UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT
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Commission file number: 001-34609
CHINA HYDROELECTRIC CORPORATION
(Exact name of Registrant as specified in its charter)
Not applicable
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
25B, New Poly Plaza, No. 1 North Chaoyangmen Street
Dongcheng District, Beijing
People’s Republic of China 100010
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class |
Name of each exchange on which registered |
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American Depositary Shares, each representing three ordinary shares, par value US$0.001 per share |
New York Stock Exchange |
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Ordinary Shares, par value $0.001 per share |
New York Stock Exchange* |
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Warrants each to purchase three Ordinary Shares |
New York Stock Exchange |
*Not for trading, but only in connection with the registration of American Depositary Shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 153,295,516 ordinary shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £ Yes R No
If this report is an annual or transaction report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. £ Yes R No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. R Yes £ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). £ Yes £ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer £ Accelerated filer £ Non-accelerated filer R
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP R International Financial Reporting Standards as issued by the International Accounting Standards
Board £ Other £
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow. £ Item 17 £ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ Yes R No
CHINA HYDROELECTRIC CORPORATION
Page
1
2
4 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
4 OFFER STATISTICS AND EXPECTED TIMETABLE
4 KEY INFORMATION
4 INFORMATION ON THE COMPANY
34 UNRESOLVED STAFF COMMENTS
88 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
88 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
128 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
143 FINANCIAL INFORMATION
147 THE OFFER AND LISTING
148 ADDITIONAL INFORMATION
150 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
160 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
162
163 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
163 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
163 CONTROLS AND PROCEDURES
163 AUDIT COMMITTEE FINANCIAL EXPERT
165 CODE OF ETHICS
165 PRINCIPAL ACCOUNTANT FEES AND SERVICES
165 EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
166 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
166 CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
166 CORPORATE GOVERNANCE
166
167 FINANCIAL STATEMENTS
167 FINANCIAL STATEMENTS
167 EXHIBITS
167
F-1
i
TABLE OF CONTENTS
MARKET RISK
HOLDERS AND USE OF PROCEEDS
Page
ii
Page iii
This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, the asset and liability accounts have been translated from Renminbi to U.S. dollars using the middle rates promulgated by Bank of China
at the balance sheet dates, and income and expense items have been translated using the average of the middle rates promulgated by Bank of China during the applicable period. We make no representation that the Renminbi amounts referred to in this annual report could have been or could be
converted into U.S. dollars at any particular rate or at all. See “Item 3—A. Selected Consolidated and Other Financial and Operating Data—Exchange Rate Information”. Unless the context otherwise requires, references in this annual report to:
•
“years” are to calendar years and, where the context requires, our fiscal year; • our “hydroelectric power projects” includes the operating company which owns the project, where the context requires; • “we,” “us,” “our company,” “our,” “CHC” and “China Hydroelectric” refer to China Hydroelectric Corporation and its subsidiaries. For SEC reporting purposes, China Hydroelectric Corporation is the successor company to our predecessor company, Binglangjiang. Our financial statements and
other financial and operating data presented in this annual report reflect the results of operations of Binglangjiang from April 25, 2007, the date we acquired Binglangjiang; • “Binglangjiang” refers to Yunnan Huabang Electric Power Development Co. Ltd., which for SEC reporting purposes is our predecessor company. Binglangjiang’s financial and operating data presented in this annual report are solely those of Binglangjiang, and do not reflect the results of operations
of our company or our other subsidiaries; • “shares” or “ordinary shares” refers to our ordinary shares, par value $0.001 per share; • “ADSs” refers to our American depositary shares, each of which represents three ordinary shares, and “ADRs” refers to the American depositary receipts that evidence our ADSs; • “China” or “PRC” refers to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, Hong Kong and Macau; • “RMB” or “Renminbi” refers to the legal currency of China and “US$”, “U.S. dollars” or “$” refers to the legal currency of the United States; • “effective tariff” means gross revenues, which are revenues not netted for VAT or other applicable business surcharges, if any, recorded in the relevant period, divided by the quantity of electricity sold in such period; and • “effective utilization rate” means the quantity of electricity sold in the relevant period expressed as a percentage of installed capacity for electricity generation in such period. 1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that relate to our current expectations and views of future events. These forward-looking statements are contained principally in the items entitled “Information on the Company,” “Risk Factors,” “Operating and Financial Review and Prospects,”
“Financial Information” and “Quantitative and Qualitative Disclosures About Market Risk.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. These forward-looking statements include, among
other things, statements relating to:
•
our business strategies and plan of operations; • our ability to acquire productive hydroelectric companies and assets; • our capital expenditure and funding plans; • our operations and business prospects; • our dividend policy; • estimates of production of and tariffs applicable to our hydroelectric power projects; • projects under development, construction and planning; • the regulatory environment for the power industry in general and the level of policy support for renewable energy; and • future developments in the PRC hydropower industry. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual outcomes may differ
materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors set forth in “Risk Factors” and the following:
•
supply and demand changes in the electric power markets; • changes in electricity tariffs in the regions in which we operate; • our production and transmission capabilities; • availability of sufficient and reliable transmission resources; • our relationship with, and other conditions affecting, the power grids we service; • risks inherent to hydroelectric power production, in particular hydrological conditions, as well as changes in geologic conditions and equipment failure; • weather conditions or catastrophic weather-related damage; • competition, in particular increased supply of power generated by renewable energy resources available to the power grids we service; • our plans and objectives for future operations and expansion or consolidation; • the effectiveness of our cost-control measures; • inflationary trends and interest rate changes; • the effects of changes in currency exchange rates; • environmental laws, including those directly affecting our operations, and those affecting our customers’ demand for electricity; 2
• changes in political, economic, legal and social conditions in China, including the PRC government’s specific policies with respect to investment in the hydroelectric and power industries, economic growth, inflation, foreign exchange and the availability of credit; and • our liquidity and financial condition. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a
result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we reference in this annual report and have filed as exhibits to this annual report,
completely and with the understanding that our actual future results or performance may be materially different from what we expect. 3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. A. Selected Consolidated and Other Financial and Operating Data On April 25, 2007, we acquired Binglangjiang, and commenced our business as an operator of small hydroelectric power projects in China. The following tables present our selected historical consolidated financial information, and that of our predecessor company Binglangjiang. Our selected
consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated balance sheet data as of December 31, 2009 and 2010 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this
annual report, which have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. The selected statements of operations data for Binglangjiang for the year ended December 31, 2006 and the period from January 1, 2007 to April 24, 2007 and for us for the period from
July 10 (inception) to December 31, 2006 and for the year ended December 31, 2007 and the selected consolidated balance sheet data for Binglangjiang as of December 31, 2006 and for us as of December 31, 2006 and 2007 have been derived from the audited financial statements and the related notes of
Binglangjiang or us not included in this annual report. Our audited consolidated financial statements, and the audited financial statements of our predecessor company Binglangjiang, are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP.
Historical results are not necessarily indicative of the results of operations to be expected for future periods. Binglangjiang is considered our predecessor company for SEC reporting purposes, as we acquired substantially all of the business of Binglangjiang and our own operations prior to that acquisition were insignificant compared to the operations of Binglangjiang. Binglangjiang’s financial statements and
other financial and operating data presented in this annual report are solely those of Binglangjiang, are set forth for the purpose of presenting the financial information of our predecessor company and do not reflect the results of operations of our company or our other subsidiaries. Our consolidated
financial statements and other financial and operating data presented in this annual report reflect the results of operations of Binglangjiang from April 25, 2007, the date we acquired Binglangjiang. You should read this information together with “Operating and Financial Review and Prospects” and the consolidated and other financial statements and the related notes of our company and our predecessor company Binglangjiang included elsewhere in this annual report. 4
Binglangjiang (Predecessor)
Our Company (Successor)
For the
For the
For the Period
For the Year Ended
2007
2008
2009
2010
(US$ in thousands, except share and per share data) Consolidated Statements of Operations Data: Revenue
$
2,075
$
571
$
—
$
2,434
$
14,715
$
36,175
$
66,653 Cost of Revenue
(691
)
(219
)
—
(813
)
(6,025
)
(17,183
)
(24,845
) Gross profit
1,384
352
—
1,621
8,690
18,992
41,808 Operating expenses: General and Administrative expenses
(13
)
(23
)
(901
)
(2,560
)
(6,761
)
(9,099
)
(19,440
) Operating income(loss)
1,371
329
(901
)
(939
)
1,929
9,893
22,368 Other income and expenses: Interest income
1
—
340
1,051
1,340
510
1,191 Interest expenses
(914
)
(285
)
(873
)
(3,275
)
(5,847
)
(14,228
)
(15,852
) Change in fair value of derivative financial liabilities and warrant liability
—
—
—
(266
)
420
(13,793
)
365 Exchange loss
—
—
—
(1,095
)
(1,067
)
(23
)
(855
) Share of losses in an equity investee
—
—
—
(27
)
(503
)
(70
)
— Other income, net
—
—
—
8
144
(225
)
128 Income (loss) before income tax expenses
458
44
(1,434
)
(4,543
)
(3,584
)
(17,936
)
7,345 Income tax expenses
(19
)
(1
)
—
(17
)
(444
)
(1,492
)
(3,360
) Consolidated net income (loss)
439
43
(1,434
)
(4,560
)
(4,028
)
(19,428
)
3,985 Less: Net loss (income) attributable to noncontrolling interests
—
—
—
—
41
32
(243
) Net income (loss) attributable to China Hydroelectric Corporation shareholders
439
43
(1,434
)
(4,560
)
(3,987
)
(19,396
)
3,742 Consolidated Statements of Operations Data: Less: Cumulative dividends on Series A convertible redeemable preferred shares
—
—
—
—
(14,680
)
(19,836
)
(1,989
) Cumulative dividends on Series B convertible redeemable preferred shares
—
—
—
—
(5,531
)
(14,412
)
(1,412
) Cumulative dividends on Series C convertible redeemable preferred shares
—
—
—
—
—
(356
)
(162
) Beneficial conversion feature on Series A convertible redeemable preferred shares
—
—
—
—
—
—
(6,990
) Beneficial conversion feature on Series B convertible redeemable preferred shares
—
—
—
—
—
—
(5,040
) Beneficial conversion feature on Series C convertible redeemable preferred shares
—
—
—
—
—
—
(222
) Changes in redemption value of Series A convertible redeemable preferred shares
—
—
—
—
(10,569
)
—
— Changes in redemption value of Series B convertible redeemable preferred shares
—
—
—
—
(4,134
)
—
— 5
Year
Ended
December 31,
2006
Period from
January 1 to
April 24,
2007
from July 10
(inception) to
December 31,
2006
December 31,
Binglangjiang (Predecessor)
Our Company (Successor)
For the
For the
For the Period
For the Year Ended
2007
2008
2009
2010
(US$ in thousands, except share and per share data) Changes in redemption value of Series C convertible redeemable preferred shares
$
—
$
—
$
—
$
—
$
—
$
(1,872
)
$
— Loss attributable to ordinary shareholders
—
—
(1,434
)
(4,560
)
(38,901
)
(55,872
)
(12,073
) Basic and diluted net loss attributable to China Hydroelectric Corporation shareholders per share
—
—
(0.34
)
(0.33
)
(2.50
)
(3.59
)
(0.08
) Weighted average ordinary shares used in basic and diluted net loss attributable to China Hydroelectric Corporation shareholders per share computation
*
*
4,240,822
13,817,466
15,554,416
15,541,666
143,253,450 Basic and diluted net loss attributable to ordinary shareholders per ADS
—
—
—
—
—
—
(0.25
) Weighted average ordinary shares used in basic and diluted net loss attributable to ordinary shareholders per ADS computation
—
—
—
—
—
—
47,751,150 Other Financial Data: EBITDA, as adjusted(1)
*
*
(901
)
(320
)
6,474
22,782
42,788
*
Not provided, as the information relates to the results of operations of Binglangjiang prior to its acquisitions by us. (1) See “Operating and Financial Review and Prospects—Results of Operations—EBITDA, as adjusted for a reconciliation of this non-GAAP number. 6
Year
Ended
December 31,
2006
Period from
January 1 to
April 24,
2007
from July 10
(inception) to
December 31,
2006
December 31,
Binglangjiang
Our Company (Successor)
As of December 31,
As of December 31,
2006
2007
2008
2009
2010
(US$ in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents
$
142
$
628
$
15,606
$
38,693
$
31,618
$
33,457 Restricted cash
—
50,340
—
—
—
— Accounts receivable, net
152
—
329
3,137
8,434
4,359 Deferred tax assets
—
—
—
1,166
489
1,260 Amounts due from related parties
64
33
25
13
—
5,950 Debt issuance costs
—
—
47
—
—
— Amounts due from an equity investee
—
—
287
4,534
—
— Prepayments and other current assets
206
—
3,269
9,437
4,582
9,486 Total current assets
564
51,001
19,563
56,980
45,123
54,512 Debt issuance costs
—
975
—
—
—
— Investment in an equity investee
—
—
4,721
4,295
—
— Deferred IPO initial public offering costs
—
—
—
6,032
12,774
— Property, plant and equipment, net
16,752
—
20,713
334,512
384,493
583,686 Land use right
—
—
8,333
30,678
38,707
48,944 Intangible assets, net
—
—
3,008
3,666
4,513
6,249 Goodwill
—
—
2,773
96,533
107,824
135,219 Deferred tax assets
—
—
—
—
—
512 Other non-current assets
—
—
—
872
399
709 Total non current assets
16,752
975
39,548
476,588
548,710
775,319 Total assets
17,316
51,976
59,111
533,568
593,833
829,831 Total current liabilities
2,392
850
14,436
77,285
101,467
163,095 Long term loan
13,831
—
10,269
138,133
172,469
224,297 Deferred tax liabilities
—
—
—
13,415
18,599
25,350 Other non-current liabilities
—
—
—
568
104
106 Long-term note
—
50,285
—
—
—
— Convertible redeemable preferred shares
—
—
—
299,236
353,840
— Total China Hydroelectric Corporation shareholders’ equity (deficit)
1,093
841
34,406
4,181
(53,435
)
405,887 Noncontrolling interests
—
—
—
750
789
11,096 Total liabilities and shareholders’ equity (deficit)
17,316
51,976
59,111
533,568
593,833
829,831 7
(Predecessor)
2006
Binglangjiang
Our Company (Successor)
As of and
As of and
As of and
2007
2008
2009
2010 Selected Operation Data(1) Installed Capacity (MW)
$
21.0
$
21.0
$
58.0
(2)
$
271.0
(2)
$
376.60
$
548.8 Electricity Sold (kWh)
106,646,530
23,495,595
108,303,945
(3)
333,964,005
(3)
798,945,372
1,480,742,042 Effective tariff (RMB/kWh)
0.164
0.2
0.18
(4)
0.33
(4)
0.34
(4)
0.33
(4)
(1)
For Binglangjiang, operating data given are for the periods stated. For our company, operating data given are for our period of ownership of the hydroelectric power projects during the periods indicated. (2) Our aggregate installed capacity information presented includes, as of December 31, 2007 and December 31, 2008, the installed capacity of Shapulong, as of December 31, 2008, the installed capacity of Shapulong, Banzhu, and Wangkeng, as of December 31, 2009, the installed capacity of Wangkeng, as
of December 31, 2010, the installed capacity of Wangkeng, Jinlong, Jintang and Jinwei, although as of such respective dates, our equity interest in Shapulong, Banzhu, Wangkeng, Jinlong, Jintang and Jinwei were 50.0%, 90.0%, 90.0%, 55%, 74% and 74% respectively. We acquired the remaining 10.0%
interest in Banzhu in March 2009, the remaining 50.0% interest in Shapulong in August 2009 and the remaining 10% interest in Wangkeng in January 2011. (3) Electricity sold and effective tariff information for the year ended December 31, 2007 does not reflect electricity sold by Shapulong. Electricity sold and effective tariff information for the year ended December 31, 2008 does not reflect electricity sold by Shapulong and Yuanping. Our 50% equity
interest in Shapulong accounted for using the equity method of accounting and our proportional share of Shapulong’s net loss is included as a share of losses in equity investee, in our consolidated statement of operations for the year ended December 31, 2007 and 2008. In the years ended December
31, 2007 and 2008, Shapulong sold 43,292,057kWh, 42,308,157kWh, respectively. We acquired the remaining 50.0% equity interest in Shapulong in August 2009. Although Yuanping commenced operations in March 2007, and has transmitted electricity to the power grid controlled by Fujian Ningde
Electric Power Bureau, that transmission was made without a fixed or pre-determined tariff per kWh until late June 2009. Therefore, cash received in exchange for the transmission of electricity to the power grid before late June 2009 was recorded as customer deposits. Accordingly, no revenues were
recorded by Yuanping in the year ended December 31, 2008. However, related cost of revenue was not deferred, and was charged to expenses as incurred. All of the customer deposits received from the date of our acquisition of Yuanping after the per kWh tariff became fixed or determinable. In
August 2009, the Ningde Pricing Bureau, the regional pricing bureau in Fujian province, approved a unit price per kWh of RMB0.29, inclusive of value-added tax, or VAT, for electricity transmitted by Yuanping to the power grid controlled and owned by the provincial grid company prior to July 8,
2009. The unit price per kWh of RMB0.29 will continue to be in effect until the regional pricing bureau approves a new unit price per kWh. In the year ended December 31, 2007 and 2008, Yuanping transmitted 30,071,595kWh, 28,292,478kWh of electricity, respectively. (4) see Exhibit 15.1 to this Annual Report on Form 20-F for the details of the calculation of effective tariff. 8
(Predecessor)
For the
Year Ended
December 31,
2006
For the Period from
January 1 to
April 24, 2007
For the Period Ended
December 31,
Exchange Rate Information Our financial statements
and other financial data included in this annual report are presented in U.S. dollars. Our business and operations are
primarily conducted in China through our PRC subsidiaries. The functional currency of our PRC subsidiaries is RMB and their
revenues and expenses are denominated in that currency. Unless otherwise noted, the asset and liability accounts have been
translated from Renminbi to U.S. dollars using the middle rates promulgated by Bank of China at the balance sheet dates, and
income and expense items have been translated using the average of the middle rates promulgated by Bank of China during the
applicable period. The middle rates promulgated by Bank of China were RMB7.8087 to $1.00, RMB7.3046 to $1.00, RMB6.8346 to
$1.00, RMB6.8282 to $1.00 and RMB6.6227 to $1.00 as of December 31, 2006, 2007, 2008, 2009 and 2010, respectively, and the
averages of the middle rates during such years were RMB7.9395 to $1.00, RMB7.5560 to $1.00, RMB7.0696 to $1.00, RMB6.8314 to
$1.00 and RMB6.7255 to $1.00, respectively. We make no representation that any RMB or U.S. dollar amounts referred to in this
annual report could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or
at all. The effects of foreign currency translation adjustments are included as a component of accumulated other
comprehensive income in our shareholders’ equity. The PRC government imposes controls over its foreign currency
reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign
trade. On April 4, 2011, the middle rate was RMB 6.5527 to $1.00. B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors An investment in our securities involves significant risks. You should carefully consider the risks described below, together with all of the other information in this annual report, including our consolidated and other financial statements and related notes included elsewhere in this annual report, before you
decide to purchase our securities. If any of these risks actually occurs, our business, prospects, financial condition or results of operations could be materially and adversely affected, the trading price and value of our securities could decline and you could lose all or part of your investment. Risks Relating to our Company and the PRC Hydroelectric Power Industry We have a limited operating history which provides limited reference for you to evaluate our ability to achieve our business objectives. We were formed in July 2006 as a Cayman Islands exempted company with limited liability without any operating business. We have acquired a total of twenty-six operating hydroelectric power projects and will continue to carry out our acquisition strategy in China. Our financial condition, results of
operations and our future success will, to a significant extent, depend on our ability to continue to acquire and, develop hydroelectric power projects throughout China and to achieve significant economies of scale. Our company has a limited operating history and is subject to the risks and uncertainties
associated with early stage companies. Accordingly, you will have a limited basis on which to evaluate our ability to achieve our business objectives. We cannot assure you that more acquisitions can be consummated on terms favorable to us or at all, or that if we achieve those acquisitions we will be able
to operate our expanded business profitably. We also may not successfully complete the greenfield projects we undertake to develop given our lack of experience developing greenfield projects, which refer to projects that lack one or more construction permits and have not begun construction. If we fail
to achieve our business objectives, then we may 9
not be able to realize our expected revenue growth, maintain our existing revenue levels or operate at a profit. Even if we do realize our business objectives, our business may not be profitable in the future. Our business is dependent upon hydrological conditions, which may from time to time result in conditions that are unfavorable to our business operations. Our hydroelectric power generating prospects are dependent upon hydrological conditions prevailing from time to time in the broad geographic regions in which our existing and future hydroelectric power projects are located. There can be no assurance that the water flows at our existing and future
sites will be consistent with our expectations, or that climatic and environmental conditions will not change significantly from the prevailing conditions at the time our projections were made. Water flows vary each year, and depend on factors such as rainfall, snowfall, rate of snowmelt and seasonal
changes. Our existing and future hydroelectric power projects may be subject to substantial variations in climatic and hydrological conditions which may reduce water flow and thus our ability to generate electricity. While we have selected and will continue to select our hydroelectric power projects for
acquisition in part on the basis of their projected outputs, the actual water flow required to produce those outputs may not exist or be sustained. For example, utilization at all our hydroelectric power projects in 2007 was below our forecast due to low levels of precipitation during the year throughout
China. If hydrological conditions result in droughts or other conditions that negatively affect our existing or proposed hydroelectric generation business, our results of operations could be materially and adversely affected. The operation of our hydroelectric power projects and customer demand for our power may be vulnerable to disruptions caused by natural and man-made disasters, which may materially and adversely affect our results of operations. Our hydroelectric power projects could be required to cease operating in the event of a drought, and to cease operating or even be damaged in the event of a flood. Water supply to our hydroelectric power projects and the projects themselves are vulnerable to natural disasters including, but not
limited to, earthquakes, storms, tornadoes and floods, as well as disasters caused by human actions such as terrorist attacks, military conflicts and other deliberate or inadvertent actions which may affect the availability of water supplies or water flow to our hydroelectric power projects. For example, in
1988, heavy floods occurred in Zhejiang province, causing large scale damage to dams and the water supply system. A severe snowstorm in Zhejiang province in 2008 interrupted the transmission system in the area and contributed to the decrease in the effective utilization rate of Shapulong that year. In
2008, a major earthquake struck Sichuan province, causing great loss of life and property and disruption to the local economy. The earthquake in 2008 caused damage to the tailwater concrete apron and the spillway gates of Liyuan hydroelectric power project and the repair of such damage cost RMB11.7
million ($1.7 million) and was completed in March 2010. Our hydroelectric power projects located in Yunnan province, Sichuan province and Fujian province are all in areas of relatively high seismic risk as compared to other areas of China. Such disasters are unpredictable and can significantly damage
our access to water supply and power plant equipment as well as the property of our consumers. Under such circumstances, market demand for power in general may be significantly and adversely affected, reducing the need for the electricity we produce, and we may be unable to continue operation of
our plants or to produce the level of electricity we expect. The insurance coverage we maintain may not be adequate to compensate us for all damages and economic losses which may arise in connection with these disasters. Such disruption to our operations could materially and adversely affect our
results of operations. We may encounter difficulties in identifying suitable acquisition opportunities, which would result in us being dependent upon our current portfolio of hydroelectric power projects and having limited revenue growth potential. Our ability to implement our acquisition strategy will depend on a number of factors, in particular, our ability to identify suitable acquisition targets and reach agreements with vendors for 10
acceptable consideration and on commercially reasonable terms. We believe identifying and acquiring projects on reasonable terms may be more difficult in the future as domestic and international competitors seek to acquire small hydroelectric power projects in China. If we are unable to acquire suitable hydroelectric power projects in China, we will continue to remain dependent upon a our existing hydroelectric power projects. This may:
•
result in our dependence upon the performance of our existing operating plants; • result in our dependence upon electricity sales in the existing geographical areas; • subject us to increased risks associated with drought or other natural disasters in the existing geographical areas we operate; and • limit our ability to grow our revenues and to obtain the benefits of scale that we anticipate. Greenfield projects and projects under construction present substantial development, construction, start-up and partnership risks, which could materially and adversely affect our results of operations, financial condition and growth prospects. Greenfield projects, in particular the Wuyue pumped storage facility, and projects under construction, present substantial development risk. The development and construction of hydroelectric power projects is time-consuming and complex and requires significant capital investment. In connection with
the development and construction of hydroelectric power projects, we will seek to obtain government permits and approvals, land purchase or leasing agreements, equipment procurement and construction contracts, operation and maintenance agreements, and sufficient equity capital and debt financing.
Factors that may impair our ability to develop and construct hydroelectric power projects include:
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delays in obtaining various regulatory approvals, licenses or permits from different governmental authorities at different levels, including permission for the construction and operation of the hydroelectric power project itself, the environmental permits and permits to use the relevant land; • shortages or increases in the cost of equipment, materials or labor; • adverse weather conditions, which may delay the completion of hydroelectric power projects or substations, or natural disasters, accidents or other unforeseen events; • unforeseen engineering, design, environmental or geological problems; • opposition of local interests; • strikes and labor disputes; • inability to obtain financing on satisfactory terms; and • adverse changes in the PRC regulatory environment. Any of these factors may cause delays in completion of hydroelectric power projects and may increase the cost of contemplated projects. If we are unable to complete the projects contemplated, the costs incurred in connection with such projects may not be recoverable. Even if we complete these
projects, as a result of project delays, cost overruns, changes in market circumstances or other reasons, we may not be able to achieve the intended economic benefits or demonstrate the commercial viability of these projects, which may materially and adversely affect our results of operations, financial
condition and growth prospects. In addition, the commencement of operations at a newly constructed hydroelectric power project involves many risks, including start-up problems, the breakdown or failure of equipment or processes, performance below expected or contracted levels of output or efficiency and problems with the
construction of new supporting infrastructure, such as grid transmission equipment. While manufacturers’ warranties are generally obtained for limited periods relating to each project and its equipment in varying degrees, and construction contractors may guarantee certain performance levels, subject to the
payment of liquidated damages, the proceeds of such warranties or performance guarantees, if any, may not be adequate to cover lost revenues or increased costs and 11
expenses associated with equipment problems during project start-up. We also may develop projects with local development partners, which exposes us to risks associated with our partners’ failure to retain development rights, obtain permits and approvals required for the development of a project or
perform their management, construction or financing obligations. Realization of any of these risks could materially and adversely affect our results of operations, financial condition and growth prospects. We derive our revenues solely from the sale of hydroelectric power electricity and each of our projects typically has only one customer. Any prolonged disruption to the demand for hydropower or termination of a customer relationship may cause our revenues to decrease significantly. We derive revenues solely from the sale of electricity generated by hydroelectric power projects, and most of our power is sold to one of two national power grids. If for any reason the national power grids reduce or eliminate their purchases of hydropower, whether due to the emergence of a
cheaper renewable energy source, withdrawal of government policy support for the dispatch of renewable energy or a severe drop in the PRC’s demand for power, we may not have alternative customers readily available to us. Without alternative sources of income, our revenues would decrease
significantly should a reduction in demand for hydropower or lack of customers continue for a prolonged period. Failure to renew the power purchase agreement could result in a reduction or complete loss of revenues from the hydroelectric power project, which would have a materially adverse effect on our revenues, results of operations and net cash used in operating activities. Our power purchase agreements with the local grids to which our hydroelectric power projects are connected generally have terms of one to five years. Some of these agreements provide for automatic renewal while others do not. If we should be unable to renegotiate a power purchase agreement
with the local grid, it is unlikely we would be able to obtain alternative customers for the power generated by the project, as only one grid is available to each hydroelectric power project and there are no neighboring industrial sites ready to take up the power. We depend on the experience of our executive officers and our business may be severely disrupted in the event that we lose their services and are unable to find replacements with comparable experience and expertise. We believe that our future success is dependent upon the continued services of our executive officers, as we rely on their industry experience and expertise in our business operations. In particular, we rely heavily on John D. Kuhns, our Chairman and Chief Executive Officer, Dr. You-Su Lin,
Chairman of Beijing A.B.C. Investment, and “James” Tie Li, our Chief Financial Officer and President, for their business vision, management skills and technical expertise in the hydroelectric industry as well as their working relationships with many of our potential acquisition targets, the power grids we
service and other participants in the hydroelectric industry. We do not maintain key-man life insurance for any of our executive officers. If any of these executive officers were unable or unwilling to continue in their present positions, or if they left our company, we may not be able to replace them with
comparably skilled executives, which would cause severe disruption to our ability to manage our business. Each of our executive officers has entered into an employment or other agreement with us, which contains confidentiality and non-competition provisions. However, if any disputes were to arise with
respect to such agreement, even if the executive left our company to join or form a competing entity, we cannot assure you of the extent to which such person’s agreement could be enforced in China because the Chinese legal system, especially with respect to the enforcement of such provisions, is still
developing. If we are unable to retain or replace our key personnel and other key employees, we may not be able to implement our business strategy and our financial condition and results of operations may be materially and adversely affected. 12
We will need additional funding to accomplish our growth strategy and may be unable to raise capital on terms favorable to us or at all, which could increase our financing costs, dilute your ownership interests, affect our business operations or force us to delay, reduce or abandon our growth strategy. Our growth strategy is to acquire and develop additional hydroelectric power projects in China and expand those projects with potential for expansion. To successfully implement this growth strategy, we will need to raise additional funds. Our ability to arrange financing and the cost of such financing
are dependent on numerous factors, including but not limited to:
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general economic and capital market conditions; • the availability of credit from banks or other lenders; • investor confidence in us; and • the continued performance of our hydroelectric power projects. We cannot predict when, if ever, our operations will generate sufficient cash flows to fund our capital investment requirements. Until they do, we will be required to finance our cash needs through public or private equity offerings, bank loans or other debt financing, or otherwise. We currently intend
to increase our levels of debt financing to optimize our capital structure. There can be no assurance that international or domestic financing for future power plant acquisitions, development and expansion of existing hydroelectric power projects will be available on terms favorable to us or at all, which
could force us to delay, reduce or abandon our growth strategy, increase our financing costs, or both. Additional funding from debt financings may make it more difficult for us to operate our business because we would need to make principal and interest payments on the indebtedness and may be obligated to abide by restrictive covenants contained in the debt financing agreements, which may,
among other things, limit our ability to make business and operational decisions and pay dividends. Furthermore, raising capital through public or private sales of equity to finance acquisitions or expansion could cause earnings or ownership dilution to your shareholding interests in our company. Assumptions applied to our investment analyses and feasibility studies may not be accurate, and thus our actual return on investments, operational results, and overall growth may be materially and adversely affected. In performing investment analysis and feasibility studies for our acquisition and development targets, we consider factors such as: (i) demand for power and growth potential in the province where the hydroelectric power projects is located, (ii) increase in power generation capacity in the locality, (iii)
the average tariff of hydroelectric power projects of similar types and capacity, (iv) quality of transmission systems to the local power grids, (v) facilities and technology at the power plant and (vi) ability to retain existing debt financing for the plant or obtain new financing. However, much of the
information we rely on in preparing these analyses is provided by the sellers of the plants. With the rapid development of the PRC hydroelectric power industry in recent years, there is some increased risk of plants being built based on inaccurate or incomplete technical data. As a result, the assumptions
we use to perform our internal investment analyses and feasibility studies may not be accurate or complete. If any one of our observations or assumptions, or a combination thereof, proves to be inaccurate, then our estimated returns on investments, operational results and our overall growth may be
materially adversely affected. The operations of our hydroelectric power projects may be adversely affected by the failure of key equipment, civil structures or transmission systems, which could result in lost revenues, increased maintenance costs and our owing damages to our customers for lost revenues. The breakdown of generation equipment or failure of other key equipment or of a civil structure in one or more of our hydroelectric power projects could disrupt the generation of electricity and result in revenues being lower than expected. Further, any breakdown or failure of 13
one or more of our transmission systems could disrupt transmission of electricity by a power plant to the power grid. We have in the past experienced an equipment breakdown at two of our hydroelectric power projects, resulting in temporary suspensions of electricity generation and distribution. Repair
of such breakdowns may take one or two days or up to a month, depending on the nature of the problem and availability of spare parts. In addition, if the problem is related to the grid, we will not be able to dispatch our power until the grid carries out the necessary repairs. A portion of the generation
facilities that we have acquired, or may acquire in the future, were, or may have been, constructed many years ago. Older generating equipment may require significant capital expenditure to keep it operating efficiently. Such equipment is also likely to require periodic upgrading and improvement.
Breakdown or failure of one of our plants also may prevent us from performing under the applicable power sales agreement which, in certain situations, could result in termination of the agreement or incurring liability for liquidated damages. These events may reduce our ability to generate power,
resulting in loss of revenues and increased maintenance costs. Our power generating operations may be adversely affected by operational risks, which may result in uninsured losses. Operating hydroelectric power projects involves many risks and hazards which may be beyond our control and could cause significant business interruptions, personal injuries and property or environmental damage, and could increase power generating costs at affected hydroelectric power projects for
an unknown duration. These risks include but are not limited to:
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failure of power transmission systems; • unexpected maintenance or technical problems; • human error; • failure of our mechanical, software or monitoring systems; and • industrial accidents. The occurrence of any of these events, and the consequences resulting from them, may not be covered adequately or at all by our insurance policies. We do not currently carry any third-party liability insurance, business interruption insurance or insurance covering environmental damage arising from
accidents on our property or relating to our operations. See “Information on the Company—Insurance”. Uninsured losses incurred or payments we may be required to make may have a material adverse effect on our results of operations and financial condition. Our operations may be interrupted by realization of unexpected risks or difficulties in integrating acquired businesses, which could interrupt our existing business and materially and adversely affect our results of operations. Our continued growth and ability to leverage our management expertise depend on the successful implementation of our acquisition strategy. We cannot assure you that any particular acquisition will produce the intended benefits. For instance, if we fail to integrate an acquired project into our
operations successfully, or the synergies expected from an integration ultimately fail to materialize, then our existing business operations may be interrupted. We may have as a result expended significant management time, capital and other resources to the transaction, which interrupted our existing
business operations. Risks which may be incurred through acquisitions include, but are not limited to:
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potential construction or engineering problems which may expose us to severe economic loss or legal liabilities and require substantial expenditure from us to remediate; • unforeseen or hidden liabilities, including exposure to legal proceedings, associated with newly acquired companies; • failure to generate sufficient revenues to offset the costs and expenses of acquisitions; 14
• potential impairment losses and amortization expenses relating to goodwill and intangible assets arising from any of such acquisitions, which may materially reduce our net income or result in a net loss; and • possible contravention of Chinese regulations applicable to such acquisitions. Any one or a combination of the above risks could interrupt our existing business and materially adversely affect our results of operations. Our growth strategy is dependent upon our ability to manage our growth effectively which, if unsuccessful, could result in a material adverse impact on our financial condition and results of operations. Our business and operations have been expanding rapidly. The success of our growth strategy depends in part upon our ability to manage our rapid growth, including, for example, our ability to assimilate management of acquired plants into our own management structure, to hire, train, supervise and
manage new employees, to establish and maintain adequate financial control and reporting systems and other systems and processes, and to manage a rapidly growing and much larger operation. We cannot assure you that we will be able to:
•
expand our systems and processes effectively or efficiently or in a timely manner; • allocate our human resources optimally or reduce headcount without experiencing community protest, strike or other social unrest; • identify and hire qualified employees or retain valued employees; • incorporate effectively hydroelectric power projects in various stages of development that we may acquire; • maintain good relationship with power grids; or • centralize and improve the efficiency of the management and operations of the hydroelectric power projects acquired. If we fail to effectively manage our growth, then our financial condition and results of operations could be materially adversely affected. On-grid tariffs are set based on regulatory guidance, actual supply of electricity to a power grid and regional demand for electricity, and changes in these factors may materially and adversely affect our results of operations. We make all of our electricity sales to power grids and such sales are subject to on-grid tariffs. Since April 2001, the Chinese government has gradually implemented a new on-grid tariff setting mechanism based on the actual costs of power projects as well as the average costs of comparable power
projects that were constructed during the same period within the same provincial power grid. This on-grid tariff setting mechanism was intended to replace the old mechanism for setting on-grid tariffs for planned output. Based on our experience, the determination of such average costs usually takes into
consideration such factors as:
•
construction costs, which vary according to the installed capacity of the individual power projects; • operating and administrative expenses; • maintenance and repair costs of power projects; and • interest expense on outstanding debts. Based on the factors listed above, we receive lower tariffs in comparison to thermal power projects because we have (i) minimal fuel costs and (ii) lower operating and capital construction costs. Any future reductions in our tariffs, or inability to obtain higher tariffs, for example, to cover any
increased costs we may have to incur, as a result of the on-grid tariff-setting mechanism or a change to such on-grid tariff-setting mechanism may adversely affect our revenues and profits. In some regions we negotiate annually with the local grid operators the on-grid tariff for our power 15
before applying to the government for approval of the tariff, while in other regions the tariff is set by agreement between the power grid and the government. In addition, the price for electric power sold to end consumers is fixed in China because the sales price of electricity is uniformly formulated by the National Development and Reform Commission. Thus, we must estimate the price at which the National Development and Reform Commission will
allow power grids to sell electricity and set our prices so that, from the power grids’ perspective, their cost for our electricity is acceptable when considered with the costs of other power producers on the grid. Thus, although our on-grid tariffs are lower than those for thermal power projects, the tariff
levels we obtain from local grids may still be impacted by changes in the cost of generating thermal power and actual regional demand for power. In addition, if demand for electricity rises beyond expectations, then we cannot raise our prices accordingly to benefit from the increased demand. If actual
sales prices are significantly below our estimates for such sales prices, then our financial condition and results of operations may be materially and adversely affected. If less than all of the electricity we generate is dispatched by the grids, our future revenues will be reduced. Our profitability depends, in part, upon each of our hydroelectric power projects generating electricity at a level sufficient to meet or exceed the planned generation agreed with our local dispatch company, which in turn will be subject to local demand for electric power and dispatching to the grids by
the dispatch centers of the local grid companies. The dispatch of electric power generated by a power project is controlled by the dispatch centers of the applicable grid companies pursuant to a dispatch agreement with us and pursuant to governmental dispatch regulations. In each of the markets in which we operate, we compete against other
power projects for power sales, and dispatch is allocated based on actual demand from the grid. No assurance can be given that the dispatch centers will dispatch the full amount of the planned generation of our power projects. A reduction by the dispatch centers in the amount of electric power
dispatched relative to our hydroelectric power projects’ planned generation could have a material adverse effect on our power generation and thus reduce our revenues. Compliance with environmental regulations can be costly, and we may become subject to further environmental compliance requirements in connection with our operations, which could materially and adversely affect our results of operations and financial condition. We are required to comply with PRC national and local regulations regarding environmental protection for the construction and operation of our hydroelectric power projects. For all of our existing hydroelectric power projects, we have applied for all the environmental permits that are necessary
under current PRC laws and regulations to conduct our business, but have not obtained some of the environmental permits from the relevant governmental authorities yet. Furthermore, to the extent that our existing hydroelectric power projects may have been in compliance with PRC environmental
protection laws and regulations at the time they were constructed, we cannot assure you that the PRC government will not require retroactive application of current laws and regulations to such old plants. Compliance with environmental regulations can be very expensive, and non-compliance with these
regulations may result in adverse publicity, potentially significant monetary damages and fines and suspension of our business operations. In addition, if more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. If we fail to comply with
any future environmental regulations, we may be required to pay substantial fines, suspend production or even cease operations. We do not carry any insurance for damages resulting from failure to comply with environmental regulations. In addition, China currently has no minimum flow requirements such as those that have been implemented by other countries that employ hydroelectric power. The purpose of minimum flow requirements is to ensure that there is enough water upstream and downstream for other users, and for
navigation, fish and other wildlife. China may implement minimum flow requirements in the future, and to the extent we do not have sufficient water supply due to such minimum flow requirements, we may have to reduce our power generation or cease operation of the affected 16
plants, as a result of which our results of operations and financial condition would be materially and adversely affected. Our business and business prospects rely in part on policy support from the PRC government, and our financial condition and results of operations may be materially and adversely affected if we lose such support. National, provincial and local governments in China support the expansion of hydroelectric power, which eases the approval process for facility acquisition, construction and financing. Under the PRC Renewable Energy Law, Catalogue for the Guidance of Foreign Investment Industries, the Eleventh
Five-year Plan of the Development of Renewable Energy Resources and other relevant laws, expansion of both large- and small-scale hydroelectric power production is one of the priorities for the development of the nation’s power supply, and foreign investment in the sector is encouraged. We currently
enjoy several types of government support, including provision of bank loans, sometimes at lower interest rates than those borne by other private companies, policy support for local grids to purchase all the power we generate and lower levels of VAT levied on small hydropower production in some
provinces where we have operations. If for any reason, such as development of new energy production technologies or migration to other renewable energy sources, China removes such policy support, our financial condition and results of operations may be materially and adversely affected. Competition in the PRC power industry may increase, and our results of operations and growth prospects may be materially and adversely affected if we are unable to compete effectively. We compete in the Chinese domestic market with other PRC power generation companies. The five biggest power companies in China, namely, China Huaneng Group, China Datang Group, China Huadian Group, China Guodian Group and China Power Investment Group, collectively operated
47.7% of China’s total power generation installed capacity by the end of 2009, according to the State Electricity Regulatory Commission, and the 30 largest power companies in China collectively operated 70.43%. These power companies and a number of other power producers have substantially greater
financial, infrastructure or other resources than we do. We may also face competition from new entrants to the hydropower industry having business objectives similar to ours, including venture capital and private equity funds, leveraged buyout funds, and other operating businesses that may offer more
advanced technological capabilities or that have greater financial resources. The ability of our competitors to access resources that we cannot access may prevent us from acquiring additional hydropower projects in strategic locations or from increasing our generating capacity. There is also increasing
competition among operating power projects for increases in dispatched output, higher on-grid tariffs and land use rights. If we are unable to compete successfully, our growth opportunities to increase generating capacity may be limited and our revenue and profitability may be adversely affected. In
recent years, the ongoing reform of the PRC power industry has included experimental programs to set on-grid tariffs through competitive bidding among thermal power projects. The tariffs determined by competitive bidding may be lower than the pre-approved tariffs for planned output. In the future,
competitive bidding may extend to hydroelectric power projects and further increase price competition among domestic power generation companies. We cannot assure you that increased competition in the future will not have a material adverse effect on our results of operations and growth prospects. Our business depends on the competitiveness of hydroelectric power generation in relation to other forms of electric power generation. Fewer hydroelectric power projects may be built and less electricity from hydroelectric power sources may be sold if fossil fuel prices decline significantly or if other
renewable energy sources become less expensive than hydroelectric power, either of which could have a material adverse effect on our results of operations, financial condition and growth prospects. The demand for power projects that produce electricity from renewable energy sources such as water depends in part on the cost of generation from other sources of energy. The terms under 17
which supplies of petroleum, coal, natural gas and other fossil fuels, as well as uranium, can be obtained are key factors in determining the economic interest of using these energy sources rather than renewable energy sources. The principal energy sources in competition with renewable energy sources are
petroleum, coal, natural gas and nuclear energy. The high price levels for fossil fuels, in particular, petroleum and natural gas, can enhance the price competitiveness of electricity from renewable energy sources. A decline in the competitiveness of electricity from renewable energy sources in terms of cost
of generation, technological progress in the exploitation of other energy sources, discovery of large new deposits of oil, gas or coal, or a decline in prices of those fuels, could weaken demand for electricity generated from renewable energy sources. In the renewable energy sector, competition primarily exists with regard to factors such as bidding for available sites, performance of sites in generation, quality of technologies used, price of power produced and scope and quality of services provided, including operation and maintenance services. A
decline in the competitiveness of electricity generated from hydroelectric sources in terms of such factors could weaken demand for hydroelectric power. Should hydroelectric power production become uncompetitive with other forms of renewable energy production, or if fossil fuel production becomes
more cost competitive, the construction of hydroelectric power projects may slow, thus reducing our pool of potential acquisition targets and limiting our ability to grow our operations. Certain of our operating subsidiaries are parties to loan agreements that provide for lender rights that may adversely affect our ability to operate our business and restrict our ability to pay dividends and we could be materially adversely affected if our lenders accelerate our debt due to our current or
future failures to comply with our loan agreements. Pursuant to loan agreements to which certain of our operating subsidiaries are a party, our lenders have rights that include the following: (i) restricting the borrower during the term of the loan from undertaking any shareholding change or restructuring without obtaining prior approval of the lender;
(ii) restricting the borrower from undertaking investment, asset transfer or pledging or mortgaging its assets without obtaining prior approval of the lender; (iii) restricting the borrower from paying dividends until the loan is fully repaid; and (iv) placing the borrower’s power generation revenues into
escrow until the loan is repaid. These restrictions may prevent us from disposing of or restructuring the ownership of our hydroelectric power projects, and limit the funds available to pay dividends to our shareholders. In addition, during the year ended December 31, 2009, our Wuliting and Yingchuan hydroelectric power projects were not in compliance with certain covenants relating to use of loan proceeds contained in the loan agreements to which they are parties. As a result, we consider the aggregate balance
in the amount of $32.6 million of these loans to be callable and reclassified the balance from long term loans to current portion of long term loans as of December 31, 2009 and recorded an interest expense in the amount of $0.2 million related to penalty charges for the noncompliance for the year ended
December 31, 2009. During the year ended December 31, 2010, the portion of the loan of Wuling that was not in compliance with certain debt covenants provisions as of December 31, 2009 was repaid in full and the remaining non-current portion of the loan was reclassified as long-term loan accordingly.
The loan balances of Yinchuan that were not in compliance with certain debt covenants as of December 31, 2009 were not settled during the year ended December 31, 2010 and remained classified as current portion of long-term loans as of December 31, 2010. Planning, construction, acquisition and operation of our hydroelectric power projects require us to obtain and maintain a significant number of permits and approvals from PRC government agencies, some of which we have not obtained or were not transferred to us upon project acquisition. Failure to
obtain these permits and approvals could result in significant fines and our 18
loss of the right to develop or operate those assets, which would materially and adversely affect our future growth plans and results of operations. The planning, construction, acquisition and operation of small hydroelectric power projects in China requires permits and approvals to be obtained and maintained under different regulatory schemes administered by a wide range of PRC government agencies. Many of the completed projects we have
acquired have not historically obtained or have failed to maintain all of those permits required for their operation, and in some cases permits that were obtained have not been transferred to us following our acquisition of the plant. Furthermore, the development rights we have obtained or may obtain
are, in most cases, for projects that have not yet received planning and other permits. We believe we have applied for the grant, transfer or renewal, as applicable, of all permits and approvals required to develop and operate our hydroelectric power projects. However, our applications with respect to one
or more projects may be rejected and we may be fined for failure to timely obtain permits and approvals for any of those projects. Failure to obtain missing permits and approvals may in certain cases result in significant fines or the government authorities requiring us to cease operation of our
hydroelectric power projects, or unwind the acquisition of the project, any of which would materially and adversely affect our future growth plans and results of operations. Failure to obtain permits and approvals for our development projects may result in our inability to complete and operate the project,
or our being subject to penalties and fines upon completion of the project, either of which could materially and adversely affect our future growth and results of operations. Our operations in China are extensively regulated by the PRC government and our costs associated with compliance with such regulations are substantial. Our results of operations and future growth prospects may be materially and adversely affected by future changes in government regulations and
policies. All of our hydroelectric power projects in China are subject to extensive regulation by the PRC governmental authorities, including central governmental authorities such as the Ministry of Commerce, the State Administration for Industry and Commerce, the National Development and Reform
Commission, the State Electricity Regulatory Commission, the State Administration of Taxation, the Ministry of Environmental Protection, the Ministry of Communications and Transportation, the Ministry of Water Resources, the Ministry of Land and Resources and the Ministry of Housing and Urban-
Rural Development, as well as their provincial and local counterparts. Government regulations address virtually all aspects of our operations, including, among others, the following:
•
planning and construction of new power projects; • the granting of power generation, dispatch and supply permits; • the amount and timing of power generation; • the setting of on-grid tariffs paid to power producers and power tariffs paid by consumers of electricity; • power grid control and power dispatch, including the setting of preferential policies for the dispatch of renewable energy generated power; • allocation of water resources and control of water flows; • environmental protection and safety standards; • acquisitions by foreign investors; and • taxes, in particular Enterprise Income Tax and Value Added Tax. Our costs of compliance with, and reliance on, this regulatory system is significant to our business. An increase in the cost of compliance could increase our operating costs and expenses and materially and adversely affect our results of operations. Moreover, policy movements against renewable
energy power producers could limit our opportunities for growth and materially and adversely affect our revenues. 19
The transfer of state-owned assets in China is subject to approval by authorities in charge of state-owned assets administration and supervision. Any failure by us or prior owners of our projects to comply with PRC laws and regulations in respect of the transfer of state-owned assets may result in the
imposition of fines or forfeiture of our projects. We have acquired a total of twenty-six operating hydroelectric power projects and will continue to carry out our acquisition strategy in China. Some of our projects were previously state-owned assets. Under PRC law, the transfer of state-owned assets is subject to strict procedures and approvals. We
believe we have complied with all requisite procedures in acquiring state-owned assets, namely our Shapulong hydroelectric power project. However, if a previous transferor of state-owned assets failed to comply with relevant PRC law, the transfer of the state-owned assets may be reversed by the
government or fines may be levied. In such circumstances, we will have a legal right to recover our investment in the assets, but we may not be able to recover from the relevant parties, which could result in a loss of power generation plants, loss of revenues and a significant increase in operating costs. Acquisition of state-owned assets involves a public bidding process and failure to win the bids for our state-owned target companies or equity interests therein may limit our future growth and the control of our existing projects. Under PRC law, we are required to bid for the acquisition of state-owned assets that we wish to acquire. We typically negotiate the terms of the sale with the state-owned seller prior to the bidding process, however, we may not be successful in the bid and may fail to obtain the project as a result.
