quarter of July 18 a severe flood in Sichuan damaging our Liyuan project. Liyuan is the [low head, run of the river contributed] located in the Northeast region of the province and is our only project in Sichuan. So particularly consists of concrete [dam powerhouse and still vacates ship block] integrated into one structure along with 35KV substation and is rated as 12 megawatt of production.

Fortunately, the plant caused no injuries to our staff, but it did damage the tailrace concrete apron, spillway gate, power generation plant, auxiliary equipment and the substation. Our insurance adjusters are still fully evaluating the damage claim, but we are taking part of the excess loss for the damage during the third quarter of year 2013.

Liyuan contributed less than 2% of our revenues for the last three years, so we do not expect a loss of productive capacity there to have a material effect on our financial results going forward.

Now I would like to turn to what we can control. As we state regularly, we are highly focused on operating efficiently and reducing operating expenses. The relatively high fixed cost of revenue resulted in low gross margin on lower revenue, but we offset this with a tighter control of overhead operating expenses.

Going forward we will continue to look for additional efficiencies to reduce the fixed cost of operating and will hold steady or reduced operating overhead. Furthermore, adjusted EBITDA on a continuing basis declined 11.6% to $10.7 million. We consider this to be an achievement in a relatively fixed cost of business, a decline in revenue significantly results in a far greater decline in earnings. By our actions, we are able to [contain] the decline in adjusted EBITDA and because we have lowered our fixed cost, we are confident that [change] in revenue will result in more pronounced [gains] for adjusted EBITDA.

Now, I would like to turn the call over to Liya, who will discuss our third quarter and nine months financial results in greater detail. Liya?

Liya Chen

Thank you, Dr. Lin and thank you everyone for joining our conference call. I'm Liya Chen, CFO of China Hydroelectric Corporation.

I will first discuss unaudited financial results for the third quarter ended September 30, 2013. To simplify our discussion, please keep in mind the following. First, all figures referred to this quarter unless I specify otherwise, I'll refer to this quarter as Q3 2013, and the year ago quarter as Q3 2012. I will refer to the second quarter of this year as Q2, 2013.

Second, while we will review GAAP numbers, we will also simplify [our] analysis by looking at our continuing operations and also reporting adjusted results that remove one-time items such as the US impairment charge and non-cash items like warrant liabilities.

We previously announced the sale of our Liyuan project late last year, so in order to give priority to the comparisons, the continuing operations removed the financial contribution of Liyuan from [inaudible]. Also as Dr. Lin noted, we sustained damage at our Liyuan project and incurred some charges for damage.

Net revenue for Q3 2013 was $16.4 million, a decrease of 18.4% from Q3, 2012. As Dr. Lin noted, the lower revenue was due mostly to the decline in electricity sold resulting from lower precipitation in two of our three main operating regions.

And effective tariff declined 3.6% year-over-year to RMB0.27 per kWh also contributing slightly to the decline and gross profit was $8.1 million, a decrease of 28.3% from Q3, 2012, which translates into a gross margin of 49%, which compares to gross margin of 56% in the year ago quarter. Our cost of revenue is mostly fixed, so lower revenue was a principle driver of the lower gross profit and the margin.

As Dr. Lin noted, we focus our expenses continuously and corporate overhead, which is [losing] our control and G&A expenses were down 38% year-over-year to $3.3 million and last year we incurred one-time expenses related to the proxy contest, so last year's expenses were higher than normal.

But keep in mind; we also incurred one-time expenses this year in the evaluation of the non-binding offers from NewQuest. We did implement permanent expense reductions earlier this year, specifically closing the U.S. office and reducing professional service expenses that are now apparent in our lower expense base.

Net interest expense was reduced year-over-year from $7 million to $6 million in Q3, 2013; and as a result of our proactive actions we are taken to improve our capitalization. Second, as Dr. Lin noted, we suffered flood damage at our Liyuan project in Sichuan. We're continuing to evaluate the damage in conjunction with our insurance adjusters. However, we have reached to some conservative estimates of minimum level of damage that we can recognize in our financial statements. Thus in the quarter, we took asset impairment charge of $3.5 million.

Net adjusted EBITDA attributable to common shareholders, which we believe best reflects the underlying growing economics of the process, was $10.7 million, an 11.6% or $1.4 million decrease from Q3, 2012. We are proud to have [continued declined] adjusted EBITDA, which is not a result we will normally expect in a relatively fixed cost [booking]. Instead our adjusted EBITDA margin increased to 66% compared to the 60% we achieved last year with higher revenue.

And our GAAP net loss attributable to common shareholders was $3 million or $0.06 per diluted ADS. The GAAP result improved the impairment charge [borrowing] to revaluation and our [asset relevant to items]. Non-GAAP net loss attributable to China Hydroelectric shareholders from continuing operations was $0.5 million or $0.01 per diluted ADS for the third quarter of 2013, compared to a net loss of $1.1 million or $0.02 diluted ADS in the prior year period.

Now, I will briefly highlight financial results from continuing operations for the nine months ended September 30, 2013. And because of variability in weather we encourage investors to analyze our results on annual base; and in fact, over multiple years' timeframe.

This gives them an opportunity for -- like nature, weather variability to average out and it’s a better indicator of our long-term economies of our business. All figures will refer to the first nine months of 2013 unless I express otherwise and reflects only continuing operation.

