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China Hydroelectric Corporation (NYSE:CHC)

Q4 2013 Earnings Conference Call

April 22, 2014 09:00 ET

Executives

Scott Powell - IR & Corporate Communications

You-Su Lin - Interim CEO

Liya Chen - CFO

Analysts

Operator

Good day everyone and welcome to the China Hydroelectric Corporation fourth quarter and full year 2013 earnings conference call. (Operator Instructions). And at this time I would like to turn the conference over to Scott Powell, Investor Relations and Corporate Communications. You may begin.

Scott Powell

Thank you. We appreciate everyone who has taken the time to join today’s China Hydroelectric Corporation’s fourth quarter and full year 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, and 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 condition, 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, 2013 and filed with the Securities and Exchange Commission on April 21, 2014 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.

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

Thank you Scott and thank you everyone for joining our conference call. I’m 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 it impacted us. I will then focus on the elements we can control. Our operating practices, expense controls and the capital structure.

Year 2013 was a slightly lower than average rainfall year, approximately 92% of the historical long term average, just slightly dryer conditions affected the projects in all our three provinces in which the company operates. Going forward in Zhejiang was 96% of the long term average. Rainfall in Fujian was 93% of the long term average and the rainfall in Yunnan was 86% of the long term average.

Despite of a 12.8% of decline in revenue year-over-year due to reduced electricity sales, the company has again demonstrated that a tight control of operating expenses can mitigate year-to-year precipitation fluctuations which are the main determinants of our revenue.

I’m pleased to announce that China Hydroelectric Corporation achieved a significant reductions in general and administrative expenses year-over-year. Regarding decrease of approximately $7 million. We also further reduced our short term third party borrowings which contributed to a significant decrease in interest expenses year-over-year. Despite of the nearly 13% decline in revenue year-over-year our significant reductions in operating and interest expenses contributed to a decline of only 7% in adjusted EBITDA on a continuing basis and the improvements to our bottom-line figures.

We consider this to be achievement in a relatively fixed cost business, a decline in revenue typically result in a far greater decline in earnings. By our actions we’re able to contain the decline in adjusted EBITDA and because we have lowered our fixed cost we’re confident that gains in revenue will result in more pronounced gains for adjusted EBITDA.

As we state regularly we’re highly focused on operating efficiently and reducing operating expenses. Going forward we will continue to look for additional efficiencies to reduce the fixed cost of operating and to hold a steady or reduced corporate overhead.

Operationally I’m pleased with the performance of our hydroelectric facilities in our three major operating region, Zhejiang, Fujian and Yunnan provinces. While precipitation levels in each of these provinces were below historical averages. All facilities in these provinces continue to operate as planned with no significant disruptions or downtime.

Our average effective utilization rate declined year-over-year primarily due to reduced rainfall and our effective tariff remained unchanged year-over-year at RMB0.33/kWh.

As we noted on our last call the only note was operational issue was with our Liyuan project in Sichuan province which was damaged last July by a flood.

The company and our insurance are just -- are still assessing the claim. I would like to note that Liyuan contributed less than 2% of our revenue for the last three years. So we do not expect this loss of productive capacity to have material effect on our financial results going forward.

Upon today we have received about RMB8.8 million net cash payout from the insurance company for the single world class [ph], the machinery and equipment claim is still in progress and the total amount can be recovered from the insurance company if as yet or no.

I would now like to turn the call over to Liya, who will discuss our fourth quarter and full year 2013 financial results in great details. 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 fourth quarter ending December 31, 2013. To simplify our discussions please keep in mind the following. First, all figures to refer to this quarter unless as specified otherwise. I will refer to this quarter as Q4, 2013 and the year ago quarter as Q4, 2012. Second, while we will review GAAP numbers we will also simplify analysis by looking at our continuing operations and after reporting adjusted results that we move onetime items such as the U.S. [ph] impairment charge and non-cash items like borrowings to liabilities.

We previously announced the sale of our Yuheng Project late in 2012 so in order to gain (indiscernible) to the components the continuing operations removed the financial contribution of Yuheng from out a principal period. Next revenue for Q4, 2013 was 10.1 million a decrease of 18.5% from Q4, 2012 the lower revenue was due mostly to the decline in electricity sold resulting from lower precipitation in Fujian province.

Effective tariff declined 3.4% year-over-year to RMB0.28/kWh also contributing slightly into the decline. Gross profit was 0.3 million a decrease of 88.9% from Q4, 2012 this translates in a gross margin of 3% which compares to gross margin of 22% in the year ago quarter. Our cost of revenue is mostly fixed so lower revenue was the principal driver of the lower gross profit and margins.

As Dr. Lin noted we booked our expenses (indiscernible) on corporate overhead which is within our control. General and administrative expenses were down to 45% year-over-year to 3.5 million. Last year we incurred onetime expenses related to the proxy contest. So last year’s expenses were higher than normal but keep in mind we also incurred expenses this quarter related to the (indiscernible). We can implement permanent expense reductions earlier in 2013 so basically closing the U.S. office and reducing professional service expenses, that are now currently in our lower expense base.

And net interest expense was reduced year-over-year from 6.7 million to 4.5 million in Q4 2013 a result of proactive action we’ve taken to improve our capitalization. Adjusted EBITDA attributable to company shareholders which we believe (indiscernible) underlying ongoing economics of the business was 3 million, a 14.3% or 6.5 million decrease from Q4, 2012. Adjusted EBITDA margin remained unchanged at 29%. Our GAAP net loss attributable to company shareholders was 5.1 million or a $0.09 per diluted ADS. The GAAP results including non-cash items such as warrant revaluation. Now all other relevant items, non-GAAP net loss attributable to China Hydroelectric Corporation shareholders from continuing operations was 5.5 million or $0.09 diluted ADS for the fourth quarter of 2013 compared to a net loss of 8.3 million or $0.15 per diluted ADS in the prior year period.