To the extent we seek in the future to acquire state-owned assets, we will need to follow this process, and may not be successful in obtaining the target business. To the extent we are unsuccessful in our bids for these state-owned interests, our future growth and the ability to control our existing projects
may be materially and adversely affected. Certain of our acquisitions have not obtained approval from the local counterparts of the National Development and Reform Commission, which could result in our being required to subsequently obtain the approval, losing preferential tax treatments and other preferential government support, or being
ordered to cease operation of the subject hydroelectric power project. In accordance with relevant PRC laws and regulations, acquisitions involving foreign investment require approval from the National Development and Reform Commission, or its local counterparts. Certain of our acquisitions of hydroelectric power projects have not procured approvals from the local
counterparts of the National Development and Reform Commission, despite having obtained approvals from relevant local counterparts of the Ministry of Commerce. We have in some instances approached the local counterparts of the National Development and Reform Commission to apply for these
approvals, but have been told by the government agency that it is not necessary for our projects to obtain these approvals. Failure to obtain any of the approvals may have a material adverse effect on our business operations, including our being required to subsequently obtain the approval, losing
preferential tax treatments and other preferential government support, or being ordered to cease operation of the subject hydroelectric power project. We have not obtained formal title certificates to some of the properties we occupy, which may subject us to lawsuits or other actions being taken against us and may result in our loss of the right to operate on these properties and increased operating expenses. We have not obtained formal title certificates in respect of the land that we use at the Wuliting, Zhougongyuan, Binglangjiang II, Jinlong, Jintang, Jinwei, Jinjiu, and Dongguan hydroelectric power projects with a total area of approximately 2,571,106 m2. We are in the process of completing the legal
procedures for obtaining the relevant title certificates for the parcels of land and buildings involved and registering them in the name of our operating companies. However, we may not be able to obtain all of the formal title certificates. While we are indemnified by certain predecessors of our operating
companies for any losses or expenses that we may suffer from these title defects, our rights as owner or occupier of these properties and buildings may be adversely affected as a result 20
of the absence of formal title certificates and we may be subject to lawsuits or other actions taken against us and may lose the right to continue to operate on these properties. In addition, certain of the land use rights currently held by us were obtained by way of allocation by the PRC government without charge. These parcels of land at the Shapulong, Banzhu, Wangkeng, Liyuan, Ruiyang, Yuheng, Yingchuan, Xiaopengzu, Mangxian, Husahe Cascade III, Husahe Cascade
IV, and Qianling sites are used as workshops, dams and reservoirs, and have a total area of approximately 10,344,218.98 m2. The PRC central or local governments may in the future require us to re-obtain such land use rights by way of grant by the government or require us to pay site use fees. In the
event that we are required to obtain the land use rights by way of grant, we will be obligated to enter into state-owned land use rights grant contracts with the competent land administration authorities and pay relevant taxes and fees, including but not limited to land premiums in accordance with
relevant PRC laws and regulations. These taxes and fees for obtaining land use rights may be significant and if we are required to pay these amounts our operating expenses could be significantly increased. Furthermore, part of the land occupied by Jinwei hydroelectric project is leased allocated land. In accordance with relevant PRC laws and regulations, the lease of allocated land shall obtain approval from the competent land and resources authority. We have not procured such approval so far. Jinwei
hydroelectric project is also leasing certain land from the local peasants which is collectively-owned. In accordance with relevant PRC laws and regulations, collectively-owned land shall not be leased for industrial use purpose such as hydropower generation. The total area for the aforesaid leased allocated
land and collectively-owned land is approximately 435,288.4 m2. In the event that we are required to cease such lease and/or any penalties are imposed on us, our business operations and financial condition could be materially and adversely affected. Certain of our existing hydroelectric power projects have not passed the completion acceptance procedure, which could result in the imposition of fines or the closure of non-permitted hydroelectric power projects. In accordance with relevant PRC laws and regulations, hydroelectric power projects are required to pass a completion acceptance procedure. Currently, only thirteen of our twenty-six projects have passed the completion acceptance procedure and two projects, namely, Husahe Cascade IV and
Mangxian projects cannot verify whether they have passed completion acceptance due to the loss of files caused by flood in 2004. The remaining eleven of our existing hydroelectric power projects have not passed the completion acceptance procedure and they may not successfully pass the completion
acceptance procedure in the future. We expect three will complete the procedure by the end of 2011. As for the remaining eight projects in Fujian Province, we have been informed by relevant governmental authorities that Fujian Province has temporarily suspended the completion acceptance procedure
for small hydroelectric projects and the time for resumption is uncertain. Failure by any of our existing projects to pass completion acceptance procedure could result in the government imposing fines or ordering us to shut down such hydroelectric power projects. Our executive officers may allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our business and operations, which could materially and adversely affect our ability to manage our operations. John D. Kuhns, our Chairman and Chief Executive Officer, Dr. You-Su Lin, the Chairman of Beijing A.B.C. Investment, “James” Tie Li, our Chief Financial Officer and President, Mary E. Fellows, our Executive Vice President and Corporate Secretary, are, to varying degrees, currently pursuing
other business interests. This may result in a conflict of interest in allocating their time between our operations and other businesses. If our officers’ other business affairs require them to devote substantial amounts of time to such affairs, it could limit their ability to devote time to our business and
operations, which could materially adversely affect our ability to manage our operations. 21
Our directors and officers may in the future become affiliated with entities engaged in business activities similar to those conducted by us and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented, which could limit the business
growth opportunities for our company. Following a period of one year from the date of our initial public offering, our directors and officers may become affiliated with entities engaged in business activities similar to those conducted by us. Additionally, our directors and officers may become aware of business opportunities which may be
appropriate for presentation to us as well as to the other entities with which they are or may be affiliated. Due to these existing affiliations, they may have fiduciary obligations or contractual obligations to present potential business opportunities to those entities prior to presenting them to us.
Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. The loss of these business opportunities could limit the growth of our company. If a poll is not demanded at our shareholder meetings, voting will be by a show of hands and shares will not be proportionately represented. Shareholder resolutions may be passed without the presence of the majority of our shareholders in person or by proxy. Voting at any of our shareholder meetings is by a show of hands unless a poll is demanded. A poll may be demanded by the chairman of the meeting or by any three shareholders present in person or by proxy or by any shareholder(s) holding 1/10 of the total voting rights of shareholders present at
the meeting. If a poll is demanded, each shareholder present in person or by proxy will have one vote for each ordinary share registered in his name. If a poll is not demanded, voting will be by show of hands and each shareholder present in person or by proxy will have one vote regardless of the
number of shares registered in his name. In the absence of a poll, shares will therefore not be proportionately represented. In addition, the quorum required for our shareholder meetings consists of shareholders who hold at least one-third of our ordinary shares being present at a meeting in person or by
proxy. Therefore, subject to the requisite majorities, shareholder resolutions may be passed at our shareholder meetings without the presence of the majority of our shareholders in person or by proxy. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. We are subject to reporting obligations under U.S. securities laws. Under the current SEC regulations, we will be required to include a management report on internal controls over financial reporting in our Form 20-F annual report for the year ended December 31, 2010, and we will be required to
include an auditor’s report on internal controls over financial reporting for the year ending December 31, 2011. In connection with the audit of our consolidated and other financial statements included in the annual report for fiscal year ended December 31, 2009, we and our registered public accounting firm identified certain control deficiencies, which amounted to “material weakness” as defined under the
standards established by the Public Company Accounting Oversight Board. We have implemented measures to remediate these material weaknesses and improve our internal control. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010 and
has concluded that our internal control over financial reporting was effective as of December 31, 2010. See “Item 15. Controls and Procedures”. Nevertheless, we cannot assure you that our internal control measures will continue to be effective and that any significant deficiencies and material weakness in
our internal control over financial reporting will not be identified in the future. Moreover, if we fail to maintain the adequacy of our internal control, we may not be able to conclude that we have effective internal control over financial reporting. Even if we do conclude that our internal control over
financial reporting is effective, our independent registered public accounting firm may still issue a report that is qualified if it is not satisfied with our internal control. We have not obtained an independent audit opinion of our internal controls, and, as a result, we are not aware of any deficiencies which
would result from such an audit. 22
Furthermore, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help us to manage the company effectively and prevent fraud. As a result, our failure to maintain effective internal control over financial reporting could result in a
loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs. Compliance with rules and requirements applicable to public companies is costly and complex and any failure by us to comply with these requirements on an ongoing basis could negatively affect investor confidence in us and cause the market price of our securities to decline. As a new public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the SEC and the NYSE, have required changes in the corporate governance practices of public
companies. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. Complying with these rules and requirements may be especially difficult and costly for us because we may have
difficulty locating sufficient personnel in China with experience and expertise relating to U.S. GAAP and U.S. public-company reporting requirements and such personnel may command high salaries. If we cannot attract or retain sufficient personnel to ensure compliance with these rules and regulations,
we may need to rely more on outside legal, accounting and financial experts, which may be very costly. Any failure by us to comply with these requirements on an ongoing basis could expose us to increased risk of fraud and subject us to potential delisting from the NYSE, regulatory investigations and
civil or criminal sanctions. In addition, we will incur additional costs associated with our public company reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Risks Relating to Doing Business in China Adverse changes in PRC economic and political policies could have a material adverse effect on the overall economic growth of China, which could reduce the demand for electricity and materially and adversely affect our business. Our operating businesses are based in China and all of our power sales are made in China. As such, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. China economy differs from the economies of
most developed countries in many aspects, including:
•
the level of government involvement; • the level of development; • the growth rate; • the level and control of capital investment; • the control of foreign exchange; and • the allocation of resources. While the Chinese economy has grown significantly in the past two decades, the growth has been uneven geographically, among various sectors of the economy and during different periods. We cannot assure you that the Chinese economy will continue to grow or to do so at the pace that has
prevailed in recent years, or that if there is growth, such growth will be steady and uniform. In addition, if there is a slowdown, such slowdown could have a negative effect on our business. It is uncertain whether various macroeconomic measures and monetary policies adopted by the PRC government
will be effective in sustaining the fast growth rate of the Chinese economy. In addition, such measures, even if they benefit the overall Chinese economy in the long term, may have a negative effect on us. For example, our financial condition and results of operations may be materially and adversely
affected by government control over capital investments, and our ability to access bank financing may be adversely affected by continued tightening of the PRC’s monetary policy. 23
Although the Chinese economy has been transitioning from a planned economy to a more market-oriented economy, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by
China government could materially and adversely affect our business. The PRC government also exercises significant control over Chinese economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential
treatment to particular industries or companies. Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of investments and expenditures in China, which in turn could lead to a reduction in demand
for electricity and consequently have a material adverse effect on our businesses. Interpretation of PRC laws and regulations involves uncertainty. We are incorporated in Cayman Islands and are subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned companies. All of our operating businesses are located within China and are governed by PRC laws and regulations.
The PRC legal system is based on written statutes, and prior court decisions can only be used as a reference. Since 1979, the PRC government has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organization and governance, commerce, taxation and
trade. However, due to the fact that these laws and regulations have not been fully developed, and because of the limited volume of published cases and the non-binding nature of prior court decisions, interpretations of PRC laws and regulations are not always uniform and involves a relatively high
degree of uncertainty. Laws may be changed without being immediately published or may be amended with retroactive effect. Depending on the government agency or how an application or case is presented to such agency, we may receive less favorable interpretations of laws and regulations than certain
of our competitors. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. The Antimonopoly Law may subject our future acquisitions to increased scrutiny, which could affect our ability to consummate acquisitions on terms favorable to us or at all. The Antimonopoly Law of China became effective on August 1, 2008. The law was enacted in part to guard against and cease monopolistic activities, and to safeguard and promote orderly market competition. In accordance with the law, monopolistic acts shall include monopolistic agreements among
business operators, abuse of dominant market positions by business operators and concentration of business operators that eliminates or restricts competition or might be eliminating or restricting competition. On August 3, 2008, the State Council promulgated the Regulations on the Thresholds for Reporting of Concentration of Business Operators, or the Reporting Threshold Regulations, which provide specific thresholds for reporting of concentration of business operators. Under the Antimonopoly Law
and the Reporting Threshold Regulations, the parties to an acquisition must report to the Ministry of Commerce in advance if in the preceding accounting year the turnover in the aggregate achieved by all the parties to the transaction exceeds RMB10.0 billion ($1.5 billion) worldwide or RMB2.0 billion
($0.3 billion) within China, and the turnover achieved by at least two of them respectively exceeds RMB400.0 million ($58.6 million) within China. However, the Ministry of Commerce has the right to initiate investigation of a transaction not reaching the above-mentioned reporting thresholds if the
Ministry of Commerce has evidence that the transaction has or may have the effect of excluding or restricting competition. The antitrust scrutiny procedures and requirements set forth in the Antimonopoly Law and the Reporting Threshold Regulations grant the government extensive authority of
evaluation and control over the terms of acquisitions in China by foreign investors, and their implementation involves significant uncertainties and risks. To the extent our future acquisitions meet the threshold requirements set forth in the law and the Reporting Threshold Regulations, or are deemed by
the Ministry of Commerce to meet the thresholds, we will 24
be subject to antimonopoly review. The consummation of our future acquisitions could therefore be much more time-consuming and complex, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or prevent the consummation of such acquisitions,
and prevent us from attaining our business objectives. On February 3, 2011, General Office of the PRC State Council issued the Circular of the General Office of the State Council on the Establishment of Security Review System Regarding Mergers and Acquisitions in China by Foreign Investors with effect in March, according to which, the acquisitions
by foreign investors of domestic Chinese companies active in the certain sectors shall be subject to security review, including military enterprises, key agricultural products, key energy and resources, key infrastructure, key transportation services, key technologies and key equipment manufacturing activities
that raise national security concerns, where the foreign investor might acquire actual control of the target Chinese company through the acquisition. This newly-issued regulation is unclear in certain aspects including the definition of key sectors which are expected to be further specified and therefore how
it will be interpreted and implemented in practice remains to be seen. In case our future acquisitions fall within the security review scope, the consummation of such acquisitions could therefore be much more time-consuming and complex, and any required approval processes may delay or prevent the
consummation of such acquisitions, and prevent us from attaining our business objectives. The PRC tax law could increase the enterprise income tax rate applicable to our operating businesses in China, which could have a material adverse effect on our results of operations. On March 16, 2007, the new PRC Enterprise Income Tax law, or EIT Law, was enacted, which became effective on January 1, 2008 and replaced the previous two separate tax legal regimes for foreign invested enterprises, or FIEs, and Chinese domestic companies. The EIT Law adopts a uniform tax
rate of 25% for all enterprises, including FIEs, and revokes many of the previous tax exemption, reduction and preferential treatments which were applicable to FIEs. However, any enterprises that were established before the promulgation of the EIT Law that are entitled to preferential tax treatments for
a fixed period will continue to be entitled to such preferential tax treatments until the expiration of such period. If the fixed period has not commenced because of losses, it shall be deemed to commence on January 1, 2008. In addition, certain qualified high-technology enterprises may still benefit from a
preferential tax rate of 15% under the EIT Law if they meet the criteria of “high and new technology enterprises strongly supported by the State.” As a result, the applicable tax rate to certain of our existing PRC operating businesses have increased from 15% to the unified tax rate of 25% under the
EIT Law. Moreover, the EIT Law provides that a withholding income tax rate of 20% will be applicable to dividends payable to foreign investors that are “non-resident enterprises” to the extent such dividends have their source within China unless the jurisdiction of such foreign investor has a tax treaty with
China that provides a different withholding arrangement. The implementing regulations to the EIT Law subsequently reduced this withholding income tax rate from 20% to 10%. We may be deemed a PRC resident enterprise under the EIT Law and be subject to PRC taxation on our worldwide income. The EIT Law also provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation
regulations to the EIT Law issued by the State Council, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of
properties and other assets of an enterprise. At present, the PRC tax authorities have not issued any guidance on the application of the new EIT Law and its Implementation Regulations on non-Chinese enterprises or non-Chinese group enterprises and their controlled entities. As a result, it is unclear
what factors will be used by the PRC tax authorities to determine whether we are a “de facto management body” in China. A substantial number of our 25
management personnel are located in the PRC, and all of our revenues arise from our operations in China. However, we do recognize some interest income and other gains from our financing activities outside China. If the PRC tax authorities determine that we are a PRC resident enterprise, we will be
subject to PRC tax on our worldwide income at the 25% uniform tax rate, which may have a material adverse effect on our financial condition and results of operations. Notwithstanding the foregoing provision, the new EIT Law also provides that, if a resident enterprise already invests in another
resident enterprise, the dividends received by the investing resident enterprise from the invested resident enterprise are exempt from income tax, subject to certain qualifications. Therefore, if we are classified as a resident enterprise, the dividends received from our PRC subsidiaries may be exempt from
income tax. However, due to the short history of the EIT Law, it is unclear as to (i) the detailed qualification requirements for such exemption and (ii) whether dividend payments by our PRC subsidiaries to us will meet such qualification requirements, even if we are considered a PRC resident enterprise
for tax purposes. Interest and dividends payable by us to our foreign investors and gain on the sale of our ADSs, warrants or ordinary shares may become subject to withholding taxes under PRC tax laws, which may materially and adversely affect your investment in our securities. Under the EIT Law and implementation regulations issued by the State Council, PRC withholding tax at the rate of 10% is applicable to interest and dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in China, or which have
such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such interest or dividends have their sources within China. Similarly, any gain realized on the transfer of ADSs, warrants or ordinary shares by such
investors is also subject to 10% PRC withholding tax if such gain is regarded as income derived from sources within China. If we are considered a PRC “resident enterprise,” it is unclear whether the interest or dividends we pay with respect to our securities, or the gain our non-PRC shareholders or
ADS or warrant holders may realize from the transfer of our ordinary shares or other securities, would be treated as income derived from sources within China and be subject to PRC tax. If we are required under the EIT Law to withhold PRC income tax on interest or dividends payable to our non-PRC shareholders that are “non-resident enterprises,” or if you are required to pay PRC income tax on the transfer of our securities, the value of your investment in our securities may be
materially adversely affected. We rely principally on dividends and other distributions, if any, on equity paid by our operating businesses in China, and limitations on their ability to pay dividends to us could have a material adverse effect on our business and results of operations. We are a holding company and we rely principally on dividends and other distributions, if any, on equity paid by our operating businesses in China for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any
debt we may incur and pay our operating expenses. If our operating businesses incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. We currently expect to permanently reinvest the earnings of our
operating businesses in China and have no plan to cause our operating businesses to make a dividend distribution to us. As entities established in China, our operating businesses are subject to certain limitations with respect to dividend payments. PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. For
each of our operating businesses that is a Sino-foreign joint venture enterprise, it may not distribute its after-tax profits to us if it has not already made contributions to its reserve fund, enterprise development fund and employee bonus and welfare fund at percentages that are decided by its board of
directors. For each of our operating businesses that is a wholly foreign-owned enterprise, it may not distribute its after-tax profits to us if it has not already made contributions to 26
its employee bonus and welfare fund at a percentage that is decided by its board of directors and to its reserve fund at a rate of no less than 10% of its net profit. A wholly foreign-owned enterprise is required to continue making contributions to its reserve fund until such fund reaches 50% of its
registered capital. For each of our operating businesses that is a PRC domestic company, it may not distribute its after-tax profits to us if it has not already made contributions to its statutory reserve fund at a rate of no less than 10% of its net profit. A PRC domestic company is required to continue
making contributions to its statutory reserve fund until such fund reaches 50% of its registered capital. These reserve funds may not be distributed as cash dividends. The total amount of our restricted net assets was RMB3,263.2 million ($466.8 million) as of December 31, 2010. In addition, if our
operating businesses in China incur further debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Limitations on the ability of our operating businesses in China to pay dividends to us could adversely limit our
ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business. Accordingly, if for any of the above or other reasons, we do not receive dividends from our operating businesses in China, our liquidity, financial
condition and ability to make dividend distributions to our shareholders will be materially and adversely affected. Fluctuations in the value of RMB will affect the amount of our non-RMB debt service in RMB terms and affect the value of, and dividends payable on, our ADSs in foreign currency terms. The value of RMB depends, to a large extent, on China’s domestic and international economic, financial and political developments and government policies, as well as the currency’s supply and demand in the local and international markets. Fluctuation of the value of RMB will affect the amount of
our non-RMB debt service in RMB terms since we have to convert RMB into non-RMB currencies to service our foreign debt. Since our income and profits are denominated in RMB, any appreciation of RMB will also increase the value of, and any dividends payable on, our ADSs in foreign currency
terms. Conversely, any depreciation of RMB will decrease the value of, and any dividends payable on, our ADSs in foreign currency terms. Restrictions on currency exchange may limit our ability to receive dividends from our operating businesses in China and their ability to obtain overseas financing. Our operating businesses in China may convert a portion of RMB held by them into foreign currencies to meet its foreign currency obligations, including, among others, payments of dividends declared, if any, in respect of our ordinary shares. Under China’s existing foreign exchange regulations, our
operating businesses in China are able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange, by complying with certain procedural requirements. However, we cannot assure you that China government will not take measures in the future to
restrict access to foreign currencies for current account transactions, including payment of dividends. Foreign exchange transactions for capital account items, such as direct equity investments, loans and repatriation of investments, by our operating businesses in China continue to be subject to significant foreign exchange controls and require the approval of PRC governmental authorities, including the
State Administration of Foreign Exchange. In particular, if our operating businesses in China borrow foreign currency-denominated loans from us or other foreign lenders, these loans must be registered with the local offices of the State Administration of Foreign Exchange. These limitations could affect
their ability to obtain additional equity or debt funding that is denominated in foreign currencies. PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit our ability to use the proceeds of our initial public offering to make additional capital contributions or loans to our PRC operating businesses. Any capital contributions or loans that we, as an offshore company, make to our PRC operating businesses, including from the proceeds of our initial public offering, are subject to PRC regulations. 27
For example, any of our loans to our PRC operating businesses cannot exceed the difference between the total amount of investment our PRC operating businesses are approved to make under relevant PRC laws and their respective registered capital, and must be registered with the local branch of the
State Administration of Foreign Exchange as a procedural matter. In addition, our capital contributions to our PRC operating businesses must be approved by the National Development and Reform Commission and the Ministry of Commerce or their local counterpart and registered with the State
Administration for Industry and Commerce or its local counterpart. We cannot assure you that we will be able to obtain these approvals on a timely basis, or at all. If we fail to obtain such approvals, our ability to make equity contributions or provide loans to our PRC operating businesses or to fund
their operations may be negatively affected, which could adversely affect their liquidity and their ability to fund their working capital and expansion projects and meet their obligations and commitments. Furthermore, the State Administration of Foreign Exchange promulgated a new circular in August 2008 with respect to the administration of conversion of foreign exchange capital contribution of foreign invested enterprises into RMB. Pursuant to this new circular, RMB converted from foreign
exchange capital contribution can only be used for the activities within the approved business scope of such foreign invested enterprise and cannot be used for domestic equity investment or acquisition unless otherwise allowed by PRC laws or regulations. As a result, we may not be able to increase the
capital contribution of our operating subsidiaries and subsequently convert such capital contribution into RMB for equity investment or acquisition in China. Risks Relating to Our Securities The trading prices of our ADSs and warrants are likely to be volatile, which could result in substantial losses to investors. The trading prices of our ADSs and warrants are likely to be volatile and could fluctuate widely in response to factors beyond our control. The initial public offering price for our units was determined by negotiation between us and the underwriters and the price at which the ADSs and warrants are
traded after our initial offering have declined below the initial public offering price. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it
could divert the attention of senior management, and, if adversely determined, could have a material adverse effect on our results of operations and financial condition. The performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs and warrants. Recently, a number of PRC-based
companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock markets. The trading performances of these PRC-based companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards PRC-based companies
listed in the United States and consequently may impact the trading performance of our ADSs and warrants. These broad market and industry factors may significantly affect the market price and volatility of our ADSs and warrants, regardless of our actual operating performance. In addition to market and industry factors, the price and trading volume of our ADSs and warrants may be highly volatile for specific business reasons. Factors such as variations in our financial results, announcements of new business initiatives by us or by our competitors, recruitment or departure of
key personnel, changes in the estimates of our financial results or changes in the recommendations of any securities analysts electing to follow our securities or the securities of our competitors could cause the market price for our ADSs and warrants to change substantially. Any of these factors may result
in large and sudden changes in the trading volume and price for our ADSs and warrants. 28
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price. Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our future ability to raise capital through offerings of our ADSs. Currently there are 153,295,516 ordinary shares outstanding. In addition, there are outstanding options and warrants to purchase an aggregate of 58,584,565 ordinary shares, including options and warrants to purchase an aggregate of 52,025,565 ordinary shares immediately exercisable as of the date of
this annual report. All of the ADSs sold in the initial public offering are freely tradable without restriction or further registration under the U.S. Securities Act of 1933, or the Securities Act, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Subject to applicable restrictions and
limitations under Rule 144 of the Securities Act of 1933, all of our shares outstanding prior to our initial public offering are eligible for sale in the public market. In addition, the ordinary shares subject to options and warrants for the purchase of our ordinary shares will become eligible for sale in the
public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 under the Securities Act of 1933. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our ADSs could decline. Future issuances of ordinary shares or ADSs may depress the trading price of our ADSs. Any future issuance of equity securities could dilute the interests of our existing shareholders and could substantially decrease the trading price of our ADSs. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy (including in
connection with acquisitions and other transactions), to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons. Our outstanding warrants may materially and adversely affect the market price of our ADSs. The units sold in our initial public offering include warrants to purchase 18,000,000 ordinary shares. The potential issuance of additional ordinary shares on exercise of these warrants could materially and adversely affect the market price of our ADSs. This is because exercise of the warrants will
increase the number of issued and outstanding ordinary shares and thus may dilute the net tangible book value per ADS. Additionally, the sale or possibility of sale of the ordinary shares underlying the warrants could have an adverse effect on our ability to obtain other financing. You will not be able to exercise your warrants if we do not have an effective registration statement in place when you desire to do so. No warrants will be exercisable, and we will not be obligated to issue ordinary shares upon exercise of warrants by a holder unless, at the time of such exercise, we have a registration statement under the Securities Act in effect covering the ordinary shares issuable upon the exercise of the warrants
and a current prospectus relating to ordinary shares is available. We have agreed to use our best efforts to have a registration statement in effect covering ordinary shares issuable upon exercise of the warrants from the date the warrants become exercisable and to maintain a current prospectus relating to
ordinary shares until the warrants expire or are redeemed. However, we cannot assure you that we will be able to do so. Additionally, we have no obligation to settle the warrants for cash in the absence of an effective registration statement or under any other circumstances. The warrants may be
deprived of any value, the market for the warrants may be limited, the holders of warrants may not be able to exercise their warrants if there is no registration statement in effect covering the ordinary shares issuable upon the exercise of the warrants, or the prospectus relating to the ordinary shares
issuable upon the exercise of the warrants is not current and the warrants may expire worthless. 29
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings. If we offer holders of our shares any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to you if it is lawful and reasonably practicable. However, the depositary may allow rights that are not distributed or sold to lapse. In that case, you will
receive no value for them. In addition, U.S. securities laws may restrict the sale, deposit, cancellation and transfer of the ADSs issued after exercise of rights. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the
securities to which these rights relate are either exempt from registration under the Securities Act with respect to holders of ADSs, or are registered under the provisions of the Securities Act. We can give no assurance that we can establish an exemption from registration under the Securities Act, and we
are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, you may be unable to participate in our rights offerings and may experience dilution of your holdings as a result. A significant percentage of our outstanding ordinary shares are held by a small number of our existing shareholders, and these shareholders may have significantly greater influence on us and our corporate actions by nature of the size of their shareholdings relative to our public shareholders. Vicis Capital Master Fund owns 31.9% and CPI Ballpark Investments Ltd. and Blue Ridge Investments, LLC, both of which are subsidiaries of Bank of America Corporation, own an aggregate of 25.2% of our voting shares as of February 14, 2011. Through publicly available information, we are
aware of a potential share transfer between CPI Ballpark Investments Ltd. and Blue Ridge Investments, LLC. Each of these shareholders is an affiliate within the meaning of the Securities Act, due to the size of their respective shareholdings in us. Vicis Master Fund currently has one board
representative on our seven director board. Accordingly, these shareholders have had, and may continue to have, significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or
substantially all of our assets, election of directors and other significant corporate actions. Anti-takeover provisions in our charter documents may discourage a third party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium. Our Amended and Restated Memorandum and Articles of Association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in a change-of-control transaction. These provisions could have the effect of depriving our shareholders of
an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction. For example, our board of directors will have the authority, without further action by our shareholders, to issue new preferred shares in one or more tranches, which may have powers and rights, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences,
greater than the rights associated with our ordinary shares. These new preferred shares could thus be issued quickly, and could have terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues new preferred shares,
the market price of our ADSs or warrants may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected. In addition, our board of directors is divided into three classes and only one class of directors is up for re-election at each annual meeting of shareholders. We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law and it is difficult to 30
enforce certain judgments, you may have less protection of your shareholder rights than you would under U.S. law. Our corporate affairs are governed by our Amended and Restated Memorandum and Articles of Association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the
fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English
common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some
jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. The Cayman Islands courts are unlikely:
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to recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or • to entertain original actions brought against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum
of money is payable, other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty, and would give a judgment based thereon provided that (i) such courts had proper jurisdiction over the parties subject to such
judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is
submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands. You will have limited ability to bring an action in the Cayman Islands or in China against us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated in the Cayman Islands and because we conduct a majority of our operations in China. We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China. Most of our directors and officers reside outside the United States and substantially all of the assets of those persons are located outside the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the
Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights on a merger or consolidation of a company where the shares of the company are listed on a recognized stock exchange or inter-dealer quotation system. This may make it
more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offer or give you additional consideration if you believe the consideration offered is insufficient. 31
Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our Amended and Restated Articles
of Association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary
for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company. Your ability to protect your rights as shareholders through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law. Cayman Islands companies may not have standing to initiate a derivative action in a federal court of the United States. As a result, your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a U.S. federal court may be limited. The voting rights of holders of ADSs must be exercised in accordance with the terms of the deposit agreement, the ADRs, and the procedures established by the depositary. The process of voting through the depositary may involve delays that limit the time available to you to consider proposed
shareholders’ actions and also may restrict your ability to subsequently revise your voting instructions. Holders of our ADSs may only exercise their voting rights with respect to the underlying shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to
vote the underlying shares in accordance with these instructions. Under our Amended and Restated Memorandum and Articles of Association and Cayman Islands law, the minimum notice period required for convening a general meeting is 21 days. When a general meeting is convened, you may not
receive sufficient notice of a shareholders’ meeting to permit you to withdraw your shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you to give your voting instructions in a
timely manner. We will make all reasonable efforts to cause the depositary to send voting information to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and
its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your shares are not voted as you requested. Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests. Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our shares underlying your ADSs at shareholders’ meetings if it does not receive your voting instructions, unless:
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we have failed to timely provide the depositary with our notice of meeting and related voting materials; • we have instructed the depositary that we do not wish a discretionary proxy to be given; • we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting; 32
• a matter to be voted on at the meeting would have a material adverse impact on shareholders. The effect of this discretionary proxy is that we will be able to control the voting of the shares underlying your ADSs if you fail to instruct the depository in time, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our company.
Holders of our shares are not subject to this discretionary proxy. You may not receive distributions on our shares or any value for them if it is illegal or impractical for us to make them available to you. The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a
holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any
government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of our ADSs, shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our shares or any value
for them if it is illegal or impractical for us to make them available to you. These restrictions may have a material and adverse effect on the value of your ADSs. You may be subject to limitations on transfers of your ADSs. Your ADSs, represented by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a
number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public
holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it is necessary or advisable to do so in connection with the performance of its duty under the deposit
agreement, including due to any requirement of law or any government or governmental body, or under any provision of the deposit agreement. We may be a passive foreign investment company, or PFIC, which could lead to additional taxes for U.S. holders of our warrants, ADSs or ordinary shares. We do not expect to be, for U.S. federal income tax purposes, a passive foreign investment company, or a PFIC, which is a foreign company for which, in any given taxable year, either at least 75% of its gross income is passive income which generally includes dividends, interest, royalties, rents and
gains from commodities and securities transactions or at least 50% of its assets produce or are held to produce passive income, for our 2009 or 2010 taxable years and we expect to operate in such a manner so as not to become a PFIC for any future taxable year. However, because the determination of
PFIC status for any taxable year cannot be made until after the close of such year and requires extensive factual investigation, including ascertaining the fair market value of our assets on a quarterly basis and determining whether the gross income that we earn is or is not passive income, we cannot
assure you that we will not become a PFIC for our 2010 taxable year or any future taxable year. If we are or become a PFIC, you could be subject to additional U.S. federal income taxes on gain recognized with respect to the warrants, ADSs or ordinary shares and on 33
certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules. Non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in
the preceding taxable year. ITEM 4. INFORMATION ON THE COMPANY A. History and Development of the Company We were formed in July 2006 as an exempted company under the laws of the Cayman Islands to serve as a vehicle for the acquisition of hydroelectric assets in China. At the time of our formation we considered, but did not pursue, operating as a publicly traded special purpose acquisition company.
We did not have any operating business until the completion of our first acquisition in April 2007. Key events in our corporate development since our formation include the following. Please note that U.S. dollar translations provided below are derived from our consolidated financial statements.
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in November 2006, we raised $50.0 million through the sale of convertible notes in a private placement to institutional investors; • in April 2007, we established a wholly owned subsidiary, Beijing A.B.C. Investment Consulting Co., Ltd. in Beijing, China, which provides management and other consulting services to our hydroelectric power projects in China; • in April 2007, we acquired Yunnan Huabang Electric Power Development Co., Ltd., which owns and operates the Binglangjiang I hydroelectric power project, with an installed capacity of 21.0 MW, and which has the right to complete construction of, and operate, the Binglangjiang II hydroelectric
power project, with a design capacity of 20.0 MW, both in Yingjiang County, Dehong Prefecture, Yunnan province, for a total consideration of RMB50.0 million ($6.5 million). In addition, we made a cash advance to the company of RMB125.0 million ($16.2 million) in April 2007 prior to the
completion of the acquisition. Binglangjiang is considered our predecessor company for SEC reporting purposes, as we acquired substantially all of the business of Binglangjiang and our own operations prior to that acquisition were insignificant compared to the operations of Binglangjiang; • in May 2007, we acquired, through an asset purchase, the Liyuan hydroelectric power project, a completed project with an installed capacity of 12.0 MW located in Cangxi County, Guangyuan City, Sichuan province, from Cangxi County Jianghe Hydroelectric Power Development Co., Ltd., for a
purchase price of RMB77.0 million ($10.0 million) in cash. We established at that time Sichuan Huabang Hydroelectric Development Co., Ltd. to own and operate the plant; • in December 2007, we acquired a 50.0% equity interest in Yunhe County Shapulong Hydropower Generation Co., Ltd., which owns and operates the Shapulong hydroelectric power project, with an installed capacity of 25.0 MW, located in Yunhe County, Lishui City, Zhejiang province, for a
purchase price of RMB33.0 million ($4.5 million) in cash. In August 2009, we acquired a 13.0% equity interest in the company for a purchase price of RMB8.6 million ($1.3 million) and a further 37.0% equity interest in the company for a purchase price of RMB21.0 million ($3.1 million); • in January 2008, we raised $150.0 million in a private placement of Series A convertible redeemable preferred shares to institutional investors; • in January 2008, we acquired Zhejiang Province Jingning Yingchuan Hydroelectric Development Co., Ltd., which owns and operates the Yingchuan hydroelectric power project, with an installed capacity of 40.0 MW, located in Jingning County, Lishui City, Zhejiang province, for a total consideration
of RMB304.0 million ($42.3 million), which was comprised of a cash purchase price of RMB291.4 million ($40.6 million) and a payment of RMB12.6 million ($1.8 million) to settle all of the liabilities of the company; 34
• in January 2008, we acquired Qingtian Wuliting Hydroelectric Development Co., Ltd., which owns and operates the Wuliting hydroelectric power project, with an installed capacity of 42.0 MW, located in Qingtian County, Lishui City, Zhejiang province, for a purchase price of RMB342.1 million
($47.6 million), which was comprised of a cash purchase price of RMB206.9 million ($28.8 million) and a payment of RMB135.3 million ($18.8 million) to settle all of the liabilities of the company; • in January 2008, we acquired Suichang County Jiulongshan Hydroelectric Development Co., Ltd., which owns the Zhougongyuan hydroelectric power project, with a design capacity of 53.6 MW, located in Suichang County, Lishui City, Zhejiang province, for a purchase price of RMB157.3 million
($21.9 million) in cash. We were obligated to make a cash injection into the company of RMB250.0 million ($34.8 million) to complete the construction of the project under the original agreement; • in July 2008, we raised $101.0 million in a private placement of Series B convertible redeemable preferred shares to institutional investors; • in August 2008, we raised $28.0 million in a private placement of Series B convertible redeemable preferred shares to institutional investors; • in October 2008, we acquired a 90.0% equity interest in Sanming Zhongyin Banzhu Hydroelectric Co., Ltd., which owns and operates the Banzhu hydroelectric power project, with an installed capacity of 45.0 MW, located in Sanming City, Fujian province, for a purchase price of RMB134.2 million
($19.6 million) in cash. We were obligated to make a capital injection of RMB104.9 million ($15.4 million) to the company to finance its future operations after the acquisition, of which RMB21.2 million ($3.1 million) was made in March 2009, and the remaining capital injection of RMB83.7 million
($12.3 million) will be made in 2010. In addition, pursuant to a supplemental agreement with the shareholders at the time, Sanming Ruifeng Hydropower Investment Co., Ltd. and Yong’an Ruifeng Hydroelectric Ltd. were entitled to receive the RMB59.2 million ($8.7 million) of current assets,
including cash and cash equivalents, accounts receivable and amounts due from related parties of Banzhu as of the acquisition date. Subsequently, in January 2009, Sanming Ruifeng Hydropower Investment Co., Ltd. agreed to forego RMB7.0 million ($1.0 million) of the current assets that Sanming
Ruifeng Hydropower Investment Co., Ltd. is entitled to receive. In March 2009, we acquired the remaining 10.0% equity interest in this company for a purchase price of RMB17.0 million ($2.5 million) in cash; • in October 2008, we acquired a 90.0% equity interest in Pingnan County Wangkeng Hydroelectric Co., Ltd., which owns and operates the Wangkeng hydroelectric power project, with an installed capacity of 40.0 MW, located in Pingnan County, Ningde City, Fujian province, for a purchase price of
RMB220.5 million ($32.3 million) in cash; • in October 2008, we acquired Pingnan County Yuanping Hydroelectric Co., Ltd., which owns and operates the Yuanping hydroelectric power project, with an installed capacity of 16.0 MW, located in Pingnan County, Ningde City, Fujian province, for a purchase price of RMB58.0 million ($8.5
million) in cash; • in October 2008, we acquired Pingnan County Yuheng Hydropower Co., Ltd., which owns and operates the Yuheng hydroelectric power project, with an installed capacity of 30.0 MW, located in Pingnan County, Ningde City, Fujian province, for a purchase price of RMB121.0 million ($17.7 million)
in cash; • in March 2009, Pingnan County Wangkeng Hydroelectric Co., Ltd., signed a RMB150.0 million ($22.0 million) loan agreement with Industrial Bank Co., Ltd., Ningde Branch to refinance the Wangkeng hydroelectric power project; • in March 2009, Qingtian Wuliting Hydroelectric Development Co., Ltd., signed a RMB219.6 million ($32.2 million) loan agreement with Bank of China, Lishui City Dayang Sub-branch to refinance the Wuliting hydroelectric power project; 35
• in June 2009, Sanming Zhongyin Banzhu Hydroelectric Co., Ltd., signed a RMB294.9 million ($43.2 million) loan agreement with the Bank of China, Fujian Branch to refinance the Banzhu hydroelectric power project; • in June 2009, Suichang County Jiulongshan Hydroelectric Development Co., Ltd. signed a RMB216.0 million ($31.6 million) loan agreement and a RMB9.0 million ($1.3 million) loan agreement with the Agricultural Bank of China, Lishui Branch to refinance the Zhougongyuan hydroelectric power
project; • in July 2009, we signed a memorandum of understandings with the Bank of China, Fujian Branch, pursuant to which the bank will provide 50.0% of financing required for the acquisition or refinancing of any hydroelectric power projects acquired by us through an Investment Holding Company to
be established by us in Fujian province; • in August 2009, we acquired Longquan Ruiyang Cascade II Hydroelectric Co., Ltd., which owns and operates the Ruiyang hydroelectric power project, with an installed capacity of 32.0 MW, located in Xiaomei Township, Longquan City, Zhejiang province, for a purchase price of RMB160.0 million
($23.4 million) in cash; • in September 2009, we signed a non-binding framework agreement with Sichuan Huashui Power Construction Engineering Co., Ltd. to jointly develop 40 small hydroelectric power projects in Sichuan province totaling approximately 1,250.0 MW of design installed capacity, for which Sichuan Huashui
Power construction Engineering Co., Ltd. has the development right. We have subsequently determined not to pursue these projects. • in October 2009, we signed a capital increase agreement with Henan Lan Tian Group Co., Ltd. to subscribe for a 79.0% equity interest in Henan Wuyue Storage Power Generation Co., Ltd., which owns the right to develop a 1,000.0 MW pumped storage project, located in Yinpeng Township,
Guangshan County, Xinyang City, Henan province, for a purchase price of RMB162.5 million ($23.8 million) in cash; • in October 2009, we raised $20.0 million in a private placement of Series C convertible redeemable preferred shares to an institutional investor; • in December 2009, we transferred one hydroelectric power project from Suichang County Jiulongshan Hydroelectric Development Co., Ltd., to the newly established Suichang County Zhougongyuan Hydroelectric Development Co., Ltd. Both Suichang County Jiulongshan Hydroelectric Development
Co., Ltd. and Suichang County Zhougongyuan Hydroelectric Development Co., Ltd. are wholly owned by us; • in January 2010, we established a wholly owned subsidiary, Fujian Huabang Hydroelectric Investment Co., Ltd.; • in January 2010, we completed our initial public offering and received net proceeds of approximately $85.99 million, and our ADSs and warrants started trading on the NYSE under the symbols “CHC” and “CHCWS”, respectively; • in February 2010, we received a Loan Framework Agreement from the Bank of China’s Fujian Branch pursuant to which the bank approved our wholly owned subsidiary, Fujian Huabang Hydroelectricity Investment Co., as a borrower of up to an aggregate of RMB3 billion ($440 million) for the
acquisition of hydroelectric projects. Each acquisition loan will be subject to individual approval by the bank and to definitive documentation (which will include the term and interest rate thereof). The Loan Framework Agreement represents the bank’s form of internal commitment for the loan
facility; • in March 2010, we acquired 79.0% equity interest in Henan Wuyue Storage Power Generation Co., Ltd. for a total purchase price of RMB162.5 million ($24.4 million) and paid the first installment payment of RMB32.5 ($4.8 million) in cash; • in April 2010, we acquired Yingjiang County Qinrui Husahe Hydropower Co., Ltd., which owns and operates Mangxian, Husahe Cascade III and Husahe Cascade IV hydroelectric power projects, with a total installed capacity of 18.7 MW in Yingjiang County, Yunnan province in the PRC for a
purchase price of RMB115.0 million ($16.8 million), financed 36
partially through cash on hand and through the assumption or refinancing of existing non-recourse debt; • in June and August 2010, we acquired Fugong County Hengda Hydroelectric Development Co., Ltd. and Fugong Xineng Power Development Co. Ltd., respectively, which own and operate three operating projects including Aluhe, Zilenghe and Latudihe hydroelectric projects, totaling 54.1 MW in
installed generating capacity, for a purchase price of RMB96.3 million ($14.2 million); • in September 2010, we acquired Luquan Xiaopengzu Power Generation Co., Ltd., which owns and operates a 44 MW operating hydroelectric project in Luquan County, Yunnan province in the PRC for a purchase price of RMB150.0 million ($22.1 million); • in December 2010, we acquired Shaowu City Jinling Power Generation Co., Ltd., which owns 55% equity interests in Shaowu City Jinlong Hydroelectric Co., Ltd., 74% in Shaowu City Jintang Hydroelectric Co., Ltd. and 74% in Shaowu City Jinwei Hydroelectric Co., Ltd. These four companies
own and operate a 55.4 MW group of five operating projects in Fujian province, including Qianling&Jinjiu, Dongguan, Jinlong, Jinwei and Jintang hydroelectric projects, for a purchase price of RMB75.1 million ($11.3 million); and • in November 2010, Fujian Huabang entered into an equity transfer purchase agreement with Sanming City Chenyang Hydropower Co., Ltd. to acquire the remaining 10% equity interest at the price of RMB38,967 (US$5,937K) in Wangkeng. In January 2011, Fujian Huabang completed the
acquisition of the 10% equity interest. Our Offices Our registered office is located at the offices of Appleby Trust (Cayman) Ltd., Clifton House, 75 Fort Street, P.O. Box 1350, George Town, Grand Cayman, KY1-1108. Our executive offices are located at 25B, New Poly Plaza, No. 1 North Chaoyangmen Street, Dongcheng District, Beijing, PRC
10010 and our telephone number at such location is (86-10) 6492-8483. Our website is www.chinahydroelectric.com. The information contained on our website does not form part of this annual report. Our agent for service of process in the United States is “James” Tie Li, Chief Financial Officer and
President, China Hydroelectric Corporation, at 420 Lexington Avenue, Suite 860, New York, NY 10170 and his telephone number at such location is (1-646) 467-9810. 37
B. Business overview Overview We are a fast-growing owner and operator of small hydroelectric power projects in China, led by an international management team. We were formed in July 2006 to acquire existing small hydroelectric assets in China and aim to become the PRC’s largest independent small hydroelectric power
producer. Our primary business is to identify, evaluate, acquire, develop, construct and finance hydroelectric power projects in China. In addition, we acquired the development rights to a 1,000.0 MW pumped storage hydroelectric power project. Our revenues to date have derived from the sale of electricity generated by our small hydroelectric power projects to local power grids, while our costs of operations relate to the operation of our hydroelectric power projects, as well as the cost of financing our acquisition of these hydroelectric power
projects and necessary capital contributions. The map below sets out the locations and installed capacities of our hydroelectric power projects in operation and design capacities of hydroelectric power projects under construction. 38
We wholly own twenty-three operating hydroelectric power projects and have a controlling interest in three additional operating hydroelectric power projects. Our operating hydroelectric power projects are located in four provinces in China: Zhejiang, Fujian, Yunnan and Sichuan. We acquired all of our existing hydroelectric power projects from other developers and operators beginning in 2007. We intend to continue our expansion by acquiring, operating and developing a diversified portfolio of additional small hydroelectric power projects in targeted locations in China. We
believe our experience and capabilities gained in the acquisition, development and operation of small hydroelectric power project in China will enable us to take advantage of the opportunities present in the PRC hydropower market. Installed capacity at our projects reached 58.0 MW at December 31,
2007, 271.0 MW at December 31, 2008, 376.6 MW at December 31, 2009, 548.8 MW at December 31, 2010. Our Competitive Strengths Focused acquirer, operator and developer of hydroelectric power projects in a low-cost and fast-growing renewable energy market We focus on the acquisition, operation and development of small hydroelectric power projects in China. We also acquired the development rights to a pumped storage hydroelectric power project. Given the PRC’s status as the world’s largest generator of hydropower, government support for
hydropower and cost pressure from high fossil fuel prices, we believe the opportunity to realize returns in the PRC hydroelectric power sector will continue to increase in the near term. Our senior management, engineering, finance, legal and support teams have extensive experience in the hydroelectric
power industry. We seek to generate and improve returns on investment through leveraging our expertise in identifying, assessing, acquiring, developing, obtaining approvals for and operating hydroelectric power projects. Hydropower in China is a clean renewable energy source with relatively low initial
capital expenditures, low operating costs and long asset lives. Our management believes the initial capital investment per hydropower MW is currently significantly lower in China than in the United States and Europe, due largely to the low cost and high quality supply of raw materials, construction
services, power generation equipment and labor in China. The PRC hydroelectric power industry further benefits from policy support contained in the Renewable Energy Law, the Catalogue of Foreign Investment, the Eleventh Five-Year Renewable Energy Plan and other laws and regulations.