Net revenues were $64.5 million, a decrease of 11.6% year-over-year principally due to our lower precipitation in two of our three main operating regions. We sold 1.3 billion kWh of electricity in the period and equates of 12.6% from year earlier period. Our effective tariff decreased slightly to RMB0.33 per kWh compared to RMB0.34 per kWh last year.

And gross profit decreased 13.3% year-over-year to $38.8 million, primarily due to a lower revenue and the fixed nature of the cost of revenue and the gross margin decreased to 60% from 64% last year.

Net interest expense declined to $17.9 million versus $21.3 million in the year ago period due to a decrease in the balance of borrowings of two third parties. Our adjusted EBITDA on a continuing basis attributable to common shareholders was $47 million, a decline of 6.6% from the earlier period.

I would now like to review our balance sheet, which we continue to strengthen during the period of this quarter in line with our strategy as described by Dr. Lin. We ended the quarter with cash and cash equivalent of $17.6 million, compared with $17.5 million at the start of the quarter. Total debt declined by approximately $10 million during the quarter. Our total debt now stands at $253 million.

I will now turn the call back to Dr. Lin for final comments. Dr. Lin?

You-Su Lin

Thank you. Before we go to questions, I want to give you an update on precipitation present in the fourth quarter to help you assess our current situation. As of today, rainfall in October and November has been lower than that in the same [past] period in year 2012.

Fujian and Zhejiang, which are regions in which we received higher tariff, are receiving average to slightly below average rainfall. But please keep in mind that actual precipitation results may be materially different when reported.

In addition, I would like to provide a brief update about the pending arbitration claim. The first is the labor arbitration claim alleging unpaid salary and social security payments of RMB6.6 million. Earlier this month there was a hearing by the Henan Guangshan County Labour Arbitration Committee, no ruling or award has yet been granted.

The second claim we should be penalized was late capital injection. The company filed a counter claim against the Henan Lantian Group, and the CIETAC was a combination of the agreement between Lantian and the company. We are seeking a ruling that there is no penalty due to the late capital injection and furthermore a return of the company's first capital injection in two years.

As of today, no ruling or award has been granted, there's more detail of this claim in our press release.

That concludes our formal remarks. We will now open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll go to [John Sheehy], Private Investor.

Unidentified Analyst

Hello everybody. Thanks for hosting the call and thanks for taking my questions. Congratulations on posting better year-to-date financial results compared to last year despite having a weaker rainfall. I would like to ask, there's been a lot of news about the recently concluded central committee meeting, and could you share some comments about the implications of that for the company's long-term outlook and opportunities?

You-Su Lin

Okay. Maybe I'll just say few things. I think generally speaking in China this has been considered another new round for economic reform and which we are quite optimistic for foreign investors and the Chinese private investors rather than state-owned companies. But it's sort of a long-term procedure. We don't know for the next coming months or even next year and the results can been affected through our production or business.

Unidentified Analyst

Is there any new hints about deregulation of the power grid or deregulation of power tariffs in the long-term?

You-Su Lin

Yes. There is a sort of discussion for that, but there has been no detailed regulation has come up yet.

Unidentified Analyst

Okay. Thank you very much for that. Then my other question is could you share some comments about the current financing environment for your company, the rates and terms that are available to you from lenders?

Liya Chen

Yes. It's Liya, CFO of the company. I'm glad to answer your question. Honestly, I don't have a [price point] on my hand. So it's really hard to predict the lengthy environment in the future, next year. But [the statute] some data I saw in the testament is the new loan growth for October and November were very slow. And what I believe is for the coming December it's going to be very -- remain very low.

So in terms of the company's refinancing, I'm really happy to announce that we just successfully closed our new loan with [inaudible] bank for like $21.5 million, 12 years loan. This interest rate definitely was under 9%, which for most of the case -- most of the small or medium-sized business. But enterprises cannot even get at this moment, you know where this -- the terms and also with interest rate.

Unidentified Analyst

That's excellent news.

Liya Chen

Okay. Thank you.

You-Su Lin

Yes.

Operator

(Operator Instructions) We'll go next to Andrew Bose of High Valley Capital.

Andrew Bose - High Valley Capital

Hi. Thanks for taking my call. I understand you tried addressing the pending go-private transaction in the prepared remarks, but I was hoping you could give some more information on what has happened so far in the process and what we can expect going forward?

You-Su Lin

So far because as Scott just announced, we got our Special Committee handle the issues. We even don’t know the procedure and what's our most recent situation there. The company will disclose development of doing private transactions and we [want] appropriate and required interest. But I think the Special Committee is handling the whole situation of that.

Andrew Bose - High Valley Capital

Okay. I would assume you would be in touch with the Special Committee and there would be some progress on the due diligence that the company is doing to make sure that the shareholder’s interests are taken into consideration. You’ve done a great job on expense reductions, interest reductions, debt down payment clearly the offer as inadequate and the company should have a stronger stance on the situation. I mean the Special Committee is a Special Committee, but the company usually would present that this offer is inadequate and these are the things we are doing to do the best thing for shareholders.

Clearly the stock is broken, but this is an opportunity to make something better for shareholders.

You-Su Lin

Yeah.

Operator

(Operator instructions) And it appears we have no further questions at this time.

Scott Powell

Thank you, everyone for taking the time today to join our third quarter 2013 earnings conference call. China Hydroelectric Corporation looks forward to updating you on its progress in the near future. Thank you and have a good day.

Operator

And again that does conclude today's presentation. We thank you for your participation.

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