Now I will briefly highlight financial results from continuing operations for the 12 months ended December 31, 2013. Because of variability in weather will encourage investors to analyze our results on an annual basis and in fact over multiple year timeframe. This gives us an opportunity for the natural weather variability to average out and is a better indicator of the long term economics of our business.

All figures will refer to the full year 2013 unless as specified otherwise and will reflect only continuing operations. Our net revenue were $74.5 million, a decrease of 12.8% year-over-year principally due to lower precipitation in our three main operating regions. With still 1.5 billion kWh of electricity in the period a decrease of 13.2% a year earlier period.

Our effective tariff remained unchanged at RMB0.33/kWh and the gross profit decreased 21.2% year-over-year to 39.2 million primarily due to lower revenue and the fixed nature of the cost of revenue and the gross margin decreased to 53% from 58% last year.

And G&A expenses for 2013 decreased by 34% to 13.3 million from 20.3 million for 2012 for the reasons we discussed earlier. Net interest expense declined to 22.5 million versus 28 million in the year ago period due to a decrease in the balance of borrowings to third party. And adjusted EBITDA on continuing basis attributable to common shareholders were 49.9 million a decline of 7.2% from the year earlier period and net loss attributable to China Hydroelectric Corporation shareholders was 2.2 million in 2013 compared to 5.2 million in the prior year period. A non-GAAP net income attributable to China Hydroelectric shareholders was 0.7 million compared to non-GAAP net loss of 3.8 million in the prior year period.

I will now like to review our balance sheet; we ended the year with cash and equivalents of 14.2 million compared with 17.6 million as of September 30, 2013. Long term bank loans were 250.1 million as of December 31, 2013, an increase from 238.5 million as of September 30, 2013.

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

You-Su Lin

Thank you Liya. Before we go to questions I want to give you an update precipitation patterns in the first quarter [ph] to help you assess our current situation. As of today going forward in the first quarter of year 2014 has been lower than that of the same period in year 2013. Fujian and Zhejiang which are regions in which the company received the higher tariff, continued to experience average to slightly below average levels of precipitation but please in keep mind that actual precipitation results maybe materially different than the one’s reported. In addition we like to provide a brief update about legal proceedings the first is the labor attribution claim alleging unpaid salary and a social security payments of RMB6.6 million.

On November 26, 2013, a ruling was delivered which first awarded RMB3.5 million for unpaid employee salary and a social security upto November 30, 2013 and second concluded that we shall not any pay salary or social security for the employees of Wuyue since November 30, 2013.

On February 17, 2014 we paid RMB3.5 million to Wuyue in accordance with this ruling which has been immediately allocated to the Wuyue employees. The second claim which should be analyzed for our late capital injection. The company filed a counter-claim against Lantian at CIETAC for termination of agreements between Lantian and the Company. We’re 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 Wuyue.

We expect CIETAC to deliver a ruling in relation to this proceeding during the second quarter of this year, which will be final and binding to all parties. There is more detail of this claim in our press release.

Finally I’m pleased to announce that our hydroelectric projects in Yunnan province have received tariff increase in year 2014 for electricity sold to the provincial grid companies. The new tariff per kilowatt hour sold to the provincial grid companies is RMB0.1927/kWh from June to October than RMB0.235 during May and November, and RMB0.282 from December to April. So it's different from period to period. As of today the Company has not received any notice indicating a change to the tariffs received for electricity sold to non-provincial grid companies.

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

Question-and-Answer Session

Operator

(Operator Instructions). We have a question from (indiscernible).

Unidentified Analyst

I had a question regarding the preliminary documents that are going out to shareholders. In those documents it had mentioned in the background of the transaction that there was a Bidder A, who offered $4 a share for ADS. There was a Bidder B that offered $4.75 for ADS and I’m very concerned whether or not this was a fair process. When I see such premiums over what the current consortium is offering as a shareholder who is basically excluded from having any say in this outcome due to the consortiums over 50% shareholdings in the company I don’t know what kind of legal remedies there are but this does not seem like this is a fair price to shareholders when you’ve two independent groups offering considerably more. I was wondering if you can comment or if the special committee could put together something that will explain the shareholders why did they not proceed and discuss with those groups who were even willing to accept to buy only 50% of the company at still significantly higher premiums. Thank you.

Scott Powell

We’re not commenting on the proposed transaction on this conference call. Please refer to our future filings with the SEC and the Company’s future press releases for updates on the transaction.

Unidentified Analyst

At this point in time that’s all people care about is transaction. The company as a public entity is going away. This is our only concern, what we’re getting? We’re not getting stock in future entity. There is nothing for us after this. This is our payout. So I think people should understand this because this is basically looks to me like a case where management is taking control is usurping our value. Hope other shareholders feel the same and vote against this. Thank you.

Operator

(Operator Instructions). And Mr. Powell there are no further questions at this time.

Scott Powell

Thank you everyone for taking the time today to join our fourth quarter and full year 2013 earnings conference call. The Company looks forward to updating you on it's progress in the near future. Thank you and have a good day.

Operator

And that concludes today’s teleconference. Thank you for your participation.

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