Hydroelectricity is a priority for China in developing its power supply, and foreign investment in the construction and operation of hydroelectric power projects is encouraged. These supports, combined with the fragmented nature of the small hydropower sector in China, present significant opportunities
for an internationally funded expert acquirer, developer and operator such as our company to realize shareholder value through consolidation and efficient operation of quality target assets. Superior access to acquisition opportunities We believe sellers of hydroelectric power projects in China prefer a purchaser with industry expertise, ready financing and the ability to execute acquisitions quickly. We have demonstrated these strengths by identifying, reviewing, negotiating and signing acquisitions of thirteen hydroelectric power
projects since our inception. Our acquisitions have been from government owned sellers, who face pressure to privatize their assets, and from poorly capitalized private operators who lack access to financing. We believe we are the only internationally financed venture operating on this scale and focused
on hydroelectric power in China. We believe our industry experts, who are well known among the owners, operators and regulators of hydroelectric power projects, and our track record in the PRC hydropower market have created recognition of our company as a well-funded, knowledgeable, and
dependable purchaser in the market. We believe this has enabled us to source quality targets ahead of other potential buyers, with asset owners now approaching us to offer their assets for sale. We believe that we have established that we are considering for acquisition. 39
Experienced management team We believe our management team provides our company a significant advantage over our competitors in acquiring and operating hydroelectric power projects. Our Chairman and Chief Executive Officer John D. Kuhns established Catalyst Energy, North America’s largest hydroelectric power provider
and one of the first independent power producers, in the 1980s, and has been active in the PRC hydropower market since the 1990s. Our director and Chairman of our Beijing management subsidiary, Beijing A.B.C. Investment, Dr. You-Su Lin has over 14 years experience in the PRC hydroelectric power
industry. Our engineering, operational and finance teams have rich experience in and knowledge of the hydroelectric power industry and strong expertise in investment and financing. They have spearheaded our efforts to identify and close acquisition opportunities and their expertise has allowed us to
rapidly assess multiple projects simultaneously. We believe our management team possesses in-depth comprehension of relevant PRC laws and an excellent relationship with the hydropower industry regulators, all of which help to ease the acquisition, construction and operation approval process. We also
retain key management at our acquired hydroelectric power projects in order to sustain relationships with the power grids, enhance our understanding of local conditions and maintain operational continuity. Our experienced in-house engineering team actively participates in the operation of our acquired
assets and contributes to all major maintenance, technical upgrade and expansion of projects, as well as hydrology management. Geographical diversification combined with regional project clustering reduces operational risk and enhances operational efficiencies Our hydroelectric power projects in operation and under construction are located on a geographically diverse collection of waterways. We believe each of these waterways has historically documented hydrological resources to make it a strong producer of hydroelectric power. We will continue to focus
on the acquisition of hydroelectric power projects in diverse regions with favorable hydrology. As hydropower production is significantly impacted by weather, geographic diversification protects our business from the effects of unfavorable weather patterns in any one region. Geographic diversification also
mitigates the potential risks from earthquakes, floods and other natural disasters in a region. We believe that our ownership of multiple hydroelectric power projects on the same waterway serves to enhance our operational efficiencies. The clustering of projects allows better load balancing among our projects through distribution of waterflows, and thus power generation, to projects with
excess capacity and optimal tariffs. Clustering also lowers our operation costs as one regional management, engineering and operations team can operate multiple plants. Ability to access and effectively deploy capital We believe our large and diverse capital base and skilled management team give us the ability to quickly respond to and secure attractive acquisition opportunities. Our financing capabilities have been demonstrated by our success in raising over $447 million of international equity or equity-linked
capital since our inception. As of December 31, 2010, we had also assumed borrowings of RMB2,006 million ($302.8 million). Our access to local bank loan facilities via our PRC subsidiaries reduces our cost of borrowings and optimizes our capital structure, in particular as hydropower is a government-
supported sector in China that is entitled to preferential lending policies. We maintain a large pipeline of projects that we are considering for acquisition, ranging from fully approved projects which we have identified as promising to completed projects or projects under construction, to ensure
opportunities for steady future investment of our capital. No current obligation exists to purchase any of these pipeline projects. Business Strategy Maintain acquisition pace and increase project construction Our goal is to become the largest PRC owner and operator of small hydroelectric power projects. We plan to continue expanding our asset portfolio in order to realize operational 40
efficiencies and increase our return on investment. We believe small hydroelectric power assets in China will continue to be available for acquisition given the number of plants in operation and the highly fragmented nature of the industry, coupled with the pressures on many current owners to sell. We
will continue to fill our acquisition pipeline with targets we believe have the potential to meet our investment criteria. However, no current obligation exists to purchase any of these pipeline projects. We believe our planned expansion is supported by increasing domestic demand for electricity and the
availability of acquisition targets. Moreover, we intend to maintain our acquisition pace to solidify our first mover advantage in the market. By achieving scale in our operations, especially along single waterways, we seek to lower our operating costs by spreading our local management teams across
multiple plants and maximizing our access to waterflows and thus generation capacity. We primarily target small hydroelectric power projects, being hydroelectric power projects of 50 MW or less in capacity, in regions with high hydroelectric power tariffs or the opportunity for increasing hydroelectric power tariffs. We initially focused on completed projects, because they provide us a
means to grow capacity and cash flows immediately. Completed projects that have the potential for capacity expansion are also attractive to us, as they allow us to add capacity and increase our cash flows at low incremental costs. We have started acquiring projects under construction and development
rights to greenfield projects, which allow us to leverage our management team’s expertise in the sourcing, permitting and managing the construction of hydroelectric power projects. We expect to continue to take controlling positions in projects, which allows us to run their operations and thereby leverage
our management expertise. However, our strategy to maintain our acquisition pace is limited by our ability to identify suitable acquisition opportunities and to obtain financing, see “Risk Factors—Risks Relating to our Company and the PRC Hydropower Industry—We may encounter difficulties in identifying
suitable acquisition opportunities, which would result in us being dependent upon a limited number of hydroelectric power projects and having limited revenue growth potential,” and “Risk Factors—Risks Relating to our Company and the PRC Hydropower Industry—We will need substantial additional
funding to accomplish our growth strategy and may be unable to raise capital on terms favorable to us or at all, which could increase our financing costs, dilute your ownership interests, affect our business operations or force us to delay, reduce or abandon our growth strategy.” Optimize capital structure We plan to improve our capital structure by increasing our financial leverage through diverse fundraising channels, with the goal of increasing our debt-to-equity ratio while lowering our cost of capital. In particular, we are in discussions with both international and PRC banks to obtain secured and
unsecured debt financing for our projects. Financing under discussion includes substantial credit facilities to be provided to our company or Beijing A.B.C. Investment, rather than the project-specific borrowing currently undertaken by our individual subsidiaries. We expect such facilities to provide lower
interest rates and terms superior to the borrowings undertaken at operating level. We have refinanced approximately RMB253.0 million ($38.2 million) of our existing long-term loans, typically with reduced interest rates and longer tenures, thereby lowering our borrowing costs and interest rates. We have
also signed a loan framework agreement with the Bank of China’s Fujian Branch for the borrowing of up to an aggregate of RMB3 billion ($440 million) subject to the bank’s approval of each acquisition loan. We believe that the availability of hydroelectric assets as collateral, our relatively stable cash
flow and our low operating costs improve our access to debt financing. We anticipate that our broad access to both international and PRC lenders will reduce our cost of capital, as we will be able to borrow from whichever market offers superior terms, thereby allowing us to maximize returns to
shareholders. However, the implementation of our strategy to improve our capital structure is dependent on our ability to obtain financing. See “Risk Factors—Risks Relating to our Company and the PRC Hydropower Industry—We will need substantial additional funding to accomplish our growth strategy
and may be unable to raise capital on terms favorable to us or at all, which could increase our financing costs, dilute your ownership interests, affect our business operations or force us to delay, reduce or abandon our growth strategy.” 41
Continue geographic diversification and consolidation of hydropower capacity in key regions We seek to expand our portfolio of hydroelectric power projects in regions where we believe demand for power, tariff levels and hydrological conditions present opportunities for an attractive rate of return on capital. By diversifying the locations in which we operate, we seek to protect our revenue
streams from the impact of hydrological variation, natural disasters and grid failure. We have recently expanded our regional focus in Henan province through the acquisition of development rights to the Wuyue pumped storage hydroelectric power project. We also plan to enlarge our hydropower capacity
by clustering our projects along waterways. We will continue to identify waterways that have or could support multiple projects, so as to achieve operational efficiencies by managing multiple projects with one local management team and by leveraging their local knowledge and relationships. Furthermore,
clustered projects allow us to not only lower our unit cost of power production, but also to increase production and maximize revenue through the control of water flow to our plants along a single waterway. We have begun to implement this strategy through the acquisition and completion of construction
of the Zhougongyuan hydroelectric power project which was split into two power projects in December 2009-Zhougongyuan and Jiulongshan, which is a series of three hydropower stations along a single waterway. However, the implementation of this strategy is dependent on our ability to identify suitable
acquisition targets. See “Risk Factors—Risks Relating to our Company and the PRC Hydropower Industry—We may encounter difficulties in identifying suitable acquisition opportunities, which would result in us being dependent upon a limited number of hydroelectric power projects and having limited
revenue growth potential.” Increase utilization rates and revenues We seek to increase power generation at our projects by implementing measures to improve project management, forecast hydrological conditions, maximize and control water flows to our projects and establish new customer relationships. We will continue to enhance our operational control and
introduce best practices across our hydroelectric power projects. Following acquisition or commission of a hydroelectric power project, our maintenance team conducts regular maintenance to help minimize accidents, equipment outage and transmission failures. Our engineering team also provides detailed
analyses of hydrological conditions to allow us to best adapt our generation plan to prevailing hydrological conditions. Where we operate several plants on a single waterway, we may also control the water flow to our projects so as to maximize the utilization rate at each project and shift production to
plants with excess capacity and the highest tariffs. We may also in the future increase installed capacity and utilization at our projects through capital improvements and upgrades. The strength of our relationships with our power grids influences both our tariffs and planned annual generation for our hydroelectric power projects, and we will continue to focus on those relationships through frequent communication, investment in projects that will help the grid to maintain an
even supply of power across the grid, sharing technical information to assist the grid with load balancing and dispatch and coordinating the water flows to all hydroelectric power projects on waterways covered by the grid. Where opportunities arise to increase our tariffs for a project by connecting to an
alternative grid or a local business, we may also develop these new customer relationships. However, the implementation of our strategy to increase utilization is dependent on substantial variations in climatic and hydrological conditions. Also, the implementation of our strategy to increase revenues is
dependent on the customer base we have for electricity produced by our hydroelectric power projects. See “Risk Factors—Risks Relating to Our Company and the PRC Hydroelectric power Industry—Our business is dependent upon hydrological conditions, which may from time to time result in conditions
that are unfavorable to our business operations”, and also “Risk Factors—Risks Relating to our Company and the PRC Hydroelectric Power Industry—We derive our revenues solely from the sale of hydropower electricity and each of our projects typically has only one customer. Any prolonged disruption to
the demand for hydropower or termination of a customer relationship may cause our revenues to decrease significantly”. 42
Reduce costs and streamline operations We will continue to adopt best practices and standards across our hydroelectric power assets, drawing on our senior management’s expertise and experience in project management. Our management team closely oversees each project’s operational performance versus established metrics, and where a
project reports excess cost, we take actions to rationalize operations and realize cost savings. By planning for a high utilization rate and better load balancing, we strive to continue reducing our unit cost of power generation at each project. Where labor and other costs are in excess of that necessary to
operate the project, we will rationalize operations, and we retain the right at each project we acquire to terminate redundant employees. With acquisition or commission of additional hydroelectric power projects, we expect to achieve larger economies of scale and gain increased negotiating power over
our suppliers. Finally, we expect to continue to realize cost savings through centralized deployment and management of our engineering, maintenance, accounting and other support functions. However, the implementation of our strategy to reduce costs and streamline operations is dependent on our ability
to manage our growth effectively. See “Risk Factors—Risks Relating to our Company and the PRC Hydroelectric Power Industry—Our growth strategy is dependent upon our ability to manage our growth effectively which, if unsuccessful, could result in a material adverse impact on our financial condition
and results of operations.” Our Hydropower Assets Overview We categorize hydropower projects into the following four categories:
•
completed projects refer to projects that are built and in operation; • projects under construction refer to projects that are being built and are not yet in operation; • approved projects refer to projects that have received the approvals, permits and licenses necessary for construction to commence; and • greenfield projects refer to projects that lack one or more construction permits and have not begun construction. We currently operate in four Chinese provinces: Zhejiang, Fujian, Sichuan and Yunnan. We focus on a number of diverse locations that are rich in hydroelectric power resources and either have relatively high tariffs or present a high likelihood of tariff increases. The provinces in which we currently
operate reflect this strategy. All these provinces are rich in hydroelectric power resources. We believe Yunnan and Sichuan currently have some of the lowest tariff rates in China, and we believe there is a likelihood of tariff increases, while Zhejiang and Fujian already have some of the highest tariff rates
in China. In order to rationalize overhead costs, we have acquired and plan to continue to acquire hydroelectric power assets that are clustered or located around good hydrological resources and where we might have the opportunity to acquire adjacent projects. Our six hydroelectric power projects in
Zhejiang province are clustered together in the southern part of Zhejiang province, and our four hydroelectric power projects in Fujian are clustered together in the northern part of Fujian province, neighboring Zhejiang province. Our hydroelectric power projects 43
located in Yunnan province, Sichuan province and Fujian province are all in areas of relatively high seismic risk as compared to other areas of China. Descriptions of the projects Our hydroelectric power projects are of the following types: A—Run-of-the-river diversion dam. The typical feature of this type of hydroelectric power project is that a water diversion structure (dam) spans a river and water is conveyed to a powerhouse via a water conveyance facility, which is a tunnel, pipeline, or a combination of the two. The rate of water
flow to the powerhouse is equal to the natural rate of flow in the river. B—Low head run-of-the-river. The typical feature of this type of hydroelectric power project is that a dam spans a river, a powerhouse with low head turbine generator(s) is incorporated into the diversion structure, and water flowing through the powerhouse is released back into the river at the dam.
The rate of water flow to the powerhouse is equal to the natural rate of flow in the river. C—Impoundment dam reservoir. The typical feature of this type of hydroelectric power project is that a water diversion structure (dam) spans a river and water is conveyed to a powerhouse via a water conveyance facility, which is a tunnel, pipeline, or a combination of the two. The rate of water flow
to the powerhouse is not equal to the natural rate of flow in the river, as water is impounded or stored at the dam site in a reservoir. This storage provides flexibility in energy production so that it can be dispatched in line with demand. D—Pumped storage. The essential feature of this type of hydroelectric power project is a powerhouse with reversible pump hydraulic turbine generators connected by a water conveyance facility to an upper and a lower reservoir. The water is transferred between the two reservoirs, pumped from the
lower to the upper reservoir (consuming power) during off-peak periods of surplus grid power and released from the upper to the lower reservoir (producing power) during peak periods of grid deficit. The table below sets forth technical and operating data of our hydroelectric power projects as of the dates indicated. Project or
Actual or
Approved
Installed
Electricity Sold (kWh)
Effective
Design
Type
2008
2009
2010
2008
2009
2010 Completed Projects Binglangjiang I, Yunnan
January
0.227 January
21.0
117,278,061
95,514,582
94,591,565
63.6
51.9
51.4
45.0
A Binglangjiang II, Yunnan
September
2009
0.227 January to
May
20.0
N/A
29,141,455
64,041,599
N/A
51.5
36.6
55.0
A Liyuan, Sichuan
August
2006
0.29
12.0
25,098,176
23,435,555
16,217,714
23.8
22.3
15.4
42.0
B Shapulong(2), Zhejiang
June 2001
0.535 peak
hours; 0.268
25.0
42,308,157
(6)
40,630,896
(6)
64,624,002
19.3
18.6
29.5
23.0
C Yingchuan, Zhejiang
April 2002
0.535 peak
hours;
40.0
90,768,127
107,225,642
138,329,822
25.8
30.6
39.5
28.0
C Wuliting, Zhejiang
October
0.535 peak
hours;
42.0
70,224,000
92,554,400
148,943,520
19.0
25.2
40.5
33.0
B Ruiyang, Zhejiang
December
0.535 peak
hours;
32.0
51,237,120
62,453,774
77,819,280
18.2
22.3
27.8
24.0
C 44
Expansion
and
Location
Expected
Date in
Service
Tariff(1)
(RMB/kWh)
Capacity
(MW)
Utilization Rate
(%)(11)
Utilization
(%)
1988
to May;
0.177 June to
December
0.177 June to
December
off-peak
0.268
off-peak
2007
0.268
off-peak
2003
0.268
off-peak
Project or
Actual or
Approved
Installed
Electricity Sold (kWh)
Effective
Design
Type
2008
2009
2010
2008
2009
2010 Jiulongshan, Zhejiang
0.535 peak
37.6
N/A
73,964,924
69,618,958
N/A
20.0
21.1
25.0
C/A
(9) Zhougongyuan, Zhejiang
March 2009
0.535 peak
hours;
16.0
N/A
2,934,316
41,837,946
N/A
12.5
29.9
25.0
C/A
(9) Banzhu, Fujian
November
0.36
45.0
(6)
155,536,410
(8)
126,659,753
(8)
185,287,772
39.3
32.1
47.0
40.0
B Wangkeng(2), Fujian
July 2004
0.31
40.0
(6)
129,217,917
(9)
108,369,852
(9)
183,820,955
36.8
30.9
52.5
42.0
C Yuanping(3), Fujian
March 2007
0.29
16.0
38,393,478
44,316,824
82,908,637
27.3
31.6
59.2
39.0
A Yuheng(4), Fujian
November
0.29
30.0
90,983,456
69,284,988
134,173,611
34.6
26.4
51.1
42.0
A Husahe, Yunnan
March 1995
0.227 January to
May; 0.177 June
to December
18.7
64,150,395
61,430,886
66,801,125
52.0
37.5
54.8
49.0
A Aluhe, Yunnan
June 2006
0.20 November
to April; 0.16
May to October
10.0
40,020,362
21,016,068
13,950,979
45.7
24.0
24.0
50.0
A Zilenghe, Yunnan
October
0.20 November
to April; 0.16
May to October
25.2
92,747,820
60,618,360
46,546,038
42.0
27.5
42.1
63.0
A Latudi, Yunnan
February
2009
0.20 November
to April; 0.16
May to October
18.9
N/A
30,343,420
21,312,493
N/A
18.3
34.0
45.0
A Xiaopengzu, Yunnan
December
0.247 January to
April, and
December; 0.222
May and
November; 0.197
June to October
44.0
N/A
26,262,657
29,916,026
N/A
27.0
23.2
42.0
C Qianling(10), Fujian
July 1984
0.24
10.0
34,292,160
34,279,560
42,760,900
39.1
39.1
48.8
40.0
B Jinjiu(10), Fujian
October
2004
0.28
3.0
17,125,780
15,561,700
16,448,390
65.2
59.2
62.6
40.0
B Dongguan(10), Fujian
November
0.28
4.8
9,636,720
9,761,600
7,328,800
22.9
23.2
17.4
48.0
B Jinlong(10), Fujian
November
0.30
10.0
39,244,590
37,243,920
44,458,470
44.8
42.5
50.8
40.0
B Jintang(10), Fujian
October
0.26
11.6
37,964,325
36,111,460
42,626,430
37.4
35.5
41.9
40.0
B Jinwei(10), Fujian
July 2009
0.30
16.0
N/A
18,437,720
53,400,480
N/A
27.4
38.1
48.0
B
Total:
548.8 Under Construction Wuyue, Henan
2014-2015
1,000.0
Total:
1,548.8
(1)
We are required to withhold VAT due on our power dispatched at a rate of 6.0% or 17.0% depending on the size and location of the plant. Approved tariffs presented above are gross of VAT. Peak hours are generally from 8 a.m. to 10 p.m. For Bingliangjiang II, the effective tariff stated was
effective from January 1, 2010. In 2009, from September 4 to November 3, the effective tariff was 0.12 and from November 4 to December 31 was 0.17. Effective from May 1, 2010, the tariff for Binglangjiang I, II and Husahe was increased from 0.22 to 0.227 (January to May) and from 0.17 to 0.177
(June to December). (2) We acquired a 50.0% equity interest in Shapulong in December 2007. 2007 data for Shapulong are for the period from January 1, 2007 to December 24, 2007. We have owned 100.0% of the equity interest in Shapulong since August 2009. We have owned 90.0% of the equity interest in 45
Expansion
and
Location
Expected
Date in
Service
Tariff(1)
(RMB/kWh)
Capacity
(MW)
Utilization Rate
(%)(11)
Utilization
(%)
hours
0.268
off-peak
0.268
off-peak
1998
1999
2007
2009
2004
2005
2006
Wangkeng since October 2008. We have owned 100.0% of the equity interest in Wangkeng since January 2011. (3) In August 2009, the Ningde Pricing Bureau, the regional pricing bureau in Fujian province, approved a unit price per kWh of RMB0.29, inclusive of VAT, for electricity transmitted by Yuanping to the power grid controlled and owned by the provincial grid company prior to July 8, 2009. The unit
price per kWh of RMB0.29 will continue to be in effect until the regional pricing bureau approves a new unit price per kWh. (4) Currently, Yuheng is receiving RMB0.29 per kWh for electricity supplied to Fujian Province Pingnan County Power Supply Co., Ltd., pursuant to the power purchase agreement entered into between Yuheng and Fujian Province Pingnan County Power Supply Co., Ltd. on December 28, 2008, which is
valid until December 28, 2009. However, pursuant to the Interim Agreement of Conformity of Power Purchase and Supply in Rongping Supply Area entered into by Yuheng, Fujian Province Pingnan County Power Supply Co., Ltd., Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. and
Pingnan County Hengli Hydroelectric Co., Ltd. on August 31, 2007, or the Interim Agreement, the tariff rate of RMB0.181 per kWh has been set for the supply of an aggregate volume of 300 million kWh of electricity by Yuheng to Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd.
through Fujian Province Pingnan County Power Supply Co., Ltd. for a contractual term of forty-two months ending in October 2010. Therefore, for electricity supplied under the Interim Agreement to Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd., Yuheng is only entitled to
RMB0.181 per kWh of the RMB0.29 per kWh revenue received from Fujian Province Pingnan County Power Supply Co., Ltd. and is obligated to remit the remaining RMB0.109 per kWh, to Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. until the earlier of reaching the cumulative
volume of 300 million kWh or October 2010. Pursuant to the Transfer of Yuanping Hydropower Plant and Cooperation Agreement entered into between Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. and Fujian Province Anheng Assets Management Co., Ltd., Fujian Yuheng Power
Group and Fujian Dachuang Hydro Power Co., Ltd., which were the founders of Pingnan County Yuheng Hydropower Co., Ltd., Yuheng provided a guarantee deposit of RMB30 million ($4.4 million) to Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. to guarantee the supply of
electricity of an aggregate volume of 300 million kWh over the contractual term, and is entitled to be refunded RMB0.1 of the guarantee deposit for every kWh of electricity supplied to Rongping Chemical through the power grid up to 300 million kWh over the contractual term. 2007 data for
Yuheng are for the period from May 18 to December 31, 2007. (5) Our aggregate installed capacity information presented in this annual report includes, as of December 31, 2007, the installed capacity of Shapulong, as of December 31, 2008, the installed capacities of Shapulong, Banzhu and Wangkeng, and as of December 31, 2009, the installed capacity of Wangkeng,
although as of such respective dates, our equity interest in Shapulong, Banzhu and Wangkeng were 50.0%, 90.0% and 90.0%, respectively. (6) We held a 50.0% equity interest in Shapulong in 2008. On an equity interest basis, we would be entitled to 21,646,029 kWh and 21,154,079 kWh of electricity sold for 2007 and 2008, respectively, had we owned our equity interest in Shapulong for those periods. Effective utilization rates for the plant
do not reflect our equity interest in the plant, but the operation of the plant as a whole. We have owned 100.0% of the equity interest in Shapulong since August 2009. (7) We have held a 100.0% equity interest in Banzhu since March 2009, but we only held a 90.0% equity interest in Banzhu as of December 31, 2008. On an equity interest basis, we would be entitled to 152,183,576 kWh and 139,982,769 kWh of electricity sold for 2007 and 2008, respectively, had we
owned our 90% equity interest in Banzhu for those periods. Effective utilization rates for the plant do not reflect our equity interest in the plant, but the operation of the plant as a whole. (8) We held a 90.0% interest in Wangkeng in 2008, 2009 and 2010. On an equity basis, we would be entitled to 116,296,125 kWh, 97,532,867 kWh and 165,438,860 kWh of electricity sold for 2008, 2009 and 2010, respectively, had we owned our equity interest in Wangkeng for those periods. 46
Effective utilization rates for the plant do not reflect our equity interest in the plant, but the operation of the plant as a whole. (9) The Zhougongyuan project consists of three separate hydropower plants in series on the same river. The upstream hydropower plant is an impoundment dam reservoir hydropower plant (type C) and the other two in series downstream are run-of-the-river diversion dam hydropower plants (type A).
Zhougongyuan project was split into two subsidiary projects in December 2009: Jiulongshan project and Zhougongyuan project. (10) We completed our acquisition of Shaowu City Jinling Hydropower Co. Ltd., the owner of the Qianling, Jinjiu and Dongguan hydroelectric power project, together with Jinling’s 55% controlling interest in Shaowu City Jinlong Hydropower Co. Ltd., the owner of the Jinlong project, Jinling’s 74%
controlling interest in Shaowu City Jintang Hydropower Co. Ltd., the owner of the Jintang project, and Jinling’s 74% controlling interest in Shaowu City Jinwei Hydropower Co. Ltd., the owner of the Jinwei on December 30, 2010. As a result, we are not entitled to the revenue of these projects for
the year ended December 31, 2010. In the future, we would be entitled to the electricity production and revenue of Jinlong, Jintang and Jinwei on an equity basis of 55%, 74% and 74%, respectively. (11) See Exhibit 15.1 to this annual report for detailed calculations of effective utilization rates. Completed Projects Yunnan Province Binglangjiang I. Binglangjiang I is a run-of-the-river, diversion-type hydroelectric facility commissioned in January 1988 with an installed capacity of 21.0 MW and an annual design utilization rate of 60.0%, which was reduced to 45% when Binglangjiang II was commissioned and water
previously dedicated solely to Binglangjiang I was then allocated between Binglangjiang I and Binglangjiang II. The effective utilization rate for Binglangjiang I was 63.6% for 2008, 51.9% for 2009 reflecting normal operations as Binglangjiang II commenced operations. The effective utilization for 2010
was 51.4% which reflects normal operations and precipitation levels. Yunnan Huabang Electric Power Co., Ltd. entered into a grid connection and dispatching agreement with Yunnan Dehong Electric Power Co., Ltd. on January 15, 2004, which is valid until the termination or expiration of the power
purchase agreement described below, pursuant to which Yunnan Huabang is to connect the hydroelectric power project to the power grid owned or controlled by Yunnan Dehong Electric Power Co., Ltd. Yunnan Huabang Electric Power Development Co., Ltd. entered into a supplemental power
purchase agreement with Yunnan Dehong Electric Power Co., Ltd. on June 19, 2009, which was valid the calendar year of 2009 and pursuant to which, Binglangjiang I received a floating tariff ranging from RMB0.13 per kWh to RMB0.20 per kWh during the rainy season from June to October and
RMB0.17 per kWh from November to December. Yunnan Huabang Electric Power Development Co., Ltd. entered into a supplement power purchase agreement with China Southern Grid, Dehong Power Supply Co. Ltd., which is valid the calendar year of 2010 and pursuant to which Binglangjiang I and
Binglangjiang II receive a tariff of RMB0.22 per kWh during the dry season from January to May and RMB0.17 per kWh during the rainy season from June to December subject to new tariff rates promulgated by the government. Binglangjiang I and Binglangjiang II are permitted to supply up to 150.0
million kWh of electricity for 2010. Based on the actual demand, China Southern Grid may purchase more power at the same tariff rates. The VAT for this plant is 6.0%. On August 11, 2010, Yunnan Huabang Electric Power Development Co., Ltd. entered into a new grid connection and dispatching
agreement with Dehong Power Supply Co., Ltd. for Binglangjiang I and II which is valid till new agreement is signed. On December 29, 2010, Yunnan Huabang Electric Power Development Co., Ltd. entered into a supplemental agreement on the power purchase and sale contract for the calendar year of
2011 with Dehong Power Supply Co., Ltd. with respect to Binglangjiang I, pursuant to which, Dehong Power Supply Co., Ltd. agrees to pay RMB0.227 per KWh (January to May) and RMB0.177 per KWh (June to December). 47
Binglangjiang I is located on the Binglangjiang River, which is in the southwestern corner of Yunnan province in Yingjiang County, Dehong Prefecture. Binglangjiang I is a four-component complex consisting of a concrete diversion dam, canal and penstock, powerhouse and substation. The
powerhouse contains three 7.0 MW vertical Francis-type or mixed-flow-type turbines manufactured by Hangzhou Electric Equipment Co., Ltd. The area of the powerhouse building that contains the plant is 592.0 m2. The area of the land the project utilizes is 2,310.7 km2 including the drainage basin. We
acquired Binglangjiang I in April 2007. Binglangjiang II. Binglangjiang II is a run-of-the-river, diversion-type hydroelectric power project commissioned in September 2009 with a design capacity of 20.0 MW and an annual design utilization rate of 55.0%. The combined effective utilization rate for Binglangjiang I and II for 2010
was 44.2%. We have applied for a tariff of RMB0.12 per kWh during the commissioning period from September 4, 2009 to November 4, 2009 and RMB0.17 per kWh during the period from November 5, 2009 to December 31, 2009. Yunnan Huabang Electric Power Development Co., Ltd. entered into a
power purchase agreement and a supplemental agreement with Dehong Power Supply Co. Ltd. on November 4, 2009. The supplemental agreement was valid from November 4, 2009 to December 31, 2009, pursuant to which Binglangjiang II received a tariff of RMB0.17 per kWh during the period from
November 4, 2009 to December 31, 2009. For calendar year 2010, Binglangjiang II receives a tariff of RMB0.22 per kWh during the dry season from January to May and RMB0.17 per kWh during the rainy season from June to December subject to new tariff rates promulgated by the government. The
VAT for this plant is 6.0%. We executed a grid connection agreement for Binglangjiang II on July 19, 2009, which is valid until the expiration or termination of the power purchase agreement for the project. The utilization rate for Binglangjiang II was 36.6% in 2010. On August 11, 2010, Yunnan
Huabang Electric Power Development Co., Ltd. entered into a new grid connection and dispatching agreement with Dehong Power Supply Co., Ltd. for Binglangjiang I and II which is valid till new agreement is signed. On December 29, 2010, Yunnan Huabang Electric Power Development Co., Ltd.
entered into a supplemental agreement on the power purchase and sale contract for the calendar year of 2011 with Dehong Power Supply Co., Ltd. with respect to Binglangjiang II, pursuant to which, Dehong Power Supply Co., Ltd. agrees to pay RMB0.227 per KWh (January to May) and RMB0.177 per
KWh (June to December). Binglangjiang II is located on the Binglangjiang River in the southwestern corner of Yunnan province in Yingjiang County, Dehong Prefecture. Binglangjiang II is a four-component complex with a concrete diversion dam, tunnel and penstock, powerhouse and substation. The powerhouse contains two
10.0 MW vertical Francis turbine generators manufactured by Kunming Electric Equipment Co., Ltd. The area of the powerhouse building that contains the plant is 800.0 m2. The area of the land the project utilizes is 2,310.7 km2 including the drainage basin. Husahe. The Husahe hydroelectric project is located in Yingjiang County, Dehong Prefecture, Yunnan province and consists of three independent projects, Husahe 3, Husahe 4 and Mangxian, in a series on the Husa River with a total installed capacity of 18.7 MW and a combined Design
utilization rate of 49%. The drainage basins for the projects are 262.6 km2. Husahe 3 is a 3.2 MW four component facility consisting of a masonry diversion, 816 meter long canal and penstock, powerhouse and a 35 kv substation which is connected to a 110 kv substation at Mangxian hydropower Station. The powerhouse contains two horizontal Francis type turbine generator
units. The project was placed in service in 1995. The design capacity utilization rate is 74%. Husahe 4 is a 14 MW four component facility consisting of a gravity dam, 459 meter concrete lined tunnel and penstock, powerhouse and 35 kv substation which is connected to a 110 kv substation owned by the utility at Mangxian Hydropower Station. The project buildings occupy 1,575.72 square
meters. The powerhouse contains two vertical Francis type turbine generators. The project was placed in service in 1998. The actual utilization rate is 46%. During periods of high water flows, the overflow from Husahe 4 is directed to the 1.5 MW Mangxian Hydropower Station which has a utilization
rate of 15%. Mangxian is a 1.5 MW small overflow hydroelectric power project. 48
On August 11, 2010, Yingjiang County Qinrui Husahe Hydropower Co., Ltd. entered into a grid connection and dispatching agreement with Dehong Power Supply Co., Ltd. for each of Husahe 3, Husahe 4 and Mangxian, which is valid till a new agreement is signed. On December 29, 2010, Yingjiang
County Qinrui Husahe Hydropower Co., Ltd. entered into a supplemental agreement on power purchase and sale contract for the calendar year of 2011, pursuant to which, Dehong Power Supply Co., Ltd. agrees to pay RMB0.227 per KWh (January to May) and RMB0.177 per KWh (June to December). Xiaopengzu. Xiaopengzu is an impoundment reservoir type of hydroelectric power project commissioned in October 2009 with a design capacity of 44.0 MW and an annual design utilization rate of 42%. Luquan Xiaopengzu Power Generation Corporation entered into a power purchase and
sale agreement effective from January 1, 2010 to December 31, 2010, pursuant to which the Yunnan Grid Corporation agrees to pay Xiaopengzu tariff on a seasonal basis. In year 2010, Xiaopengzu received a tariff of RMB0.247 per kWh during the dry season from January to April and in December, and
RMB0.222 per kWh during the normal season in May and November, and RMB0.197 per kWh during the rainy season from June to October. The VAT for this plant is 6.0%. Xiaopengzu’s effective utilization was 27.0% and 23.2% in 2009 and 2010 respectively, lower than the design utilization rate of
42% due to below average precipitation levels. Xiaopengzu is located on the Pudu River in the Luquan County, Kunming City in Yunnan Province. Xiaopengzu is a four-component complex consisting of a concrete impoundment dam, tunnel and penstock, powerhouse and substation. The powerhouse contains two 22 MW vertical Francis turbine
generators manufactured by Fujian Nanping Nandian Hydropower Equipment Manufacturing Co., Ltd. The area of the powerhouse building is 697 m2. The area of the land the project utilizes is 8,162 km2 including the drainage basin. Aluhe. Aluhe is a high head run-of-the-river, diversion-type hydroelectric power project located on the Alu River, commissioned in April 2007 with a design capacity of 10 MW and an annual design utilization rate of 50%. Aluhe is a four-component complex consisting of a concrete
diversions, tunnels, pipeline and penstock, powerhouse and substation. The powerhouse contains two 6.3 MW horizontal Pelton turbine generators manufactured by Lingling Hengyuan Hydropower Equipments Co., Ltd. The area of the powerhouse building that contains the plant is 450 m2. The area of the
land the project utilizes is 23 km2 including the drainage basin. Fugong County Hengda Hydroelectric Development Co., Ltd. entered into a power purchase and sale agreement with Yunnan Nujiang Grid Co., Ltd. with respect to the Aluhe hydroelectric project, effective from January 1, 2010 to
December 31, 2010, pursuant to which Yunnan Nujiang Grid Co., Ltd. agrees to pay Aluhe tariff on a seasonal basis. In year 2010, Aluhe received a tariff of RMB0.20 per kWh during the dry season from November to April, and RMB0.16 per kWh during the rainy season from May to October. The
VAT for this plant is 6.0%. The effective utilization rate was 45.7%, 24.0% and 24.0% in 2008, 2009 and 2010 respectively. The lower than design utilization rate in 2009 and 2010 was the result of intermittent grid availability. Zilenghe. Zilenghe is a high head run-of-the-river, diversion-type hydroelectric power project commissioned in October 2007 with a design capacity of 25.2 MW and an annual design utilization rate of 63%. Fugong County Hengda Hydroelectric Development Co., Ltd. entered into a power purchase and sale agreement with Yunnan Nujiang Grid Co., Ltd. with respect to Zilenghe hydroelectric project, effective from January 1, 2010 to December 31, 2010, pursuant to which the Yunnan Nujiang Grid Co.,
Ltd. agrees to pay Zilenghe tariff on a seasonal basis. In year 2010, Zilenghe received a tariff of RMB0.20 per kWh during the dry season from November to April, and RMB0.16 per kWh during the rainy season from May to October. The VAT for this plant is 6.0%. The effective utilization rate was
42.0%, 27.5% and 42.1% in 2008, 2009 and 2010 respectively, lower than the design utilization rate of 63.0%, due to intermittent grid availability. Zilenghe is a four-component complex consisting of concrete diversion dams, tunnels, pipeline and penstock, powerhouse and substation. The powerhouse contains four 6.0 MW horizontal Pelton turbine generators manufactured by Lingling Hengyuan Hydropower Equipment Co., Ltd. The area 49
of the powerhouse building is 600 m2. The area of the land the project utilizes is 1,942 km2 including the drainage basin. Latudi. Latudi Hydropower Station is located on the Latudi River in Fugong County, Nujiang Prefecture, Yunnan Province. Latudi is a high head run of the river diversion type project commissioned in February 2009 with a design capacity of 18.9 MW and an annual design utilization rate
of 45%. Fugong Xineng Power Development Co., Ltd. entered into a power purchase and sale agreement with Yunnan Nujiang Grid Co., Ltd. effective from January 1, 2010 to December 31, 2010, pursuant to which Yunnan Nujiang Grid Co., Ltd. agrees to pay Latudi tariff on a seasonal basis. In year
2010, Latudi received a tariff of RMB0.20 per kWh during the dry season from November to April, and RMB0.16 per kWh during the rainy season from May to October. The VAT for this plant is 6.0%. The effective utilization rate was 18.3% and 34.0% in 2009 and 2010 respectively. The effective
utilization was lower than the design utilization rate of 45.0% due to intermittent grid availability. Latudi Hydrostation is a four-component complex consisting of two concrete diversion dams, pipelines and penstock, powerhouse and substation. The powerhouse contains three 6.3 MW horizontal Pelton turbine generators manufactured by Lingling Hengyuan Hydropower Equipment Co., Ltd. The
area of the powerhouse building is 500 m2. The area of the land the project utilizes is 28 km2 including the drainage basin. Sichuan Province Liyuan. Liyuan is a low head run-of-the-river hydroelectric power project commissioned in August 2006 with an installed capacity of 12.0 MW and an annual design utilization rate of 42.0%. The effective utilization rate was 23.8% for 2008, 22.3% for 2009 and 15.4% for 2010. The effective
utilization rates for Liyuan in 2008, 2009 and 2010 were lower than its design utilization rate due to high variability and concentration of precipitation and water flows during such periods. Water flows at times exceeded facility capacity resulting in abandoned water. We expect this situation to be mitigated
in the future with the completed development and construction of a series of upstream plants on the Donghe river which will have the effect of moderating water flows in the river. Until such development is completed, the utilization rates for Liyuan may remain below design. Sichuan Huabang
Hydroelectric Development Co., Ltd. entered into a grid connection and dispatching agreement with Sichuan Cangxi Electric Power Co., Ltd. on May 18, 2010, which is valid until May 17, 2011, pursuant to which Sichuan Huabang Hydroelectric Development Co., Ltd. is to connect the hydroelectric
power project to the power grid owned or controlled by Sichuan Cangxi Electric Power Co., Ltd.. On May 17, 2010, Sichuan Huabang Hydropower Development Co., Ltd. and Sichuan Cangxi Electric Power Co., Ltd., part of the China Southern Power Grid Corporation Ltd., or the Southern Grid,
entered into a power purchase and sale agreement effective from May 17, 2010 until May 17, 2011, pursuant to which the Sichuan Cangxi Electric Power Co., Ltd. is paying Liyuan a tariff of RMB0.29 per KWh. According to the terms of such agreement, the agreement remains effective after the initial
term, unless both parties agree to terminate. The VAT for this plant is 6.0%. Liyuan is located on the Donghe river, which is in northeast Sichuan province at Donghe, Cangxi County, Guangyuan City. Liyuan consists of a concrete gravity dam, powerhouse, hinged spill way gates and ship lock integrated into one structure, and a substation. The power house contains six
vertical 2.0 MW axial Kaplan type turbines manufactured by Jiangxi Pingxiang Hydro Power Facility. The area of the structure that contains the plant is 644.0 m2. The area of the land the project utilizes is 4,934 km2 including the drainage basin. We acquired Liyuan in May 2007. The major earthquake
that struck Sichuan province in 2008 caused damage to the tailwater concrete apron and the spillway gates of Liyuan hydroelectric power project and the repair of such damage cost us RMB11.7 million ($1.7 million) and was completed in March 2010. During the repair period, power generation was
limited and hence less than normal production from Liyuan hydroelectric power project was achieved in 2009. 50
Zhejiang Province Shapulong. Shapulong is an impoundment reservoir hydroelectric power project commissioned in June 2001 with an installed capacity of 25.0 MW and an annual design utilization rate of 23.0%. The effective utilization rate was 19.3% for 2008, 18.6% for 2009 and 29.5% for 2010. The lower
than design utilization rate in 2008 was due in part to a severe snowstorm that interrupted the transmission system in the area and the lower than design utilization rate in 2009 was related to normal operations coupled with lower than average precipitation levels. The higher than design capacity
utilization rate in 2010 was attributable to normal operations coupled with higher than average precipitation. Yunhe Shapulong Hydropower Generation Co., Ltd. entered into a grid connection and dispatching agreement with Lishui Electric Power Bureau on June 10, 2001, for an indefinite term, pursuant
to which Shapulong is to connect the hydroelectric power project to the power grid owned or controlled by Lishui Electric Power Bureau. Yunhe County Shapulong Hydropower Generation Co., Ltd. entered into a power grid economic agreement with Lishui Electric Power Bureau, part of the State Grid,
in October 2008, which is valid until September 30, 2011 pursuant to which the Lishui Electric Bureau is paying Shapulong a tariff of RMB0.535 per kWh during peak hours and RMB0.268 per kWh during off-peak hours. The VAT for this plant is 6.0%. Shapulong is located in the watershed of the Wutongkeng river, which is part of the Ou river basin in Yunhe County, Zhejiang province. Shapulong is a four component project consisting of a concrete faced dam, tunnel and penstock, powerhouse and substation. The powerhouse contains two 12.5
MW vertical Francis turbine generators manufactured by Kvaerner Hangzhou Power Equipment Co., Ltd. The area of the powerhouse is 506.3 m2. The area of the land the project utilizes is 42 km2 including the drainage basin. We acquired Shapulong in December 2007. Yingchuan. Yingchuan is an impoundment reservoir hydroelectric power project commissioned in April 2002 with an installed capacity of 40.0 MW and an annual design utilization rate of 28.0%. The effective utilization rate was, 25.8% for 2008, 30.6% for 2009 and 39.5% for 2010. The
higher than design capacity utilization rate in 2010 was attributable to normal operations coupled with higher than average precipitation. Zhejiang Province Jingning Yingchuan Hydroelectric Development Co., Ltd. entered into a grid connection and dispatching agreement with Lishui Electric Power
Bureau in November 2008, which is valid until November 2009 and thereafter so long as there is no disagreement between the two parties, pursuant to which Jingning Yingchuan Hydroelectric Development Co., Ltd. connected the hydroelectric power project to the power grid which is currently under the
operation and management of Lishui Electric Power Bureau. According to the terms of such agreement, the agreement remains effective after the initial term, unless both parties agree to terminate. In October 2008 a power grid economic agreement was executed between Zhejiang Province Jingning
Yingchuan Hydroelectric Development Co., Ltd. and Lishui Electric Power Bureau, part of the State Grid, effective from October 1, 2008 to September 30, 2011 subject to a two-year automatic renewal pursuant to which the Lishui Electric Power Bureau is paying Yingchuan a tariff of RMB0.535 per
kWh during peak hours and RMB0.268 per kWh during off-peak hours. The VAT for this plant is 6.0%. Yingchuan is located on the Yingchuan stream, which is a tributary of the Xiaoxi river in the upper reaches of the Oujiang water system in Jingning County, Zhejiang province. Yingchuan is a four-component complex consisting of a concrete-faced dam, tunnel and penstock, powerhouse and
substation. The powerhouse contains two 20.0 MW vertical Francis turbine generators manufactured by Kvaerner Hangzhou Power Equipment Co., Ltd. The area of the powerhouse is 489.2 m2. The area of the land the project utilizes is 200 km2 including the drainage basin. We acquired Yingchuan in
January 2008. Wuliting. Wuliting is a low head, run-of-the-river hydroelectric power project commissioned in October 2007 with an installed capacity of 42.0 MW and an annual design utilization rate of 33.0%. The effective utilization rate was, 19.0% for 2008, 25.2% for 2009 and 40.5% for 2010. The
lower than design utilization rate in 2008 was due to commissioning activities of the major equipment. In 2008, no more than two power generators were operating at anytime due to remediation measures to the generator cooling systems required following commissioning. Lower than design utilization
rate 51
in 2009 was attributed in part to repair and maintenance to a reservoir upstream of Wuliting and outside of the Company’s control which resulted in water flows in excess of capacity and considerable abandoned water. The higher than design capacity utilization rate in 2010 was attributable to normal
operations coupled with higher than average precipitation. Qingtian Wuliting Hydroelectric Development Co., Ltd. entered into a grid connection and dispatching agreement with Lishui Electric Power Bureau in November 2008, which is valid until November 2009 and thereafter so long as there is no
disagreement between the two parties, pursuant to which Qingtian Wuliting Hydroelectric Development Co., Ltd. is to connect the hydroelectric power project to the power grid which is currently under the operation and management of Lishui Electric Power Bureau. In October 2008 Wuliting entered
into a grid economic agreement with Lishui Electric Power Bureau, which is valid until September 30, 2011 subject to a two-year automatic renewal, pursuant to which Lishui Electric Power Bureau, part of the State Grid, is paying Wuliting a tariff of RMB0.535 per kWh during peak hours, being 8 a.m. to
10 p.m., and RMB0.268 per kWh during off-peak hours, being 10 p.m. to 8 a.m. The VAT for this plant is 6.0%. Wuliting is located on the Daxi stream at the lower reaches of the Oujiang River, Wuliting village, Qingtian County, Zhejiang province. Wuliting consists of a concrete gated structure, powerhouse, spill way, and ship lock integrated into one structure, and a substation. The powerhouse contains three
14.0 MW horizontal bulb turbines manufactured by Hangzhou Jianghe Electromechanical Equipment Co., Ltd. The area of the structure is 1,683.1 m2. The area of the land the project utilizes is 8,872 km2 including the drainage basin. We acquired Wuliting in January 2008. Ruiyang. Ruiyang is an impoundment reservoir hydroelectric power project commissioned in December 2003 with an installed capacity of 32.0 MW and an annual design utilization rate of 24.0%. The effective utilization rates were, 18.2%, 22.3% and 27.8% for 2008, 2009 and 2010,
respectively, reflecting normal operations and natural fluctuation in precipitation levels. Longquan Ruiyang Cascade II Hydroelectric Co., Ltd. entered into a grid connection and dispatching agreement with Lishui Electric Power Bureau on October 18, 2003, for an indefinite term, pursuant to which
Ruiyang is to connect the hydroelectric power project to the power grid owned or controlled by Lishui Electric Power Bureau. Longquan Ruiyang Cascade II Hydroelectric Co., Ltd. entered into a grid economics agreement with Lishui Electric Power Bureau in April 2007, which is valid until December
31, 2009 subject to a two-year automatic renewal, pursuant to which Lishui Electric Power Bureau is currently paying Ruiyang a tariff of RMB0.535 per kWh during peak hours and RMB0.268 per kWh during off-peak hours. According to the terms of such agreement, the agreement remains effective
after the initial term, unless both parties agree to terminate. The VAT for the plant is 6.0%. Ruiyang is located on the upper reach of Longquan Brook (Mei Brook), a tributary to Ou river, within the boundaries of Xiaomei Township, Longquan City, Zhejiang province. Ruiyang is a five-component project consisting of a concrete-faced-rock-fill dam, a 4 km tunnel, penstock, powerhouse, and
substation. The power house contains two 16 MW vertical Francis turbine generators manufactured by Kvaerner Hangzhou Power Equipment Co., Ltd. The area of the powerhouse structure is 892.0 m2. The area of the land the project utilizes is 188.0 km2 including drainage basin. We acquired Ruiyang in
August 2009. Jiulongshan and Zhougongyuan. Jiulongshan and Zhougongyuan are a hydroelectric power project complex consisting of three separate hydroelectric power projects in series on the same river. The upstream hydroelectric power project, Zhougongyuan I, is an impoundment dam reservoir
hydroelectric power project and the other two, Jiulongshan I and Jiulongshan II, downstream are run-of-the-river, diversion dam hydroelectric power projects. The three projects have a total design capacity of 53.6 MW and a combined annual design utilization rate of 25.0%. The effective utilization rate
was 19% for 2009 reflecting normal precipitation levels during the commissioning period of the three projects. Zhougongyuan was commissioned in May through December 2009. The effective utilization rate for 2010 was 25% reflecting normal operations. Suichang County Jiulongshan Hydroelectric
Development Co., Ltd. entered into a grid connection and dispatching agreement with Lishui Electric Power Bureau on April 21, 2009 for each of the three hydroelectric power projects, which is valid until April 2010 subject to a two-year automatic renewal, pursuant to which Suichang County
Jiulongshan Hydroelectric Development Co., Ltd. is to connect the 52
hydroelectric power projects to the power grid which is currently under the operation and management of Lishui Electric Power Bureau. On July 16, 2010, Suichang County Jiulongshan Hydroelectric Development Co., Ltd. and Suichang County Zhougongyuan Hydroelectric Development Co., Ltd.
respectively entered into a power purchase and sale contract with Lishui Electric Power Bureau for Jiulongshan I, Jiulongshan II and Zhougongyuan, which are valid from July 1, 2010 to June 30, 2013, pursuant to which Lishui Electric Power Bureau, part of the State Grid, is paying Zhougongyuan and
Jiulongshan a tariff of RMB0.535 per kWh during peak hours and RMB0.268 per kWh during off-peak hours. In December 2009, Suichang County Jiulongshan Hydroelectric Development Co., Ltd., which then owned all of the three hydroelectric power projects, transferred one of them, Zhougongyuan
III, to the newly established Suichang County Zhougongyuan Hydroelectric Development Co., Ltd. with total investment of RMB140.0 million ($19.5 million) and registered capital of RMB90.0 million ($12.8 million). In connection with the transfer, Suichang County Jiulongshan Hydroelectric
Development Co., Ltd., reduced its total investment to RMB320.0 million ($44.5 million) and registered capital to RMB204.1 million ($29.0 million). The purpose of the transfer is to have two interconnect arrangements of less than 50 MW resulting in lower VAT for the complex. The VAT for the three
hydroelectric power projects was 17.0% for 2009 and 6% for 2010. Zhougongyuan is located on the Zhougongyuan river, which is a tributary of the Wuxijiang river. Each of the hydroelectric power projects consists of a concrete dam, tunnel and penstock, powerhouse and substation. Zhougongyuan I powerhouse contains two 12.5 MW vertical Francis type turbine
generators, Zhougongyuan II powerhouse contains two 6.3 MW vertical Francis type turbines generators and Zhougongyuan III powerhouse contains two 8.0 MW vertical Francis type turbine generators, all of which were manufactured by Nanping Equipment Manufacturing Co., Ltd. The area of the
structures that contain powerhouses are 447.1 m2, 440.9 m2 and 487.9 m2, respectively. The area of the land the project utilizes is 388.0 km2 including the drainage basin. The effective utilization rate was 12.5% and 29.9% in 2009 and 2010 respectively, compared to the design utilization rate of 25.0%. The lower than Design utilization rate in 2009 was due to intermittent operation during the commissioning period, coupled with less than favorable precipitation levels. Fujian Province Banzhu. Banzhu is a low head, run-of-the-river hydroelectric power project commissioned in November 1998 with an installed capacity of 45.0 MW and an annual design utilization rate of 40.0%. The effective utilization rate was 39.3% for 2008, 32.1% for 2009 and 47.0% for 2010,
reflecting normal operations and natural fluctuation in precipitation levels. On September 30, 2010, Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. entered into a grid connection and dispatching agreement with Fujian Province Electric Power Co., Ltd. Sanming Power Industry Bureau which is valid for
five years from the execution date. On August 18, 2008, Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. entered into a power purchase and sale agreement with Fujian Province Electric Power Co., Ltd. which was valid until December 31, 2010 subject to a three-year automatic renewal, pursuant to
which, Fujian Province Electric Power Co., Ltd. is currently paying Banzhu a tariff of RMB0.36 per KWh. The VAT for this plant is 17.0%. Banzhu is located on the Shaxi River, a main tributary of the Minjiang River in Fujian province, 8 km downstream from Sanming City. Banzhu consists of a full gated structure, powerhouse, spill way and ship lock integrated into one structure, and substation. The powerhouse contains three 15.0 MW
horizontal bulb turbines manufactured by Hangzhou Generation Equipment Manufacturing Co., Ltd. The area of the structure is 5,915.3 m2. The area of the land the project utilizes is 9,774 km2 including the drainage basin. We acquired a 90.0% equity interest of Banzhu in October 2008 and the
remaining 10.0% equity interest in March 2009. Wangkeng. Wangkeng is an impoundment reservoir hydroelectric power project commissioned in July 2004 with an installed capacity of 40.0 MW and an annual design utilization rate of 42.0%. The effective utilization rate was 36.8% for 2008, 30.9% for 2009 and 52.5% for 2010, reflecting
normal operations and natural fluctuations in precipitation levels. On July 21, 2008, Pingnan County 53
Wangkeng Hydroelectric Co., Ltd. entered into a grid connection and dispatching agreement with Fujian Province Ningde Electric Power Industry Bureau, which is valid until December 2010, pursuant to which Pingnan County Wangkeng Hydroelectric Co., Ltd. is to connect the hydroelectric power
project to the power grid which is currently under the operation and management of Fujian Province Ningde Electric Power Industry Bureau. Pingnan County Fushun Hydroelectric Co., Ltd. (formerly Pingnan Wangkeng Hydroelectric Co., Ltd.), entered into a power purchase and sales agreement with
Fujian Province Electric Power Co., Ltd., part of the Southern Grid, on October 28, 2004, which was valid until December 31, 2009, pursuant to which the Fujian Power Grid is paying Wangkeng hydroelectric power project a tariff of RMB0.31 per kWh. On September 30, 2010, Pingnan County
Wangkeng Hydroelectric Co., Ltd. entered into a new grid connection and dispatching agreement with Fujian Province Electric Power Co., Ltd. Ningde Power Industry Bureau which is valid until December 31, 2015. On June 28, 2010, Pingnan County Wangkeng Hydroelectric Co., Ltd. entered into a new
power purchase and sale contract with Fujian Province Electric Power Co., Ltd. which is valid till March 31, 2011 subject to a three-year automatic renewal. The VAT for this plant is 17.0%. Wangkeng is located on the Huotongxi river in Pingnan County, Fujian province. Wangkeng is a four component complex consisting of a concrete arch dam, tunnel and penstock, powerhouse and substation. The powerhouse contains two 20.0 MW vertical Francis type turbine generators manufactured
by GE Asia (Hangzhou) Hydroelectric Equipment Co., Ltd. The area of the powerhouse structure is 706.8 m2. The area of the land the project utilizes is 290 km2 including the drainage basin. We acquired Wangkeng in October 2008. Yuanping. Yuanping is a run-of-the-river diversion hydroelectric power project commissioned in March 2007 with an installed capacity of 16.0 MW and an annual design utilization rate of 39.0%. The effective utilization rate was 27.3% for 2008, 31.6% for 2009 and 59.2% for 2010. The
lower than design utilization rate in 2008 were due in part to the ramp up of the hydroelectric power project during the commissioning period and in 2009 due to normal operations coupled with natural fluctuation in precipitation levels. The higher than design utilization rate in 2010 was attributable to
normal operations coupled with higher than average precipitation. On December 26, 2008, a grid connection and dispatching agreement was executed by and between Pingnan County Yuanping Hydroelectric Co., Ltd. and Pingnan County Power Supply Co., Ltd. which is valid until December 27, 2010,
pursuant to which Fujian Province Pingnan County Yuanping Hydroelectric Co., Ltd. is to connect the hydroelectric power project to the power grid which is currently under the operation and management of Fujian Province Pingnan County Power Supply Co., Ltd. Pingnan County Yuanping
Hydroelectric Co., Ltd. entered into a power purchase agreement with Fujian Province Pingnan County Power Supply Co., Ltd. on December 28, 2008, which is valid until December 28, 2009, pursuant to which Fujian Province Pingnan County Power Supply Co., Ltd. is paying Yuanping an interim tariff
of RMB0.260 per kWh for supplying electricity. The tariff was approved by the regional pricing bureau to be RMB0.29 per kWh. The VAT for this plant is 6.0%. According to the terms of such agreement, the agreement remains effective after the initial term, until both parties agree to terminate. Yuanping is located on the Huotongxi river in Fujian province. Yuanping is a four-component complex with a concrete diversion dam, tunnel and penstock, powerhouse and substation. The powerhouse contains a single 16.0 MW vertical Francis turbine generator manufactured by Nanping Nandian
Hydroelectric Equipment Co., Ltd. The area of the land that occupies the structures is 750.0 m2. The area of the land the project utilizes is 671 km2 including the drainage basin. We acquired Yuanping in October 2008. Yuheng. Yuheng is a run-of-the-river diversion hydroelectric power project commissioned in November 1999 with an installed capacity of 30.0 MW and an annual design utilization rate of 42.0%. The effective utilization rate was, 34.6% for 2008, 26.4% for 2009 and 51.1% for 2010,
reflecting normal operations and natural fluctuation in precipitation levels. On December 26, 2008, a grid connection and dispatching agreement was executed by and between Pingnan County Yuheng Hydropower Co., Ltd. and Fujian Province Pingnan County Power Supply Co., Ltd., which is valid until
December 27, 2010, pursuant to which, the Yuheng hydroelectric power project is to be connected to the power grid which is currently under the operation and management of Fujian 54
Province Pingnan County Power Supply Co., Ltd. Pingnan County Yuheng Hydropower Co., Ltd. entered into a power purchase agreement with Fujian Province Pingnan County Power Supply Co., Ltd. on December 28, 2008, which is valid until December 28, 2009, pursuant to which, Fujian Province
Pingnan County Power Supply Co., Ltd. is to pay Yuheng a tariff of RMB0.29 per kWh for supplying electricity. According to the terms of the agreement it remains effective after the initial term, until both parties agree to terminate. However, Pingnan County Yuheng Hydropower Co., Ltd. entered into
the Interim Agreement of Conformity of Power Purchase and Supply in Rongping Supply Area with Fujian Province Pingnan County Power Supply Co., Ltd., Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. and Pingnan County Hengli Hydroelectric Co., Ltd. on August 31, 2007, or the
Interim Agreement, which is in force until August 31, 2010, pursuant to which, Fujian Province Pingnan County Power Supply Co., Ltd. and Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. are to pay Yuheng a tariff of RMB0.181 per kWh for supplying 300 million kWh of electricity to
Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. for a contractual term of forty-two months, which ends in October 2010. Therefore, for electricity amount supplied under the Interim Agreement to Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd., Yuheng is only entitled
to RMB0.181 per kWh of the RMB0.29 per kWh revenue received from Fujian Province Pingnan County Power Supply Co., Ltd. and is obligated to remit the remaining RMB0.109 per kWh, to Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. until the earlier of reaching the cumulative
volume of 300 million kWh or October 2010. Pursuant to the Transfer of Yuanping Hydropower Plant and Cooperation Agreement entered into between Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. and Fujian Province Anheng Assets Management Co., Ltd., Fujian Yuheng Power
Group and Fujian Dachuang Hydro Power Co., Ltd., which were the founders of Pingnan County Yuheng Hydropower Co., Ltd., Yuheng provided a guarantee deposit of RMB30 million to Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. to guarantee the supply of electricity of an
aggregate volume of 300 million kWh over the contractual term and is entitled to be refunded RMB0.1 of the guarantee deposit for every kWh of electricity supplied to Rongping Chemical through the power grid up to 300 million kWh over the contractual term. The VAT for this plant is 6.0%. Yuheng is located in the Huotongxi river in Fujian province. Yuheng is a four-component complex with a concrete diversion dam, tunnel and penstock, powerhouse, and substation. The powerhouse contains three 10.0 MW vertical mixed flow Francis turbine generators manufactured by Chongqing
Turbine Generator Manufacturing Company Ltd. The area of the structure that contains the powerhouse is 546.0 m2. The area of the land the project utilizes is 671 km2 including the drainage basin. We acquired Yuheng in October 2008. Jinlong. Jinlong is a low head run of the river hydroelectric power facility commissioned in November 2005 with an installed capacity of 10 MW and an annual design utilization rate of 40%. The effective utilization rate was 44.8%, 42.5% and 50.8% in 2008, 2009 and 2010, respectively. The
effective utilization rate in 2010 was higher than the design utilization rate due to normal operations and higher than average precipitation. Shaowu City Jinlong Hydroelectric Co., Ltd. entered into a power purchase agreement with Fujian Province Shaowu Power Supply Bureau on March 2007, which is
valid until March 31, 2009, pursuant to which Fujian Province Shaowu Power Supply Bureau agrees to pay a tariff of RMB0.30 per kWh for supplying electricity and the tariff was approved by the regional pricing bureau. The VAT for this plant is 6.0%. According to the terms of such agreement, the
agreement remains effective unless any party has disagreement on the terms of the agreement, and the validity shall extend to the expiry of the operation period. Jinlong is located on the on the Fu Tun Xi River in northwest Fujian province in Shaowu City. Jinlong is a low head run of the river gated complex with the powerhouse incorporated into the diversion structure on the right bank. The powerhouse contains two 5.0 MW horizontal fully regulated bulb
turbine generators manufactured by Fu Chung Jiang Hydraulic Turbine Factory. Jintang. Jintang is a low head run of the river hydroelectric power facility commissioned in October 2006 with a design capacity of 11.6 MW and an annual design utilization rate of 40%. The effective utilization rate was 37.4%, 35.5% and 41.9% in 2008, 2009 and 2010, respectively,
reflecting normal operations and natural fluctuation in precipitation levels. Shaowu City Jintang Hydroelectric 55
Co., Ltd. entered into a power purchase agreement with Fujian Province Shaowu Power Supply Bureau on December 2008, which is valid until November 31, 2011, pursuant to which Fujian Province Shaowu Power Supply Bureau agrees to pay a tariff of no more than RMB0.30 per kWh for supplying
electricity. Fujian Provincial Pricing Bureau has approved an interim tariff of RMB0.26 per kWh. The VAT for this plant is 6.0%. According to the terms of such agreement, the agreement remains effective unless any party has disagreement on the terms of the agreement, and the validity shall extend to
the expiry of the operation period. Jintang is located on the Fu Tun Xi River in the northwest of Fujian province in Shaowu City. Jintang is a low head run of the river gated complex with the powerhouse incorporated into the diversion structure on the right bank. The powerhouse contains two 5.8 MW horizontal fully regulated bulb
turbine generators manufactured by Dong Feng Hydroelectric Machinery Works. Jinling. Jinling is located in Shaowu City, Fujian province and consists of three projects, Qianling, Jinjiu and Dongguan. Qianling and Jinjiu are incorporated into the same powerhouse and gate structure on the Futunxi River. The entire complex of Qianling and Jinjiu has a total design
capacity of 13.0 MW. Dongguan has a design capacity of 4.8 MW. Shaowu City Jinling Power Generation Co., Ltd. entered into a power purchase agreement with Fujian Province Shaowu Power Supply Bureau for each of Qianling, Jinjiu and Dongguan hydroelectric power projects in March 2007, which
is valid till March 31, 2009, according to which Fujian Province Shaowu Power Supply Bureau agrees to pay a tariff of not more than RMB0.24 per KWh for Qianling, a tariff of not more than RMB0.28 per KWh for Jinjiu and a tariff of RMB0.28 per KWh for Dongguan. The approved tariff for
Qianling is RMB0.24 per KWh and for Jinjiu RMB0.28 per KWh. The VAT for these three plants is 6.0%. According to the terms of such agreement, the agreement remains effective unless any party has disagreement on the terms of the agreement, and the validity shall extend to the expiry of the
operation period. Qianling. The Qianling hydroelectric facility is a low head run of the river hydroelectric power facility commissioned in July 1984 with a design capacity of 10 MW and an annual design utilization rate of 40%. The effective utilization rate was 39.1%, 39.1% and 48.8% in 2008, 2009 and
2010, respectively. The higher than design utilization rate in 2010 was attributable to normal operations coupled with higher than average precipitation. The Qianling hydropower complex is located on the on the Fu Tun Xi River in northwest Fujian province in Shaowu City. Qianling is a low head run of
the river gated complex with the powerhouse incorporated into the diversion structure on the right bank. The powerhouse contains eight 1.25 MW vertical partially regulated kaplan turbine generators manufactured by Dong Feng Hydroelectric Turbine Factory. Jinjiu. The Jinjiu hydroelectric facility is a low head run of the river hydroelectric power facility commissioned in October 2004 with a design capacity of 3.0 MW and an annual design utilization rate of 40%. The effective utilization rate was 65.2%, 59.2% and 62.6% in 2008, 2009 and 2010
respectively. The higher than design utilization rate was attributable to operator preference in optimizing performance and water allocation between Jinjiu and Qianling. The Jinjiu hydropower facility is located on the Fu Tun Xi River in northwest Fujian province in Shaowu City. Jinjiu has a single 3.0
MW fully regulated vertical kaplan style turbine that is incorporated into the Qianling complex which is a low head run of the river gated complex with the powerhouse incorporated into the diversion structure. The powerhouse contains the Qianling eight 1.25 MW vertical partially regulated kaplan
turbine generators manufactured by Dong Feng Hydroelectric Turbine Factory plus the single Jinjiu 3.0 MW vertical kaplan turbine generator manufactured by Nanping Hydroelectric Turbine Generator company. Dongguan. The Dongguan hydroelectric facility is a low head run of the river hydroelectric power facility commissioned in November 2004 with a design capacity of 4.8 MW and an annual design utilization rate of 48%. The effective utilization rate was 22.9%, 23.2% and 17.4% in 2008,
2009 and 2010, respectively. Effective utilization has been lower than design as water levels at the dam were reduced to accommodate construction activity immediately upstream unrelated to the project. Dongguan is located on the Fu Tun Xi River in northwest Fujian province in Shaowu City. Dongguan is a low head run of the river gated complex with the powerhouse incorporated into the 56
diversion structure at the left bank. The powerhouse contains three 1.6 MW horizontal fully regulated bulb turbine generators. Jinwei. Jinwei is a low head run of the river hydroelectric power facility commissioned in July 2009 with a design capacity of 16.0 MW and an annual design utilization rate of 48%. The effective utilization rate was 27.4% and 38.1% in 2009 and 2010, respectively. Effective utilization has
been lower than design utilization reflecting the startup of operations as the facility was commissioned in July 2009. Shaowu City Jinwei Hydroelectric Co., Ltd. entered into a power purchase agreement with Fujian Province Nanping Power Bureau on January 2007, which is valid until December 31, 2009,
pursuant to which Fujian Province Nanping Power Bureau agrees to pay a tariff of RMB0.30per kWh for supplying electricity. The VAT for this plant is 6.0%. According to the terms of such agreement, the agreement remains effective unless any party has disagreement on the terms of the agreement,
and the validity shall extend to the expiry of the operation period. Jinwei is located on the Fu Tun Xi River in the northwest of Fujian province in Shaowu City. Jinwei is a run of the river gated complex with the powerhouse incorporated into the diversion structure on the right bank. The powerhouse contains two 8.0 MW horizontal fully regulated bulb turbine
generators manufactured by Dong Feng Hydroelectric Machinery Works. Projects under Development Henan Province Wuyue. Wuyue will be a pumped storage hydroelectric power project with a planned design capacity of 1,000.0 MW and an annual design utilization rate of between 15% to 30%, depending upon utility requirements. The Wuyue project is party to various design, construction, equipment
and installation contracts totaling approximately RMB154.2 million ($22.6 million) in value. Wuyue will be connected to the Hubei-Henan exchange interface of the east channel in the Henan 500 KV power grid. Wuyue will be located in Yinpeng Township, Guangshan County, Xinyang City, Henan province, between the existing lower Wuyue reservoir and an upper reservoir yet to be built.
The hydroelectric project will contain four 250.0 MW reversible pump hydraulic turbine generators. The area of the hydroelectric power project will be 3,800 m2. The area of the land the project will occupy will be 6,940 m2 including power plant and water conveyance facilities. In September 2010, we signed a framework agreement with China Guangdong Nuclear Energy Development Co. Ltd. (“Guangdong Nuclear”) for the equity transfer of a controlling interest of the Wuyue Pumped Storage Power Generation Co. Ltd. Under the framework agreement, subject to the
completion of definitive documents, completion of due diligence and receipt of required governmental and other approvals in the PRC, China Hydroelectric will transfer 51% equity interest in Wuyue Company to Guangdong Nuclear, in exchange for which Guangdong Nuclear will agree to fund its
proportionate share of the on-going development costs of the project. The terms contained in the framework agreement, which may be terminated by either party prior to the execution of definitive agreements, are expected to be memoralized in definitive agreements which the parties expect to be
completed by the first half of 2011. Projects for which We have Signed Definitive Agreements to Acquire Yunnan Province Dazhaihe. In November 2010, we signed a definitive agreement to acquire Jinping Kanghong Hydroelectric Development Co., Ltd., which owns and operates Dazhaihe hydroelectric project, a 15 MW operating project in Yunnan province for a purchase price of RMB118 million ($17.8 million). Wangkeng. In November 2010, we signed a definitive agreement to acquire the remaining 10% equity interests in Pingnan County Wangkeng Hydroelectric Co., Ltd. for a purchase price of RMB39.0 million ($5.9 million). This acquisition was completed in January 2011. 57
Our Project Acquisition Process Our steps for evaluating and acquiring hydroelectric power projects are set forth below. Opportunity Sourcing and Screening Our management has a broad network of contacts throughout China, including contacts in the hydroelectric industry and in the central, provincial and local governments, through which we have developed a pipeline of hydroelectric project acquisition opportunities. Our criteria for evaluating a potential target hydroelectric power project or development project for acquisition include the following:
•
acquisition price, and anticipated construction cost where applicable, as compared to current and projected cash flow and the historical and projected return on investment, taking into account historical tariff levels and tariff trends; • the acquisition cost as compared to the estimated replacement value, the appraised value and our own assessment of fair value using a number of valuation methodologies; • the status of approvals, permits and licenses required for the construction and operation of the plant, including the legal status of the land occupied by the plant; 58
• the hydrological condition of the plant site; • the ability to retain existing or obtain new local bank financing on reasonable terms; • the operating history of the target business, including actual power production and local supply and demand; • the installed capacity and design of the hydroelectric power project operated by the target business, including opportunities to expand or otherwise improve generation capacity taking into consideration the current installed capacity and design utilization; • the potential to diversify the regions in which we operate or to realize operational efficiencies from clustering multiple plants on a single water way; • the competency of existing management and operational personnel of the target project; and • the local government for the project, the relationship with the customer grid and the local tax rates. These criteria are not intended to be exhaustive. Any screening relating to the merits of a particular target business will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting the acquisition consistent with our business
strategy. Our management believes there are ample acquisition targets that meet the above criteria. Furthermore, we believe that there are few experienced and funded buyers in the market. In evaluating prospective acquisitions, our management has sourced a large number of hydroelectric projects in
China, including conducting site visits and analyzing operating data from the projects. In addition, our management has conducted comprehensive research on market and competitive dynamics in the industry. We have engaged certain finders for sourcing acquisition opportunities for our company, but we have not paid any finder’s fees to date, as we have not closed any acquisitions based on the introductions made by them. We plan to discontinue the use of finders in the future. Sign Memorandum of Understanding or Letter of Intent Once an acquisition opportunity is identified, our staff will conduct an internal preliminary engineering, legal and financial assessment of the target project. The results of the internal preliminary assessment are reported to our management, which decides whether we will pursue the opportunity. If our management decides to pursue the opportunity, we will enter into a memorandum of understanding or letter of intent with the owner of the target project. This sets forth the general terms and conditions for a possible acquisition and may elect to provide for the payment by us of a deposit of
up to 5% of the purchase price. The memorandum of understanding or letter of intent allows us to conduct our due diligence review. The memorandum of understanding or letter of intent is generally non-binding, although where we pay a deposit, we may forfeit it if we do not complete the acquisition
for reasons other than the failure of the project to pass our due diligence review. Due Diligence After the execution of a memorandum of understanding or letter of intent, we conduct a full due diligence review of the target project. The due diligence review covers four main aspects: financial, engineering, legal and asset appraisal. Generally, third-party advisors, such as engineering firms, law
firms and asset appraisers, are engaged to assist us with in-depth due diligence under our direction, and will provide due diligence reports for our review. Our own staff is also responsible for the financial review of target projects. Our financial evaluation is the key first step to understanding the viability of the potential project. We conduct different analyses of the business to ensure the valuation sought is in line with market. We achieve this through evaluation of the asked price, operating expenditure and capital expenditure
to ensure that the price we are paying is reasonable. The engineering firm is directed to 59
include in their report an estimate of cost to operate the plant, taking into account periodic equipment maintenance. The engineering review generally consists of site visits, physical inspection of the facilities, meetings with plant management, analysis of hydrological conditions and potential and historical electricity production, review of project design, construction and operation records, and review of the acquisition
cost, operating cost and annual capital expenditures. In the review of hydrological conditions and electricity production, the engineering firm is directed to (i) review the precipitation records and the methods used to determine the amount and timing of water flow and the project water intake; (ii) review the methods employed to convert the kinetic
energy of water into electricity, including applying the hydrologic potential from the project water to the water conveyance facilities and turbine equipment of the project; and (iii) account for reasonable estimates of planned and unplanned outages due to maintenance, high and low water levels, and
transmission interruption due to grid conditions outside the control of the project operator. The engineering firm’s report typically includes monthly and annual electricity production using historical hydrologic records and the equipment installed or to be installed, reflecting a simulation of historical and
likely future net electricity production from the project which is then compared, in the case of plants already in operation, to actual electricity production since commencement of operations. The review of project design is intended to ensure that the civil, mechanical and electrical design of the project is prudent and suitable for the intended duty of a utility grade hydroelectric power project performing continuous operation. In the review of project design, the engineering firm is directed
to review the suitability of the project for specific geotechnical conditions, civil structures, and the mechanical and electrical requirements for infrastructure and equipment, including the dimensions, methods of fabrication, depth of excavation, and source of materials used in all project features, including
diversion structure, water conveyance, support, power house and outflow. The actual records of the project construction are selectively reviewed to ensure that customary quality control practices were performed and that construction materials, including steel and concrete, incorporated in the project were manufactured and placed in accordance with prudent design practice.
The review covers quality control measures employed by the manufacturers of turbines, generators and electrical equipment in the manufacturing and assembly process and identifies any substandard material or completed work that was removed and replaced. The review of the actual construction ensures
that civil, mechanical and electrical aspects of the project conform with the design, that any redesign improvements from the original design necessitated by the actual conditions have been properly incorporated into the work, and that the final as built project is a utility grade hydroelectric power project
suitable for continuous duty. Our third party-review of the project design and project construction is intended, among other things, to uncover any deficiencies in the structural or operational integrity of the hydroelectric power project that may have arisen due to construction of the hydroelectric power
project based on incomplete or inaccurate technical data, faulty design or poor construction process or materials. We engage legal counsel to investigate the legal status of the target hydropower project through a review of relevant legal documents, including permits and approvals, tax records, and building ownership certificates and land use rights. The legal counsel prepares a legal due diligence report that sets
forth any issues they identify and the associated risks. This process allows us to reduce our risk exposure and more effectively negotiate with the seller to remediate material legal issues before acquiring the target project. Finally, we also obtain an appraisal from a reputable appraiser of the fair market value of the target project before entering into an agreement with the seller. We generally obtain a written appraisal that covers the plant, property and equipment. Investment Committee Approval Upon completion and review of the financial, engineering, legal, and appraisal due diligence, our investment committee will decide whether to enter into a definitive acquisition agreement. Our 60
investment committee currently consists of Mr. Kuhns, Dr. Lin, Mr. Li, Mr. Gan and Mr. Best. Projects are only pursued upon the unanimous consent of the committee members. Negotiate and Sign Definitive Agreement The legal documentation of the acquisition is prepared by our legal counsel in conjunction with their in-depth due diligence review of the target. If our project review committee is satisfied with the results of the in-depth due diligence, we will enter into an equity interest or asset purchase agreement
and other related agreements with the seller of the target and other related parties as necessary. The agreements cover the pricing and payment terms for the acquisition, the financing requirements for the transaction, estimates of approval status and timing and may involve divestiture of non-core assets.
These acquisition agreements contain representations, warranties and covenants of the parties that we believe are customary for comparable transactions in China, covering historical tariff, electricity generation and hydrology, the condition of the plant and equipment, the status of government approvals
and the ownership history of the plant. Certain representations and warranties of the sellers of these projects, such as those relating to the quality and performance of the projects and obtaining key government approvals, may survive the closing of the project acquisition for a certain period of time, and
the breach of these representations, warranties and covenants may entitle us to a setoff against the amounts payable to the sellers or other compensation or indemnification. The executed acquisition agreements are submitted to the relevant government authorities, in particular the provincial or local
commerce authorities, for approval. The government approval process generally takes 15 to 60 days, but may take longer in some cases. We generally seek to establish a new wholly foreign-owned enterprise to hold our acquired projects, or we may transfer the assets to an existing FIE. Upon approval by the authorities, including the Ministry of Commerce, the State Administration of Foreign Exchange, the National Development and Reform Commission and the State Administration for Industry and Commerce, of the acquisition, the relevant engineering, assets, financial and
personnel records and materials are handed over from the prior owner of the hydroelectric power project to us, and we assume the operation of the hydroelectric power project. See “Regulation—Regulation Relating to Foreign Investment”. For projects which are wholly or partially state-owned, we must enter into a competitive bidding process to win the right to acquire a hydroelectric power project. Our acquisition process for these state-owned projects is otherwise the same as that for privately held projects. We may in the future bid
for other state-owned projects. See “Risk Factors—Risks Relating to our Company and the PRC Hydropower Industry—Acquisition of state-owned assets involves a public bidding process and failure to win the bids for our state-owned target companies or equity interests therein may limit our future growth
and the control of our existing projects.” and “Regulation—Regulations Relating to Transfer of State-Owned Assets”. Project Construction Substantially all of the design, construction and engineering supervision work for our greenfield projects and projects under construction is subcontracted to third parties. Typically, design institutes, contractors and engineering supervisors are selected through an open bidding process. A general
contractor may be hired, who is responsible for the selection of sub-contractors, or, in some projects, more than one contractor is hired, each responsible for a designated portion of the project on a turnkey basis. A selection procedure is put in place to ensure compliance with quality and workmanship
standards. Factors taken into account when selecting contractors may include their qualifications, reputation, track record, past cooperation with us, and financial condition and resources, as well as the competitiveness of their bids. The qualifications and performance of the contractors are reviewed from
time to time. Information throughout the entire project construction process is constantly collected from the contractors and directly by our team, and is closely monitored and analyzed to ensure compliance with quality and workmanship standards and to avoid unanticipated delays and cost overruns. 61
The construction contracts typically provide for fixed or capped payments, subject to adjustments for certain types of excess, such as design modifications during construction, unanticipated geological conditions discovered during construction and changes in commodities prices. The contractors are
typically responsible for procuring the necessary raw materials, as well as providing engineering and construction services, if required. We generally purchase key equipment from domestic manufacturers and vendors. China is the biggest hydroelectric power producer in the world, according to the International Energy Agency, and as a result has a number of manufacturers providing quality hydroelectric equipment at competitive
prices. There are also numerous hydroelectric contractors, supervisors and installers competing for projects in China. We expect that, as we grow, we will have greater negotiating power with equipment manufacturers, vendors, contractors and related service providers for the construction and maintenance
of our projects. Commissioning of Project Since March 2003, the National Development and Reform Commission was created and assumed authority over the review and approval of major new hydroelectric power projects. Approval by the Ministry of Commerce or its designated authority is also required when foreign investment is involved
in establishing or acquiring a hydroelectric power project. On July 19, 2004, the State Council issued a decision entitled “Reform of the Investment System”, or the State Council Decision, which changed the approval process for investments in China. Depending on the types of investments, investments are subject to one of three types of procedures: a full
approval procedure, a verification procedure, or a filing for the record procedure. According to the State Council Decision, hydroelectric power projects without PRC government funding are subject to a verification procedure. This involves the review and verification by the investment regulatory authority of the State Council; if the project is classified as important, additional
review and verification by the State Council will be required. Verification by the National Development and Reform Commission and the Ministry of Commerce or local government will also be necessary if foreign investment is involved. Applicants are required to submit only project application reports
in lieu of the project proposals, feasibility studies and application reports for commencing construction previously required. The types of specified investments qualified for the verification procedure are subject to change by the State Council. To develop a new hydroelectric power project, the requisite approvals and permits must be obtained prior to the commencement of construction of a project. These approvals and permits generally include approvals in connection with the plant site, water and soil conservation, environmental
protection, land use rights, water resources demonstration, construction land planning permit, construction works planning permit, and construction works commencement permit, among others. We do not plan to develop greenfield projects in the near term. The construction of hydroelectric power projects is also subject to acceptance inspections, including acceptance inspections with respect to water storage, commissioning of generator units, environmental protection, water and soil conservation facilities and construction completion, among others.
Currently, five of our twelve projects have completed completion acceptance procedures, five are expected to complete the procedures in June 2010 and the remaining two are expected to complete the procedures in December 2010. See “Risk Factors—Risks Relating to our Company and the PRC
Hydropower Industry—Certain of our existing hydroelectric power projects have not passed the completion acceptance procedure, which could result in the imposition of fines or the closure of non-permitted hydroelectric power projects.” To operate hydroelectric power projects, relevant permits such as an Electric Power Business Permit (for power generation) and Water Drawing Permit are also required. In addition, the operation of hydroelectric power projects is subject to the supervision and administration of certain relevant
governmental authorities, which include the State Electricity Regulatory Commission, and its local branches, and other authorities in charge of water resources, environmental protection, and work safety, among others. See “Regulation”. 62
Project Operation and Maintenance We manage most of our existing hydroelectric power projects, except for the Liyuan hydroelectric power project in Sichuan province, and we intend to continue to manage our hydroelectric power projects in the future. The management of the Liyuan hydroelectric power project is currently
outsourced to a company affiliated with the local power grid to which the plant is connected. We have acquired and will continue to acquire hydroelectric power projects that are clustered or located where we have the potential to acquire adjacent projects, which enables us to centralize operational and
management functions for the hydroelectric power projects and thus achieve cost savings. Repairs and maintenance of hydroelectric power projects are conducted on a regular basis or when necessary. Regular repairs and maintenance are generally scheduled during the off-peak season in order to reduce their impact on normal operations. We perform regular inspections of our generators
to look for signs of possible equipment degradation. Minor repairs are typically carried out on an annual basis without interruption to the planned generation of the hydroelectric power project. Major repairs are carried out every four to six years and involve the generator ceasing operation for up to three
months. Emergency repairs may be required to be made by our company or by the grid through which we dispatch our power when equipment failures or natural disasters occur. For example, we had been unable to transmit power at the Shapulong power plant to the local grid for approximately six
weeks, as the transmission line connecting our plant to the local grid failed during a severe snow storm. Emergency repairs may take one or two days to a month, depending on the nature of the repair, and may interrupt our planned generation. Sales and Marketing Power Sale Each of our operating hydroelectric power projects has entered into a written power purchase agreement with the grid to which it is connected. Generally, the agreement has a term of three to five years, with the tariff negotiated annually. The agreement normally provides that the annual utilization
hours of the hydroelectric power project will be determined with reference to the estimated demand for electricity, the forecast water inflow volume at the plant and the strategic importance of the hydroelectric power project to the customer grid. The output that each of our hydroelectric power projects
generates is also subject to local demand for power and the amount of power to be dispatched to the grid, and is set and controlled by the relevant provincial government. Actual daily generation of electricity is determined by the dispatch authority based on the needs of the grid. Our actual power
generated may therefore be less than our planned power production as approved by the provincial authorities. In practice, our actual power generated is determined based on our daily interactions with our local power grids. We must inform each grid of our ability to produce power based on actual
hydrological conditions, and they will take this into account when requesting us to dispatch power each day. In Sichuan, Yunnan and Fujian provinces, our experience has been that we may dispatch all the power we can produce on any given day to the local grid. In Zhejiang province, where we receive
different tariffs for peak and off-peak power, we generally dispatch all the power we can produce, however, the local grids may restrict the amount of peak power we dispatch. In line with national policy, we believe the local grids in Zhejiang generally favor renewable energy generators in selecting
dispatch of peak power. We expect that the dispatch of the power we generate will be increasingly influenced by market demand and our competitive tariff as the dispatch system continues to develop towards a market mechanism. The development of this market mechanism is described below. In 2003, the State Electricity Regulatory Commission and the State Administration for Industry and Commerce jointly promulgated a model contract form, or the Model Contract Form, for use by power grid companies and power generation companies in connection with electricity sale and purchase
transactions. The Model Contract Form contains provisions for stipulating the parties’ rights and obligations, amount of electricity subject to purchase, payment method and liabilities for breach of contract. We believe that the publication of the Model Contract Form has facilitated the 63
negotiation and execution of electricity purchase contracts between power grid companies and power generation companies in a fair, transparent and efficient manner. In 2007, all of the agreements entered into between our hydroelectric power projects and the local grid companies were based on the
Model Contract Form. Power sales through competitive bidding are one of the targets of the power market reform. The PRC government began to experiment with a program in 1999 to effect power sales through competitive bidding in some provinces, and has been gradually expanding the program with a view to creating
a market-oriented electric power industry. Pursuant to the Implementation Opinions Regarding Promotion of Electric Power System Reform in the Eleventh Five-year Plan promulgated on April 6, 2007, the State Electricity Regulatory Commission will speed up the reform to establish an electric power
market suitable to China’s circumstances. Among other things, the State Electricity Regulatory Commission will propose relevant policies based on the practices pioneered in the northeastern region and eastern region; promote the construction of a uniform competitive bidding system in each regional
power market; accelerate the development of power markets in the eastern region and the northeastern region; carry out trial or simulated operations in the southern region and central region as appropriate; formulate plans and marketing rules for the power market in the northern region and
northwestern region; and expand the experimental program on direct power sales between power generation companies and large-scale end-users. Currently, participants in the trial operations of the regional power markets are limited to coal-fired power projects. Although the Renewable Energy Law and regulations promulgated thereunder require the dispatch and purchase of all power generated by small hydroelectric power projects, these
requirements are not always followed in practice. Relevant law requires 100% of our power produced to be purchased by our customer grid, but in practice our planned generation is agreed with the grid each year and may be below our design utilization output. Furthermore, where there is a decrease in
demand or increased competition for supply of power to a grid, we may be required by the local dispatch company to generate less than the planned generation agreed with the grid. Establishing regional power markets and increasing the use of the bidding method are the trend in China’s power market
reform, and we believe this will create a competitive environment that is fair, transparent and equitable. In general, we believe the move away from local grids to larger regional and state grids will increase our competitive advantage as a low tariff provider of renewable energy, and allow us to increase
our utilization levels. We believe that hydroelectric power projects may benefit from this reform, if extended to hydroelectric power projects, as hydroelectricity is a low-cost renewable energy compared to thermal energy. We expect that our efficient operations and management will enable us to compete
effectively in an open, orderly and fair market. However, the recent global economic downturn, and the domestic stimulus programs implemented by the PRC government to combat the downturn, may result in the slowing of the reform process outlined above, as the government seeks to support existing
thermal power producers through periods of reduced demand. We believe this may in particular be true in the coastal regions, such as Fujian and Zhejiang provinces, which have been affected significantly by the shrinking of the PRC’s export economy. See “Regulation—Regulations on Renewable Energy
Resources; Regulations of Power”. On-grid Tariff Since April 2001, the Chinese government has started to gradually implement a new on-grid tariff-setting mechanism based on the operating and capital costs of individual power projects as well as the average costs of comparable power projects. On July 3, 2003, the Chinese government approved the
tariff reform plan and made it clear that the long-term objective of the reform is to establish a standardized and transparent tariff-setting mechanism. Pursuant to the National Development and Reform Commission circular issued in June 2004, on-grid tariffs for newly built power generating units commencing operation since June 2004 should be set based on a number of factors. This new mechanism was intended to replace the old tariff-setting
mechanism which was designed to enable power projects to recover all operating and debt service costs and to earn a reasonable profit or a fixed rate of return on the net fixed assets. Based 64
on our experience, the determination of average costs under the new mechanism usually takes into consideration factors such as the following:
•
construction costs, which vary according to the capacities of the individual power projects; • operating and administrative expenses, such as labor and fuel costs; • maintenance and repair costs of power projects; and • interest expenses on outstanding debts. In December 2004, the National Development and Reform Commission proposed and the State Council approved a linkage mechanism between coal and power tariff rates, pursuant to which the National Development and Reform Commission may adjust power tariffs if the average coal price
changes by 5% within a period of six months compared with the preceding period. The change in a period, if less than 5%, will be carried forward to the future periods until the accumulated changes reach 5%. Currently, the tariff rates of hydropower are not subject to this linkage mechanism, but
reforms in the pricing of coal-fired and other power projects influence the tariffs we receive, and the demand for hydropower, as they impact the economics of the grid as a whole. On March 28, 2005, the National Development and Reform Commission issued the Interim Measures on Regulation of on-grid Tariff, or the Interim Measures, to provide guidance for the reform of tariff-setting mechanism in the transition period. Under the Interim Measures, the tariff is classified
into an on-grid tariff, a transmission and distribution tariff and an end-user tariff. The transmission and distribution tariff will be set by the government. The end-user tariff will comprise power purchasing cost, loss of power in transmission and distribution, the transmission and distribution tariff and any
government subsidy. The government is responsible for regulating and supervising power tariffs in light of the principles of efficiency, incentives, and investment encouragement and taking into consideration affordability of power to local consumers. The on-grid tariffs for our planned output and excess output are subject to an annual review and approval process involving the relevant provincial government authority and the National Development and Reform Commission. In Zhejiang and Fujian provinces, where the tariff rates are among the
highest in the country and where our hydroelectric power projects are connected to the state grid, we have little influence on the setting of the tariff rates for our planned and excess output, which are set by the local pricing bureau in line with the Interim Measures upon consultation with the state grid.
In Yunnan and Sichuan provinces, where the tariff rates are among the lowest in the country and where our hydroelectric power projects are connected to local grids, we have some ability to negotiate the tariff rates for our planned and excess output with the local grid companies before the tariffs are
submitted to the local pricing bureau for approval. Our ability to influence the tariff will depend on the local supply and demand for electricity and the strategic location of our plant in the grid. See “Regulation—Regulations on Renewable Energy Resources; Regulations of Power.” Competition Competition within the electric power industry has only been introduced recently in China, as energy producers were historically controlled by the government. China has experienced significant capacity shortages, and suppliers have often been unable to meet the surging demand for electricity. We
believe that competition between power projects to sell electricity is lessened due to prevalent supply shortages. Nonetheless, we believe that competition will increase in the long run. All hydroelectric power projects in China are subject to dispatch conducted by various dispatch centers. A dispatch center is required to dispatch electricity pursuant to the Regulations on the Administration of Electric Power Dispatch Networks and Grids, issued by the State Council with effect from
November 1, 1993, and in accordance with its agreements with hydroelectric power projects subject to its dispatch. Power generation companies are also required to enter into on-grid dispatch agreements with power grid companies. As a result, there is competition for favorable dispatch treatment in
China’s electric power industry, especially during the off-peak periods. Our ability to sell electricity depends on the dispatch and allocation determined by the dispatch 65
requirements of the local grids to which we sell our electricity. We therefore do not compete directly with other power producers to sell the electricity we generate, but instead, to sell the electricity solely through the local girds. Please see “Business—Sales and Marketing—Power Sale.” As a generator of
renewable energy, hydroelectric power projects are technically entitled to preferential treatment in dispatchment over thermal power projects. This factor, combined with the increasing cost of coal and other fossil fuels, has led to increased interest in and support to hydropower in China. If the gap
between supply and demand for power in China is met largely by renewable energy generators in the same regions we may in the long term face competition from other renewable energy generators for dispatch of our power. However, we believe that in markets dominated by fossil fuel generators, we
will experience rising tariffs over the long term. In addition to competition from other hydroelectric power projects and other power generators to dispatch the power we generate, we may in the future face competition in acquiring additional hydroelectric power projects. Competition may come from China’s five biggest power generating companies,
which are all state-owned enterprises and currently operate primarily coal-fired power projects but have become increasingly interested in hydroelectric power projects and other forms of renewable energy. These companies have excellent relationships with the power grids, which provide them an
advantage when introducing new plants to a grid. We expect these five companies will focus on large hydroelectric power projects and be slower to seize acquisition opportunities, while we target small projects and have a demonstrated ability to move quickly. Certain smaller China-based and overseas
listed power companies are also seeking to acquire hydroelectric power projects in China. Hydroelectric power projects in China are also attractive investments for international investors seeking to generate and trade certified emissions reduction credits. We believe these local and foreign companies are
acquiring hydroelectric power projects along with other renewable energy operations and lack the segment focus that our Company has. While we are aware of their activities in the market, we have not experienced direct competition with them to date for project acquisition. We may also encounter some
competition from venture capital and private equity funds, leveraged buyout funds and other foreign funded entities interested in acquiring hydropower assets in China. We believe we have the expertise and experience in the hydropower sector to compete effectively with these players. Intellectual Property Rights We have registered the Internet domain name www.chinahydroelectric.com. In China, the registration and protection of a company’s corporate name is carried out at the provincial level. We cannot prevent others from registering our corporate name. If a company first registers China Hydroelectric Corporation as its corporate name in a province where we operate our
business, we will have to adopt another corporate name. However, we do not believe that any such loss of our right to use the name China Hydroelectric Corporation would have a significant adverse impact on our business or operations. Insurance We currently maintain property insurance for our hydroelectric power projects. Our current insurance coverage is maintained with Ping An Property and Casualty Insurance Company of China, Ltd., PICC Property and Casualty Company Limited, China United Property Insurance Company Limited,
Tian An Insurance Company Limited, China Pacific Property Insurance Co., Ltd., Sunshine Property and Casualty Insurance Company Limited and Taiping General Insurance Co., Ltd. on our properties, plants and equipments, and includes construction all risk insurance. Our current coverage totals
approximately RMB802.5 million ($117.6 million). As with most property insurance policies in China, our policies do not cover damage resulting from earthquakes, war or acts of terror. In February 2010, we purchased Director and Officer liability insurance for our directors and officers with a coverage of
$20.0 million, Employment Practice Liability insurance with a coverage of $3.0 million and Pension Trustee Liability insurance with a coverage of $3.0 million. 66
Except for an electricity supply liability insurance policy maintained for the Wangkeng hydroelectric power project with PICC Property and Casualty Company Limited, we do not maintain any other third-party liability insurance to cover claims in respect of bodily injury or property or environmental
damage arising from accidents on our property or relating to our operations other than the third-party additional risk insurance included in our construction all risk insurance coverage. We also do not carry business interruption insurance, which is not customarily carried by power companies in China. We
believe that our insurance coverage is adequate and is standard for the power industry in China. See “Risk Factors—Risks relating to the Company and PRC Hydropower Industry—Our power generating operations may be adversely affected by operational risks, which may result in uninsured losses.” Environmental Matters We are subject to various environmental laws and regulations set by the national, provincial and municipal governments in China, including regulations on water pollution, as well as water and waste discharge. See “Regulation.” Our new power projects are normally required to undergo an environmental impact assessment by qualified third parties, and a report of the assessment needs to be submitted to the relevant environmental authorities in order to obtain their approval before commencing construction. Upon
completion of each project, the relevant environmental authorities inspect the site to ensure the applicable environmental standards have been complied with, and the resulting report is presented together with other specified documents to the relevant construction administration authorities for their
approval. See “Regulation—Regulations on Environmental Protection in Construction Projects.” We believe our environmental protection systems and facilities for our hydroelectric power projects are adequate for us to comply with currently effective national and local environmental protection regulations. It is expected that the PRC government will impose additional and stricter environmental
protection regulations which could require us to make additional expenditures to remain in compliance with environmental regulations. In particular, were the PRC government to introduce minimum water flow requirements for hydroelectric power projects, a reduction of our power generation at some of
our plants could result. We focus on acquiring projects in operation or under construction rather than developing greenfield projects of our own. When we acquire hydropower projects, we conduct due diligence to determine whether the target project has obtained the approvals and permits necessary for construction and
operation, including approvals issued by the Environmental Protection Authority. Where approvals and permits are missing, we require the target project to take remedial action after the acquisition to obtain the necessary approvals and permits. See “Regulation—Regulations on Environmental Protection
on Construction Projects”. Headquarters We currently maintain our headquarters at 25B, New Poly Plaza, No. 1 North Chaoyangmen Street, Dongcheng District, Beijing, PRC 100010. Our headquarters occupy 517 square meters under a lease agreement expiring in April 2011. We also maintain office space pursuant to an office sharing
agreement with Kuhns Brothers, Inc. in New York City. Legal Proceedings We are not currently a party to any material legal or administrative proceedings except for the action brought by Sinohydro Bureau 16 Company Limited (“Sinohydro Bureau 16”) in November 2010 before the Intermediate People’s Court of Nanping City against Shaowu City Jinlong Hydroelectric
Co., Ltd. (“Jinlong”), in which we own 55% controlling equity interest. Sinohydro Bureau 16 claims that Jinlong owes Sinohydro Bureau 16 construction fees in the amount of RMB7,405,373.55 and is seeking the payment of principal plus interest and liquidated damages in the 67
amount of RMB3.5 million. A court hearing was held on March 29, 2011, but no court decision has been made. We are actively seeking an out-of-court settlement with Sinohydro Bureau 16. In the event we lose the case, we may be required to pay the principal plus any interest and liquidated damages
awarded by the court. However, we believe we have a claim against Jinlong’s former owner, from whom we bought Jinlong, for indemnification of any liquidated damages against us. We currently are not aware of any material legal or administrative proceedings threatened against us. From time to time,
we may be subject to various legal or administrative proceedings arising in the ordinary course of our business. REGULATION This section sets forth a summary of the most significant PRC regulations that affect our business and the industry in which we operate. We operate our business in China under a legal regime consisting of the State Council, or China central government, and several ministries and agencies under its authority, including the Ministry of Commerce, the State Administration for Industry and Commerce, the State Administration of Foreign
Exchange, the National Development and Reform Commission, the Ministry of Water Resources, the Ministry of Environmental Protection, the Ministry of Land and Resources, the Ministry of Housing and Urban-Rural Development, the State Administration of Taxation, and the State Electricity
Regulatory Commission. From time to time, the State Council, the Ministry of Commerce, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange, the National Development and Reform Commission, the Ministry of Water Resources, the Ministry of
Environmental Protection, the Ministry of Land and Resources, the Ministry of Housing and Urban-Rural Development, the State Administration of Taxation and the State Electricity Regulatory Commission issue regulations that apply to our business. Regulations Relating to Foreign Investment On October 31, 2007, the National Development and Reform Commission and the Ministry of Commerce jointly promulgated a revised Catalogue for the Guidance of Foreign Investment Industries, or the Catalogue, which came into effect on December 1, 2007. The Catalogue lists those industries
and economic activities in which foreign investment in China is encouraged, restricted or prohibited. Pursuant to the Catalogue, construction and operation of hydroelectric power projects with the main purpose of power generation fall within the encouraged category. The principal PRC regulations in connection with foreign investment include:
•
The Sino-foreign Equity Joint Venture Law (1979), as amended; • The Regulations of Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended; • The Wholly Foreign-owned Enterprise Law (1986), as amended; • The Detailed Rules of the Wholly Foreign-owned Enterprise Law (1990), as amended; • The Company Law of the PRC (1993), as amended; • The Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (2009); • The Interim Administrative Measures on Foreign Investment (2004); • The Circular Regarding Further Strengthening and Regulating the Administration of Foreign Invested Projects issued by the National Development and Reform Commission (2008). • Circular of the General Office of the State Council on the Establishment of Security Review System Regarding Mergers and Acquisitions in China by Foreign Investors (2011) 68
Generally, the acquisitions of domestic enterprises by foreign investors in China shall be subject to the prior approvals of the National Development and Reform Commission and the Ministry of Commerce, or their local counterparts. After obtaining the approvals from the National Development and
Reform Commission and the Ministry of Commerce, the change of shareholders shall be registered with the State Administration for Industry and Commerce or its local counterparts and other alteration registrations shall be filed with the government authorities in charge of foreign exchange, customs,
tax, land, etc. Regulations on Renewable Energy Resources The Law of Renewable Energy Resources of China On February 28, 2005, the Standing Committee of the National People’s Congress adopted the Law of Renewable Energy Resources, or the Renewable Energy Law, effective from January 1, 2006. On December 26, 2009, the Standing Committee of the National People’s Congress adopted an
amendment to the Renewable Energy Law, which has come into effect on April 1, 2010. Pursuant to the Renewable Energy Law, the PRC government encourages the development and utilization of renewable energy resources, including the connection of renewable energy power generators to local
power grids. Pursuant to the Renewable Energy Law, the PRC government implements the development and utilization of renewable energy resources by encouraging the purchase of all renewable energy generated. The State Council energy department, in conjunction with the national power regulatory
agency and the State Council finance department, determines, in accordance with the national renewable energy development and utilization plan, the proportion of renewable energy power generation with respect to the overall generating capacity for the planning period. The grid enterprises shall enter
into grid connection agreements with renewable energy power generation enterprises which have procured administrative permits or have submitted filings and shall purchase all hydro-produced power meeting the technical standards for grid connection within their grid coverage. Grid enterprises refusing
to purchase power produced by renewable energy generators may be fined in an amount up to double the economic loss suffered by the renewable energy generator. The Renewable Energy Law also authorizes the relevant pricing authorities to set on grid tariffs based on the principles in favor of
promoting the utilization of renewable energy and being economically reasonable, and to adjust the tariffs in accordance with the improvement of the renewable energy development and utilization technologies. However, the Renewable Energy Law also stipulates that the application of the Renewable
Energy Law to hydroelectric power shall be guided by the department in charge of energy of the State Council and subject to the approval of the State Council. Such guidance has yet to be provided by the State Council, and in practice the local grids or relevant pricing authorities may not always follow
the Renewable Energy Law when purchasing power or setting tariffs. The Medium and Long Term Development Plan of Renewable Energy Resources In light of the rapid growth of China economy and rising consumption of energy, China government increasingly encourages the development and use of renewable energy resources. On August 31, 2007, the National Development and Reform Commission issued the Medium and Long Term
Development Plan of Renewable Energy Resources, or the Medium and Long Term Development Plan. According to the Medium and Long Term Development Plan, the share of the development and use of renewable energy account for 7.5% of the primary energy consumption in 2005. It aims to have
the consumption of renewable energy reaches 10% of the total energy consumption by 2010, and 15% by 2020. The Eleventh Five-year Plan of the Development of Renewable Energy Resources On March 3, 2008, the National Development and Reform Commission issued the Eleventh Five-year Plan of the Development of Renewable Energy Resources, or the Eleventh Five-year Plan. In accordance with the Eleventh Five-year Plan, the total installed capacity of hydroelectric power
generation plants in China is to reach 190,000 MW in 2010, up from 117,000 MW at the end of 69
2005, among which, the installed capacity of small hydroelectric power generation plants shall account for 50,000 MW. During the period of the Eleventh Five-year Plan, China government plans to build up eight Strong provinces of Small Hydropower, including, among others, the provinces in which our
projects are located, namely Yunnan province, Fujian province, Zhejiang province and Sichuan province, and 15 small hydropower bases, including Lishui City, Sanming City and Ningde City, among others. The Guiding Catalogue for the Development of Renewable Energy Resources Industry On November 29, 2005, in accordance with the Renewable Energy Law, the National Development and Reform Commission promulgated the Guiding Catalogue for the Development of Renewable Energy Resources Industry, or the Guiding Catalogue. Grid-connected hydroelectric power projects are
included in the Guiding Catalogue. In accordance with relevant provisions of the Renewable Energy Law, financial institutions may provide preferential loans with interest subsidies to the development and utilization projects relating to renewable energy resources which are included in the Guiding
Catalogue and satisfy the credit requirements. In addition, the Guiding Catalogue contains two categories of hydropower and four categories of relevant equipment manufacturing which are encouraged and shall be entitled to a series of preferential policies in the area of technology research/development,
taxation, pricing, marketing/sales and import/export, the details of which shall be promulgated by the State Council. To date, the State Council has not issued any regulatory guidance to provide relevant details regarding these preferential policies. Business activities conducted by us in the development and
use of hydroelectric power are encouraged by the government and we may be entitled to benefit from these preferential policies once the State Council issues detailed implementation rules. The Administrative Regulations on Power Generation of Renewable Energy Resources On January 5, 2006, the National Development and Reform Commission promulgated the Administrative Regulations on Power Generation of Renewable Energy Resources. Pursuant to this regulation, grid operators are required to ensure renewable energy power generators are connected to their
power grid. The Supervision and Administrative Measures on the Full Purchase of Electricity of Renewable Energy Resources by Grid Enterprises On July 25, 2007, the State Electricity Regulatory Commission promulgated the Supervision and Administrative Measures on the Full Purchase of Electricity of Renewable Energy Resources by Grid Enterprises effective from September 1, 2007. This regulation further stipulates the grid operators
shall purchase all the power generated by renewable energy power generators connected to their grid. The regulation also provides that except for large or medium sized hydroelectric power projects, renewable energy power generators do not need to participate in competitive bidding for their on-grid
tariffs. This regulation also provides that power dispatch institutions shall give priority to renewable power generation companies when dispatching power. Regulation of Power The Electric Power Law, which became effective on April 1, 1996, Regulation on the Administration of Electric Power Dispatch to Networks and grids effective on November 1, 1993 and the Regulations on Electric Power Supervision and Administration, which became effective on May 1, 2005, set
out the regulatory framework of the power industry in China. Pursuant to this framework the on-grid tariffs are approved and supervised by China government, and all power projects in China are subject to the dispatch of the power they produce by power grid companies assigned to them. 70
Regulation of On-grid Tariffs On February 10, 2002, the State Council promulgated the Issuance of the Reform Plan for the Electric Power System Circular, according to which, in the long-term on-grid tariff will be gradually determined by market competition. On April 6, 2007, the General Office of the State Council issued the Opinions on Implementing Further Reform in Electric Power Industry during the “Eleventh Five-year Plan” Period, which confirms, among other things, the continuance of further reform of tariff, establishment of the formation
system of on-grid tariff corresponding to the competition in power generation segment, execution of the tariff policies favorable to energy saving and environmental protection, and full implementation of the tariff scheme stimulating the development of clean energy. The Electric Power Law, effective from April 1, 1996, provides the general principles for determining tariffs, which are intended to include reasonable compensation for costs, a reasonable profit and tax, to share expenses fairly and to promote the construction of power projects. In April 23, 2001, the former State Development and Planning Commission, the predecessor to the National Development and Reform Commission, issued a notice containing guidelines for tariff administration. Pursuant to the notice, a new on-grid tariff-setting mechanism, based on the operating
term of power stations as well as the average costs of comparable advanced power stations adopting the same type of techniques that were constructed during the same period within the same provincial power grid, was gradually implemented. On July 9, 2003, the State Council promulgated the Tariff Reform Scheme. In accordance with the Tariff Reform Scheme, the direction of the reform of the on-grid tariff is to introduce a competitive mechanism in all respects and the tariff shall be set through the competition of supplying and
demanding parties. During the transition period, the on-grid tariff is mainly implemented by a two-part tariff system, among which, capacity tariff shall be set by the government and the energy tariff shall be set by market competition. Competitive bidding for a portion of the energy tariff and other
transition methods may also be adopted according to actual situations. On March 28, 2005, the National Development and Reform Commission issued the Interim Measures on Regulation of On-grid Tariff, the Interim Measures on Regulation of Transmission and Distribution Tariff, and the Interim Measures on Regulation of End-user Tariff, to provide guidance for the
reform of the tariff-setting mechanism in the transition period. The National Development and Reform Commission issued the Trial Measures for the Administration of the Tariff of, and the Sharing of Costs in Connection with, Power Generation Using Renewable Energy Resources, or the Trial Measures, on January 4, 2006, however, the Trial Measures
explicitly stipulate that the mechanism for setting the tariff after tax for hydroelectricity be in accordance with prevailing regulations for the time being. On July 25, 2007, the State Electricity Regulatory Commission promulgated the Supervision and Administration Measures on the Full Purchase of Electricity of Renewable Energy Resources by Grid Enterprises effective from September 1, 2007. The Measures provide that except for large or medium
hydroelectric power projects, renewable energy power generators will not participate in competitive bidding for on-grid tariffs. If hydropower generators with the electricity fully purchased by grid companies are engaged in any transaction in the power market, they shall comply with relevant rules and
regulations of the State Electricity Regulatory Commission. Regulation of Power Dispatch On November 1, 1993, the Regulations on the Administration of Electric Power Dispatch to Networks and Grids, or the Dispatch Regulations, became effective. The Dispatch Regulations apply to all power projects in China and require them to generate power in accordance with their grid
connection agreements. On August 2, 2007, the State Council approved the Measures on Dispatch of Energy Saving Power Generation (For Trial Implementation), or the Trial Dispatch Measures, jointly issued by the 71
National Development and Reform Commission, the State Electricity Regulatory Commission, the former State Environmental Protection Bureau, the predecessor of the Ministry of Environmental Protection and Office of the National Energy Leading Group. Pursuant to the Trial Dispatch Measures, the
dispatch priority of power generation units is determined in the following sequence: (a) non-adjustable power generation units utilizing renewable energy (including hydraulic energy); (b) adjustable power generation units utilizing renewable energy (including hydraulic energy) and garbage generator units
which meet the requirements of environmental protection; (c) nuclear power generation units; (d) coal-fired heat-load based CHP units and multiple resource power generation units; (e) gas-fired power generation units; (f) coal-fired power generation units, including cogeneration units without heat load;
and (g) oil-fired power generation units. The Provisions on the Administration of Electric Power Business Permits On October 13, 2005, the State Electricity Regulatory Commission promulgated the Provisions on the Administration of Electric Power Business Permits, which came into effect on December 1, 2005. Pursuant to this regulation, public power projects, grid-connected self-provided power projects, and
other projects as prescribed by the State Electricity Regulatory Commission shall apply for and procure power generation permits. The enterprises failing to obtain power generation permits and illegally conducting power business shall be ordered to obtain the permits and any illegal income shall be
forfeited, with fines up to five times the illegal income being imposed. If a crime is constituted, criminal liability shall arise. Regulations Relating to Transfer of State-Owned Assets Under the Interim Measures for the Management of the Transfer of State-owned Assets of Enterprises, or the Interim Measures, jointly promulgated by the State-owned Assets Supervision and Administration Commission of the State Council, and the Ministry of Finance, with the effective date on
February 1, 2004, the transfer of state-owned assets can be carried out by auction, bidding, agreement or other means that are permitted under the PRC laws and regulations. A seller of state-owned assets must appoint an asset valuation institution to valuate the to-be-transferred assets and the valuation
report, after being confirmed by or filed with relevant authority in charge of state-owned assets administration, shall be referenced to determine the transfer price. In case the transfer price is lower than 90% of the valuation result, the transaction shall be suspended and shall not proceed until being
approved by relevant approval authorities. On December 31, 2006, the State-owned Assets Supervision and Administration Commission and the Ministry of Finance jointly issued the Circular on Some Issues Relevant to the Transfer of State-owned Assets of Enterprises, or the Circular. Pursuant to the Circular, the state-owned assets are
permitted to be transferred over the counter only under the following two (2) circumstances with the approval of the State-owned Assets Supervision and Administration Commission or the State-owned Assets Supervision and Administration Commission offices at provincial level and at the set price: (1) Where there are special requirements on the transferee in the restructuring of the key industries and sectors of national economy; or (2) Where the direct transfer by agreement is necessary in the internal assets reorganization of the invested enterprises, that is the enterprises supervised by relevant state-owned assets regulatory authorities as the investors, and the transferor and the transferee should both be the invested enterprises
or their wholly invested or absolutely controlled enterprises. According to the Circular, in the event that the proposed state-owned assets are to be transferred to a foreign investor, such transfer shall proceed publicly in a related assets exchange market. If the agreement must necessarily be conducted by agreement, the requirements on transfer by agreement
specified by the Interim Measures and the Circular shall be all satisfied. If the foreign investors are potential transferees and the target assets belong to the sectors in which foreign capital is restricted or forbidden to be invested in accordance with the Catalogue for the Guidance of Foreign Investment
Industries and other applicable PRC laws and regulations, the transferor shall 72
indicate the relevant information publicly to remind the potential transferees. If a foreign investor becomes the transferee in the assets exchange market, the transferor shall obtain approval from relevant governmental authorities in accordance with applicable laws and regulations. Regulations on Environmental Protection in Construction Projects All hydropower stations in China are subject to the Environmental Protection Law, the Environmental Impact Evaluation Law, the Law on the Prevention and Treatment of Water Pollution, the Law on the Prevention and Treatment of Air Pollution and the Law on Ocean Environment Protection,
or collectively, the National Environmental Laws, relevant administrative regulations, ministerial rules and the environmental rules promulgated by the local governments in which jurisdictions the hydropower stations are located. According to the National Environmental Laws, the State Environmental
Protection Administration, the predecessor of the Ministry of Environmental Protection, sets national pollutants emission standards and provincial governments may set their local standards for the pollutant emission not specified in the national standards, and set stricter local standards which are required
to be filed at the State Administration for Environmental Protection, the predecessor of the Ministry of Environmental Protection. Enterprises discharging pollutants in areas where the local standards for pollutant emission have been set shall observe such local standards. Pursuant to the Environmental Impact Evaluation Law promulgated on October 28, 2002, the Administrative Rules on Environmental Protection of Construction Projects promulgated on November 29, 1998, and Administrative Measures on Environmental Protection Acceptance upon Completion of
Construction Projection promulgated on December 27, 2001, enterprises are required to engage qualified and certified institutions to provide environmental impact evaluations on construction projects and to prepare environmental impact assessments. Construction of any new hydroelectric power project or
expansion of an existing hydroelectric power project may only commence after such an assessment is submitted to and approved by the relevant environmental protection administrative authority. According to the Classified Directory for Environmental Protection and Administration of Construction Projects, promulgated on September 2, 2008 by the Ministry of Environmental Protection and effective on October 1, 2008, the construction of hydroelectric power projects are required to prepare
environmental impact assessment forms except for those with total installed capacity of 1,000KW or above, pumped storage power stations and hydroelectric power projects in environmental sensitive areas being required to prepare environmental impact assessment reports. In accordance with the
Environmental Impact Evaluation Law, construction of any hydropower station is prohibited without the approval of the relevant government authorities of such environmental report or form and the related underlying documents if construction of a hydropower station occurs without such governmental
approval, whether by failing the evaluation or not applying for an evaluation, then the relevant enterprise will be ordered to cease construction and be subject to making up relevant procedures within a prescribed time period with the relevant environmental protection administrative authorities.
Enterprises that fail to complete such formal procedures within the prescribed time may be fined, and the management and other personnel with direct responsibility for the enterprise are subject to administrative penalties. The National Environmental Laws generally impose discharge fees for polluting
substances, and provide for possible closure by the central or local government of any enterprise which fails to comply with orders requiring it to cease or rectify the activities causing environmental damage. In accordance with the Administrative Rules on Environmental Protection of Construction Projects, the Administrative Measures on the Completion Acceptance of Environmental Protection of the Construction Projects and other relevant regulations, each hydroelectric power project must be tested
and approved by local environmental agencies before commissioning, and is subject to continuous government monitoring after commissioning. After the completion of the construction of the hydroelectric power project, it must apply for completion acceptance of environmental protection. 73
The Law of Energy Conservation of China On October 28, 2007, the Standing Committee of the National People’s Congress adopted amendments to the Law of Energy Conservation, which sets forth policies to encourage energy conservation in industrial sector, buildings, transportation, public institutions and key energy consumption entities.
The amendments also seek to develop small hydroelectric power generation plants based on the principle of scientific planning and orderly development. Regulations on Water and Soil Conservation On June 29, 1991, the Law of Water and Soil Conservation was promulgated, which was amended on December 25, 2010 with effect from March 1, 2011. On August 1, 1993, the Implementation Regulations on the Law of Water and Soil Conservation were issued, which were amended on December
29, 2010 with effect from January 8, 2011. In accordance with these regulations, when launching a construction project that may result in water and soil loss in mountainous areas, upland areas, and sandy areas with high wind or any other area specified in the water and soil conservation plan prone to
water and soil loss, the construction entity shall compile a water and soil conservation scheme and submit it to the water resources authority of the people’s government at or above the county level for approval. Facilities for water and soil conservation shall be designed, constructed and put into operation
simultaneously with the principal part of the construction project and subject to the completion acceptance by relevant governmental authorities, including the water resources authority, before the construction project is put into production. Enterprises shall in the course of construction and production
adopt water and soil conservation measures and shall be liable to the control of any loss of water and soil. In case commencing the construction of a construction project, which is required to compile a water and soil conservation scheme, without such scheme or without procuring the approval for such
scheme, the water resources authority of the people’s government at or above the county level shall order the construction entity to cease the illegal act and go through the relevant formalities within the prescribed time limit; if it fails to do so, a fine up to RMB500,000 shall be imposed upon; and
disciplinary actions shall be taken against the directly liable person in charge and other directly liable persons of the production or construction entity according to law. Where any entity puts a construction project into operation without going through completion acceptance of facilities for water and soil
or failing to pass such completion acceptance, the water resources authority of the people’s government at or above the county level shall order it to cease production or use until the completion acceptance is passed, and a fine up to RMB500,000 shall be imposed upon. Regulations on Water Drawing According to the Water Law, which was promulgated by the Standing Committee of the National People’s Congress on August 29, 2002 and took effect on October 1, 2002, any legal entity or individual drawing water directly from rivers, lakes or underground shall apply to the water administrative
departments or the drainage management departments for a Water Drawing Permit and pay the water resource fees in order to obtain the water drawing rights in accordance with the national water drawing system and the water resource fees system. The State Council is responsible for stipulating the
detailed rules regarding the implementation of the Water Drawing Permit system and the collection of water resource fees. On February 21, 2006, the State Council promulgated the Administrative Regulations on Water-drawing Permits and the Collection of Water Resource Fees, or the Water Drawing Regulations, effective from April 15, 2006. Pursuant to the Water Drawing Regulations, any entity or individual that
draws water resources shall, other than for the exceptions prescribed in the Water Drawing Regulations, apply for a Water Drawing Permit and pay water resource fees. Absence of the water drawing permit or failure to obtain such a permit may result in the forced cessation of the water drawing activity,
the requirement of immediate remediation and/or the imposition of fines. The Water Drawing Regulations also provide that a water-drawing entity or individual shall pay water resource fees. A water-drawing entity or individual shall draw water according to the 74
government-approved annual water drawing plan. For water drawing exceeding the plan or quota, water resource fees shall be charged progressively on the excess. In accordance with the Water Drawing Regulations, the amount of water resource fees due shall be determined based on the levy standard of water resource fees at the locality of the water intake and the actual volume of water for drawing. As for water drawing for the purpose of hydroelectric
power generation, the amount of water resource fees due may be determined based on the levy standard of water resource fees at the locality of the water intake and the actual quantity of electricity generated. Where a water drawing entity or individual refuses to pay, delays in, or defaults on the
payment of water resource fees, the entity or individual will be subject to the penalties prescribed under the Water Law. On April 9, 2008, the Ministry of Water Resources promulgated the Measures for Administration of Water Drawing Permits, or the Water Drawing Permit Measures. Under the Water Drawing Permit Measures, for construction projects which need to apply for water drawing, the applicant shall
entrust an organization with corresponding qualification to prepare a Construction Project Water Resources Analysis Report. For construction projects which draw a comparatively low volume of water and have a comparatively small impact on the surrounding environment, the applicant may be exempted
from complying with the requirement to prepare a Construction Project Water Resources Analysis Report but should fill out a Construction Project Water Resources Analysis Form. The applicant should submit the application documents to the relevant authority for obtaining the Water Drawing Permit
after the construction of the water-drawing project or facility has been completed and its trial operation has lasted for 30 days. On November 10, 2008, the Ministry of Finance, the National Development and Reform Commission and the Ministry of Water Resources jointly issued the Administrative Measures on the Collection and Use of Water Resource Fees, or the Water Resource Fees Measures, effective from January 1,
2009. In accordance with the Water Resource Fees Measures, the water resource fees shall be levied on a monthly basis. A water-drawing entity or individual shall submit the volume of water drawn (or the quantity of electricity generated) to the competent water resources authority in charge of
collection of water resource fees on a monthly basis and shall make payment of water resource fees within seven days after receiving the Water Resource Fees Payment Notice sent by the competent water resources authority in charge of collection of water resource fees. The Water Resource Fees
Measures further clarify that the levy standard of water resource fees shall be set by the National Development and Reform Commission jointly with the Ministry of Finance and the Ministry of Water Resources with respect to the water conservancy projects directly under the administration of the PRC
central government or covering different provinces, autonomous regions, or municipalities directly under the PRC central government whose water drawing shall be subject to examination and approval of the drainage area management authority. In addition, the Water Resource Fees Measures stipulate
that the levied water resource fees are to be exclusively used for water conservation protection and management, as well as the reasonable development of water resources. Regulation in Relation to Land All land in China is either state owned or collectively owned, depending on the location of the land. All land in the urban areas of a city or town is state owned, and all land in the suburban areas of a city or town and all rural land is, unless otherwise specified by law, collectively owned. The State
has the right to expropriate or requisition with compensations land in accordance with law if required for the benefit of the public. In April 1988, the Constitution of China, or the Constitution, was amended by the National People’s Congress to allow for the transfer of land use rights for value. In December 1988, the Land Administration Law was amended to permit the transfer of land use rights for value. In accordance with the Land Administration Law amended in 2004, the construction unit shall obtain the state-owned land use rights through grant or by other means with consideration. But the 75
following land may be obtained through governmental allocation with the approval of the people’s governments at and above the county level according to law:
•
Land for use by government organs and for military use; • Land for building urban infrastructure and for public welfare undertakings; • Land for building energy, communications and water conservancy and other infrastructure projects heavily supported by the State; and • Other land as provided for by the law and administrative decrees. Under the Provisional Regulations of China concerning the Grant and Assignment of the Land Use Right of State-owned Land in Urban Areas, or the Urban Land Regulations, promulgated in May 1990, local governments at or above county level have the power to grant land use rights for specific
purposes and for a definite period to a land user pursuant to a contract for the grant of land use rights against payment of a grant premium. Under the Urban Land Regulations, all local and foreign enterprises are permitted to acquire land use rights unless the law provides otherwise. The State may not resume possession of lawfully granted land use rights prior to expiration of the term of grant. If public interest requires the resumption
of possession by the State under special circumstances during the term of grant, compensation must be paid by the State. A land user may lawfully assign, mortgage or lease its granted land use rights to a third party for the remainder of the term of grant. Under the Urban Land Regulations, there are
different maximum periods of grant for different uses of land: 70 years for residential purposes; 40 years for commercial, tourism and entertainment purposes; 50 years for industrial, public utilities, comprehensive or other purposes. On October 22, 2001, the Ministry of Land and Resources promulgated the Catalogue of Allocated Land, according to which, for infrastructure facilities projects, such as energy, transportation and water resources heavily supported by the State, the land use rights may be allocated; for the
infrastructure facilities projects, such as energy, transportation and water resources which are aimed at profit-making and not heavily supported by the State, land use rights shall be supplied for value. On March 16, 2007, the National People’s Congress promulgated the Real Properties Rights Law of China effective from October 1, 2007, which stipulates that the construction land use rights may only be created through grant or allocation. For land used for industrial, business, entertainment or
commercial residential purposes, the construction land use rights must be granted by means of public tender, auction or listing-for-sale. To create the construction land rights through allocation is stringently restrained. For adopting such means of allocation, the provisions on land uses in the laws and
administrative regulations must be observed. On January 3, 2008, the State Council promulgated the Notice of the State Council Regarding Promoting Saving and Intensive Use of Land, according to which, except for the lands used for military, social security housing and special purposes, it is promoted that the use of land for governmental
offices, transportation, energy, water resources and other infrastructures (industries) shall be compensated. In particular, the compensated use of land should be applied to those lands used for commercial purposes firstly. As a result, we expect to be required to pay compensation for some or all of the
allocated land occupied by our hydroelectric power projects. Regulations on Construction Pursuant to the Construction Law, effective from March 1, 1998, prior to the start of construction projects, project owners must, in accordance with relevant provisions of the State, apply to competent construction administrations at or above the county level of the place where the project is to be
located for construction permits, except for small projects below a value set by the competent construction administration of the State Council. 76
Regulations on Bid Invitation and Bid Tendering On August 30, 1999, the Standing Committee of the National People’s Congress adopted the Law of China on Bid Invitation and Bid Tendering, effective from January 1, 2000, according to which, the projects such as large-scale infrastructure facilities and public utilities involving the social and public
interests and public safety, projects which are, wholly or partially, invested by the State-owned funds or funded through State financing and projects using loans or aid funds from international organizations or foreign governments, including surveying and prospecting, design, engineering and supervision of
such projects as well as the procurement of major equipments and materials related to the construction of such projects, must be subject to bid invitation procedure. On May 1, 2000, the National Development and Reform Commission, the former State Development and Planning Commission, promulgated the Provisions on the Scope and Scale Standards of Bid Invitation for Construction Projects, which further defines the scope of projects of large-scale
infrastructure facilities and public utilities involving the social and public interests and public safety, projects which are, wholly or partially, invested by the State-owned funds or funded through State financing and projects using loans or aid funds from international organizations or foreign governments. On October 29, 2001, the Ministry of Water Resources promulgated the Administrative Provisions on Bid Invitation and Bid Tendering of Water Resources Construction Projects, effective from January 1, 2002, according to which the bid invitation procedure shall be required where any of surveying
and prospecting, design, engineering, and supervision of water resources works construction projects and the procurement of substantial equipment and materials related to water resources works construction projects falls within the following specific scope and concurrently meets any of the following scale
standards: (1) Specific scope
•
water resources construction projects involving the social and public interests and public safety such as flood prevention, drainage, irrigation, hydraulic power generation, diversion (supply) of water, harnessing shoals, water conservation and protection of water resources; • water resources construction projects which are, wholly or partially, invested by the State-owned funds or funded through State financing; or • water resources construction projects using loans or aid funds from international organizations or foreign governments. (2) Scale standards
•
the estimated price for any single construction contract exceeds RMB2,000,000; • the estimated price for any single procurement of substantial equipments and materials exceeds RMB1,000,000; • the estimated price for any of surveying and prospecting, design or supervision exceeds RMB500,000; or • the estimated prices are lower than the above standards, but the total investment of the projects exceeds RMB30,000,000. Regulations Relating to Anti-trust The Antimonopoly Law of China was adopted by the Standing Committee of the National People’s Congress on August 30, 2007 and became effective on August 1, 2008. The Antimonopoly Law provides that business operators shall not eliminate or restrict competition by engaging in activities such
as:
•
entering into monopoly agreement; • abusing the dominant market position; 77
• conducting concentrations (as defined under the Antimonopoly Law) without first obtaining approvals from relevant authorities; • abusing administrative power; or • abusing intellectual property rights. On August 3, 2008, the State Council promulgated the Regulations on the Thresholds for Reporting of Concentration of Business Operators. In accordance with this new regulation, the concentration of business operators refers to merger of business operators, acquisition of control over other business
operator(s) by acquiring equity interests or assets, or contracting or in other manners to acquire control of, or become capable of exerting decisive influences on, other business operator(s). This new regulation further provides that, where the concentration of business operators reaches any of the following
thresholds, the business operators concerned shall report it to the commercial authority of the State Council beforehand, otherwise, the concentration shall not be carried out: (1) the annual turnover achieved by all the business operators to a concentration transaction exceeds RMB10 billion world-wide in
the preceding financial year, and at least two of them has turnover which in each case exceeds RMB400 million in China in the preceding financial year; or (2) the annual turnover achieved by all the business operators to a concentration transaction exceeds RMB2 billion in China in the preceding
financial year, and at least two of them has turnover which in each case exceeds RMB400 million in the preceding financial year. Where a concentration of business operators does not reach the aforesaid reporting thresholds but the facts and evidence collected through prescribed procedures indicate that
such concentration can or may eliminate or restrict competition, the commercial authority of the State Council shall carry out investigations in accordance with the law. The calculation of turnover shall take into consideration special situations in certain industries and sectors such as banking, insurance,
securities, futures and specific rules shall be formulated by the commercial authority together with other departments under the State Council. On February 3, 2011, General Office of the PRC State Council issued the Circular of the General Office of the State Council on the Establishment of Security Review System Regarding Mergers and Acquisitions in China by Foreign Investors, or Security Review Circular, which provides for the
establishment of a new inter-ministerial-security-review committee under the State Council, or the Committee, which will be comprised of members from National Development and Reform Commission, Ministry of Commerce and other relevant departments. According to the Security Review Circular, the
acquisitions by foreign investors of domestic Chinese companies active in the following sectors shall be subject to security review: (i) military including related activities, companies located near key and sensitive military facilities, and other units concerning national defense; or (ii) key agricultural products,
key energy and resources, key infrastructure, key transportation services, key technologies and key equipment manufacturing enterprises etc that raise national security concerns, where the foreign investor might acquire actual control of the target Chinese company through the acquisition. The types of merger and acquisition transaction covered by the Security Review Circular include: (i) the purchase by foreign investors of existing equity interest or shares or increased capital of Chinese non-foreign-invested-enterprises and conversion of such domestic Chinese enterprises into foreign
invested enterprises; (ii) the purchase by foreign investors of equity interests or shares owned by Chinese parties in foreign invested enterprises or the purchase by foreign investors of the increased capital of foreign invested enterprises; (iii) the establishment by foreign investors of foreign invested
enterprises and the purchasing and operating of assets acquired from domestic Chinese enterprises through such foreign invested enterprises, or the purchase of equity interests or shares of domestic Chinese enterprises through foreign invested enterprises; and (iv) the purchase directly by foreign investors
of assets owned by domestic Chinese enterprises and the establishment of foreign invested enterprises to operate such assets. As contemplated by the Security Review Circular, the new security review process will consider the impact of the proposed transaction on national defence, national economic stability, basic social living order, and the research and development capacity for key technologies related to national 78
security. The new security review process would begin with a preliminary screening conducted upon application to the Ministry of Commerce initiated by the foreign investors in a proposed transaction. Chinese government agencies, national trade unions/associations, competitors, and upstream and
downstream enterprises are also entitled to initiate a security review of a proposed transaction by the Committee through an application to Ministry of Commerce. The Ministry of Commerce will transfer to the Committee all applications determined to fall within the purview of the security review
regulations within five working days. The Committee will first complete a general review of the proposed transaction. If after the general review, the Committee concludes that the proposed transaction may have an impact on national security, the Committee will conduct a special review of the proposed
transaction. If after the special review, the Committee concludes that the proposed transaction may have a material impact on national security (including economic and social stability), the Committee will so notify Ministry of Commerce and the parties to the proposed transaction will be required to
terminate the transaction or implement other measures or modifications to eliminate the impact of the proposed transaction on national security. It is unclear whether the Security Review Circular would have retrospective effect. If any of our existing projects is considered as having caused concerns to the
national security, the relevant PRC authority may require us to terminate the transaction, transfer relevant equity interests or assets, or implement other measures or modifications to eliminate the impact of the transaction on national security. On March 4, 2011, Ministry of Commerce issued Tentative Measures on Certain Issues Concerning Implementation of Security Review System Regarding Mergers and Acquisitions in China by Foreign Investors with effect from March 5, 2011 to August 31, 2011, which specifies, inter alia, the
application procedure and requisite documents need to be submitted to the Ministry of Commerce. Tax Law Enterprise Income Tax Law PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. In accordance with the Income Tax Law of China for Foreign Invested Enterprises and Foreign Enterprises, or the FIE Income Tax Law, and the related implementing regulations, foreign
invested enterprises established in China are generally subject to an income tax rate of 33%. The FIE Income Tax Law and the related implementing rules provide favorable tax treatment to certain foreign invested enterprises. PRC domestic companies are governed by the Enterprise Income Tax
Provisional Regulations of China and are generally subject to an enterprise income tax rate of 33%, although those enterprises that qualify as “high and new technology enterprises” and are registered and operate in “national high-tech zones” are entitled to a preferential income tax rate of 15% in
accordance with Notice on Several Preferential Tax Policies of Ministry of Finance and State Administration of Taxation. On March 16, 2007 and December 6, 2007, respectively, the new PRC Enterprise Income Tax Law, or the EIT Law and the Implementation Regulations of Enterprise Income Tax Law of China were promulgated by the National People’s Congress and the State Council and became effective on
January 1, 2008. Under the EIT Law, the EIT shall be levied at the rate of 25%. In case a non-resident enterprise that has no organ or establishment within the territory of PRC, or its income has no actual connection to its organ or establishment within the territory of PRC obtains incomes sourced
within the territory of PRC, the EIT shall be levied at the rate of 20% for such incomes, which has been reduced to 10% by the Implementation Regulations of the EIT Law. As regards a small meager-profit enterprise satisfying the prescribed conditions, the EIT shall be levied at a reduced rate of 20%.
As regards important high-tech enterprises necessary to be supported by the state, the EIT shall be levied at a reduced rate of 15%. Enterprises that enjoy the preferential policies of low tax rates in the past time shall be gradually transited to be enjoying the statutory tax rate within 5 years after carrying
out the EIT Law. As of January 1, 2008, the enterprises that enjoy preferential treatments in the form of periodic tax deductions and exemptions may, after carrying out the EIT Law, continue to enjoy the relevant preferential treatments under the preferential measures and the time period set down in
the previous tax law, administrative regulations and 79
relevant documents until the expiration of the said time period. However, its preferential time period shall be counted from 2008 if such an enterprise has not enjoyed the preferential treatments yet because of its failure to make profits. Businesses contributing to the development of Western China are
also entitled to a reduced EIT rate of 15%. Our Binglangjiang I business benefitted from this reduced rate of 15% in 2007. Under current PRC tax laws, regulations and rulings, an enterprise payer is classified as either a resident enterprise or non-resident enterprise. A resident enterprise refers to an enterprise that is established under PRC law within the PRC, or is established under the laws of foreign country or region
but has its de facto management body located in China. “De facto management body” is defined as an organization that exercises material and full management and control over matters including the enterprise’s production and operations, personnel, finance and property. A “non-resident enterprise”
refers to an enterprise established under the laws of a foreign jurisdiction which does not have its de facto management body located in China, but which either establishes an organization or office within China or, without such presence within China, generates revenue within China. A resident enterprise
shall pay the EIT for its incomes sourced from both inside and outside the territory of PRC. In case a non-resident enterprise sets up an organ or establishment within the territory of PRC, it shall pay EIT on its incomes sourced inside the territory of PRC and incomes sourced outside the territory of
PRC but actually connected with the said organ or establishment. In case a non-resident enterprise has no organ or establishment within the territory of PRC, or its incomes have no actual connection to its organ or establishment inside the territory of PRC, it shall pay EIT on the incomes sourced inside
the territory of PRC. On January 9, 2009, the State Administration of Taxation promulgated the Interim Measures for the Administration of Withholding of the Source of Enterprise Income Tax for Non-resident Enterprises, or the Interim Measures, which took effect retroactively on January 1, 2009. In accordance with
the Interim Measures, if a non-resident enterprise obtains the income originating from the PRC, or the taxable income, including equity investment income such as dividend and bonus, interest, rental and royalty income, income from property transfer and other income, the payable EIT on the taxable
income shall be withheld at the source by the enterprise or individual who is directly obligated to make relevant payment to the non-resident enterprise under relevant laws or contracts, or the withholding agent. The withholding agent shall make the withholding registration with the competent tax authority within 30 days after it has signed the first business contract or agreement involving the taxable income with the non-resident enterprise. Thereafter, whenever contracts involving the taxable income are
signed, amended or renewed by the withholding agent and the non-resident enterprise, the withholding agent shall, within 30 days of such signing, amendment or renewal, submit a “Contract Filing and Registration Form for EIT Withholding”, a copy of the contract and other relevant documents to the
competent tax authority for record. In the event that a transfer of domestic equity between non-resident enterprises takes place outside the PRC, the domestic enterprise whose equity is transferred shall file a copy of the equity transfer contract with the competent tax authority when it applies for change
of tax registration according to the law. The withholding agent shall withhold the EIT on the taxable income to be paid or due to the non-resident enterprise. If the withholding agent has not withheld the EIT or is unable to withhold the EIT, the non-resident enterprise shall, within 7 days after the payment is made or becomes due, file
and pay the EIT to the local tax authority where the taxable income has occurred. In the event that a transfer of domestic equity between non-resident enterprises takes place outside the PRC, the non-resident enterprise receiving the taxable income shall pay the EIT to the local tax authority of the
domestic enterprise whose equity is transferred in person or through an agent, and the domestic enterprise whose equity is transferred shall assist the tax authority in the collection of the EIT from the non-resident enterprise. In the event that a non-resident enterprise fails to file and pay the EIT to the tax authority in the manner or within the timeframe required by the Interim Measures, it will be ordered by the tax authority to pay the EIT within a limited period of time. If the non-resident enterprise fails to pay the
EIT within such period of time, the tax authority may collect and verify information of other 80
PRC income sources and relevant payers of the non-resident enterprise, and issue a tax notice to the relevant payers to pursue the due EIT and fine by the non-resident enterprise from the amount payable by the relevant payers to the non-resident enterprise. On February 20, 2009, the State Administration of Taxation promulgated the Notice on Relevant Issues of Implementing Dividend Clauses under Tax Treaties, or the Notice. According to the Notice, the transaction or arrangement, the major purpose for which is to obtain preferential tax treatment,
shall not justify the application of preferential treatment stipulated in dividend clauses under tax treaties. Should the tax payer improperly enjoy the treatment under tax treaties as a result of such transaction or arrangement, the tax authorities in charge shall have the right to adjust. As the Notice is
newly issued, it remains unclear how the PRC tax authorities will implement it in practice and to what extent it will impact on the corporate restructuring we are currently undertaking. See “Our Corporate History and Structure—Organization Chart” and “Operating and Financial Review and
Prospects—Holding Company Structure.” On August 24, 2009, the State Administration of Taxation promulgated the Administrative Measures for Enjoyment of Tax Treaty Treatments by Non-residents (Trial), or the Administrative Measures, with the effective date on October 1, 2009. Pursuant to the Administrative Measures, the treatment
under tax treaties refers to the tax liabilities that should be performed according to the PRC tax laws but can be reduced or exempted under the tax treaties. Where non-residents (including non-resident enterprises and non-resident individuals) enjoy preferential treatment under tax treaties in terms of
dividends, interests, royalties or property gains, such non-residents shall apply to the competent tax authorities for examination and approval in accordance with the Administrative Measures; otherwise, they will not be able to enjoy the treatment under the tax treaties. Value-added Tax According to the amended Provisional Regulations of the PRC on Value-added Tax effective on January 1, 2009, and the amended Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax effective since January 1, 2009, all organizations and individuals
engaged in the sale of goods, provision of processing, repairs and replacement services, and importation of goods within the territory of the PRC are taxpayers of value-added tax. Ordinary tax payers shall pay value-added tax at the rate of 13% or 17%, while small scale tax payers shall pay value-added
tax at the rate of 3%. According to the Notice Regarding the Application of Low Value-added Tax Rate and Simplified Method Taxation Policies to Certain Products, or the Notice, which was jointly issued by the Ministry of Finance and the State Administration of Taxation on January 19, 2009 and
took effect, retrospectively, on January 1, 2009, small hydropower generation units administrated at or below the county level may choose to apply the value-added tax rate of 6% in accordance with the simplified method to electric power generated by it. Small hydropower generation units are defined as
hydropower generation units with the installed capacity of no greater than 50 MW. The value-added tax payers using simplified method cannot claim the input value-added tax credits on their purchases. Stamp duty According to the Provisional Rules of the People’s Republic of China on Stamp Duty and Detailed Rules for Implementation of Provisional Regulations of China on Stamp Duty as brought into effect on 1 October 1988, all institutions and individuals creating and obtaining taxable documents within
China shall pay stamp duty. The list of taxable documents includes purchase and sale contracts, processing contracts, construction project contracts, property lease contracts, cargo freight contracts, warehousing and storage contracts, loan contracts, property insurance contracts, technical contracts, other
documents that resemble a contract in nature; title transfer deeds; business account books; certificates of rights, licenses and other taxable documents specified by the Ministry of Finance. 81
Urban Maintenance & Construction Tax and Education Surcharges On October 18, 2010, the State Council of the PRC released a Circular on Unifying the System of Urban Maintenance & Construction Tax and Education Surcharges for Domestic and Foreign-invested Enterprises and Individuals, or Circular 35, providing that, effective from December 1, 2010, the
relevant regulations, rules, and policies regarding urban maintenance & construction tax and education surcharges shall be applicable to foreign-invested enterprises, foreign enterprises, and foreign individuals (FIEs). Following the release of Circular 35, on November 4, 2010, the Ministry of Finance and the
State Administration of Taxation jointly issued a Circular on Issues Relating to Levying Urban Maintenance & Construction Tax and Education Surcharge on FIEs for implementation of Circular 35, which provides that urban maintenance & construction tax and education surcharges will be imposed on FIEs
in respect of value-added tax, consumption tax and business tax payable on and after December 1, 2010. The urban maintenance & construction tax and education surcharges are calculated as a percentage of the value-added tax, consumption tax and business tax due. The education surcharges are levied at
a unified rate at 3%, while the rates for urban maintenance & construction tax differ depending on the location of the taxpayer: (i) 7% for taxpayers located in a city; (ii) 5% for taxpayers located in a county and town area; and (iii) 1% for taxpayers located in other regions. Foreign Currency Exchange The principal regulations governing foreign currency exchange in China are the Foreign Currency Administration Rules amended and promulgated on August 5, 2008, and the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange. Under the above-referenced rules, for
current account items such as trade and service-related foreign exchange transactions, entities or individuals inside the PRC could either retain their foreign exchange income or sell them to financial institutions engaged in foreign exchange settlement and sale business (the “Authorized Financial
Institutions”); additionally, they could make foreign exchange payments with their own foreign exchange or with the foreign exchange purchased from the Authorized Financial Institutions. For capital account items, the retaining or sale to the Authorized Financial Institutions of foreign exchange income
(such as from direct investments, loans and investments in securities) will be subject to approval by the State Administration of Foreign Exchange, except as otherwise provided by PRC laws and regulations. Moreover, foreign exchange payments should be made to the Authorized Financial Institutions by
presenting valid documentations with the payer’s own foreign exchange or with the foreign exchange purchased from the Authorized Financial Institutions, with the exception of certain foreign exchange payments that are subject to approval by the State Administration of Foreign Exchange (such as
repatriation of investment outside the PRC). Capital investments by foreign-invested enterprises outside of PRC are also subject to approval by certain authorities, including but not limited to, the Ministry of Commerce, the State Administration of Foreign Exchange and the National Development and
Reform Commission (or their local counterparts). Currently, PRC laws and regulations do not provide clear criteria for obtaining the State Administration of Foreign Exchange approval. Generally speaking, the State Administration of Foreign Exchange and its local branches have broad discretion on the
issuance of such approval. On August 29, 2008, the General Affairs Department of the State Administration of Foreign Exchange issued the Circular on Relevant Operating Issues concerning the Improvement of Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or the
Circular. According to the Circular, among other things, the RMB fund obtained from the settlement of foreign currency capital of a foreign-invested enterprise shall be used within the business scope approved by governmental authorities, and shall not be used for domestic equity investment unless
otherwise provided by PRC laws or regulations. When an enterprise intends to repay a RMB loan with the RMB fund obtained from the settlement of foreign currency capital, it shall submit a statement that the loan has been used in accordance with provisions under the respective contract, and used
within the business scope approved by the government. In case of a deviation from the business scope without authorization, or a repayment of the unused RMB loan with RMB obtained from the settlement of foreign exchange capital, the exchange administration 82
agency shall order that corrections be made, and shall confiscate the illegal gains and impose a fine of not more than 30% of the amount of capital involved; in case of serious violation, a fine of not less than 30% of the amount of capital involved but not more than the total amount involved will be
imposed. The State Administration of Foreign Exchange Regulations on Employee Stock Options In January 2007, the State Administration of Foreign Exchange issued implementing rules for the People’s Bank of China Regulation, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the equity incentive plan of
an overseas publicly listed company. On March 28, 2007, the State Administration of Foreign Exchange issued the Operating Procedures on Administration of Foreign Exchange regarding PRC Individuals’ Participation in Employee Share Ownership Plans and Employee Stock Option Plans of Overseas
Listed Companies, or the Stock Option Rule. The purpose of the Stock Option Rule is to regulate foreign exchange administration of PRC citizens who participate in equity incentive plans of overseas-listed companies. According to the Stock Option Rule, if a PRC citizen participates in any equity incentive plan of an overseas-listed company, a PRC domestic agent or China related company of such overseas listed company, such as the overseas-listed company itself, its parent company or its subsidiaries or branches
in China, must, among others things, file an application with the State Administration of Foreign Exchange on behalf of such individual to obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises. This is because
PRC citizens may not directly use overseas funds to purchase stock or exercise stock options. Concurrent with the filing of such application with the State Administration of Foreign Exchange, China domestic agent or China-related company must obtain approval from the State Administration of Foreign
Exchange to open a special foreign exchange account at a PRC domestic bank to hold the funds required in connection with the stock purchase or option exercise, any returned principal or profits upon sales of stock, any dividends issued upon the stock and any other income or expenditures approved by
the State Administration of Foreign Exchange. China domestic agent also is required to obtain approval from the State Administration of Foreign Exchange to open an overseas special foreign exchange account at an overseas trust bank to hold overseas funds used in connection with any stock purchase
sales of stock, dividends issued and other income approved by the State Administration of Foreign Exchange. All proceeds obtained by PRC citizens from dividends acquired from the overseas-listed company through employee stock holding plan or stock option plans or sales of the overseas-listed company’s stock acquired through other methods must be fully remitted back to China after relevant overseas
expenses are deducted. The foreign exchange proceeds from these sales and dividends can be converted into RMB or transferred to China citizen’s foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at China domestic bank. If a
stock option is exercised in a cashless transaction, China citizen is required to remit the proceeds to the special foreign exchange account. We and our PRC employees who have been granted stock options are subject to the Stock Option Rule. If we or our PRC employees fail to comply with the Stock Option Rule, we and/or our PRC employees may face sanctions imposed by the State Administration of Foreign Exchange or other
PRC government authorities. In addition, the State Administration for Taxation has issued circulars concerning employee stock options. Under these circulars, our employees working in China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to
employee stock options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their stock options. If our employees fail to pay their income taxes, or we fail to withhold them, we may face sanctions imposed by the tax authorities or other PRC government
authorities. 83
Dividend Distribution The principal PRC regulations governing the distribution of dividends by foreign-invested enterprises include:
•
The Sino-foreign Equity Joint Venture Law (1979), as amended; • The Regulations of Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended; • The Wholly Foreign-owned Enterprise Law (1986), as amended; • The Detailed Rules of the Wholly Foreign-owned Enterprise Law (1990), as amended; • Foreign Currency Administration Rules (1996), as amended; • The Company Law of China (1993), as amended; • The Enterprise Income Tax Law of China; and • The Implementation Regulations of Enterprise Income Tax Law of China. Under the above-mentioned regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at
least 10% of their after-tax profits each year, if any, to fund the reserve fund unless such reserve fund has reached 50% of their respective registered capital and to set aside a percentage of their after-tax profits to their employee bonus and welfare fund which is decided by their respective board of
directors. Sino-foreign equity joint ventures are required to set aside their reserve fund, enterprise development fund and employee bonus and welfare fund at percentages that are decided by their respective board of directors. PRC domestic companies are required to set aside at least 10% of their after-
tax profits each year, if any, to fund their respective statutory reserve fund unless such fund has reached 50% of their respective registered capital. These reserves are not distributable as cash dividends. Regulations Relating to Labor and Social Insurance We are subject to various labor laws and regulations in the PRC including but not limited to the PRC Labor Law, the PRC Labor Contract Law, the Implementation Regulations of the PRC Labor Contract Law, the PRC Social Insurance Law (promulgated on October 28, 2010 with effect from July
1, 2011), the Regulations of Insurance for Work-related Injury, the Interim Provisions on Registration of Social Insurance and the Interim Regulations on the Collection and Payment of Social Insurance Premiums. Pursuant to the PRC Labor Law and the PRC Labor Contract Law, labor contracts in
written form shall be executed to establish labor relationship between our employees and our company. We must provide wages which are no lower than local minimum wage standards to our employees. We are required to establish a system for labor safety and sanitation, strictly abide by State rules and
standards and provide relevant education to our employees. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative liabilities. Criminal liability may arise in serious cases. According to the Regulations of Insurance for Work-related Injury effective as of January 1, 2004 (which was amended on December 8, 2010 with effect from January 1, 2011), employers in China shall pay the work-related injury insurance fees for their employees, and their employees do not pay the
work related injury insurance fees. According to the Interim Regulation on the Collection and Payment of Social Insurance Premiums effective as of January 22, 1999 and Interim Measures concerning the Management of the Registration of Social Insurance effective as of March 19, 1999, employers in China shall conduct the
registration of social insurance with the competent authorities, and make contributions to the basic pension insurance, basic medical insurance and unemployment insurance for their employees. According to Interim Measures concerning the Maternity Insurance for Employees of Enterprises effective as of January 1, 1995, the employers in China shall pay the maternity insurance 84
fees not more than one percent of an employee’s total salary for their employees, and their employees do not pay the maternity insurance fees. According to Regulations on the Management of Housing Fund effective as of April 3, 1999, employers in China shall conduct the registration of housing fund with the competent authorities, open the relevant account with the designated banks and pay the housing fund equal to not less than five
percent of an employee’s monthly average salary in the last year for their employees. Regulations Relating to Construction and Work Safety Our operations are subject to extensive legislation and regulation relating to construction and work safety matters, including the PRC Labor Law, the PRC Construction Law, the PRC Safe Production Law, the Supervision Measures on the Safe Production of Electric Power, the Administrative
Regulation on Work Safety of Construction Projects, the Provisions on the Administration of Work Safety in the Construction of Water Resources Projects and other relevant laws, regulations, national standards and industrial standards. Pursuant to the PRC Labor Law, an employer should establish and enhance its system for labor safety, strictly abide by the PRC rules and standards on labor safety, educate employees to prevent occupational injury, and provide employees with labor safety conditions meeting the government
regulations and necessary articles of labor protection. According to the PRC Construction Law, the survey, design, and construction of projects must meet requirements of the State on safety standards of construction projects. Pursuant to the Administrative Regulation on Work Safety of Construction Projects enacted by the State Council and the
Provisions on the Administration of Work Safety in the Construction of Water Resources Projects promulgated by the Ministry of Water Resources, entities involved in the work safety of construction projects, including, without limitation, construction entities, surveying entities, designing entities,
supervision entities, consultancy entities, must comply with laws and regulations relating to safe production, ensure the safe construction and production of water resources projects, and assume liability for the work safety of water resources construction projects. The PRC Safe Production Law provides that any entity that is not sufficiently equipped to ensure safe production may not engage in production and business operation activities and entities must provide production safety education and training programs to employees. The design, manufacture,
installation, use, checking and maintenance of our safety equipment are required to conform to applicable national or industrial standards. In addition, it is required that labor protection equipment must meet the national or industrial standards and that entities must supervise and educate their employees
to wear or use such equipment according to the prescribed rules. In accordance with the Supervision Measures on the Safe Production of Electric Power, power plants are responsible for maintaining their safe production. Power plants are required to report to the State Electricity Regulatory Commission, State Administration of Work Safety, and relevant local
government authorities, within 24 hours, any fatal accident, grid accident, equipment damage accident, dam collapse accident or fire accident which is serious or extraordinary. Regulations Relating to Resettlement of Relocated Residents In accordance with the PRC Water Law, the PRC shall apply the policies of “resettlement of relocated residents for development purposes” to the resettlement of relocated residents in construction of water projects, and shall appropriately arrange the production and lives of the resettled relocated
residents and protect their lawful rights and interests according to the principles of providing compensation and subsidy in the early stage and support in the latter stage. The resettlement of relocated residents shall be conducted at the same pace as that of the project construction. The construction entity
shall, according to the environment capacity of the area of resettlement and the principle of sustainable development, formulate a plan for relocated residents resettlement in accordance with local conditions, and the relevant local people’s government shall 85
organize the implementation of the plan after it is legally approved. The expenses arising from the resettlement of relocated residents shall be included in the investment plan for project construction. The State Council of the PRC promulgated the amended Regulation on Land Requisition Compensation and Resettlement of Relocated Residents for Construction of Large and Medium-sized Water Resources and Hydropower Projects, or the Requisition and Resettlement Regulation, on July 7, 2006
effective from September 1, 2006. Pursuant to the Requisition and Resettlement Regulation, relevant governmental authorities shall not approve or verify the construction of those large and medium-sized water resources and hydropower projects for which the plan for relocated residents resettlement has
not been formulated or approved. Prior to the commencement of the construction of large and medium-sized water resources and hydropower projects, the project entity shall enter into the agreement on relocated residents resettlement with the people’s government at provincial, municipal or county level
located at the relocated residents regions and resettlement regions in accordance with the approved plan for relocated residents resettlement. The project entity shall pay a relocated residents resettlement fund to the local people’s government with which it has entered into the agreement on relocated
residents resettlement in accordance with the annual plan of relocated residents resettlement and the implementation progress of relocated residents resettlement. The staged completion acceptance or overall completion acceptance for large and medium-sized water resources and hydropower projects shall
not be conducted if the relocated residents resettlement has not passed acceptance. In case of violating the Requisition and Resettlement Regulation, the project entity shall be ordered to rectify the violation and pay fines ranging from RMB100,000 to RMB500,000. 86
C. Organizational Structure Organizational Chart The following diagram illustrates our corporate operating structure as of the date of this annual report: All of our PRC subsidiaries are organized as wholly foreign-owned enterprises established pursuant to the Law of China on Wholly Foreign-Owned Enterprises, except for Yunhe County Shapulong Hydropower Generation Co., Ltd. and Henan Wuyue Storage Power Generating Co., Ltd., which are
equity joint ventures established pursuant to the Law of China on Sino-Foreign Equity Joint Ventures, and Longquan Ruiyang Cascade II Hydroelectric Co., Ltd., Yingjiang County Qinrui Husahe Hydropower Co., Ltd., Shaowu City Jinlong Hydroelectric Co., Ltd., Shaowu City Jintang Hydroelectric Co.,
Ltd., Shaowu City Jinwei Hydroelectric Co., Ltd., which are domestic companies established pursuant to the Company Law of China. 87
D. Property, Plant and Equipment See “Information on the Company—Our Hydroelectric Power Assets.” ITEM 4A. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion and analysis of financial condition and results of operations in conjunction with the section entitled “Selected Consolidated and Other Financial and Operating Data” and the financial statements and related notes included elsewhere in this annual report. This
discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in
this annual report. A. Operating Results Overview We are a fast-growing owner and operator of small hydroelectric power projects in China, led by an international management team. We were formed on July 10, 2006 to acquire existing small hydroelectric assets in China and aim to become the PRC’s largest independent small hydroelectric power
producer. Our primary business is to identify, evaluate, acquire, develop, construct and finance hydroelectric power projects in China. Our revenues to date have derived from the sale of electricity generated by our small hydroelectric power projects to local power grids, while our costs of operations relate
to the operation of our hydroelectric power projects, as well as the cost of financing our acquisition of these hydroelectric power projects and necessary capital contributions. We were formed as an exempted company under the laws of the Cayman Islands to serve as a vehicle for the acquisition of
operating hydroelectric power projects and plants under construction in China. We conduct substantially all of our business through our PRC operating subsidiaries and investee company. We wholly own twenty-three operating hydroelectric power projects and have controlling interests in three operating hydroelectric power projects. Our operating hydroelectric power projects are located in four provinces in China: Zhejiang, Fujian, Yunnan and Sichuan. In addition, we expanded our
operations through the acquisition of development rights to a 1,000.0 MW pumped storage hydroelectric power project in Henan province this year. Installed capacity at our plants reached 58.0 MW, 271.0 MW, 376.6 MW and 548.8 MW at December 31, 2007, 2008, 2009 and 2010, respectively. We have a limited operating history. For the period from July 10, 2006, the date of our incorporation, to December 31, 2006, we did not have any subsidiaries or equity investees. We established or acquired all of our subsidiaries and our investee company in 2007, 2008, 2009 and 2010. As a result,
our consolidated financial statements for 2007 may not provide an accurate indication of our future results of operations. Specifically, our audited consolidated financial statements for the year ended December 31, 2007 reflect the results of operations of approximately eight months and seven months,
respectively, of the Binglangjiang I and Liyuan hydroelectric power projects. Our activities during the year ended December 31, 2007 were comprised of our acquisition and operation of three completed projects and one project under construction. Our revenues in 2007 were $2.4 million while our cost of revenues was $0.8 million, resulting in a gross profit of $1.6 million.
After deducting operating and other expenses we showed a net loss for 2007 of $4.6 million. We sold 108.3 million kWh of electricity produced at our hydroelectric power projects in 2007 during the periods in which we operated them, at an effective tariff of RMB0.18 per kWh. 88
Our activities during the year ended December 31, 2008 were comprised of our acquisition and operation of six additional completed projects and another project under construction. Excluding Shapulong, our revenues in the year ended December 31, 2008 were $14.7 million while our cost of
revenues was $6.0 million, resulting in a gross profit of $8.7 million. After deducting operating and other expenses, including $0.5 million representing our proportional share of losses of Shapulong, we reported a net loss for 2008 of $4.0 million. Excluding Shapulong, we sold 334.0 million kWh of
electricity produced at our hydroelectric power projects in 2008 during the periods in which we operated them, at an effective tariff of RMB0.33 per kWh. In 2008, we completed three additional private placements with institutional investors. In January 2008, we issued $150.0 million of Series A convertible redeemable preferred shares. In July and August, 2008 we issued an aggregate of $129.0 million of Series B convertible redeemable preferred shares. Our activities during the year ended December 31, 2009 were comprised of our completion of construction of the Zhougongyuan, Jiulongshan and Binglangjiang II hydroelectric power projects, acquisition of the Ruiyang hydroelectric power project, acquisition of the remaining 50.0% equity interest in
Shapulong and operation of our twelve completed projects. Our revenues for the year ended December 31, 2009 were $36.2 million while our cost of revenues was $17.2 million, resulting in a gross profit of $19.0 million. After deducting operating and other expenses, including interest expenses of $14.2
million, we reported a net loss for the year ended December 31, 2009 of $19.4 million. We sold 798.9 million kilowatt hours of electricity produced at our hydroelectric power projects in 2009, at an effective tariff of RMB0.34 per kWh. In October 2009, we issued an aggregate of $20.0 million Series C
convertible redeemable preferred shares. Our activities during the year ended December 31, 2010 were comprised of our acquisition of 79% controlling interest in Henan Wuyue Storage Power Generation Co., Ltd., acquisition of Husahe hydroelectric power project, Hengda hydroelectric power project, Xineng hydroelectric power project,
Xiaopengzu hydroelectric power project and Jinling hydroelectric power project, acquisition of the controlling interests held by Jinling in three of its subsidiaries, including 55% controlling interest in Jinlong Hydroelectric power project, 74% controlling interest in Jintang Hydroelectric power project, and
74% controlling interest in Jinwei Hydroelectric power project, and our operation of our twenty completed projects. Our revenues for the year ended December 31, 2010 were $66.7 million while our cost of revenues was $24.8 million, resulting in a gross profit of $41.8 million. After deducting operating
and other expenses, including interest expenses of $15.8 million, we reported a net income for the year ended December 31, 2010 of $3.7 million. We sold 1,480.7 million kilowatt hours of electricity produced at our hydroelectric power projects in 2010, at an effective tariff of RMB0.33 per kWh. On
January 25, 2010, the Company completed an initial public offering (“IPO”), whereby the Company issued 6,000,000 units of securities at $16.00 per unit. Each unit consists of one American Depository Share (“ADS”) priced at $14.80 and one warrant priced at $1.20. Each ADS represents three ordinary
shares and each warrant entitles the holder to purchase three ordinary shares for an exercise price of $15.00. The IPO yielded aggregate gross proceeds of $96 million. The proceeds, net of applicable expenses will be used to acquire hydroelectric operating companies and assets and develop new
hydroelectric power projects in China. The proceeds will also be used for working capital and general corporate purposes. In accordance with the SEC’s rules and regulations, Binglangjiang is considered our predecessor company for SEC reporting purposes, as we acquired substantially all of the business of Binglangjiang and our own operations prior to that acquisition were insignificant compared to the operations of
Binglangjiang. Binglangjiang’s financial and operating data presented in this annual report are solely those of Binglangjiang, and do not reflect the results of operations of our company or our other subsidiaries. Our financial statements and other financial and operating data presented in this annual report
include the results of operations of Binglangjiang from April 25, 2007, the date on which we acquired Binglangjiang. 89
Our Acquisitions We set forth below the key facts regarding our acquisitions to date. Please note that U.S. dollar translations provided below are derived from our consolidated financial statements presented elsewhere in this annual report. Acquisitions Completed in 2007 In April 2007, we completed our purchase of Yunnan Huabang Electric Power Development Co., Ltd., the owner of the Binglangjiang I hydroelectric power project and developer of the Binglangjiang II hydroelectric power project, for a total cash consideration of RMB50.0 million ($6.5 million). This
acquisition was accounted for as a purchase using the purchase method of accounting. We also incurred acquisition costs of $50,000 in connection with the transaction. In addition, we made a cash advance to the company of RMB125.0 million ($16.2 million) in April 2007 prior to the completion of the
acquisition. In May 2007, we completed our purchase of the Liyuan hydroelectric power project, which is now owned by our subsidiary Sichuan Huabang Hydroelectric Development Co., Ltd., for a total cash consideration of RMB77.0 million ($10.0 million). This was accounted for as a purchase using the
purchase method of accounting. We also incurred acquisition costs of $0.3 million in connection with the transaction. In December 2007, we completed our purchase of a 50.0% interest in Yunhe County Shapulong Hydropower Generation Co., Ltd., the owner of the Shapulong hydroelectric power project, for a total cash consideration of RMB33.0 million ($4.5 million). We also incurred acquisition costs of
$0.2 million in connection with the transaction. Acquisitions Completed in 2008 In January 2008, we completed our purchase of Zhejiang Province Jingning Yingchuan Hydroelectric Development Co., Ltd., the owner of the Yingchuan hydroelectric power project, for a total consideration of RMB304.0 million ($42.3 million), which was comprised of a cash consideration of
RMB291.4 million ($40.6 million) and a payment of RMB12.6 million ($1.8 million) to the seller to settle all of the liabilities of the Yingchuan hydroelectric power project. This acquisition was accounted for as a purchase using the purchase method of accounting. We also incurred acquisition costs of $0.1
million in connection with the transaction. In January 2008, we completed our purchase of Qingtian Wuliting Hydroelectric Development Co., Ltd., the owner of the Wuliting hydroelectric power project, for a purchase price of RMB342.1 million ($47.6 million) which was comprised of a cash consideration of RMB206.9 million ($28.8 million)
and a payment of RMB135.3 million ($18.8 million) to the seller to settle all of the liabilities of the Wuliting hydroelectric power project. This acquisition was accounted for as a purchase using the purchase method of accounting. We also incurred acquisition costs of $0.2 million in connection with the
transaction. In January 2008, we completed our purchase of Suichang County Jiulongshan Hydroelectric Development Co., Ltd., the owner of the Zhougongyuan hydroelectric power project, for a purchase price of RMB157.3 million ($21.9 million) in cash. In addition, we are obligated to make a capital injection
into this subsidiary of RMB250.0 million ($34.8 million) to fund the construction of the Zhougongyuan hydroelectric power project, the payment of which will be completed in 2009. This acquisition was accounted for as an asset acquisition. We also incurred acquisition costs of $0.1 million in connection
with the transaction. In October 2008, we completed our purchase of a 90.0% equity interest in Sanming Zhongyin Banzhu Hydroelectric Co., Ltd., the owner of the Banzhu hydroelectric power project, for a purchase price of RMB134.2 million ($19.6 million) in cash. This acquisition was accounted for as a purchase
using the purchase method of accounting. We also incurred acquisition costs of $91,000 in connection with the transaction. We committed to make a capital injection of RMB104.9 million ($15.4 million) to this subsidiary to finance its future operations after the acquisition, of which RMB21.2 million ($3.1
million) was made in March 2009, and the remaining capital injection of 90
RMB83.7 million ($12.3 million) will be made in 2010 out of funds other than the proceeds of the initial public offering. In addition, pursuant to a supplemental agreement with the shareholders at that time, Sanming Ruifeng Hydropower Investment Co., Ltd. and Yong’an Ruifeng Hydroelectric Ltd. were
entitled to receive the RMB59.2 million ($8.7 million) of current assets, including cash and cash equivalents, accounts receivable and amounts due from related parties, of Banzhu as of the acquisition date. In October 2008, we completed our purchase of a 90.0% equity interest in Pingnan County Wangkeng Hydroelectric Co., Ltd., the owner of the Wangkeng hydroelectric power project, for a purchase price of RMB220.5 million ($32.3 million) in cash. This acquisition was accounted for as a purchase
using the purchase method of accounting. We also incurred acquisition costs of $0.1 million in connection with the transaction. In October 2008, we completed our purchase of Pingnan County Yuanping Hydroelectric Co., Ltd., the owner of the Yuanping hydroelectric power project, for a purchase price of RMB58.0 million ($8.5 million) in cash. This acquisition was accounted for as a purchase using the purchase method of
accounting. We also incurred acquisition costs of $88,000 in connection with the transaction. In October 2008, we completed our purchase of Pingnan County Yuheng Hydropower Co., Ltd., the owner of the Yuheng hydroelectric power project, for a purchase price of RMB121.0 million ($17.7 million) in cash. This acquisition was accounted for as a purchase using the purchase method of
accounting. We also incurred acquisition costs of $92,000 in connection with the transaction. Acquisitions Completed in 2009 In March 2009, we acquired the remaining 10.0% equity interest in Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. for a purchase price of RMB17.0 million ($2.5 million) in cash. This acquisition was accounted for as an equity transaction. In August 2009, we completed the acquisition of a 13.0% equity interest in Yunhe County Shapulong Hydropower Generation Co. Ltd. for a purchase price of RMB8.6 million ($1.3 million) and the remaining 37.0% equity interest in the company for a purchase price of RMB21.0 million ($3.1
million). Since we owned a noncontrolling interest in Yunhe County Shapulong Hydropower Generation Co. Ltd. immediately before obtaining control through our acquisitions of the 13.0% and 37.0% equity interest, we have remeasured the pre-existing 50% equity interest at fair value of RMB29,580
million ($4.3 million) and recognized a gain of $105 from the remeasurement in “Other Income, net” on the accompanying Statements of Operations. The acquisition will be accounted for as a business combination achieved in stages using the acquisition method of accounting. In August 2009, we completed our purchase of Longquan Ruiyang Cascade II Hydroelectric Co., Ltd., the owner of the Ruiyang hydroelectric power project, for a purchase price of RMB160.0 million ($23.4 million) in cash. The acquisition was accounted for as a business combination using the
acquisition method of accounting. Acquisitions Completed in 2010 In March 2010, we completed our capital injection to subscribe for a 79% controlling equity interest in Henan Wuyue Storage Power Generation Co., Ltd. which owns the right to develop a pumped storage hydropower plant of 1,000 MW in Henan province. After the first installment payment of
RMB32.5 million ($4.8 million), the Company is obliged to transfer RMB130.0 million (approximately $19.4 million) cash into Wuyue in two years’ time as capital injections to fund the construction of the pumped storage hydroelectric power project, and will ultimately obtain 79% equity interest in
Wuyue. This capital injection was accounted for as an asset acquisition. In March 2010, we completed our purchase of Yingjiang County Qinrui Husahe Hydropower Co. Ltd., which owns and operates Mangxian, Husahe Cascade III and Husahe Cascade IV hydroelectric power projects, with a total installed capacity of 18.7 MW in Yingjiang County, Yunnan province in
the PRC for a purchase price of RMB115.0 million ($16.8 million). This acquisition was accounted for as a business combination using the acquisition method of accounting. 91
In June 2010, we completed our purchase of Fugong County Hengda Hydroelectric Development Co. Ltd. which owns and operates two operating projects including Aluhe, Zilenghe with a total installed capacity of 35.2 MW, for a purchase price of RMB65.0 million ($9.6 million). This acquisition was
accounted for as a business combination using the acquisition method of accounting. In August 2010, we completed our purchase of Fugong County Xineng Hydroelectric Development Co. Ltd. which owns and operates Latudi hydroelectric project with an installed capacity of 18.9MW, for a purchase price of RMB31.3 million ($4.6 million). This acquisition was accounted for as a
business combination using the acquisition method of accounting. In September 2010, we completed our purchase of Luquan County Xiaopengzu Hydroelectric Development Co. Ltd. which owns and operates a 44.0 MW hydroelectric project in Luquan County, Yunnan province in the PRC, for a purchase price of RMB150.0 million ($22.1 million). This acquisition
was accounted for as a business combination using the acquisition method of accounting. In December 2010, we completed our purchase of Shaowu City Jinling Hydropower Co. Ltd.(hereafter “Jinling”), the owner of the Jinling hydroelectric power project, together with Jinling’s 55% controlling interest in Shaowu City Jinlong Hydropower Co. Ltd., the owner of the Jinlong hydroelectric
power project, Jinling’s 74% controlling interest in Shaowu City Jintang Hydropower Co. Ltd., the owner of the Jintang hydroelectric power project, and Jinling’s 74% controlling interest in Shaowu City Jinwei Hydropower Co. Ltd., the owner of the Jinwei hydroelectric power project, for a total purchase
price of RMB75.1 million ($11.3 million). These four companies own and operate a 55.4 MW group of six projects in Fujian province, including Qianling, Jinjiu, Dongguan, Jinlong, Jinwei and Jintang hydroelectric projects. This acquisition was accounted for as a business combination using the acquisition
method of accounting based on the available and obtainable information as of December 31, 2010. Other Acquisitions In November 2010, we signed a definitive agreement to acquire Jinping Kanghong Hydroelectric Development Co., Ltd., which owns and operates Dazhaihe hydroelectric project, a 15 MW project in Yunnan province for a purchase price of RMB118 million ($17.8 million). In November 2010, we signed a definitive agreement to acquire the remaining 10% equity interests in Pingnan County Wangkeng Hydroelectric Co., Ltd. for a purchase price of RMB39.0 million ($5.9million). This acquisition was completed in January 2011. Impact of Acquisitions on our Results of Operations These acquisitions resulted in a significant increase in the book value of our net property, plant and equipment, our intangible assets, goodwill, revenues and gross profit. Our 2007 consolidated results of operations reflect approximately eight months and seven months of the resulting additional
depreciation and amortization expenses of the Binglangjiang I and Liyuan hydroelectric power projects, respectively. Our 2008 consolidated results of operations reflect approximately eleven months of the resulting additional depreciation and amortization expense of the Yingchuan and Wuliting
hydroelectric power projects, and approximately two months of the resulting additional depreciation and amortization expenses for the Banzhu, Wangkeng, Yuanping and Yuheng hydroelectric power projects, in addition to the depreciation and amortization expenses for the Binglangjiang I and Liyuan
hydroelectric power projects in 2008. Our 2009 annual depreciation and amortization expenses are expected to increase to reflect the effect of a full year of depreciation and amortization expenses relating to the acquisitions made in October 2008 and partial year of depreciation and amortization expenses
for acquisitions made in 2009. Our consolidated results of operations in 2009 reflect approximately five months of the resulting additional depreciation and amortization expenses of the Shapulong and Ruiang projects, in additional to the full year depreciation and amortization expenses for projects
acquired in 2007 and 2008. As with our 2008 consolidated results of operations, the results of operations for businesses acquired in 2009 will be only partially reflected in our 2009 consolidated results of operations. 92
Our 2010 annual depreciation and amortization expenses are expected to increase further to reflect the effect of a full year of depreciation and amortization expenses relating to the acquisitions made in 2009, a full year depreciation and amortization expenses relating to the projects put into operation
in 2009, and partial year of depreciation and amortization expenses for acquisitions made in 2010. Our consolidated results of operations in 2010 reflect approximately nine, six, four and three months of the resulting additional depreciation and amortization expenses of the Husahe, Hengda, Xineng and
Xiaopengzu projects, respectively in addition to the full year depreciation and amortization expenses for projects acquired in 2007, 2008 and 2009. As with our 2009 consolidated results of operations, the results of operations for businesses acquired in 2010 will be only partially reflected in our 2010
consolidated results of operations. Factors Affecting Our Results of Operations The most significant factors that affect our financial condition and results of operations are:
•
tariffs; • hydrological conditions; • production efficiency of our hydroelectric power projects; • expansion through strategic acquisitions; • availability and cost of debt financing; and • depreciation of property, plant and equipment and amortization of intangible assets. General Factors Affecting Our Results of Operations We have benefited significantly from the growth of the industrial base, increase in consumer consumption of electricity and overall economic growth in China. A rapidly growing industrial base and increasing residential consumption in China have contributed to a significant increase in electricity
demand. China’s electricity consumption grew 14.6% in 2010, from 2009 to 4,190TWh, according to the China Electricity Council. Renewable energy has become a strong driving force contributing to the growth. Reform of the PRC power industry, in particular support for foreign investment in
hydroelectric power, has assisted our rapid entry into and growth in the PRC small hydroelectric power market. Deregulation of the industry and policy support for the purchase of hydroelectric power will, we believe, in the long-term result in increasing tariffs for hydroelectric power in China. However,
any adverse changes in the economic growth or regulatory environment in China may have a materially adverse effect on the demand for our electricity or our ability to operate in the PRC market, which in turn may materially adversely affect our results of operations. Specific Factors Affecting Our Results of Operations Tariffs Due to the historical mechanisms used by the PRC government to set on-grid tariffs, on-grid tariffs for renewable energy producers have until recently been lower than on-grid tariffs for thermal power projects. We believe that through continued policy support from the PRC government, renewable
energy throughout China, including hydroelectric power, will in the long-term achieve on-grid tariffs equal to those for thermal power. This is already the case in Zhejiang province, where heavy demand for electricity and insufficient supply have made the on-grid tariff for hydropower comparable with
many thermal plants during peak hours. We believe the move to market pricing for hydroelectric power on-grid tariffs will depend on (i) the continued relatively high price of coal in the PRC, (ii) the absence of significantly cheaper sources of other renewable energy and (iii) the enforcement of laws
requiring the purchase by power grids of electricity from renewable energy generators. If the level of coal prices in the PRC were to drop significantly, a cheaper form of renewable energy were to be discovered and implemented throughout China or government support for hydroelectric power and the
reform of on-grid tariff setting were to be withdrawn, we might not realize these increases in tariffs or tariffs may decrease, which could materially adversely affect our 93
future revenues. However, we have not to date experienced a deterioration in our tariffs, despite the fall in world oil prices and the decrease in PRC domestic demand for electricity during the recent economic crisis, and expect the tariff for hydroelectric power in the PRC to continue to increase in the
medium-term. For provinces where our tariff is equal or close to that for thermal power, notably in Zhejiang and Fujian provinces, we believe we have not experienced a decline in tariffs as the price of electricity is still driven primarily by the cost of generating thermal power. This is unlikely to diminish
in the near-term given the high cost of transporting coal within China to thermal power projects, the built up losses at these thermal power projects, the timing difference between the setting of power tariffs and the fluctuation of coal prices and the PRC government’s desire to maintain pricing stability. We believe in Sichuan and Yunnan provinces, where the price for hydropower is well below that for thermal power, the price for hydropower will increase in the near-term through the policy drive to bring electricity to the rural areas where our hydroelectric power projects are located. We seek to secure and retain favorable tariffs for each of our hydroelectric power projects by maintaining good relations with the local power grids and increasing our importance to the power grid through becoming a reliable supplier of peak power, being power supplied from 8:00 a.m. to 10:00 p.m.
We are accomplishing this through the following means:
•
maintaining a good working relationship with the grid’s dispatch control team, with whom our hydroelectric power project managers communicate on a daily basis; • providing technical cooperation and support to the local grid, by sharing hydrology and operations data; and • conducting thorough and accurate forecasts of our hydropower generation capacity and management of water flows to supply power as and when required by the local grid. In the years ended December 31, 2008, 2009 and 2010, the effective tariff of electricity sold by us was RMB0.33 per kWh, RMB0.34 per kWh and RMB0.33 per kWh, respectively. The effective tariff for electricity sold in the year ended December 31, 2009 was slightly higher than that in the year
ended December 31, 2008 because in 2008, 47.8%, 35.1% and 9.6% of the electricity sold and 65.0%, 18.7% and 9.7% of the gross revenue were derived from our hydroelectric power projects in Zhejiang province, Yunnan province and Fujian province, respectively, where the average effective tariff was
RMB0.45, RMB0.18 and RMB0.33 respectively, while in 2009, 37.8%, 15.6% and 43.6% of the electricity sold and 49.1%, 7.8% and 40.6% of the gross revenue resulted from our hydroelectric power projects located in Zhejiang province, Yunnan province and Fujian province respectively where the
average effective tariff was RMB0.45, RMB0.17 and RMB0.32 respectively. The effective tariff for electricity sold in the year ended December 31, 2010 was slightly lower than that in the year ended December 31, 2009 because in 2010, 36.5%, 22.8% and 39.6% of the electricity sold and 48.1%, 12.7%
and 38.2% of the gross revenue were derived from our hydroelectric power projects in Zhejiang province, Yunnan province and Fujian province, respectively, where the average effective tariff was RMB0.43, RMB0.18 and RMB0.32 respectively, while in 2009, 37.8%, 15.6% and 43.6% of the electricity
sold and 49.1%, 7.8% and 40.6% of the gross revenue resulted from our hydroelectric power projects located in Zhejiang province, Yunnan province and Fujian province respectively where the average effective tariff was RMB0.45, RMB0.17 and RMB0.32 respectively. The tariffs for our power dispatched are set through power purchase agreements with the local grids to which our hydroelectric power projects are connected, and generally have terms of one to five years. We therefore do not expect there to be any disruption in the service to the local power grid or
any impact on our future revenues or liquidity. If we should be unable to renegotiate a power purchase agreement with the local grid, it is unlikely we would be able to obtain alternative customers for the power generated by the hydroelectric power project, as only one grid is available to each
hydroelectric power project and there are no neighboring industrial sites ready to take up the power. Furthermore, even if we do renegotiate a power purchase agreement for the hydroelectric power project, it may be at a lower tariff or for lower volumes of power than previously dispatched. The
realization of any of the outcomes described above could materially and adversely reduce our revenues and our results of operations and net cash used in operating activities could be materially and adversely affected. 94
Hydrological conditions Our hydroelectric power generating prospects are dependent upon hydrological conditions prevailing from time to time in the broad geographic regions in which our existing and future hydroelectric generation facilities are located. Our business is seasonal, with the majority of our generation occurring
during times of high precipitation and snow melt, primarily in the second and third quarters of the calendar year. However, unusually low or high levels of precipitation or significant volatility or uneven distribution of water supply can significantly reduce or disrupt our power generation. Floods on our
waterways may force us to shut down our run-of-the-river plants to avoid damage to the equipment, while droughts may cause water flows to be insufficient to operate the plant. In the future, we may construct additional projects along our waterways to help control the flow of water to our hydroelectric
power projects. In the absence of further development on our waterways, other than carefully forecasting the amount of water we will receive, preparing for generation during periods of high water flow and storing water in anticipation of periods of low water flow, we are unable to mitigate the impact of
hydrological conditions on our results of operations. Hydrological conditions vary significantly from year to year, and as such, it is typical for hydroelectric power projects to experience up to a 20% variance in their effective utilization rates each year. Hydrological conditions for 2010 were above historically normal levels and improved from the
relatively dry years of 2008 and 2009. We cannot forecast hydrological conditions for 2011 or any other future periods. We expect our revenues will continue to be directly impacted by the hydrological conditions at our plants. Production efficiency of our hydroelectric power projects Our future results of operations will depend on our ability to maintain or increase the levels of generation at the projects we acquire, while at the same time lowering the costs of operating those projects. We seek to achieve increased generation revenues from our hydroelectric power projects
through controlling water flow to maximize power generation, predicting hydrology conditions to increase generation, operating clusters of power projects where we can balance the generation load amongst multiple projects, improving management of individual projects, improving transmission of
electricity from our hydroelectric power projects through better connections to power grids and capital expansion. All of these efforts will be realized through the oversight of our expert management team. If our management team is unable to implement these programs, or if we are unable to maintain
generation levels at any given project or control our cost of revenues and operating expenses, we may not realize returns on the investment in the project, which would have a material adverse effect on our results of operations. Expansion through strategic acquisitions, development of greenfield projects and expansion of our existing hydroelectric power projects We currently have an acquisition pipeline of approximately 1,200.0 MW installed capacity consisting of 700MW operating projects and 500MW of under construction or development rights which we are in the process of evaluating. Our future growth in revenues will depend on our ability to
successfully complete these acquisitions and development projects and continue growing our pipeline. Availability and cost of debt financing We seek to improve shareholder returns through increasing our financial leverage at reasonable rates of interest. We are in discussions with both PRC and international financial institutions to arrange credit facilities to support our future acquisitions, and believe that the policy support in the PRC, the
availability of hydroelectric assets as collateral, our relatively stable cash flow and our low operating costs have improved our access to PRC and international financial institutions. To the extent such financing is unavailable in the PRC, for policy reasons or otherwise, we are unable to raise debt financing in the
international markets for any reason or such financing is unavailable at reasonable 95
rates, our ability to increase our leverage for further acquisitions, and thus our revenue growth, will be reduced. We have refinanced approximately RMB253.0 million ($38.2 million) of our existing long-term loans, typically with reduced interest rates and longer maturity, thereby lowering our borrowing costs for
our existing bank loan. However, the balance of our bank loan increased from $236.4 million as of December 31, 2009 to $302.8 million as of December 31, 2010 due to our assumption of the existing bank loan from the new acquisitions, resulting the overall increase of total interest expenses, from $14.2 million
in 2009 to $15.9 million in 2010. Depreciation The primary component of our cost of revenues is depreciation of property, plant and equipment. As a result, the actual cash cost of revenues of our businesses is low. Our depreciation expense for 2008 was $4.1 million out of a total cost of revenues of $6.0 million. Our depreciation expense for 2009
was $11.6 million out of a total cost of revenues of $17.2 million, while our depreciation expense for 2010 was $15.8 million out of a total cost of revenues of $24.8. Unlike other renewable energy generation systems, hydroelectric power projects may operate for decades if properly maintained. In
accordance with U.S. GAAP, we depreciate the machinery at our plants over a 1-30 year period, the dams and reservoirs over a 30-49 year period and the buildings over an 8-50 year period, all on a straight line basis. For property, plant and equipment acquired through a business combination,
depreciation is recorded on a straight-line basis over their respective remaining estimated useful lives. All direct and indirect costs that are related to the construction of property, plant and equipment and incurred before the assets are ready for their intended use are capitalized as construction in progress.
Construction in progress is transferred to specific property, plant and equipment accounts and commences depreciation when these assets are ready for their intended use. Interest costs are capitalized if they are incurred during the acquisition, construction or production of a qualifying asset and such costs
could have been avoided if expenditures for the assets have not been made. Capitalization of interest costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended
use. Upon acquisition of our hydroelectric power projects, we either record the new asset value based on the consideration paid in the case of an asset purchase or based on the fair values if it is accounted for using the acquisition method of accounting, often resulting in increased depreciation costs for
the plant. We may at the time of acquisition also restate the useful lives of a plant’s key assets. As a result, our acquisition of hydroelectric power projects may result in our recognizing higher depreciation for the plant than for the prior operator. We may also from time to time revaluate the useful life
of an asset, thus extending our depreciation expense over a longer period of time. We expect that our depreciation costs will continue to account for a significant portion of our cost of revenues. Critical accounting policies We prepare our consolidated and other financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect:
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the reported amounts of our assets and liabilities; • the disclosure of our contingent assets and liabilities at the end of each reporting period; and • the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based on our own experience, knowledge and assessment of current business and other conditions and on our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments
about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our consolidated and other financial statements, you should consider:
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our selection of critical accounting policies;
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• the judgment and other uncertainties affecting the application of such policies; and • the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements: Fair value of financial instruments Financial instruments include cash and cash equivalents, accounts receivable, certain other current assets, accounts payable, certain other liabilities, short-term loans, long-term loans, convertible notes, convertible redeemable preferred shares, derivative financial liabilities and warrants. The carrying
values of these financial instruments, other than long-term loans, convertible redeemable preferred shares, and warrants approximate their fair values due to their short-term maturities. The warrants issued in connection with the convertible notes and the IPO were recorded in equity at the fair value as
determined on the day of issuance. The convertible redeemable preferred shares were initially recorded at issue price net of issuance costs. We recognizes changes in the redemption value immediately as they occur and adjusts the carrying value of the convertible redeemable preferred shares to equal the
redemption value at the end of each reporting period. The warrants issued in connection with the convertible redeemable preferred shares were recorded as a liability at fair value as determined on the day of issuance and subsequently adjusted to the fair value at each reporting date. Upon the closing of
our IPO on January 25, 2010, these warrants were reclassified from liability to equity at the fair value immediately prior to such reclassification. With the assistance of independent third party valuation firms, we determined the fair values of the convertible notes and related derivative financial liability,
convertible redeemable preferred shares and warrants. The carrying values of long-term loans approximate their fair values due to the fact that the interest rates on these loans are reset each year based on prevailing market interest rates. Revenue recognition Our revenue is derived from the sale of electricity. Revenues are recognized when the following four criteria are met as prescribed by Accounting Standards Codification (“ASC”) sub-topic 605-10, Revenue Recognition: Overall (pre-codification SAB No. 104): (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. We consider the terms of each arrangement to determine the appropriate accounting treatment. Revenue is generally earned and
recognized upon transmission of electricity to the power grid controlled and owned by the respective regional or provincial grid companies. For transactions in which electricity has been transmitted to the power grid without a fixed or determinable unit price per kWh while the tariff is pending approval
of the regional or provincial pricing bureau, cash received in exchange for the transmission of electricity to the power grid controlled by the respective regional or provincial grid companies has been recorded as customer deposits until such time the price becomes fixed and determinable. When the price
becomes fixed and determinable, all or a portion of the customer deposits will be recognized as revenue. We do not defer the related cost of revenues, which is charged to expense as incurred. Customer deposits of $56,000 included in “Accrued expenses and other current liabilities” as of December 31,
2008 were recognized as revenues in the year ended December 31, 2009 as the unit price per kWh became fixed or determinable based on a confirmed minimum tariff obtained from the regional pricing bureau in June 2009. We have not offered any discounts or rebates to our customers nor do we
provide for refunds in our sales contracts with customers, except for the Yuheng project. Our subsidiaries are subject to withholding value-added tax (“VAT”) on the revenues earned in the PRC. The applicable rate of VAT is 6.0% for small hydroelectric power projects with a total installed capacity of 50 MW or less and 17.0% for large hydroelectric power projects with a total installed
capacity of over 50 MW. For the year ended December 31, 2008, the lower VAT rate of 6% was applied to the hydroelectric power projects of Binglangjiang, Liyuan, Yingchuan, Wuliting, Jiulongshan, Yuheng and Yuanping and the VAT rate of 17% was applied to the hydroelectric power projects of
Banzhu and Wangkeng. For the year ended December 31, 2009, the lower VAT 97
rate of 6% was applied to the hydroelectric power projects of Binglangjiang, Liyuan, Yingchuan, Wuliting, Yuheng and Yuanping and the VAT rate of 17% was applied to the hydroelectric power projects of Banzhu, Wangkeng, Jiulongshan and Zhougongyuan. For the year ended December 31, 2010, the
lower VAT rate of 6% was applied to the hydroelectric power projects of Binglangjiang, Liyuan, Yingchuan, Wuliting, Yuheng, Yuanping,Jiulongshan, Zhougongyuan, Shapulong, Ruiyang, Husahe, Hengda, Xineng, Xiaopengzu, Jinling, Jinlong, Jintang and Jinwei and the VAT rate of 17% was applied to
the hydroelectric power projects of Banzhu and Wangkeng. VAT on revenues earned from the sale of electricity by the Company to its customers for the years ended December 31,2008, 2009 and 2010 were $1.0 million, $3.7 million and $5.7 million, respectively. We have recognized revenues net of VAT
in the consolidated statements of operations. Goodwill and intangible assets Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of acquired businesses. ASC sub-topic 350-10, Intangibles—Goodwill and other: Overall (pre-codification SFAS No. 142), requires that goodwill be tested for
impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. We assign and assess goodwill for impairment at the reporting unit level. The performance of the impairment test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to
be generated by the reporting unit. Cash flow assumptions include estimating future cash flows, determining appropriate discount rates and making other assumptions. Change in these estimates and assumptions could materially affect the determination of fair value for the reporting unit. If the carrying
value exceeds the fair value, goodwill may be impaired. If this occurs, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in
order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, we would then recognize an impairment loss. Intangible assets are carried at cost less accumulated amortization. Intangible assets acquired in a business combination are recognized initially at fair value at the date of acquisition. Intangible assets with a finite useful life are amortized using the straight-line method over the estimated economic life
of the intangible assets. In connection with the acquisition of Binglangjiang in 2007, we acquired a legal right to expand and operate the Binglangjiang II plant. The development rights allow us to expand the power generation capacity of Binglangjiang by utilizing the existing water dam of Binglangjiang,
which have an estimated useful life of 30 years. We completed construction of the Binglangjiang II hydroelectric power project in August 2009. In connection with the acquisition of Yuanping in October 2008, we acquired a contractual right to use water from the dam and reservoir of the Jinzaoqiao
station, which has an estimated useful life of 40 years. On August 12, 2009, Yuheng acquired a contractual right to use water from the dam and reservoir of Wangquan Power Generation Co., Ltd., the term of which is 30 years. In connection with the acquisition of Jinling, we acquired a right to use the
dam of the Dongguan hydropower project which has a useful life of 40 years. We recognized the fair value of US$1,759 for the dam use right as a separate intangible asset apart from goodwill. The estimated useful life of the dam use right of Dongguan is 40 years. We review and adjust the carrying value of the intangible assets if the facts and circumstances suggest the intangible assets may be impaired. We assessed and concluded that there was no impairment for goodwill and intangible assets in any of the periods presented. Impairment of long-lived assets We evaluate our long-lived assets, including property, plant and equipment, land use right and intangible assets with finite lives, for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, 98
indicate that the carrying amount of an asset may not be recoverable in accordance with ASC sub-topic 360-10, Property, Plant and Equipment: Overall (pre-codification SFAS No. 144). When these events occur, we assess the recoverability of long-lived assets by comparing the carrying amount of the
assets to the expected future undiscounted cash flows resulting from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we recognize an impairment loss based on the excess of the carrying amount of the
assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. No impairment of long-lived assets was recognized for any of the periods presented. Income taxes We follow the liability method of accounting for income taxes in accordance with ASC sub-topic 740-10, or ASC 740-10, Income Taxes: Overall (pre-codification SFAS No. 109). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial
reporting and tax bases of assets and liabilities, net operating loss carry forwards and credits, using enacted tax rates that will be in effect for the period in which the differences are expected to reverse. We record a valuation allowance against the amount of deferred tax assets if based on the weight of
available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in statements of operations in the period that includes the enactment date. On January 1, 2007, we adopted Financial Accounting Standards Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB statement No. 109, or FIN 48, which has been codified into ASC 740-10. There was no cumulative effect of the adoption of
FIN 48 to beginning retained earnings. Interests and penalties arising from underpayment of income taxes are computed in accordance with the related PRC tax law. The amount of interest expenses is computed by applying the applicable statutory rate of interest to the difference between the tax position
recognized and the amount previously taken or expected to be taken in a tax return. Interest recognized in accordance with FIN 48 is classified in the financial statements as interest expenses, while penalties recognized in accordance with FIN 48 are classified in the financial statements as other expenses. In accordance with the provision of FIN 48, we recognize in our financial statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to prevail, defined as a likelihood of more than fifty percent of being sustained upon audit, based on the technical
merits of the tax position. Tax positions that meet the “more likely than not” threshold are measured, using a probability weighted approach, at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. Our estimated liability for unrecognized tax benefits is periodically assessed for adequacy and may be affected by changing interpretation of laws, rulings by tax authorities, certain changes and/or developments with respect to audits, and expiration of the statute of limitations. The outcome for a
particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are appropriately recorded in our financial
statements. Additionally, in future periods, change in facts, circumstances, and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the change
occurs. Prior to the adoption of FIN 48, we applied ASC sub-topic 450-20, or ASC 450-20, Contingencies: Loss Contingencies (pre-codification SFAS No. 5) to assess and provide for potential income tax exposures. In accordance with ASC 450-20, we maintained reserves for tax contingencies based on
reasonable estimates of the tax liability, interest and penalties that may result from such audits. 99
Preferred shares warrant On January 28, 2008 (“Warrant Issue Date”), we issued warrants to Morgan Joseph & Co. Inc. (“Morgan Joseph”), which allow Morgan Joseph to purchase (i) up to 15,000 Series A Preferred Shares at $1,100 per share prior to the closing of an IPO, or (ii) up to such number of ordinary shares
automatically converted into from 15,000 Series A Preferred Shares upon the closing of an IPO at 110% of the then-effective conversion price per Series A Preferred Shares (“Morgan Joseph Preferred Shares Warrant”). Following the IPO, the warrant currently allows Morgan Joseph to purchase
5,067,568 ordinary shares at a price of $3.256 per share. The estimated fair value of Morgan Joseph Preferred Shares Warrant at the issue date was based on a valuation performed by us with the assistance of American Appraisal China Limited, or American Appraisal, an unrelated and independent
valuation firm. We estimated the fair value of Morgan Joseph Preferred Shares Warrant at the Warrant Issue Date as call options using Black-Scholes option-pricing model, with the assistance of American Appraisal. Under this model, we made a number of assumptions, including:
the expected future volatility of our ordinary share prices; • the risk-free interest rate; • the expected dividend yield; and • the estimated fair value of our ordinary and preferred shares at the Warrant Issue Date. Since we were a privately held company at the Warrant Issue Date, we estimated the expected future volatility of our ordinary shares price based on the historical price volatility of the publicly traded shares of five comparable companies in the hydroelectric power related businesses over the periods
equal to the contractual term of Morgan Joseph Preferred Shares Warrant. The risk-free interest rate was based on the market yield of China sovereign bonds denominated in U.S. dollars with maturity terms equal to the contractual term of the Morgan Joseph Preferred Shares Warrant. The dividend
yield was estimated based on the expected dividend policy over the expected term of the warrants. The fair value of our Morgan Joseph Preferred Shares Warrant granted on January 28, 2008 was determined based on the fair value of our ordinary shares and preferred shares based on valuation performed by us retrospectively, with the assistance of American Appraisal, as of that day. The
following discussion sets forth the significant factors considered and key assumptions and methodologies used in such valuation. Determining the fair equity value requires making complex and subjective judgments, including those regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of Warrant Issue Date. The significant
factors considered include the following:
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our financial and operating results; • the assumptions and basis of our financial projections; • the nature of our business since our inception; • the stage of development of our operations; • our business plan; • our business risks; • the nature and prospects of the hydroelectric power industries in China; • the global economic outlook in general and the specific economic and competitive elements affecting our business, industry and market; and • the market-derived investment returns of entities engaged in the hydroelectric power businesses. We performed the discounted cash flow method, or DCF method, under the income approach to assess the fair value of our equity value as of December 31, 2007, based on our projected cash flow using management’s best estimate as of the valuation date. As we believed that there was no 100
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material change in our operations in the short period between December 31, 2007 and January 28, 2008 that would materially impact the fair value of our total equity value, our equity value as of the Warrant Issue Date was derived based on (i) the equity value derived as of December 31, 2007; and (ii)
the issuance proceeds from Series A preferred shares issued on January 23, 2008. Since our Company only had three hydroelectric power project in operation as at the Warrant Issue Date and our scale of business was much smaller than those listed companies in similar business and similar locations, we
concluded that a market comparison approach would not have been meaningful in determining the fair value of our equity. The DCF method involved applying appropriate discount rates to future free cash flows that are based on five-year financial projections developed by us. The major assumptions used in deriving the financial projections were consistent with our business plan at the time of the valuation. In deriving
the discount rates used in the DCF method, we considered the weighted average cost of capital, or WACC, applicable to us as well. The WACC we used was 13% for the valuation with respect to our equity value as of December 31, 2007. In addition, we have taken into account the discount for lack of marketability of our shares in the valuation to reflect the fact that we are a private company. We quantified the discount for lack of marketability, or DLOM, using the option-pricing method. This method treats the right to sell a
company’s shares freely before a liquidity event as a put option. The more distant the valuation date is from a liquidation event, the higher the put option value and thus the higher the implied DLOM. We obtained and used a DLOM of 13% for valuation with respect to our equity value as of December
31, 2007. To the extent our capital structure comprised ordinary shares and preferred shares as of the Warrant Issue Date, we used the option-pricing method to allocate total equity value derived to different classes of shares, taking into account the guidance prescribed by the AICPA Audit and Accounting
Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” or the Practice Aid. Under the option-pricing method, we treated ordinary shares and preferred shares as call options on our enterprise value, with exercise prices based on the liquidation preference of our
preferred shares. We estimated the value of these call options using the Black-Scholes option-pricing model. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the fair value of our common shares as of each balance sheet date. Upon the closing of the IPO on January 25, 2010, all of the outstanding Series A Preferred Shares were automatically converted into ordinary shares (Note 16). As a result, pursuant to the preferred shares subscription agreement, the Morgan Joseph Preferred Shares Warrant automatically became a
warrant that allows Morgan Joseph to purchase up to 5,067,568 ordinary shares at US$3.26 per share and was reclassified from liability to equity and will be subsequently accounted for as such. Share-Based Compensation We account for share awards issued to employees in accordance with ASC sub-topic 718-10 (“ASC 718-10”), Compensation-Stock Compensation: Overall. In accordance with the fair value recognition provision of ASC 718-10, share-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as an expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. We have elected to recognize share-based compensation expense for share awards granted to employees using the straight-line method. We account for share awards issued to non-employees in accordance with the provisions of ASC 718-10 and ASC sub-topic 505-50 (“ASC 505-50”), Equity: Equity-Based Payment to Non-employees. Our share awards issued to non-employees are subject to graded vesting provisions. We recognize
share-based compensation expense for share awards granted to non-employees using the accelerated recognition method over the requisite service period of the award. In accordance with ASC 718-10 and ASC 505-50, we use the binomial option pricing valuations model, or binomial model, to 101
measure the value of options granted to non-employees at each vesting date to determine the appropriate charge to share-based compensation. In accordance with ASC 718-10, the grant date for the options to employees and non-employees approved by the board of directors on August 18, 2008 and January 20, 2009, was March 4, 2009 (“Option Grant Date”) and the grant date for the options to employees and one non employee approved
by the board of directors on December 3, 2009 was January 25, 2010 (“Option Grant Date”). We estimated the fair value of our share options at the Option Grant Date using the binomial model, with the assistance of American Appraisal. It should be noted that the binomial model requires the input of
highly subjective assumptions, including the expected share price volatility. We use projected volatility rates, which are based upon historical price volatility rates experienced by comparable public companies. Because changes in the subjective input assumptions can materially affect the fair value estimate,
in our management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our share options. Changes in our estimates and assumptions regarding the expected volatility and fair value of our ordinary shares, for example, could significantly impact the
estimated fair value of our share options and, as a result, our net income and net income attributable to holders of our ordinary shares. Under the binomial model, we made a number of assumptions regarding the fair value of the options, including:
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the expected future volatility of our ordinary share price; • the risk-free interest rate; • the expected dividend yield; • the expected employee share option exercise behavior; • the expected forfeiture rate; and • the estimated fair value of our ordinary shares at the grant date. Since we were a privately held company at the Option Grant Date, we estimated the expected future volatility of our ordinary share price based on the historical price volatility of the publicly traded shares of five comparable companies in the hydroelectric power related businesses over the periods
equal to the contractual term of our share options. The risk-free interest rate was based on the U.S. Treasury zero-coupon yield in effect with maturity terms equal to the contractual term of the options. The dividend yield was estimated to be zero. We use historical turnover data to estimate the expected
forfeiture rate. The fair value of our share options on the grant date of March 4, 2009 was determined based on the fair value of our ordinary shares based on valuation performed by us contemporaneously, with the assistance of American Appraisal, as of that day. The following discussion sets forth the significant
factors considered and key assumptions and methodologies used in such valuation. Determining the fair equity value requires making complex and subjective judgments, including those regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of the Option Grant Date. The
significant factors considered include the following:
•
our financial and operating results; • the assumptions and basis of our financial projections; • the nature of our business since our inception; • the stage of development of our operations; • our business plan; • our business risks; • the nature and prospects of the hydroelectric power industries in China; • the global economic outlook in general and the specific economic and competitive elements affecting our business, industry and market; and 102
• the market-derived investment returns of entities engaged in the hydroelectric power businesses. We used a combination of (i) the guideline company method under the market approach and (ii) the discounted cash flow method, or DCF method, under the income approach to assess the fair value of our equity value as of March 4, 2009, based on our projected cash flow using management’s best
estimate as of the valuation date. We assigned an equal weighting of 50% to each of the results obtained using the guideline company method and the results obtained using the DCF method. Under the guideline company method, different value measures and market multiples of comparable companies were calculated and analyzed to induce a series of multiples that were considered representative of the industry average. The market multiples were then adjusted based on our growth rate,
business risks and profitability. Thereafter, the adjusted multiples were applied to our performance indicators to determine our value on a minority and freely traded basis. We specifically applied the financial ratios of enterprise value to revenues multiple, or EV/Revenues multiple, and enterprise value to earnings before interest,
tax, depreciation and amortization multiple, or EV/EBITDA multiple, to our pro-forma financial results for fiscal year 2008 in arriving at an indicative value of us under the guideline company method. For the valuation with respect to our equity value as of the Option Grant Date, we applied an
EV/Revenues multiple of 11.4 and an EV/EBITDA multiple of 28.3. We have selected five companies in the hydroelectric power related businesses listed in Shanghai Stock Exchange in China for reference as comparable companies: Chongqing Three Gorges Water Conservancy and Electric Power Co. Ltd., Guangxi Guiguan Electric Power Co. Ltd., Qianjiang Water
Resources Development Co. Ltd., Guangxi Guidong Electric Power Co. Ltd., Leshan Electric Power Co. Ltd. Since the nature of our operation is highly subject to geographical factors such as water supply, tariff and demand for power, etc, our business risks are most similar to the comparable companies
having similar business and similar locations in China. The DCF method involved applying appropriate discount rates to future free cash flows that are based on five-year financial projections developed by us. The major assumptions used in deriving the financial projections were consistent with our business plan at the time of the valuation. In deriving
the discount rates used in the DCF method, we considered the weighted average cost of capital, or WACC, applicable to us as well. The WACC we used was 10% for the valuation with respect to our equity value as of the Option Grant Date. In addition, we have taken into account the discount for lack of marketability of our shares in the valuation to reflect the fact that we are a private company. We adopted a DLOM of 10% for valuation with respect to our equity value as of the Option Grant Date. To the extent our capital structure comprised ordinary shares and preferred shares as of the Option Grant Date, we used the option-pricing method to allocate total equity value derived to different classes of shares, taking into account the guidance prescribed by the AICPA Audit and Accounting
Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” or the Practice Aid. Under the option-pricing method, we treated ordinary shares and preferred shares as call options on our enterprise value, with exercise prices based on the liquidation preference of our
preferred shares. We estimated the value of these call options using the Black-Scholes option-pricing model. The estimated fair value of our ordinary shares at the Option Grant Date was $2.08. Based on the initial public offering price of $4.93 per ordinary share, we have determined that the intrinsic value of the outstanding options as of December 31, 2009 was $nil. Although it is reasonable to expect that
the completion of the initial public offering should increase the value of our ordinary shares because of their increased liquidity and marketability, we believe that the added value cannot be measured with precision or certainty. The decrease in our ordinary share value from $2.56 per share as of January 28, 2008 to $2.08 per share as of March 4, 2009 was primarily due to the dilutive effect of the Series B convertible redeemable preferred shares we issued in July 2008 on our ordinary share value; and a generally
unfavorable market sentiment towards China-based publicly traded companies, reflected in an overall 103
decrease in the market value of those companies, which was partially offset by our subsequent acquisitions of Yingchuan, Wuliting, Zhougongyuan, Banzhu, Wangkeng, Yuanping and Yuheng between the period from January 28, 2008 to March 4, 2009, which were expected to expand our business
operations and improve our cashflow and financial prospects. Taxation We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands. Stamp duty may be payable on certain instruments if they are
executed, retained or adjudicated in the Cayman Islands. Enterprise Income Tax Prior to January 1, 2008, under applicable PRC tax laws, companies established in China were generally subject to a state and local enterprise income tax, or EIT, at statutory rates of 30.0% and 3.0%, respectively. In March 2007, the National People’s Congress of China enacted the EIT Law, and in November 2007, the State Council promulgated the implementing rules of the EIT Law, both of which became effective on January 1, 2008. The EIT Law curtails tax incentives granted to foreign-invested
enterprises under the previous tax law. The EIT Law, however, (i) reduces the top rate of EIT from 33.0% to 25.0%, (ii) permits companies to continue to enjoy their existing tax incentives, subject to certain transitional phase-out rules, and (iii) introduces new tax incentives, subject to various
qualification criteria. The Notice of the State Council on Carrying Out the Transitional Preferential Policies Concerning Enterprise Income Tax dated December 26, 2007 permits certain “businesses operated in Western China” to enjoy a reduced EIT rate. Under the phase-out rules, enterprises established
before the promulgation date of the EIT Law and which were granted preferential EIT treatment under the then effective tax laws or regulations may continue to enjoy their preferential tax treatments until their expiration and will gradually transition to the uniform 25.0% EIT rate over a five-year
transition period. Accordingly, our businesses have been subject to a 25.0% EIT rate from January 1, 2008, with the exception of Binglangjiang, Liyuan, Husahe, Hengda, Xineng and Xiaopengzu. Binglangjiang was entitled to a lower tax rate of 15% as its corporate income tax rate from 2007 to 2010.
Liyuan was entitled to tax exemption in years 2007 and 2008 and a tax rate of 7.5% from 2009 to 2010. Husahe was entitled to a lower tax rate of 15% as its corporate income tax rate from 2007 to 2010. Hengda was entitled to tax exemption in years 2007 and 2008 and a tax rate of 7.5% from 2009 to
2010. Xineng and Xiaopengzu were entitled to tax exemption in years 2009 and 2010. Banzhu was granted the tax preferential treatment by the PRC government on May 15, 2009, according to which, Banzhu is entitled to tax exemption in 2008 and 2009 and a tax rate of 12.5% from 2010 to 2012. As with any new law, the implementing regulations for the EIT Law may not be interpreted by the State Administration of Taxation as expected and the phase-out rules expected to be applied as described above may not be applied in the same fashion in practice or may be changed, potentially with
retroactive effect. Dividend Withholding Tax As a Cayman Islands holding company, substantially all of our income may be derived from dividends we receive from our PRC operating subsidiaries. The EIT Law and its implementing rules provide that dividends paid by a PRC entity to a non-resident enterprise for EIT purposes are subject to
PRC withholding tax at a rate of 10.0%. In addition, our tax treatment will depend on our status as a non-resident enterprise. For a detailed discussion of PRC tax issues related to resident enterprise status, see “Risk Factors—Risks Relating to Doing Business in China—We may be deemed a PRC enterprise under the EIT Law and be subject to China taxation on our worldwide income.” 104
Value Added Tax In accordance with the relevant tax laws in China, all entities engaged in the sale of goods within the territory of China are required to pay VAT. Pursuant to applicable regulations prior to January 1, 2009, hydroelectric power projects under 50.0 MW of installed capacity may choose a VAT of
6.0%, while larger hydroelectric power projects are subject to a VAT of 17.0%; however, in some provinces the higher VAT rate of 17.0% is applied to hydroelectric power projects under 50.0 MW in size. Our tariffs are set gross of VAT and our revenues are reported net of VAT. Urban Maintenance & Construction Tax and Education Surcharges In accordance with relevant PRC regulations recently issued, urban maintenance & construction tax and education surcharges will be imposed on foreign-invested enterprises, foreign enterprises, and foreign individuals in respect of value-added tax, consumption tax and business tax payable on and after
December 1, 2010. The urban maintenance & construction tax and education surcharges are calculated as a percentage of the value-added tax, consumption tax and business tax due. The education surcharges are levied at a unified rate at 3%, while the rates for urban maintenance & construction tax differ
depending on the location of the taxpayer: (i) 7% for taxpayers located in a city; (ii) 5% for taxpayers located in a county and town area; and (iii) 1% for taxpayers located in other regions. Results of Operations of Our Company Our consolidated results of operations are summarized below.
For the Year Ended
2008
2009
2010 Revenues
$
14,715
$
36,175
$
66,653 Cost of revenues
(6,025
)
(17,183
)
(24,845
) Gross profit
8,690
18,992
41,808 Operating expenses General and administrative expenses
(6,761
)
(9,099
)
(19,440
) Operating (loss) income
1,929
9,893
22,368 Interest income
1,340
510
1,191 Interest expenses
(5,847
)
(14,228
)
(15,852
) Change in fair value of derivative financial liabilities and warrant liability
420
(13,793
)
365 Exchange loss
(1,067
)
(23
)
(855
) Share of losses in an equity investee
(503
)
(70
)
— Other income (loss), net
144
(225
)
128 (Loss) income before income tax expenses
(3,584
)
(17,936
)
7,345 Income tax expenses
(444
)
(1,492
)
(3,360
) Consolidated net (loss) income
(4,028
)
(19,428
)
3,985 Net loss (income) attributable to noncontrolling interest
41
32
(243
) Net (loss) income attributable to China Hydroelectric Corporation shareholders
$
(3,987
)
$
(19,396
)
$
3,742 Revenues We derive revenues solely from the sale of electricity generated by our hydroelectric power projects. The generation of electricity by our hydroelectric power projects for any given period will depend on the planned annual generation as agreed with the power grid to whom the electricity is sold and
as approved by the relevant pricing bureau, the actual demand for our electricity from the power grid and the actual hydrological conditions experienced during the period. The on-grid tariff for electricity generated by our hydroelectric power projects is set annually by the relevant pricing bureau in
consultation with the relevant power grid. The on-grid tariff is determined in light of the 105
December 31,
initial capital investment in the plant, the historical operating cost, the water resource fees, the debt financing expense for the plant, an allowance for a reasonable return and in practice by the supply and demand for electricity in the local market. The tariff we receive is subject to VAT and, in some
cases, business surcharges, and our revenues are reported net of VAT and business surcharges. As the on-grid tariff for hydropower for most of our plants is significantly lower than that for thermal power, we expect that in the long-term we will experience an increase in the on-grid tariff for hydropower,
as power grids seek to improve their operating margins through increased purchase of hydropower and the approved tariff for thermal power increases. The power grids make monthly payments for our power delivered 30 to 60 days after month end. In 2008 and 2009 we sold our electricity to five power grids as a result of our acquisitions in Zhejiang and Fujian provinces. In 2010 we sold our electricity to eight power grids as a result of our
acquisitions in Yunnan and Fujian provinces. Any deterioration in our relationship with any of these grids, or in their financial condition could result in a material credit risk to our company and have a materially adverse effect on our financial condition and results of operations. The table below sets
forth the percentage of our revenues derived from sales to each of these power grids for the year ended December 31, 2008, 2009 and 2010.
Year Ended
Year Ended
Year Ended
% of Revenues Yunnan Nujiang Electric Power Co., Ltd.
—
—
1 Yunnan Dehong Electric Power Co., Ltd.
19
8
9 Yunnan Grid Company, Ltd.
—
—
3 Sichuan Cangxi Electric Power Co., Ltd.
7
3
1 Lishui Electric Power Bureau
65
50
49 Fujian Electric Power Co., Ltd.
7
27
24 Pingnan Power Supply Company
2
12
13 Total
100
100
100 Before we acquired the remaining 50.0% of the equity interest in Shapulong in August 2009, our investment in Shapulong was accounted for using the equity method of accounting under Accounting Standard Codification subtopic ASC 323-10, Investments—Equity Method and Joint Ventures: Overall,
and included as an investment in equity investees on our balance sheet. Under the equity method, our proportionate share of Shapulong’s net income or loss is included as share of income or losses, as applicable, in equity investees in the statement of operations. Accordingly, Shapulong’s results of
operations are not reflected in our consolidated results of operations other than as a share of income or losses, as applicable, in equity investees in our consolidated statement of operations before August 2009. Shapulong became our wholly owned subsidiary in August and its results of operations after the
acquisition are reflected in our consolidated results of operations. Although Yuanping commenced operations in March 2007 and has transmitted electricity to the power grid controlled by the Fujian Ningde Electric Power Bureau, that transmission was made without a fixed or pre-determined tariff per kWh until late June 2009. Therefore, cash received in exchange
for the transmission of electricity to the power grid before late June 2009 was recorded as customer deposits. Accordingly, no revenues were recorded by Yuanping in the year ended December 31, 2008. However, related cost of revenues was not deferred, and was charged to expense as incurred. All of
the customer deposits received from the date of our acquisition of Yuanping to late June 2009 were recognized as revenue when the regional pricing bureau confirmed a minimum tariff in late June 2009. We only recognize revenue for customer deposits recorded subsequent to the acquisition of Yuanping
after the per kWh tariff became fixed or determinable. In August 2009, the Ningde Pricing Bureau, the regional pricing bureau in the Fujian province, approved a unit price per kWh of RMB0.29, inclusive of VAT, for electricity transmitted by Yuanping to the power grid controlled and owned by the
provincial grid company prior to July 8, 2009. The unit price per kWh of RMB0.29 will continue to be in effect until the regional pricing bureau approves a new unit price per kWh. 106
December 31,
2008
December 31,
2009
December 31,
2010
In discussing our revenues, we have included information relating to (i) the effective tariff for electricity sold in the years ended December 31, 2008, 2009 and 2010, (ii) the effective utilization rate(s) for our hydroelectric power projects by province in the years ended December 31, 2008, 2009 and
2010, and (iii) the weighted average effective utilization rate for our hydroelectric power projects for both the years ended December 31, 2009 and 2010. We have generally not included effective utilization rate information for the hydroelectric power project by province for the periods that these projects were owned by us in 2007 and 2008. Effective utilization rates and effective tariff rates also do not reflect our percentage ownership of a
hydroelectric power project. Since the acquisition of each of these plants was completed at a different point in time in 2007 and 2008, and electricity generation and utilization rates at our hydroelectric power projects differ significantly from period to period due to prevailing hydrological conditions and
the seasonal nature of our business, we believe that any effective utilization rate information for our hydroelectric power projects for only the periods under consolidation may not be comparable to or representative of the utilization rates of such projects for the full year. Effective tariff is calculated as gross revenues, that are (a) revenues not netted for VAT and other applicable business surcharges, if any, recorded in the relevant period, divided by (b) the quantity of electricity sold in such period. Effective utilization rate of a hydroelectric power project is calculated
as the quantity of electricity sold in the relevant period, divided by the installed capacity for electricity generation in such period. The weighted average effective utilization rate of our hydroelectric power projects is calculated as the aggregate quantity of electricity sold in the relevant period, divided by
the aggregate installed capacity for electricity generation of all our hydroelectric power projects for the period under consideration. As our effective tariffs are calculated using gross revenues, the product of our installed capacity, effective tariff and effective utilization rate for a hydroelectric power project
is not equal to the revenues for that plant in any given period. We use effective utilization rates to measure the historic ability of a hydroelectric power project to generate electricity during any given period. However, absent mechanical failure, damage to the hydroelectric power project or human error,
effective utilization rates only reflect hydrological conditions for any given period, and are therefore not indicative of future trends in electricity generation for a hydroelectric power project. The design utilization rate for a hydroelectric power project is a calculation performed at the feasibility study phase used to assist in the design optimization of civil structures, and in the selection of turbine generator equipment. The design utilization rate for any given hydroelectric power project is
the multi-year average electricity production a facility is capable of producing given the equipment selection and historical hydrological conditions. We use design utilization rates as a management tool in monitoring actual production against precipitation to ensure our hydroelectric power projects are
operating to standard. Cost of Revenues Our cost of revenues consists primarily of depreciation, employee salaries and benefits for hydroelectric power project staff, water resource fees, non-capitalized maintenance and repair costs, amortization expenses relating to water use rights and dam use rights, and other operating costs directly
related to the generation of electricity. We expect that as we optimize the management and staffing of our newly acquired plants, we may in the future reduce the cost of revenues associated with operating any given plant. General and Administrative Expenses Our general and administrative expenses comprise employee salaries and benefits for non project staff, stock option charges, office lease payments, travel and entertainment expenses, office supplies expenses, amortization of intangible assets relating to the development rights of the Binglangjiang II
hydroelectric power project, costs of our acquisitions that cannot otherwise be capitalized, and professional fee. 107
EBITDA, as adjusted We have included earnings before interest, taxes, depreciation and amortization and certain non-cash charges, which we refer to as EBITDA, as adjusted, a non-GAAP financial measure, on a consolidated basis in this annual report. We had $(0.9) million in EBITDA, as adjusted, in the period from July
10, 2006 (inception) to December 31, 2006 and $(0.3) million in EBITDA, as adjusted, in the year ended December 31, 2007. We had $6.5 million in EBITDA, as adjusted, in the year ended December 31, 2008. We had $22.8 million in EBITDA, as adjusted, in the year ended December 31, 2009. We had
$42.8 million in EBITDA, as adjusted, in the year ended December 31, 2010. We believe that EBITDA, as adjusted, is a useful financial metric to assess our operating and financial performance before the impact of investing and financing transactions and income taxes. In addition, we believe that EBITDA is widely used by other companies in the power industry and may be
used by investors as a measure of our financial performance. We note, however, that as individual companies may have different methods of calculating EBITDA for their business, their EBITDA results may not be directly comparable to our EBITDA, as adjusted. Given the significant investments that
we have made in the past in net property, plant and equipment, depreciation and amortization expense comprises a meaningful portion of our cost structure. We believe that EBITDA, as adjusted, will provide investors with a useful tool for comparability between periods because it eliminates depreciation
and amortization expense attributable to capital expenditures and business acquisitions. The presentation of EBITDA, as adjusted, should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business. The use of EBITDA, as adjusted, has certain limitations. Depreciation and amortization expense for various long-term assets, income tax expenses, interest expenses and interest income and certain non-cash charges have been and will be incurred and are not reflected in the presentation of EBITDA,
as adjusted. Each of these items should also be considered in the overall evaluation of our results. Additionally, EBITDA, as adjusted, does not consider capital expenditures and other investing and financing activities and should not be considered as a measure of our liquidity. We compensate for these
limitations by providing the relevant disclosure of our depreciation and amortization, interest expense and interest income, income tax expenses, capital expenditures and other relevant items both in our reconciliations to the U.S. GAAP financial measures and in our consolidated financial statements, all
of which should be considered when evaluating our performance. The term EBITDA, as adjusted, is not defined under U.S. GAAP, and EBITDA, as adjusted, is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. A reconciliation of EBITDA, as adjusted, to our net loss is provided below:
For the Year Ended
2008
2009
2010 Net (loss) income
$
(3,987
)
$
(19,396
)
$
3,742 Interest expense, net
4,507
13,718
14,661 Other non-cash charges including exchange loss and change in fair value of derivative financial liabilities and warrant liability and stock-based compensations
647
14,387
4,105 Income tax expenses
444
1,492
3,360 Depreciation of property, plant and equipment, and amortization of land use rights
4,755
12,399
16,759 Amortization of intangible assets
108
182
161 EBITDA, as adjusted
$
6,474
$
22,782
$
42,788 Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 In March 2009, we acquired the remaining 10.0% interest in Banzhu. In August 2009, we completed the acquisition of the remaining 50.0% equity interest in Shapulong, and Shapulong has been accounted for as our subsidiary, not an equity investee, since then. We also completed the 108
December 31,
acquisition of the Ruiyang hydroelectric power project in August 2009. Finally, the construction of the Zhougongyuan, which was later split into Zhougongyuan and Jiulongshan projects at the end of 2009, and Binglangjiang II hydroelectric power projects was completed in March 2009 and September
2009, respectively. In March 2010, we acquired Husahe hydroelectric power project. In June 2010, we acquired Hengda hydroelectric power project. In August 2010, we completed the acquisition of Xineng hydroelectric power project. In September 2010, we acquired Xiaopengzu hydroelectric power
project. In December 2010, we acquired Jinling, the owner of the Jinling hydroelectric power project, Jinling’s 55% controlling interest in Shaowu City Jinlong Hydropower Co. Ltd., the owner of the Jinlong hydroelectric power project, Jinling’s 74% controlling interest in Shaowu City Jintang Hydropower
Co. Ltd., the owner of the Jintang hydroelectric power project, and Jinling’s 74% controlling interest in Shaowu City Jinwei Hydropower Co. Ltd., the owner of the Jinwei hydroelectric power project. Our results of operations for the year ended December 31, 2009 primarily reflect the results of operations during this period for the Binglangjiang I, Liyuan, Yingchuan, Wuliting, Banzhu, Wangkeng, Yuangping and Yuheng hydroelectric power projects, the results of operations of Shapulong and
Ruiyang for the period of our full ownership, and the results of operations of Binglangjiang II and Zhougongyuan for their periods of operation. Our results of operations for the year ended December 31, 2010 primarily reflect the results of operations during the period for which Husahe, Hengda, Xineng, Xiaopengzu, Jinling, Jinlong, Jintang and Jinwei hydroelectric power projects were consolidated to our financial statements, and the results
of operations of Banzhu, Shapulong, Ruiyang, Zhougongyuan, Jiulongshan and Binglangjiang II hydroelectric power projects for the whole year of 2010. Revenues, Cost of Revenues and Gross Profit Our revenues increased by $30.5 million, or 84.3%, to $66.7 million in the year ended December 31, 2010, compared to $36.2 million in the year ended December 31, 2009. $7.2million, or 23.6%, of the increase is attributable to the inclusion of the full year sale of electricity generated from Shapulong
and Ruiyang hydroelectric power projects acquired in Zhejiang province in August 2009. $3.7 million, or 12.2%, of the increase is attributable to the inclusion of the full year sale of electricity generated from Zhougongyuan and Binglangjiang II hydroelectric power projects which were commissioned in
2009. $15.2 million, or 49.9%, of the increase resulting from more favorable hydrological conditions and more effective management of our facilities in Fujian and Zhejiang province. $4.6 million, or 15.2%, of the increase was the result of our new acquisitions of the hydroelectric power projects in Yunnan
province in 2010. Our revenues in the year ended December 31, 2010 were derived from the sale of 1,480.7 million kilowatt hours of electricity at our hydroelectric power projects during the periods in which their results of operations were consolidated with our company’s, while our revenues in the year ended
December 31, 2009 were derived from the sale of 798.9 million kilowatt hours of electricity during the periods in which their results of operations were consolidated with our company’s. In the years ended December 31, 2009 and 2010, the effective tariff of electricity sold by us was RMB0.34 per kWh
and RMB0.33 per kWh, respectively. The effective tariff for electricity sold in the year ended December 31, 2010 was slightly lower than that in the year ended December 31, 2009 because in 2009, 37.8%, 15.6% and 43.6% of the electricity sold and 49.2%, 7.8% and 40.5% of the gross revenue were
derived from our hydroelectric power projects in Zhejiang province, Yunnan province and Fujian province respectively, where the average effective tariff was RMB0.45, RMB0.17 and RMB0.32 respectively, while in 2010, 36.5%, 22.8% and 39.6% of the electricity sold and 48.1%, 12.7% and 38.2% of the
gross revenue resulted from our hydroelectric power projects located in Zhejiang province, Yunnan province and Fujian province respectively where the average effective tariff was RMB0.43, RMB0.18 and RMB0.32 respectively. The effective utilization rate for the year ended December 31, 2010 for our hydroelectric power projects located in Sichuan, Yunnan, Zhejiang and Fujian provinces was 15.4%, 39.1%, 32.1% and 51.1% respectively, compared to 22.3%, 51.4%, 22.9% and 30.4% respectively in 2009. In general, year
over year comparisons plus or minus 5% during periods of normal equipment availability are 109
attributed to natural fluctuation in precipitation and water flows. The decrease of 6.9% utilization for the facilities located in Sichuan province is mainly attributable to the floods that occurred in that region in 2010. The decrease of 12.3% in utilization for the facilities located in Yunnan province is
mainly attributable to the severe drought in Yunnan province and the inclusion of an additional 116.8 MW of capacity (from 41.0 MW to 157.8 MW). Among the newly acquired projects, the utilization rate of Aluhe, Zilenghe and Latudi hydroelectric power projects are relatively low due to the
transmission limitation imposed by the local grid company. The increase of 9.2% and 20.7% in utilization between 2009 and 2010 for the facilities located in Zhejiang and Fujian, respectively, is attributable to the favorable precipitation in these regions in 2010. As a result of the forgoing factors, the
effective utilization rate for our entire portfolio of hydroelectric power projects was 39.4% in 2010, compared to 30.8% in 2009. Our cost of revenues consist primarily of depreciation, salaries and benefits for staff employed at our hydroelectric power projects, water resource fees, water reservoir fund, non-capitalized maintenance and repair expenses, amortization expenses relating to water use rights and other operating costs
directly attributable to the production of electricity. The total cost of revenues increased by $7.6 million, or 44.6%, to 24.8 million in the year ended December 31, 2010, compared to $17.2 million in the year ended December 31, 2009. The total cost of revenues in the year ended December 31, 2009 included the costs for sixteen hydroelectric power
projects while in the year ended December 31, 2010, the cost of revenue included the costs for twenty six hydroelectric power projects. $1.9 million, or 24.9%, of the increase is attributable to the inclusion of the full year sale of electricity generated from Shapulong and Ruiyang hydroelectric power
projects acquired in Zhejiang province in August 2009. $2.2 million, or 28.8%, of the increase is attributable to the inclusion of the full year sale of electricity generated from Zhougongyuan and Binglangjiang II hydroelectric power projects which were commissioned in 2009. $1.4 million, 17.8%, of the
increase resulted from the increased variable cost due to increased power generation in Fujian and Zhejiang province. $2.1 million, or 27.6%, of the increase was the result of our new acquisitions of the hydroelectric power projects in Yunnan in 2010. In 2009, the cost of depreciation, employee salaries
and benefits, and water resource fees accounted for 72%, 9%, and 5%, respectively, of the total cost of revenues, compared to 66.5%, 11.5%, and 6.7% of the total cost of revenues in 2010. We expected a high percentage of the depreciation to our cost of revenues since all our hydroelectric power
projects are capital intensive and depreciation shall account for a significant portion of our cost of revenues. The water resources fee was levied by the local tax authority, at around 2.5% of the gross revenue for 2010. As a result of the foregoing factors, our gross profit in the year ended December 31, 2010 was $41.8 million, increased by $22.8 million from that of $19.0 million for the year ended December, 31, 2009. Gross profit margin was 62.7% for the year ended December 31, 2010, compared to 52.6% for the
year ended December 31, 2009. Operating Expenses Our total operating expenses for the years ended December 31, 2009 and 2010 consisted entirely of general and administrative expenses relating to acquisition related expenses, salaries and benefits for staff employed other than at the hydroelectric power projects, employee stock option expenses,
office lease payments, travel and entertainment expenses, office supplies expenses, and other costs related to the expansion of our business. General and administrative expenses increased by $10.3 million, or 113.6%, to $19.4 million in the year ended December 31, 2010, compared to $9.1 million in the
year ended December 31, 2009, reflecting expanded operations. General and administrative expenses consist of hydroelectric power project related operating expenses, primarily salaries, travel and entertainment expenses, and consulting expenses, and corporate overhead expenses attributable to the operation of our company and Beijing A.B.C. Investment,
primarily relating to salaries and benefits for non-hydroelectric power project employees, office lease payments, employee stock option expenses, travel and entertainment expenses for our company and Beijing A.B.C. Investment. Project related general and administrative expenses increased from $2.3
million in the year ended December 31, 2009 to $3.4 million in the year ended 110
December 31, 2010, reflecting increased operations resulting from the two acquisitions completed in August 2009, the completion of the Zhougongyuan and Binglangjiang II hydroelectric power projects, and the four acquisitions completed in 2010, which resulted in an increase in salaries, as well as
increases in travel expenses, entertainment expenses and miscellaneous office expenses. Corporate overhead expenses increased from $6.8 million in the year ended December 31, 2009 to $16.0 million in the year ended December 31, 2010. This increase resulted from an increase of $2.4 million in employee salaries and benefits relating to the compensation increase for our officers and
additional employees hired in the year ended December 31, 2010, an increase of $3.0 million for the employee stock option expenses, and an increase of $1.9 million for accounting and auditing fees. In the year ended December 31, 2010, employee salaries and benefits of $6.1 million accounted for 37.9%
of the corporate overhead general and administrative expenses, while stock option expenses and professional fee, including legal and accounting fees, comprised of 22.5% and 16.9% respectively of the corporate overhead expenses. Other costs such as consulting fee, travel expenses, lease expenses,
acquisition related project expenses, director and insurance expenses accounted for the remaining 22.7% of the corporate overhead expenses. Operating Profit (Loss) Our operating profit was $22.4 million for the year ended December 31, 2010, compared to $9.9 million for the year ended December 31, 2009, as a result of our enhanced profitability through acquisitions and integration of hydroelectric power projects. Other Income and Expenses Our interest expense increased by $1.7 million, or 11.4%, to $15.9 million in the year ended December 31, 2010, compared to $14.2 million in the year ended December 31, 2009. Our interest expense for the year ended December 31, 2009 arose primarily from interest incurred from long-term loans,
interest penalty to original shareholders of an acquired subsidiary and other charges from bank. Our increased interest expense in the year ended December 31, 2010 was primarily due to interest expenses on long-term loans obtained by Binglangjiang, Hengda, Xineng, Xiaopengzu, Wuliting, Yingchuan,
Zhougongyuan, Shapulong, Ruiyang, Jiulongshan, Yuanping, Yuheng, Wangkeng and Banzhu in the year ended December 31, 2010. Long-term loans outstanding as of December 31, 2009 and December 31, 2010 were $229.3 million and $285.1 million, respectively. We recorded interest income of $0.5 million and $1.2 million in the years ended December 31, 2009 and 2010, respectively. The increase in interest income was primarily due to a higher average balance of bank deposits. We also experienced exchange losses of $23,000 and $855,000 for the years ended December 31, 2009 and 2010, respectively. The exchange loss for the year ended December 31, 2010 was due to (i) depreciation of the U.S. dollars that we hold in our PRC subsidiaries against their functional currency,
the RMB, and (ii) timing differences between the setting of the RMB purchase price of our acquisitions and our payment for the acquisitions through conversion of U.S. dollars. In 2009, we recorded a loss caused by the increase in the fair value of warrant liabilities of $13.8 million, which was related to the warrants, exercisable for the purchase of our Series A convertible redeemable preferred shares, issued to Morgan Joseph in January 2008. The significant increase in fair
value is primarily attributable to the higher underlying ordinary share price of our company at December 31, 2009, which increased from $1.74 as of December 31, 2008 to $4.93 as of December 31, 2009, based on the evaluation by American Appraisal China limited. In 2010, we recorded a decrease in the
fair value of warrant liabilities of $365,000, due to the decrease of the fair value of the ordinary share appraised by American Appraisal China Limited, from $4.93 per share as of December 31, 2009 to $4.63 per share as of January 25, 2010. On January 25, 2010, our IPO date, the warrant liabilities were
reclassified to equity resulting from the automatic conversion of the underlying Series A convertible redeemable preferred shares to ordinary shares. In the year ended December 31, 2009, we recorded losses in our equity investment in Shapulong of $70,000, compared to nil in the year ended December 31, 2010. Shapulong’s results of operations 111
were consolidated with our company’s following our acquisition of its remaining 50.0% equity interest in August 2009. In the year ended December 31, 2009, the Shapulong hydroelectric power project sold 40.6 million kWh of electricity and operated at an effective utilization rate of 18.6%. In the year
ended December 31, 2010, Shapulong sold 64.6 million kWh of electricity and operated at an effective utilization rate of 29.5%. Income Tax We incurred income tax expenses of $1.5 million and $3.4 million in the years ended December 31, 2009 and 2010, respectively. We have adopted an income tax return preparation method principally based on tax invoices issued and received. In accordance with applicable PRC income tax laws and
regulations, an income tax return should be prepared based on accounting income following certain tax adjustments. As of December 31, 2010, we have recognized an additional income tax provision of $1.4 million for unrecognized tax benefits which represent the estimated income tax expense we would
pay for the year ended December 31, 2010 if our income tax returns had been prepared in accordance with applicable PRC tax laws and regulations. We also recognized a decrease of unrecognized tax benefits of $0.12 million related to the settlement with the tax authority of Yinchuan. Noncontrolling Interest In the year ended December 31, 2010, we recorded noncontrolling interest in profit of consolidated subsidiaries of $243,000, relating to Wangkeng, compared to the noncontrolling interest in profit or loss of consolidated subsidiaries of $32,000 relating to Wangkeng and Banzhu in the year ended
December 31, 2009. Net Profit (Loss) The foregoing factors resulted in our net profit of $3.7 million in the year ended December 31, 2010, as compared to our net loss of $19.4 million in the year ended December 31, 2009. (Loss) Income Attributable to Ordinary Shareholders In the year ended December 31, 2010, loss attributable to ordinary shareholders was $12.1 million, comprising a net income of $3.7 million in this period, cumulative dividends on our Series A, Series B and Series C convertible redeemable preferred shares of $2.0 million, $1.4 million, and $0.2 million,
respectively, and beneficial conversion feature accretion charges on our Series A, Series B and Series C convertible redeemable preferred shares of $7.0 million, $5.0 million, and $0.2 million, respectively, Pursuant to the terms of our Series A, Series B and Series C convertible redeemable preferred shares, holders of such preferred shares are entitled to receive cash dividends on each such preferred share at the rate of 10% per annum of the issuance price plus any accrued dividends when and if
declared by our board of directors. However, in the event that a qualified public officering, as defined in the Series A, Series B and Series C preferred shares agreements, has not occurred on or before April 28, 2009, September 30, 2009 and December 31, 2010, respectively, such dividend rate increases
by 1.0% per annum, and shall further increase by 1.0% per annum as of each subsequent dividend accrual date but under no circumstances shall the dividend rate exceed 15.0% per annum. For additional terms applicable to dividend payments related to our Series A, Series B and Series C convertible redeemable preferred shares, see Note 16 to our audited consolidated financial statements included elsewhere in this annual report. Up to the date of our IPO, no cash dividends were
declared on our Series A, Series B and Series C convertible redeemable preferred shares, and cumulative dividends of $2.0 million, $1.4 million, and $0.2 million for the Series A, Series B and Series C convertible redeemable preferred shares, respectively, were accrued and recorded as a reduction of
income available to the ordinary shareholders for the year ended December 31, 2010. 112
On January 25, 2010, the Company completed an IPO, whereby the Company issued 6,000,000 units of securities at $16.00 per unit. Each unit consists of one ADS priced at $14.80 and one warrant priced at $1.20. Each ADS represents three ordinary shares and each warrant entitles the holder to
purchase three ordinary shares for an exercise price of $15.00. Upon the IPO, all Series A, Series B and Series C convertible redeemable preferred shares and related preferred share dividends accrued up to the date of IPO were converted into ordinary shares. The number of ordinary shares into which
the Series A, Series B and Series C convertible redeemable preferred shares are convertible were equal to 60%, 60% and 70%, respectively, of the price of $4.93 at which ordinary shares underlying ADSs are sold in this Offering. The Series A convertible redeemable preferred shares and related
preferred share dividends amounting to $186,530 were converted in to 63,016,780 ordinary shares, or 21,005,593 ADS, at the price of $2.96. The Series B convertible redeemable preferred shares and related preferred share dividends amounting to $150,355 were converted in to 50,795,457 ordinary shares,
or ADS 16,931,819 ADS, at the price of $2.96. The Series C convertible redeemable preferred shares and related preferred share dividends amounting to $ 20,518 were converted in to 5,941,613 ordinary shares, or 1,980,538 ADS, at the price of $ 3.45. Accretion charges amounting to $6,990, $5,040 and
$222 incurred on beneficial conversion feature on the Series A, Series B and Series C convertible redeemable preferred shares, respectively, were recorded in retained earnings. Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 We acquired the Yingchuan, Wuliting and Zhougongyuan hydroelectric power projects in January 2008, followed by the acquisition of a 90.0% interest in each of the Banzhu and Wangkeng hydroelectric power projects in October 2008. In October 2008, we acquired the Yuanping and the Yuheng
hydroelectric power projects. In March 2009, we acquired the remaining 10.0% interest in Banzhu. In August 2009, we completed the acquisition of the remaining 50.0% equity interest in Shapulong, and Shapulong has been accounted for as our subsidiary, not an equity investee, since then. We also
completed the acquisition of the Ruiyang hydroelectric power project in August 2009. Finally, the construction of the zhougongyuan, which was later split into Zhougongyuan and Jiulongshan projects at the end of 2009, and Binglangjiang II hydroelectric power projects was completed in March 2009 and
September 2009, respectively. Our results of operations for the year ended December 31, 2008 reflect the operations of the Binglangjiang I and Liyuan hydroelectric power projects for such period, the results of operations of the Yingchuan and Wuliting hydroelectric power projects during our period of ownership, that is, for a
period of approximately eleven months, and the results of operations of the Banzhu, Wangkeng, Yuanping and Yuheng hydroelectric power projects during our period of ownership, that is, for a period of approximately two months. Our results of operations for the year ended December 31, 2009 primarily reflect the results of operations during this period for the Binglangjiang I, Liyuan, Yingchuan, Wuliting, Banzhu, Wangkeng, Yuangping and Yuheng hydroelectric power projects, the results of operations of Shapulong and
Ruiyang for the period of our full ownership, and the results of operations of Binglangjiang II and Zhougongyuan for their periods of operation. As discussed above, Shapulong was accounted for as an equity investment before we acquired the remaining 50.0% equity interest in it in August 2009 and its revenues are not reflected in our consolidated revenues in the year ended December 31, 2008. Shapulong became our wholly owned
subsidiary in August 2009 and its revenues thereafter are reflected in our consolidated revenues in the year ended December 31, 2009. Cash received in exchange for the transmission of electricity by Yuanping to the power grid before late June 2009 was recorded as customer deposits. All of the customer
deposits received from the date of our acquisition of Yuanping to late June 2009 were recognized as revenue when the regional pricing bureau confirmed a minimum tariff in late June 2009. Also, the Zhougongyuan hydroelectric power project acquired in January 2008 and the Binglangjiang II
hydroelectric power project did not contribute to our revenues until after commencing operations in late March 2009 and September 2009, respectively. 113
Revenues, Cost of Revenues and Gross Profit Our revenues increased by $21.5 million, or 145.8%, to $36.2 million in the year ended December 31, 2009, compared to $14.7 million in the year ended December 31, 2008. $12.7 million, or 59.4%, of the increase is attributable to the inclusion of the full year sale of electricity generated from the
four hydroelectric power projects acquired in Fujian province in October 2008. $4.1 million, or 19.3%, of the increase was due to the commencement of the production from the two hydroelectric power projects in Zhejiang province in March 2009. $2.8 million, or 13.1%, of the increase was derived from
the increased production in the Yingchuan and Wulting hydroelectric power projects, acquired in January 2008, resulting from more favorable hydrological conditions and more effective management of our facilities. $1.6 million, or 7.3%, of the increase was the result of our new acquisitions of the
hydroelectric power projects in August 2009. Our revenues in the year ended December 31, 2009 were derived from the sale of 798.9 million kilowatt hours of electricity at our hydroelectric power projects during the periods in which their results of operations were consolidated with our company’s, while our revenues in the year ended
December 31, 2008 were derived from the sale of 334.0 million kilowatt hours of electricity during the periods in which their results of operations were consolidated with our company’s. In the years ended December 31, 2008 and 2009, the effective tariff of electricity sold by us was RMB0.33 per kWh and RMB0.34 per kWh, respectively. The effective tariff for electricity sold in the year ended December 31, 2009 was slightly higher than that in the year ended December 31, 2008
because in 2008, 47.8%, 35.1% and 9.6% of the electricity sold and 65.0%, 18.7% and 9.7% of the gross revenue were derived from our hydroelectric power projects in Zhejiang province, Yunnan province and Fujian province respectively, where the average effective tariff was RMB0.45, RMB0.18 and
RMB0.33 respectively, while in 2009, 37.8%, 15.6% and 43.6% of the electricity sold and 49.2%, 7.8% and 40.5% of the gross revenue resulted from our hydroelectric power projects located in Zhejiang province, Yunnan province and Fujian province respectively where the average effective tariff was
RMB0.45, RMB0.17 and RMB0.32 respectively. The effective utilization rate for the year ended December 31, 2009 for our hydroelectric power projects located in Sichuan, Yunnan, Zhejiang and Fujian provinces was 22.3%, 51.4%, 22.9% and 30.4%, compared to 23.9%, 63.8%, 24.2% and 16.4% in 2008. In general, year over year comparisons
plus or minus 5% during periods of normal equipment availability are attributed to natural fluctuation in precipitation and water flows. The decrease of 12.4% in utilization for the facilities located in Yunnan province is attributable to the inclusion of an additional 20.0 MW of capacity (from 21.0 MW to
41.0 MW) in the Yunnan province capacity base. As the facility, Binglangjiang II, which was commissioned in August of 2009, did not contribute a full year of energy production. The increase of 14.0% in utilization between 2008 and 2009 for the facilities located in Fujian province is attributable to the
inclusion of the capacity of that province for the full year of 2008 without including the full year energy production as the company owned the projects for only two months of 2008. As a result of the forgoing factors, the weighted average utilization rate for our hydroelectric power projects of 30.8% in
2009, compared to the weighted average utilization rate of 29.2% in 2008. Our cost of revenues consisted primarily of depreciation, salaries and benefits for staff employed at our hydroelectric power projects, water resource fees, non-capitalized maintenance and repair expenses, amortization expenses relating to water use rights and other operating costs directly attributable
to the production of electricity. The total cost of revenues increased by $11.2 million, or 185%, to 17.2 million in the year ended December 31, 2009, compared to $6.0 million in the year ended December 31, 2008. The total cost of revenues in the year ended December 31, 2008 included the costs for eight hydroelectric power
projects while in the year ended December 31, 2009, the cost of revenues included the costs for twelve hydroelectric power projects. $5.6 million, or 50.6%, of the increase is attributable to the inclusion of the full year cost of revenue from the four hydroelectric power projects acquired in Fujian province
in October 2008. $3.1 million, or 28.1%, of the increase was due to the commencement of the production from the two hydroelectric power projects in Zhejiang province in March 2009. $0.9 million, or 8.5%, of the increase was the result of our new acquisitions of the 114
hydroelectric power projects in August 2009. In 2008, the cost of depreciation, employee salaries and benefits, and water resource fees accounted for 79%, 10%, and 6%, respectively, of the total cost of revenues, compared to 72%, 9%, and 5% of the total cost of revenues in 2009. We expected a high
percentage of the depreciation to our cost of revenues since all our hydroelectric power projects are capital intensive and depreciation shall account for a significant portion of our cost of revenues. The water resources fee was levied by the local tax authority, at around 2.6% of the gross revenue for 2009. As a result of the foregoing factors, our gross profit in the year ended December 31, 2009 was $19.0 million, increased by $10.3 million from that of $8.7 million for the year ended December, 31, 2008. Gross profit margin was 52.6% for the year ended December 31, 2009, compared to 59.1% for the
year ended December 31, 2008. As a result of the foregoing factors, our gross profit in the year ended December 31, 2009 was $19.0 million, increased by $10.3 million from that of $8.7 million for the year ended December, 31, 2008. Gross profit margin was 52.6% for the year ended December 31, 2009, compared to 59.1% for the
year ended December 31, 2008. Operating Expenses Our total operating expenses for the years ended December 31, 2008 and 2009 consisted entirely of general and administrative expenses relating to acquisition related expenses, salaries and benefits for staff employed other than at the hydroelectric power projects, office lease payments, travel and
entertainment expenses, office supplies expenses, and other costs related to the expansion of our business. General and administrative expenses increased by $2.3 million, or 34.6%, to $9.1 million in the year ended December 31, 2009, compared to $6.8 million in the year ended December 31, 2008,
reflecting expanded operations. General and administrative expenses consist of hydroelectric power project related operating expenses, primarily salaries, travel and entertainment expenses, and consulting expenses, and corporate overhead expenses attributable to the operation of our company and Beijing A.B.C. Investment,
primarily relating to salaries and benefits for non-hydroelectric power project employees, office lease payments, employee stock option expenses, travel and entertainment expenses for our company and Beijing A.B.C. Investment. Project related general and administrative expenses increased from $1.3
million in the year ended December 31, 2008 to $2.3 million in the year ended December 31, 2009, reflecting increased operations resulting from the four acquisitions completed in October 2008, the two acquisitions completed in August 2009 and the completion of the Zhougongyuan and Binglangjiang II
hydroelectric power projects, which resulted in an increase in salaries, as well as increases in travel expenses, entertainment expenses and miscellaneous office expenses. Corporate overhead expenses increased from $5.5 million in the year ended December 31, 2008 to $6.8 million in the year ended December 31, 2009. This increase resulted from an increase in employee salaries and benefits relating to the compensation increase for our officers, and additional
employees hired in the year ended December 31, 2009, and increase for the employee stock option expenses, and the reclassification of the capitalized expenses to project expenses for the expense incurred prior to 2009, and an increased compensation to our directors. In the year ended December 31, 2009,
employee salaries and benefits of $3.7 million accounted for 54.4% of the corporate overhead general and administrative expenses, while lease expenses, stock option expenses, travel expenses, and director fees and project expenses related to the acquisition of hydroelectric power projects of $0.6 million,
$0.6 million, $0.2 million, $0.3 million and $0.3 million respectively, accounted for 9.5%, 8.4%, 3.6%, 4.3% and 3.8%, respectively, of the total corporate overhead general and administrative expenses. 115
Operating Profit (Loss) Our operating profit was $9.9 million for the year ended December 31, 2009, compared to $1.9 million for the year ended December 31, 2008, as a result of our enhanced profitability through acquisitions and integration of hydroelectric power projects. Other Income and Expenses Our interest expense increased by $8.4 million, or 143.3%, to $14.2 million in the year ended December 31, 2009, compared to $5.8 million in the year ended December 31, 2008. Our interest expense for the year ended December 31, 2008 arose primarily from interest incurred from bank loans and
long-term notes, amortization of debt issuance costs and amortization of the discount on the long-term notes. Our increased interest expense in the year ended December 31, 2009 was primarily due to interest expenses on long-term loans obtained by Banzhu, Jiulongshan, Yuheng, Wangkeng, Wuliting and
Yingchuan in the year ended December 31, 2009. Long-term loans outstanding as of December 31, 2008 and December 31, 2009 were $167.2 million and $229.3 million, respectively. We recorded interest income of $1.3 million and $0.5 million in the years ended December 31, 2008 and 2009, respectively. The decrease in interest income was primarily due to a lower average balance of bank deposits. We also experienced exchange losses of $1.1 million and $23,000 for the years ended December 31, 2008 and 2009, respectively. The exchange loss for the year ended December 31, 2008 was due to (i) depreciation of the U.S. dollars that we hold in our PRC subsidiaries against their functional
currency, the RMB, and (ii) timing differences between the setting of the RMB purchase price of our acquisitions and our payment for the acquisitions through conversion of U.S. dollars. During the year ended December 31, 2009, our exchange loss was minimal, as the exchange rate of the US dollars
versus RMB had minimal fluctuation, and less timing differences between our acquisitions and payments. In 2008, we recorded an increase in the fair value of derivative financial liabilities and warrant liabilities of $0.4 million, primarily relating to the warrants, exercisable for the purchase of our Series A convertible redeemable preferred shares, issued to Morgan Joseph in January 2008. In 2009, we
recorded an increase in the fair value of warrant liabilities of $13.8 million, which was also related to the aforesaid warrants. The significant increase in fair value is primarily attributable to the higher underlying ordinary share price of our company at December 31, 2009, which increased from $1.74 as of
December 31, 2008 to $4.93 as of December 31, 2009, based on the evaluation by American Appraisal China limited. In the year ended December 31, 2009, we recorded losses in our equity investment in Shapulong of $70,000, compared to losses of approximately $0.5 million in the year ended December 31, 2008. Shapulong’s results of operations were consolidated with our company’s following our acquisition of its
remaining 50.0% equity interest in August 2009. In the year ended December 31, 2009, the Shapulong hydroelectric power project sold 40.6 million kWh of electricity and operated at an effective utilization rate of 18.6%. In the year ended December 31, 2008, Shapulong sold 42.3 million kWh of
electricity and operated at an effective utilization rate of 19.3%. Income Tax We incurred income tax expenses of $0.4 million and $1.5 million in the years ended December 31, 2008 and 2009, respectively. We have adopted an income tax return preparation method principally based on tax invoices issued and received. In accordance with applicable PRC income tax laws and
regulations, an income tax return should be prepared based on accounting income following certain tax adjustments. As of December 31, 2009, we have recognized an additional income tax provision of $1.4 million for unrecognized tax benefits which represent the estimated income tax expense we would
pay for the year ended December 31, 2009 if our income tax returns had been prepared in accordance with applicable PRC tax laws and regulations. We also recognized a decrease of unrecognized tax benefits of $0.2 million related primarily to the reversal 116
of income tax expense of Banzhu due to a preferential tax rate granted in 2009, with retroactive effect to 2008 and $0.2 million related to the settlement with the tax authority of Yinchuan, Ruiyang and Wangkeng. Noncontrolling Interest In the year ended December 31, 2009, we recorded noncontrolling interest in loss of consolidated subsidiaries of $32,000, relating to Wangkeng, compared to the noncontrolling interest in loss of consolidated subsidiary of $41,000 relating to Wangkeng. Net Loss The foregoing factors resulted in our net loss of $19.4 million in the year ended December 31, 2009, as compared to our net loss of $4.0 million and in the year ended December 31, 2008. Loss Attributable to Ordinary Shareholders In the year ended December 31, 2009, loss attributable to ordinary shareholders was $55.9 million, comprising a net loss of $19.4 million in this period, cumulative dividends on our Series A, Series B and Series C convertible redeemable preferred shares of $19.8 million, $14.4 million, and $0.4 million,
respectively, and changes in redemption value of our Series C convertible redeemable preferred shares of $1.9 million. Pursuant to the terms of our Series A, Series B and Series C convertible redeemable preferred shares, holders of such preferred shares are entitled to receive cash dividends on each such preferred share at the rate of 10% per annum of the issuance price plus any accrued dividends when and if
declared by our board of directors. However, in the event that a qualified public officering, as defined in the Series A, Series B and Series C preferred shares agreements, has not occurred on or before April 28, 2009, September 30, 2009 and December 31, 2010, respectively, such dividend rate increases
by 1.0% per annum, and shall further increase by 1.0% per annum as of each subsequent dividend accrual date but under no circumstances shall the dividend rate exceed 15.0% per annum. For additional terms applicable to dividend payments related to our Series A, Series B and Series C convertible redeemable preferred shares, see Note 16 to our audited consolidated financial statements included elsewhere in this annual report. As of December 31, 2009, no cash dividends were
declared on our Series A, Series B and Series C convertible redeemable preferred shares, and cumulative dividends of $19.8 million, $14.4 million and $0.4 million for the Series A, Series B and Series C convertible redeemable preferred shares, respectively, were accrued and recorded as a reduction of
income available to the ordinary shareholders for the year ended December 31, 2009. For detailed information relating to redemption rights associated with our Series A, Series B, and Series C convertible redeemable preferred shares, see Note 16 to our consolidated financial statements included elsewhere in this annual report. The initial carrying amount of the Series A convertible
redeemable preferred shares was the issue price at the date of issuance of $150.0 million, net of issuance costs of $10.6 million. The initial carrying amount of the Series B convertible redeemable preferred shares was the issue price at the date of issuance of $129.0 million, net of issuance costs of $4.1
million. The initial carrying amount of the Series C convertible redeemable preferred shares was the issue price at the date of issuance of $20.0 million, net of issuance costs of $1.9 million. Following a determination that the Series A, Series B and Series C convertible redeemable preferred shares were
not, in accordance with their respective terms, redeemable as of December 31, 2009, but that it was probable that such Series A, Series B and Series C convertible redeemable preferred shares will become redeemable, we adjusted the carrying value of the Series A, Series B and Series C convertible
redeemable preferred shares to be equal to the redemption value as at December 31, 2009. 117
Geographic Information We manage our business, in part, through the analysis of electricity demand, hydrological conditions and the existing hydroelectric power markets in the different provinces where we operate. For the year ended December 31, 2010, 2009 and 2008, we operated and managed our business as four
operating and reportable geographic segments, namely the Yunnan province segment, the Sichuan province segment, the Zhejiang province segment and the Fujian province segment. For the year ended December 31, 2007, we operated and managed our business as two operating and reportable
geographical segments, namely the Yunnan province segment and the Sichuan province segment. Our segment information for the year ended December 31, 2010 is as follows:
Yunnan
Sichuan
Zhejiang
Fujian
Unallocated
Eliminations
Consolidated
US$
US$
US$
US$
US$
US$
US$ Revenues
8,822
660
32,959
24,213
(1
)
—
66,653 Cost of revenues
(4,059
)
(597
)
(14,414
)
(8,567
)
1
2,791
(24,845
) General and administrative expenses
(605
)
(148
)
(1,319
)
(1,328
)
(16,040
)
—
(19,440
) Interest income
9
16
8
1,120
557
(519
)
1,191 Interest expenses
(2,945
)
—
(7,493
)
(5,884
)
(49
)
519
(15,852
) Change in fair value of derivative financial liabilities and warrant liability
—
—
—
—
365
—
365 Exchange loss
—
—
—
(452
)
(403
)
—
(855
) Other (loss) income, net
(4
)
29
(133
)
(60
)
3,087
(2,791
)
128 Income tax expenses
204
1
(2,138
)
(1,344
)
(83
)
(3,360
) Consolidated net income (loss)
1,422
(39
)
7,470
7,698
(12,566
)
—
3,985 Net loss attributable to noncontrolling interests
—
—
—
(243
)
—
—
(243
) Net income (loss) attributable to China Hydroelectric Corporation shareholders
1,422
(39
)
7,470
7,455
(12,566
)
—
3,742 Total assets
183,888
14,910
305,927
395,763
435,361
(506,018
)
829,831 Total liabilities
(117,138
)
(420
)
(138,055
)
(201,651
)
(20,578
)
64,994
(412,848
) Capital expenditures
879
569
250
317
1,380
—
3,395 Depreciation & amortization expenses
2,660
373
9,392
4,413
92
—
16,930 Unallocated general and administrative expenses of $16.0 million for the year ended December 31, 2010 related primarily to various administrative costs associated with indirectly supporting the operations of our existing hydropower plants, and the acquisitions completed by us during that year.
Unallocated change in fair value of derivative financial liabilities and warrant liability is related to the fair value valuation of our preferred share warrants issued to Morgan Joseph, with a valuation date at its derecognition upon IPO. Unallocated other income, net for the year ended December 31, 2010
mainly consisted of administrative charges levied by Beijing A.B.C. Investment on our operating subsidiaries. 118
Province
Province
Province
Province
Our segment information for the year ended December 31, 2009 is as follows:
Yunnan
Sichuan
Zhejiang
Fujian
Unallocated
Eliminations
Consolidated
US$
US$
US$
US$
US$
US$
US$ Revenues
2,966
939
18,164
14,106
—
—
36,175 Cost of revenues
(1,193
)
(583
)
(9,774
)
(7,341
)
—
1,708
(17,183
) General and administrative expenses
(330
)
(203
)
(1,178
)
(613
)
(6,775
)
—
(9,099
) Interest income
115
38
57
18
319
(37
)
510 Interest expenses
(303
)
—
(7,020
)
(6,554
)
(388
)
37
(14,228
) Change in fair value of derivative financial liabilities and warrant liability
—
—
—
—
(13,793
)
—
(13,793
) Exchange loss
—
(1
)
(5
)
(7
)
(10
)
—
(23
) Share of losses in an equity investee
—
—
—
—
(70
)
(70
) Other (loss) income, net
(2
)
(1
)
(9
)
(265
)
1,760
(1,708
)
(225
) Income tax expenses
(166
)
(51
)
(403
)
(739
)
(133
)
—
(1,492
) Consolidated net income (loss)
1,087
138
(168
)
(1,395
)
(19,090
)
—
(19,428
) Net loss attributable to noncontrolling interests
—
—
—
32
—
—
32 Net income (loss) attributable to China Hydroelectric Corporation shareholders
1,087
138
(168
)
(1,363
)
(19,090
)
—
(19,396
) Total assets
42,770
14,649
311,685
204,347
337,472
(317,090
)
593,833 Total liabilities
(15,494
)
(556
)
(152,898
)
(112,187
)
(34,506
)
23,002
(292,639
) Capital expenditures
7,661
1,616
1,826
1,732
141
—
12,976 Depreciation & amortization expenses
845
338
6,887
4,432
78
—
12,580 Unallocated general and administrative expenses of $6.8 million for the year ended December 31, 2009 related primarily to various administrative costs associated with indirectly supporting the operations of our existing hydropower plants, and the acquisitions completed by us during that year.
Unallocated change in fair value of derivative financial liabilities and warrant liability is related to the fair value valuation of our preferred share warrants issued to Morgan Joseph, with a valuation date of December 31, 2009. Unallocated other income, net for the year ended December 31, 2009 mainly
consisted of administrative charges levied by Beijing A.B.C. Investment on our operating subsidiaries. 119
Province
Province
Province
Province
Our segment information for the year ended December 31, 2008 is as follows:
Yunnan
Sichuan
Zhejiang
Fujian
Unallocated
Eliminations
Consolidated
US$
US$
US$
US$
US$
US$
US$ Revenues
2,746
971
9,635
1,363
—
—
14,715 Cost of revenues
(1,120
)
(478
)
(4,598
)
(1,025
)
—
1,196
(6,025
) General and administrative expenses
(245
)
(223
)
(567
)
(210
)
(5,516
)
—
(6,761
) Interest income
359
84
18
5
877
(3
)
1,340 Interest expenses
(361
)
—
(3,519
)
(1,514
)
(456
)
3
(5,847
) Change in fair value of derivative financial liabilities and warrant liability
—
—
—
—
420
—
420 Exchange (loss) gain
(269
)
172
(165
)
(2
)
(803
)
—
(1,067
) Share of losses in an equity investee
—
—
—
—
(503
)
—
(503
) Other (loss) income, net
(3
)
1
(6
)
(5
)
1,353
(1,196
)
144 Income tax (expenses) benefits
(171
)
9
(447
)
165
—
—
(444
) Consolidated net income (loss)
936
536
351
(1,223
)
(4,628
)
—
(4,028
) Net loss attributable to noncontrolling interests
—
—
—
41
—
—
41 Net income (loss) attributable to China Hydroelectric Corporation shareholders
936
536
351
(1,182
)
(4,628
)
—
(3,987
) Total assets
40,997
13,919
242,057
212,801
337,115
(313,321
)
533,568 Total liabilities
(14,569
)
(32
)
(93,358
)
(119,423
)
(23,249
)
21,230
(229,401
) Capital expenditures
4,589
21
33,789
12
342
—
38,753 Depreciation & amortization expenses
696
305
3,113
718
31
—
4,863 Unallocated general and administrative expenses of $5.5 million for the year ended December 31, 2008 related primarily to various administrative costs associated with the acquisitions completed by us during that year. Unallocated other income, net for the year ended December 31, 2008 mainly
consisted of administrative charges levied by Beijing A.B.C. Investment on our operating subsidiaries. Holding Company Structure We are a holding company with no material operations of our own. We conduct our operations in China through our subsidiaries. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. If our current or future subsidiaries and
company incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries in China are only permitted to pay dividends to us out of their retained earnings, if any, as determined in accordance with PRC
accounting standards and regulations. Under relevant PRC laws and regulations, wholly foreign-owned enterprises in China are required to set aside at least 10% of their after-tax profits each year, if any, to fund the reserve fund unless such reserve fund has reached 50% of their respective registered
capital, and set aside a percentage of their after-tax profits to their employee bonus and welfare fund which is decided by the enterprises themselves. Sino-foreign equity joint ventures are required to set aside their reserve fund, enterprise development fund and employee bonus and welfare fund at
percentages that are decided by any such entity’s board of directors. PRC domestic companies are required to set aside at least 10% of their after-tax profits each year, if any, to fund their respective statutory reserve fund unless such fund has reached 50% of their respective 120
Province
Province
Province
Province
registered capital. Although the statutory reserves can be used to, among other things, increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserves may not be distributed as cash dividends except in the event of liquidation of the
companies. See Note 27 to our audited consolidated financial statements included elsewhere in this annual report. Recently Issued Accounting Standards In April 2010, the FASB issued revised guidance on “Compensation-Stock Compensation (ASC 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades—a consensus of the FASB Emerging Issues
Task Force”. The revised guidance addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The
revised guidance is effective for interim and annual periods beginning on or after December 15, 2010. Earlier application is permitted. The Company has not early adopted the new guidance and is currently evaluating the impact on its consolidated financial statements of adopting this guidance. In December 2010, FASB issued revised guidance on “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The revised guidance specifies that an entity with reporting units that have carrying amounts that are zero or negative is
required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting
unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the revised guidance should be included in earnings as required by Section 350-20-35.
The revised guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance. In December 2010, FASB issued revised guidance on the “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The revised guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The revised guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The revised guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The Company has not early adopted the new guidance and is currently evaluating the impact on its consolidated financial statements of adopting this guidance. B. Liquidity and Capital Resources Our ongoing cash requirements include payments of our employees’ salaries and benefits, debt servicing costs, water resource fees, office rentals and other operating costs and expenses. Our anticipated cash needs consist primarily of funding for future acquisitions, as well as maintenance and possible
capital expansion of our existing hydroelectric power projects. We are a holding company and conduct substantially all of our business through our PRC operating subsidiaries. Currently, we do not expect these subsidiaries to pay dividends. However, in 121
the future, we might rely on dividends paid by these subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating costs and expenses. The payment of dividends by entities
organized in the PRC is subject to limitations. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our operating subsidiaries in the PRC are required to
set aside a certain amount of after-tax profits each year, if any, to fund statutory reserves. These reserves and their paid-up capital are not distributable as cash dividends. As of December 31, 2010, a total of RMB3,263.2 million ($466.8 million) was not available for distribution to us in the form of
dividends due to these PRC regulations. Our Consolidated Cash Flow The following information details our consolidated cash flows from operating, investing and financing activities for the years ended December 31, 2008, 2009 and 2010. We completed our acquisition of Yingchuan and Wuliting as well as the Zhougongyuan hydroelectric power project in January 2008, and the acquisition of Banzhu, Wangkeng, Yuanping and Yuheng hydroelectric power projects in October 2008 using proceeds of our convertible debt and the proceeds
of our Series A and Series B convertible redeemable preferred shares. On January 23, 2008, we raised $150.0 million from the issuance of our Series A convertible redeemable preferred shares; and on July 24, 2008 and August 15, 2008, we issued Series B convertible redeemable preferred shares for an
aggregate purchase price of $101.0 million and $28.0 million, respectively, to fund our acquisitions, expansion of our existing projects, and repayment of our convertible notes and for our working capital purposes. Consequently, our consolidated cash flows from our operating, investing and financing
activities in the year ended December 31, 2008 reflect the proceeds of our Series A and Series B convertible redeemable preferred shares, and are affected by cash flows generated by our Yingchuan and Wuliting hydroelectric power projects for eleven months and the results of operations of the Banzhu,
Wangkeng, Yuanping and Yuheng hydroelectric power projects during our period of ownership, that is, for a period of approximately two months, in addition to those generated by our Binglangjiang I and Liyuan hydroelectric power projects in 2008. We completed our acquisition of the remaining 10.0% interest in Banzhu in March 2009 and the acquisition of the remaining 50.0% equity interest in Shapulong in August 2009. We completed our acquisition of Ruiyang in August 2009, using proceeds from long term loans. In 2010, we completed our acquisition of 79% equity interest in Wuyue in March, 100% equity interest in Husahe in April, Hengda in June, Xineng in August, Xiaopengzu in September, 100% equity interest in Jingling, together with Jinling’s 55% controlling interest in Jinlong, 74% controlling
interest in Jintang and 74% controlling interest in Jinwei in December, using proceeds from our initial public offering and long term loans. Our long-term loans outstanding as of December 31, 2010 of $285.1 million related to RMB denominated loans of $18.6 million, $17.4 million, $13.5 million, $20.7
million, $29.5 million, $18.1 million, $9.5 million, $10.0 million, $12.5 million, $19.9 million, $10.7 million, $23.5 million, $40.6 million, $18.4 million, $1.5 million, $5.4 million, $5.7 million, $9.4 million obtained by Binglangjiang, Hengda, Xineng, Xiaopengzu, Wuliting, Yingchuan, Zhougongyuan, Shapulong,
Ruiyang, Jiulongshan, Yuanping, Yuheng, Banzhu, Wangkeng, Jinling, Jinlong, Jingtang and Jinwei, respectively. Our consolidated cash flows from our operating, investing and financing activities in the year ended December 31, 2010 reflect the proceeds we received from our initial public offering, and the
short term and long-term loans we obtained, the consideration we paid for acquisitions, and are affected by cash flows generated by the results of full year operations of Jiulongshan, Zhougongyuan, Binglangjiang II, Ruiyang and Shapulong hydroelectric power projects, and the operations of Husahe,
Hengda, Xineng and Xiaopengzu hydroelectric power projects during our full ownership in addition to thoese generated by our Binglangjiang I, Liyuan, Yingchuan, Wuliting, Banzhu, Wangkeng, Yuanping and Yuheng hydroelectric power projects in the year ended December 31, 2010. In 2008, cash and cash equivalents increased by $23.1 million to $38.7 million, due to $2.4 million provided by operating activities and $242.3 million provided by financing activities partly 122
offset by $221.4 million used in investing activities. In 2009, cash and cash equivalents decreased by $7.1 million to $31.6 million, primarily due to $48.7 million used in invesing activities partly offset by $40.5 million provided by financing activities and $1.2 million provided by operating activities. In 2010,
cash and cash equivalents increased by $1.8 million to $33.5 million, primarily due to $103.6 million used in investing activities partly offset by $62.4 million provided by financing activities and $43.1 million provided by operating activities, and $0.1 million as effect of changes in exchange rate on cash and
cash equivalent. The following table sets forth the components of our consolidated cash flows for the periods indicated:
For the Year Ended
2008
2009
2010 Net cash provided by operating activities
2,370
1,213
43,122 Net cash used in investing activities
(221,408
)
(48,706
)
(103,606
) Net cash provided by financing activities
242,341
40,453
62,444 Effect of changes in exchange rate on cash
(216
)
(35
)
(121
) Net increase (decrease) in cash and cash equivalents
23,087
(7,075
)
1,839 Operating Activities Net cash provided by operating activities was $43.1 million in 2010, which was primarily attributable to a net gain of $4.0 million, and the add-back of non-cash expenses, including depreciation expenses of $15.8 million, share-based compensation expenses of $3.6 million. Also, a decrease in account
receivable of $5.4 million, and a decrease in prepayments and other current assets of $3.7 million, an increase in other non-current assets of $0.1 million, a increase in accounts payable of $0.7 million and a increase in accrued expenses and other current liabilities of $10.1 million are factors contributing to
the overall cash provided by operating activities for the year ended December 31, 2010. Net cash provided by operating activities was $1.2 million in 2009, which was primarily attributable to a net loss of $19.4 million, and the add-back of non-cash expenses, including depreciation expenses of $11.6 million, change in fair value of derivative financial liabilities of $13.8 million. Also, an
increase of account receivable of $3.7 million and a decrease in accrued expenses and other current liabilities of $4.3 million are factors contributing to the overall cash provided by operating activities for the year ended December 31, 2009. Net cash provided by operating activities was $2.4 million in 2008, which was primarily attributable to the add-back of non-cash expenses, mainly consisting of depreciation expenses of $4.1 million and exchange loss of $1.1 million, and a decrease in prepayments and other current assets of $2.2
million, partially offset by a net loss of $4.0 million and a decrease in accounts payable of $2.1 million. Investing Activities Net cash used in investing activities was $103.6 million in the year ended December 31, 2010, relating principally to purchase consideration of $43.2 million in relation to the acquisition of subsidiaries including Wuyue, Husahe, Hengda, Xineng, Xiaopengzu, Jinling, Jintang, Jinlong and Jinwei, cash
advancement to an acquired business prior to the acquisition date of $43.5 million, cash deposit for potential acquisition of $9.5 million, construction payments to contractors of $4.2 million, purchase of property, plant and equipment of $2.9 million and acquisition of land use rights of $0.2 million. Net cash used in investing activities was $48.7 million in the year ended December 31, 2009, relating principally to purchase consideration of $32.3 million in relation to the acquisition of Ruiyang, Shapulong and Banzhu, construction payments to contractors of $13.4 million, loans to Shapulong of $3.9
million, purchase of property, plant and equipment of $1.8 million and acquisition 123
December 31,
of an intangible asset of $1.0 million, partially offset by the repayment of loans by Shapulong of $3.5 million. Net cash used in investing activities was $221.4 million in the year ended December 31, 2008, relating principally to the cost of acquisition of Yingchuan and Wuliting hydroelectric power projects in January 2008, and the Banzhu, Wangkeng, Yuanping and Yuheng hydroelectric power projects in
October 2008, net of cash acquired, of $183.3 million, purchase of property, plant and equipment of $32.9 million primarily relating to the Binglangjiang II and Zhougongyuan hydroelectric power projects, advances to contractors for construction projects of $2.4 million relating primarily to the
Binglangjiang II hydroelectric power project and loans to Shapulong of $2.8 million. Financing Activities Net cash provided by financing activities was $62.4 million in the year ended December 31, 2010, resulting from proceeds of $23.8 million from long-term loans, proceeds of $8.3 million from short-term loans, proceeds of loans from related party of $2.2 million, and net proceed of $96.0 million
received from initial public offering, partially offset by Payment of deferred initial public offering costs of $10.0 million, repayment of long-term loans of $50.7 million, repayment of short-term loans of $7.2 million. Our long-term loans outstanding as of December 31, 2010 of $285.1 million related to RMB denominated loans of $18.6 million, $17.4 million, $13.5 million, $20.7 million, $29.5 million, $18.1 million, $9.5 million, $10.0 million, $12.5 million, $19.9 million, $10.7 million, $23.5 million, $40.6 million, $18.4
million, $1.5 million, $5.4 million, $5.7 million, $9.4 million obtained by Binglangjiang, Hengda, Xineng, Xiaopengzu, Wuliting, Yingchuan, Zhougongyuan, Shapulong, Ruiyang, Jiulongshan, Yuanping, Yuheng, Banzhu, Wangkeng, Jinling, Jinlong, Jingtang and Jinwei, respectively. The long-term loans are
secured by pledges of the property, plant and equipment and future electricity sales of the respective entities or guaranteed by third parties and are due between 2011 and 2027. The interest rates on these long-term loans are variable based on the benchmark rate published by the People’s Bank of China
each year. The average interest rate on the short-term and long-term loans for the 2010 was 6.16% and 6.26%, respectively. Net cash provided by financing activities was $40.5 million in the year ended December 31, 2009, resulting from proceeds of $129.2 million from long-term loans and proceeds of $4.4 million from short-term loans, proceeds of $20 million from the issuance of Series C convertible redeemable preferred
shares, partially offset by repayment of long-term loans of $95.3 million, repayment of short-term loans of $6.1 million, payment of deferred initial public offering costs of $7.1 million, and payment of Series C convertible redeemable preferred shares issuance costs of $1.9 million. Our long-term loans outstanding as of December 31, 2009 of $229.3 million related to RMB denominated loans of $42.9 million, $21.2 million, $14.6 million, $31.8 million, $10.7 million, $41.3 million, $20.5 million, $20.9 million, $14.1 million and $11.3 million obtained by Wuliting, Yingchuan,
Binglangjiang, Jiulongshan, Yuanping, Banzhu, Wangkeng, Yuheng, Ruiyang and Shapulong, The long-term loans are secured by pledges of the property, plant and equipment and future electricity sales of the respective entity or guaranteed by third parties and are due between 2010 and 2020. The interest
rates on these long-term loans are variable based on the market rate published by the People’s Bank of China each year. The average interest rate on the long-term loans for the 2009 was 6.16%. Net cash provided by financing activities was $242.3 million in 2008, resulting from proceeds of $279.0 million from the issuance of convertible redeemable preferred shares consisting of $150.0 million of Series A convertible redeemable preferred shares issued in January 2008 and $129.0 million of
Series B convertible redeemable preferred shares issued in July and August 2008, respectively, and proceeds of $4.3 million of long-term loans partially offset by issuance costs of such preferred shares of $13.8 million, repayment of long-term loans of $12.2 million, repayment of long-term notes of $9.9
million and payment of deferred initial public offering costs, including legal and accounting fees, of $4.2 million. 124
Our long-term loans outstanding as of December 31, 2008 were $167.2 million, relating to RMB denominated bank loans obtained by Binglangjiang, Yingchuan, Wuliting, Zhougongyuan, Banzhu, Wangkeng, Yuanping and Yuheng from financial institutions, which we assumed as a result of the
acquisitions of these entities. The long-term loans are secured by corporate guarantee by third parties, the pledge of property, plant and equipment of Yingchuan, Banzhu, Binglangjiang, Wangkeng, Yuanping and Yuheng and pledge of proceeds from future electricity sales of Yuanping, Wangkeng and
Banzhu, and are due from 2009 to 2020. The interest rates on these long-term loans are variable based on the market rate published by the People’s Bank of China each year. The average interest rate on the long-term loans for the year ended December 31, 2008 was 8.3082%. We have recently
renegotiated or refinanced approximately RMB990 million ($145.0 million) of our existing long-term loans with reduced interest rates and longer tenures, thereby lowering our borrowing costs and interest expenses. Capital Expenditures In the year ended December 31, 2008, we incurred capital expenditures of $38.8 million consisting primarily of capital expenditures of $4.5 million, $32.8 million and $0.8 million for the construction of the Binglangjiang II, Zhougongyuan and Wuliting hydroelectric power projects, respectively. In the
year ended December 31, 2009, we incurred capital expenditures of $13.0 million consisting primarily of capital expenditures of $7.7 million, $1.6 million, $1.8 million and $1.7 million for the construction of the Binglangjiang II, Liyuan, Zhougongyuan and Banzhu hydroelectric power projects, respectively.
In the year ended December 31, 2010, we incurred capital expenditures of $3.4 million consisting primarily of capital expenditures of $0.7 million, $0.6 million, and $1.4 million for the construction of the Binglangjiang II, Liyuan and Wuyue hydroelectric power projects, respectively. We will in the future
make significant capital expenditures to develop, expand and complete the construction of additional small hydropower assets and our pumped storage hydroelectric power project. We generally deposit our excess cash in interest-bearing bank accounts in banks in China, Hong Kong and the United States
of America. We believe that our current cash and cash equivalents, anticipated cash flow from operations will be sufficient to meet our expected cash requirements, including for working capital and capital expenditure purposes, for at least the next 12 months. We may, however, require additional cash due to
changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities, debt securities or borrow from lending institutions. We cannot assure
you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our shareholders’ interests. The incurrence of debt would divert cash for working capital and capital expenditures to
servicing debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may be adversely affected. See
“Risk Factors—We will need additional funding to accomplish our growth strategy and may be unable to raise capital on terms favorable to us or at all, which could increase our financing costs, dilute your ownership interests, affect our business operations or force us to delay, reduce or abandon our
growth strategy.” C. Research and Development Not applicable. D. Trend Information Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2010 that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital
resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions. 125
E. Off-balance sheet Arrangements We have not entered into any financial guarantees or other commitments to guarantee the payment of obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity,
market risk or credit support to us or engages in leasing, hedging or research and development services with us. 126
F. Tabular Disclosure of Contractual Obligations The following table sets forth our contractual obligations as of December 31, 2009:
Payment Due by Period
Total
Within
1-3
3-5
More than
(unaudited) Short-term borrowings(1)
$
7,098
$
7,098
$
—
$
—
$
— Interest on short-term borrowings(1)
96
96
—
—
— Long-term borrowings (including current portion of long-term borrowings)(1)
229,278
56,809
48,270
50,877
73,322 Interest on long-term borrowings (including interest on current portion of long-term borrowings)(1)
53,076
13,422
18,503
12,356
8,795 Operating lease commitments
528
451
75
2
— Purchase obligations(2)
157
157
—
—
— Total
$
290,233
$
78,033
$
66,848
$
63,235
$
82,117
(1)
See Note 14 to our audited consolidated financial statements, which are included elsewhere in this annual report, for a discussion of our short-term and long-term borrowings. (2) This represents contracted but unpaid amounts for construction projects of Binglangjiang and Liyuan that are in progress and for the purchase of property, plant and equipment of Yuheng. The following table sets forth our contractual obligations as of December 31, 2010:
Payment Due by Period
Total
Within
1-3
3-5
More than
(unaudited) Short-term borrowings(1)
$
17,742
$
17,742
$
—
$
—
$
— Interest on short-term borrowings(1)
233
233
—
—
— Long-term borrowings (including current portion of long-term borrowings)(1)
285,095
60,798
69,473
66,393
88,431 Interest on long-term borrowings (including interest on current portion of long-term borrowings)(1)
87,856
17,594
28,046
18,877
23,339 Operating lease commitments
1,664
784
880
—
— Purchase obligations(2)
21,812
21,812
—
—
— Total
$
414,402
$
118,963
$
98,399
$
85,270
$
111,770
(1)
See Note 14 to our audited consolidated financial statements, which are included elsewhere in this annual report, for a discussion of our short-term and long-term borrowings. (2) This represents contracted but unpaid amounts for construction projects or for the purchase of property, plant, and equipment of Binglangjiang, Husahe, Yuheng and Wuyue. 127
1 Year
Years
Years
5 Years
(US$ in thousands)
1 Year
Years
Years
5 Years
(US$ in thousands)
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management The following table sets forth information regarding our directors and executive officers.
Name
Age
Position/Title John D. Kuhns
60
Chairman, Chief Executive Officer Dr. Yong Cao
56
Director Anthony H. Dixon
49
Director Richard H. Hochman
65
Director Dr. You-Su Lin
57
Director, Chairman of Beijing A.B.C. Investment Shadron Lee Stastney
41
Director Stephen Outerbridge
60
Director “James” Tie Li
42
Chief Financial Officer and President Mary E. Fellows
49
Executive Vice President and Corporate Secretary Wu Gan
54
Vice Chairman of Beijing A.B.C. Investment Xinchun Lian
52
Chief Operating Officer of Beijing A.B.C.
Investment Gang Meng
38
Internal Controller of Beijing A.B.C. Investment Huakang Xiong
55
General Manager of Fujian and Senior Operating
Officer of Beijing A.B.C Investment Hong Zhang
49
General Manager of Zhejiang Jianbin Zhou
41
General Manager of Yunnan You Li
33
Financial Controller Lianghong Tu
35
Internal Control Director Jin Cao
36
Senior Human Resources Manager Shu Zhang
35
Finance Manager of Beijing A.B.C. Investment Unless otherwise indicated, the business address of each director and executive officer is c/o 25B, New Poly Plaza, No. 1 North Chaoyangmen Street, Dongcheng District, Beijing, China 100010. A description of the business experience and present position of each director and executive officer is provided below: Directors Mr. John D. Kuhns has served as our Chief Executive Officer since our inception in 2006 and our chairman since May 2007. Mr. Kuhns is currently the chairman, Chief Executive Officer and a member of the board of directors of Kuhns Brothers & Co., Inc., Kuhns Brothers Securities Corporation,
China Silicon Corporation, China Natural Energy Corporation, China Electrode Corporation, China Board Mill Corporation and Master Silicon Carbide Industries, Inc. Mr. Kuhns is also a member of the board of directors of Kuhns Brothers, Inc., Kuhns Brothers Capital Management, Inc., Kuhns
Brothers Advisors, Inc., Kuhns Brothers Enterprises Corporation, China New Energy Group Company, White Hollow Farms, Inc., White Hollow Vineyards, Inc., Lime Rock Ventures, Inc., Watch Hill Farms, Inc., Corona Equities, Inc., Global Photonics Energy Corporation, Craton Equity Partners and
China Hand Advisors, Inc., and the Chairman of Project Midway, Inc., a not for profit organization. Mr. Kuhns has over 30 years of experience in the hydroelectric power, power technology and alternative energy industry and has been involved with hydroelectricity in China since 1984. From 1981 to
1988, Mr. Kuhns built Catalyst Energy, one of the first publicly traded independent power producers in the United States, as the company’s founder, President and Chief Executive Officer. While running Catalyst Energy, he acquired Chinese hydroelectric generating equipment for use in the United
States. He furthered his development experience in China as Chairman and Chief Executive Officer at the New World Power Corporation from 1992 to 1996, where he developed and financed hydroelectric projects in China as well as Argentina, Costa Rica and Mexico. While at New World Power, he
formed a joint venture with Wuhan Steam 128
Turbine, a state-owned enterprise owned by the City of Wuhan in China, to develop hydroelectric projects in Asia, including the PRC. Mr. Kuhns has additional transaction experience in China as a controlling shareholder, President, CEO, a director and Chairman of Kuhns Brothers, Inc., an investment
banking firm which he founded in 1986 specializing in providing financing for power technology ventures, and, more recently, industrial and infrastructure companies operating within the PRC. Mr. Kuhns received a Bachelor of Arts degree in Sociology and in Fine Arts from Georgetown University, a
Master of Fine Arts degree from the University of Chicago, and a Master of Business Administration degree from the Harvard Business School. Dr. Yong Cao has been a director of our company since August 2008. Dr. Cao is currently a senior fellow of Finance and Economics at Nanyang Technological University in Singapore, which he has been working with since 1993, and a professor of Economics of Nanjing University in China. He also
serves as an independent director to Reyphon Agricultural Limited, a listed company on the Singapore Stock Exchange. Dr. Cao received his bachelor’s degree in Economics from Sichuan University, a master’s degree in Economics from the Postgraduate School of the Chinese Academy of Social Sciences
and a Ph.D. in Development Economics from the Australian National University. Mr. Anthony H. Dixon has been a director of our company since August 2008. Mr. Dixon is currently the Chief Executive Officer of ASB Biodiesel (Hong Kong) Ltd., a developer of biodiesel plants utilizing waste oils and fats as feedstock. He is also a member of the Investment Committee and the
Board of Advisors of Geo Investors Renewable Infrastructure Fund I, LP (“GIRIF”), a Delaware limited partnership which invests in the debt of renewable energy projects, primarily in the US. From 2007 to 2010 he was an independent corporate financial advisor to renewable energy and cleantech
companies primarily in the UK, Europe and Asia. From October 2007 to December 2008 Mr. Dixon was the finance director and chief operating officer of ZEDfactory Ltd., a designer and developer of zero carbon housing in the United Kingdom. Prior to which he worked for Hines Associates, a
corporate financial advisory boutique. From 2002 to 2006, Mr. Dixon was a managing director with Citigroup Global Markets, London. From 1997 to 2002, Mr. Dixon was head of Asian Securitization for Salomon Smith Barney in Hong Kong and then head of Securitization for Nikko Salomon Smith
Barney in Tokyo. From 1992 to 1997, Mr. Dixon was a vice president with Salomon Brothersin New York. Mr. Dixon was a member of the board of the Solar Electric Light Corporation from 1998 to 2011 and chairman from 2002 to 2011. He received a Master of Science in Sustainable Energy Futures
with distinction from Imperial College, London, a Master of Business Administration from the Harvard Business School, a Bachelor of Science with first class honors in Physics and a Bachelor of Arts degree in Philosophy from the University of Western Australia. Mr. Richard H. Hochman has been a director of our company since August 2006. Mr. Hochman is currently the chairman of RHH Capital Consulting, Inc., a private investment firm. Mr. Hochman has been an adviser to Regent Capital Equity Partners, L.P., a private investment firm making equity
and mezzanine investments, since April 1995. Mr. Hochman was also the chairman of Regent Management Corporation from April 1995 to December 2009. He was a managing director in PaineWebber’s Investment Banking Group from 1990 to 1995. Prior to joining PaineWebber, Mr. Hochman was a
managing director for Drexel Burnham Lambert, Inc. from 1984 to 1990. He worked in E.F. Hutton’s Corporate Finance Department from 1969 to 1984 and was promoted as a senior vice president in 1979. Mr. Hochman is a member of the board of directors of DCI Investment, Santa Monica
Amusements LLC and Forefield, Inc. Mr. Hochman received his Master of Business Administration degree from the Harvard Business School and his Bachelor of Arts degree with honors from the Johns Hopkins University. Dr. You-Su Lin has been a director of our company since August 2008 and has been chairman of Beijing A.B.C. Investment since 2007. Dr. Lin is the chairman of the board of Beijing A.B.C. Investment. Dr. Lin has been the chairman of Greenstone Investment Ltd. since 2004 and he has also been
the chairman of China Board Mill Corporation since August 2008. He serves as a member of the board of directors of China Silicon Corporation, Master Silicon Carbide Industries, Inc. and China Natural Energy. Dr. Lin was a chief consultant for Beijing Urban Construction Group Co., Ltd. in charge of
the construction of 2008 Olympic venues from 2002 to 2004. Dr. Lin received his Ph.D. in the Arts and master’s degree in the Arts from Australian National University and his bachelor’s degree in the Arts from Beijing Foreign Language University. 129
Mr. Shadron Lee Stastney has been a director of our company since May 2007. Mr. Stastney is the Chairman of Care Media and a member of the board of directors of China Board Mill Corporation, China Silicon Corporation, China New Energy Group Company, China Natural Energy Corporation,
Quality Health Plans, MDwerks, the Amacore Group, Inc., Master Silicon Carbide Industries, Inc. and Ambient Corporation. Since June 2004, Mr. Stastney has been a partner at Vicis Capital, LLC, which is an investment management firm and the managing partner of one of our principal shareholders,
Vicis Capital Master Fund. From September 2001 to February 2004, Mr. Stastney was a partner of Victus Capital Management, an investment management firm. Mr. Stastney received his Bachelor of Arts degree from the University of North Dakota and a Juris Doctor degree from the Yale Law School. Mr. Stephen Outerbridge has been a director of our company since August 2008. Mr. Outerbridge is currently a director of Emerging Markets, Latin America and Asia and of Smith Bermuda and World on Wireless. From May 2003 to September 2004, he was the chief union officer of XL Re Latin
America. He was subsequently promoted and took on the roles of president and Chief Operating Officer, in addition to chief union officer. Mr. Outerbridge has been working with XL Capital for the last eleven years. Mr. Outerbridge received his Bachelor of Arts degree from Tufts University. Officers Mr.“James” Tie Li has been our Chief Financial Officer since our inception in 2006, our President since January 2011, and our executive vice president from May 2007 to December 2010. He has been a consultant to Kuhns Brothers, Inc. since 2006. Mr. Li is a member of the board of directors of
Master Silicon Carbide Industries, Inc., China New Energy, Inc. and all of our subsidiaries. He is the founder and part-time president of Columbia China Capital Group, Inc. incorporated in 2002, a U.S.-based boutique investment firm advising Asian firms in mergers and acquisitions. From 1998 to 2001,
Mr. Li was an investment banker with Citigroup Global Markets Inc. in New York. From 2001 to 2005, Mr. Li was the portfolio manager with HypoVereins Bank, managing a $1 billion high yield portfolio. From 2005 to 2007, Mr. Li was a senior credit analyst with Standard & Poor’s in New York. Mr. Li
received his bachelor’s degree in Accounting from City University of New York and his master’s degree in Business Administration from the Columbia University Graduate School of Business. He is a CFA Charterholder and was a Certified Public Accountant licensed in the State of New Jersey. Ms. Mary E. Fellows has been our corporate secretary since our inception in 2006 and our executive vice president since May 2007. Ms. Fellows has been a partner and executive vice president of Kuhns Brothers, Inc., an investment boutique, since 1997. She is the president of Project Midway, Inc., a
not for profit organization. She is an executive vice president, secretary and a member of the board of directors of Kuhns Brothers & Co., Inc. and Kuhns Brothers Securities Corporation, China Natural Energy Corporation, China Silicon Corporation, China Electrode Corporation, China Board Mill
Corporation, Kuhns Brothers Enterprises Corporation and Master Silicon Carbide Industries, Inc. She is also a member of the board of directors of Lime Rock, LLC., Kuhns Brothers Advisors, Inc., Kuhns Brothers Capital Management Inc., and China New Energy Group Company. From 2003 to 2006,
she was a director of GenSelf Corporation. From 1997 to 2002, she was a corporate secretary of the Solar Electric Light Company. From 1996 to 1999, she was a director of Corporate Administration and corporate secretary of the New World Power Corporation. Ms. Fellows received her bachelor’s
degree in Science from Teikyo Post University. Mr. Wu Gan has been the vice chairman of Beijing A.B.C. Investment since January 2011 and was the general manager of Beijing A.B.C. Investment from July 2008 to December 2010. Mr. Gan was the director of the general office of the State Supervision Work Committee of the Communist Party
of China from 2002 to 2008. Mr. Gan received his bachelor’s degree in Engineering from the Yellow River Water Conservancy and Hydroelectric Technology School and his master’s degree in Economics from Harbin Institute of Technology. Mr. Xinchun Lian has been the Chief Operating Officer of Beijing A.B.C. Investment since October 2008. Mr. Lian worked as a public servant in the office of the Yellow River Committee at 130
the Economic Development Bureau from 2007 to 2008. He was a senior consultant at Yellow River Hydroelectric Construction Limited from 2005 to 2007, and a general manager of Yellow River Hydropower Project Construction Co., Ltd. from 1996 to 2005. Mr. Lian received his diploma in Hydraulic
Construction from Yellow River Conservancy Technical Institute and his master’s degree in Management Science and Projects from Hohai University. Mr. Lian is a national Registered First-class Construction Engineer, Senior Engineer and Supervision Engineer. Mr. Gang Meng has been the internal controller of Beijing A.B.C. Investment since November 2008. Mr. Meng joined our company as the Chief Accounting Officer in April 2008 and was appointed the internal controller in November 2008. Prior to joining our company, Mr. Meng was a manager in
the Transaction Advisory Service Group of Ernst & Young Hua Ming from January to March 2008. Mr. Meng was an internal auditor at American International Group Inc. from 2006 to 2007. He worked as an internal audit manager at NYK Line from 2005 to 2006. He was a manager at Hua Ming LLP,
an accounting firm in China, from 1999 to 2002. He was an associate at Ernst & Young Hua Ming from 1996 to 1998. Mr. Meng received his bachelor’s degree in Science in Economics from the Central University of Finance & Economics and his master’s degree in Business Administration from the William
E. Simon Graduate School of Business Administration, University of Rochester. Mr. Huakang Xiong has been appointed as the regional general manager of Fujian and and senior operating officer of Beijing A.B.C Investment recently. Mr. Xiong joined our company as operating officer in May, 2009. Prior to joining our company, he was a senior engineer of Hubei Qingjiang
Hydroelectric Development Co., Ltd. from 1990 to 2009. He is also a part-time professor in Huazhong University of Science and Technology and Three Gorges University. Mr. Xiong received his bachelor’s degree in Hydrology from Sichuan University and his master’s degree in applied computer science
from Huazhong University of Science and Technology. Mr. Hong Zhang has been appointed as the regional general manager of Zhejiang recently. Mr. Zhang joined our company as Chief Operating Officer in 2008. Prior to joining our company, Mr. Zhang was a senior engineer of Yellow River Committee in Ministry of Water Resources from 1983 to
2008. Mr. Zhang also worked in Zhengzhou Power Generating Equipment Plant from 1983 to 1991. Mr. Zhang received his bachelor’s degree in electrical technology from Xi’an Jiaotong University. Mr. Jianbin Zhou has been the regional general manager of Yunnan since 2007. Prior to joining our company, Mr. Zhou was the chairman of Yunnan Huabang Hydroelectric Development Co., Ltd. from 2004 to 2007. Mr. Zhou has extensive working experience in hydroelectric plant operation. He
was vice general manger of Yunnan Dehong Prefecture Hydroelectric Development Co., Ltd. in 2003, and vice general manger of Junxi Hydroelectric Development Co., Ltd. from 2001 to 2003. He also served as general manger of Dazhai, Ruixiang and Longxi Power Plant from 1995 to 2000. Mr. Zhou
received his associate degree in electromechanical science from Fuchunjiang Hydroelectric Institute. Mr. “Rhyson” You Li joined our company in June 2010 and has been appointed the financial controller since then. Prior to joining our company, Mr. Li was a senior manager in the Energy and Utility Assurance Service Group of PricewaterhouseCoopers and had been with PwC for 9 years. Mr. Li is
a Certified Public Accountant of PRC (CICPA) and Australia (CPAA). He has extensive working experience in the financial reporting and auditing of large-scale US listed utility companies. Mr. Li had two year overseas working experience in PwC’s UK firm as an executive auditor. Mr. Li received his
bachelor’s degree from the Central University of Finance & Economics in 2001. Ms. “Maggie” Lianghong Tu joined our company as the Internal Control Director in April 2010. Prior to joining our company, Ms. Tu was a manager from 2006 to March 2010 in Business Risk Service Group of Ernst & Young (China) Advisory Ltd., focusing on SOX 404 compliance, enterprise risk
management, internal control review and internal audit etc. She was a senior consultant at Ernst & Young Hua Ming from 2004 to 2006, and an associate in Beijing ShineWing CPAs Co. Ltd. from 2002 to 2004. She received her bachelor’s degree in Economics from Beijing institute of Business and her
master’s degree in management science from Beijing Technology and Business University. She is also a member of CICPA and CIA. 131
Ms. Jin Cao joined our company as HR senior manager in January 2011. Prior to joining our company, Ms. Cao was HR manager from June 2008 to December 2010 of PricewaterhouseCoopers. She had been working as HR manager for Intel China Ltd. from 1999 to 2006 and before that was three
years in Siemens China. Ms. Cao has extensive working experience in all fields of human resources. Ms. Cao received her master’s degree from La Sorbonne in 2005. Ms. Shu Zhang has been the finance manager of Beijing A.B.C. Investment since May 2008. Ms. Zhang was an accounting supervisor of Nortel Networks (China) Co., Ltd. from 2004 to 2008. She was the chief accountant of Gemplus (Tianjin) New Technology Co., Ltd. from 2001 to 2004. Ms. Zhang
received her bachelor’s degree in Accounting from the Capital University of Economics and Business. Director Disclosure Mr. John D. Kuhns In August 2007, Kuhns Brothers Capital Management, Inc, or KBCM, a subsidiary of Kuhns Bros. & Co., Inc., which has its principal executive office in the State of Connecticut, entered into a consent order with the State of Connecticut Department of Banking pursuant to which (i) KBCM, without
admitting or denying any allegations or violations, and prior to a hearing and without an adjudication of any issue of law or fact, accepted and consented to the entry of the findings of the Department of Banking that from August 2004, KBCM transacted business as an investment advisor in the State of
Connecticut without being registered under the Connecticut Uniform Securities Act and (ii) agreed to implement revised supervisory and compliance procedures and to pay a fine of $5,100. In 2005, the National Association of Securities Dealers, or NASD, currently the Financial Industry Regulatory Authority, or FINRA, identified certain alleged violations of NASD rules by Kuhns Brothers Securities Corporation, a member firm of the NASD of which Mr. Kuhns is an officer and
registered principal. Specifically, the NASD found that Kuhns Brothers violated the membership rules of the NASD by (i) initiating a 50.0% or greater transfer of its ownership without giving prior notice to, and obtaining approval from, the NASD, (ii) acting as placement agent in a private offering in
violation of its Section 15(c) exemption under the Exchange Act, (iii) failing to maintain its minimum required net capital, and (iv) failing to properly maintain client records. Subsequently, Kuhns Brothers and Mr. Kuhns, as registered principal of that firm, without admitting or denying the allegations or
findings, prior to a hearing and without an adjudication of any issue of law or fact, consented to the imposition by the NASD of a censure and a fine of $15,000 in October 2005. Prior to 1995, Mr. Kuhns inadvertently was delinquent in the filing of certain forms with the U.S. Securities and Exchange Commission regarding his beneficial ownership position in two related companies. Specifically, Mr. Kuhns failed to timely file Forms 3 regarding his shareholdings in Photocomm,
Inc. and New World Power Corporation and Forms 4 and 5 for New World Power Corporation. In 1995, Mr. Kuhns agreed with the SEC to remedy the delinquency and remain in compliance with applicable SEC regulations regarding such filings. No further actions were taken by the SEC. Mr. Richard H. Hochman Mr. Hochman was previously a member of the board of directors of Cablevision Systems Corporation, or Cablevision. He served as the chairman of Cablevision’s compensation committee and as a member of its audit committee. In September 2006, Cablevision announced that it had completed a
voluntary review of its past practices in connection with grants of stock options and stock appreciation rights and that it was restating its consolidated financial statements for the three prior years as a result. Cablevision had determined that the grant date and exercise price assigned to a number of its
stock options and stock appreciation rights during the period from 1997 to 2002 did not correspond to the actual grant date and the closing price of its common stock on the actual grant date. In such cases, according to Cablevision, the date assigned to the grant corresponded to 132
the date of a unanimous written consent executed by the members of Cablevision’s compensation committee, but the date of that consent did not correspond to the actual date of the grant. Mr. Hochman resigned his position on the audit committee and compensation committee of Cablevision in
September 2006 but remained on the board of directors of Cablevision until May 2008, when he chose not to stand for re-election. Our Key Consultant Mr. Michael H. Best is an independent engineering consultant and technical project manager. Mr. Best has served as a director of Advanced Power Systems International, Inc. since 2000. Mr. Best received his bachelor’s degree in Engineering from Columbia University. B. Compensation Compensation of Directors and Executive Officers The aggregate cash compensation that we paid to our directors and executive officers included in the list under the heading “—Directors and Executive Officers” for the years ended December 31, 2008, 2009 and 2010 was $2.6 million, $2.7 million, and $4.9 million, respectively. The retirement plan
sponsored by us is composed of two components: A career average defined benefit plan and a 401(k) / Profit Sharing Plan, with a total employer contribution limit of $0.1 million to certain executive officers. Our defined benefit plan is a type of pension plan in which we promise a specified
monthly benefit on retirement for certain executives that is predetermined by a formula based on the employee’s earnings history, tenure of service, age, and present value factor. The 401(k) Profit Sharing Plan is designed to permit eligible employees to defer a portion of
their salary up to eligible limit and the employer contributes about 13% of the eligible salary limit to certain executive. For share-based compensation, see “—2008 Share Incentive Plan.” 2008 Share Incentive Plan The China Hydroelectric Corporation 2008 Share Incentive Plan, or the 2008 Plan, allows our company to grant options, share appreciation rights, share awards, phantom awards and other equity-based or cash-based awards to employees, consultants, and other individuals providing services to our
company, including our directors. The maximum aggregate number of ordinary shares that may be issued under the 2008 Plan is 12,000,000 ordinary shares. The purpose of the 2008 Plan is to promote long-term growth and profitability of our company by (i) providing key people with incentives to
improve shareholder value and to contribute to the growth and financial success of our company through their future services, and (ii) enabling our company to attract, retain and reward the best-available persons. The 2008 Plan administrator, which may be our board of directors or its authorized designee, has full power and authority to administer, construe and interpret the 2008 Plan. Grants under the 2008 Plan will be governed by individualized grant agreements and stock restriction agreements and may be
subject to either time-based or performance-based vesting provisions. Separate form grant agreements have been drafted for employees in China to comply with certain registration, reporting and tax rules. The only awards that have been granted pursuant to the 2008 Share Incentive Plan are stock options. Share Options. The exercise price of incentive share options must be at least equal to the fair market value of our ordinary shares on the date of grant. However, the exercise price of all other options may be as determined by the administrator. The term of an incentive stock option may not exceed
ten years from the date the 2008 Plan is adopted by our board of directors or the date that is approved by the shareholders. The administrator determines the term of all other options. After termination of an employee, director or consultant, he or she may exercise his or her options for the period of
time stated in the option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for twelve months. In all other cases, the option will generally 133
remain exercisable for thirty days. However, an option generally may not be exercised later than the expiration of its term. We grant awards with exercise prices at or above fair market value. In pricing awards under the plan, the administrator has considered the share purchase price negotiated with
independent third parties in recently completed equity financings, as well as the progress of the company in developing its business since the time of those financings. Share Appreciation Rights. Share appreciation rights allow the recipient to receive the appreciation in the fair market value of our ordinary shares between the date of grant and the exercise date. The exercise price of share appreciation rights granted under our plan may be as determined by the
administrator. Share Awards. Share awards relate to the grant of restricted or unrestricted share awards to eligible participants in such amounts, on such terms and conditions, and for such consideration, including no consideration or such minimum consideration as may be required by law as the administrator may
from time to time determine. Phantom Shares. Phantom shares are share-equivalent units granted to a participant that is credited to a bookkeeping reserve account solely for SEC reporting purposes and shall not require a segregation of any of our assets. Such shares are granted from time to time as the administrator may
determine. Amendment and Termination. Our 2008 Plan will automatically terminate in 2018, unless we terminate it sooner. Our board of directors has the authority to amend, alter, suspend or terminate the 2008 Plan. Our board of directors granted stock options to purchase 3,897,000 ordinary shares in August 2008, of which the options granted to one employee to purchase 5,000 ordinary shares expired as the employee terminated his services to us before the option became exercisable, stock options to purchase
35,000 ordinary shares in January 2009 and subsequently stock options to purchase 7,000,000 ordinary shares in December 2009 under the 2008 Plan to our executive officers, directors, employees and consultants. The options granted in December 2008 and January 2009 to our executive officers, employees
and consultants have an exercise price of $7.70 per share and will vest in a three-year period, with one-third vesting each year, and a term of five years. The options granted in December 2009 have an exercise price equal to the price of the ordinary shares underlying the ADSs sold in the IPO and will
vest in a four-year period, with one-fourth vesting each year, and a term of five years. The 40,000 options granted to our non-executive directors, Richard H. Hochman and Shadron Lee Stastney, and two non-executive directors who have resigned from our board, Robert W. MacDonald and Dennis
Galgano, have an exercise price of $7.70 per share, and will vest, or did vest, 100% on the first anniversary of the grant date or upon the resignation or removal of such director from our board. We may in the future adjust downward the exercise price of our share options to the then fair market value of
our ordinary shares in order to better incentivize our management. The following table sets forth information on share options that have been granted and are outstanding as of the date of this annual report under the 2008 Share Incentive Plan:
Name
Ordinary
Exercise
Grant
Expiration
Ordinary
Exercise
Grant
Expiration John D. Kuhns
1,095,000
7.70
August 18,
August 18,
2,500,000
4.93
December 3,
December 3, “James” Tie Li
500,000
7.70
August 18,
August 18,
1,050,000
4.93
December 3,
December 3, Mary E. Fellows
500,000
7.70
August 18,
August 18,
1,050,000
4.93
December 3,
December 3, Dr. You-Su Lin
805,000
7.70
August 18,
August 18,
1,660,000
4.93
December 3,
December 3, Richard H. Hochman
10,000
7.70
August 18,
August 18,
—
—
—
— Shadron Lee Stastney
10,000
7.70
August 18,
August 18,
—
—
—
— 134
Shares
Underlying
Outstanding
Options
Price
($/Share)
Date
Date
Shares
Underlying
Outstanding
Options
Price
($/Share)
Date
Date
2008
2013
2009
2014
2008
2013
2009
2014
2008
2013
2009
2014
2008
2013
2009
2014
2008
2013
2008
2013
Name
Ordinary
Exercise
Grant
Expiration
Ordinary
Exercise
Grant
Expiration Other employees, consultants and former directors
784,000
7.70
August 18,
August 18,
—
—
—
— Other employees and consultants as a group
35,000
7.70
January 20,
2009
January 20,
2014
600,000
4.93
December 3,
2009
December 3,
2014 Total
3,739,000
6,860,000 On August 18, 2008, our board of directors adopted the China Hydroelectric Corporation 2008 Share Incentive Plan, or the 2008 Plan, that provides for the issuance of awards to purchase up to 12,000,000 ordinary shares. The effectiveness of the 2008 Plan is subject to the approval of our
shareholders within twelve months from the date on which the 2008 Plan was adopted by the board of directors. The administrator, which is the board of directors or its authorized designee, has full power and authority to administer, construe and interpret the 2008 Plan. Under the terms of the 2008
Plan, incentive stock options must be granted at exercise prices at least equal to the fair market value on the date of grant. On August 18, 2008, the board of directors approved the grant of 40,000, 260,000 and 3,597,000 non-qualified stock options to certain directors, non-employees and employees,
respectively, at an exercise price of $7.70 per share. On January 20, 2009, our board of directors approved the grant of 35,000 non-qualified stock options to certain employees at an exercise price of $7.70 per share. On March 4, 2009, the board of directors passed a resolution to modify the 2008 Plan such
that the 2008 Plan could be made effective without approval by our shareholders. In accordance with ASC sub-topic 718-10, Compensation—Stock Compensation: Overall, the grant date for the share-based awards issued on August 18, 2008 and January 20, 2009 was March 4, 2009. Accordingly, no
compensation expense was recognized for the year ended December 31, 2008. We recognized compensation expense of $0.6 million for the year ended December 31, 2009. See Note 25 to our audited consolidated financial statements included elsewhere in this annual report. On December 3, 2009, our board of directors approved the grant of 7,000,000 share options to certain of directors, officers and employees at an exercise price equal to the price at which the ordinary shares underlying the ADSs are sold in the IPO of the Company; provided that the options shall
expire in the event that the Company does not consummate its initial public offering within six months of the approval date. Since the exercise price was not known until the initial public offering was priced on January 25, 2010, the accounting grant date for the share-based awards issued on December 3,
2009 was not established as of December 31, 2009. As such, no compensation expense related to the December 3, 2009 grant was recognized in 2009. In the year ended December 31, 2009, one of the employees terminated her contractual relationship with the Company and her 5,000 share options were forfeited immediately upon the termination. In the year ended December 31, 2010, two of the employees and one consultant terminated their
contractual relationships with the Company and their 263,000 and 60,000 share options, respectively, were forfeited immediately upon the termination. Employment Agreements with Executive Officers We have entered into employment agreements with each of our executive officers. Under the agreements with John D. Kuhns, “James” Tie Li, Mary E. Fellows, Dr. You-Su Lin and Wu Gan, we may terminate an executive officer’s employment for cause, with thirty days’ advance written notice and an opportunity to cure, for certain acts of such officer including but not limited to
a conviction of a felony or crime involving moral turpitude, willful failure to perform the officer’s responsibilities in the best interests of the Company, or breach of any provision of any employment, non-disclosure, non-competition, non-solicitation or other similar agreement executed by the officer for the
benefit of the Company. In such case, under the employment agreements with Mr. Kuhns, Mr. Li and Ms. Fellows, such officer will only be entitled to the base salary through the 135
Shares
Underlying
Outstanding
Options
Price
($/Share)
Date
Date
Shares
Underlying
Outstanding
Options
Price
($/Share)
Date
Date
2008
2013
effective date of the employment termination and such officer’s right to all other benefits under the employment agreement, other than vested benefits, will terminate, except as required by any applicable law. We may also terminate our employment agreements with these executive officers without cause upon thirty calendar days’ advance written notice. Under the employment agreements with Mr. Kuhns, Mr. Li, Ms. Fellows and Mr. Gan, in such case of termination by us, and also in a case where an
officer voluntarily terminates his/her employment with us upon thirty-days’ advance written notice for good reason (except in the event of a qualifying termination during certain change in control periods), the Company shall continue to provide the officer with his/her base salary and health and welfare
benefits for a period of twelve full months. Further, the Company shall pay the officer all other benefits to which the officer has a vested right at the time, according to the provisions of each governing plan or program. Under the employment agreements with Mr. Kuhns, Mr. Li and Ms. Fellows, the
Company shall also make a prorated payment of the executive’s bonus for the fiscal year in which termination occurs, calculated based upon the performance of the officer against the bonus criteria established by the board for the officer in effect through the end of the month immediately preceding the
effective date of the termination, subject to the board’s discretion to increase the amount of such prorated payment. While, under the employment agreements with Dr. Lin, in both cases of termination by us for cause or without cause upon thirty calendar days’ advance written notice, such officers will be
entitled to any base salary, bonus and incentive payment that has accrued under the agreement but has not been paid on or before the termination date and any reimbursement due to the officer under the agreement for expenses incurred by the officer on or before the termination date. Under the employment agreements with Mr. Kuhns, Mr. Li and Ms. Fellows, in the event of a qualifying termination during a change in control period, the officer shall be entitled to certain benefits, including a lump sum equal to one and a half times or two times, as the case may be, the highest
rate of the officer’s annual base salary in effect at any time up to and including the effective date of termination and a lump sum equal to the average annual bonus paid to the officer for the last three years prior to the change in control. In the event of constructive termination or termination of the
employment agreement by the company without cause, under the employment agreements with Mr. Gan and Dr. Lin, such officers shall be entitled to receive an amount equal to 100% of his annualized salary as in effect on the severance date. In addition, these employment agreements with Mr. Kuhns, Mr. Li, Ms. Fellows and Mr. Gan contain clauses of non-competition, non-solicitation, confidential information and work product agreements. According to these clauses, each of our executive officers should be bound by (i) non-competition
restrictions during his/her employment and for two years after the termination of his/her employment and three years in the case of Mr. Gan, (ii) confidential information restrictions during his/her employment and for a period of three years thereafter and (iii) non-solicitation restrictions during the non-
competition period. We entered into employment agreements respectively with Xinchun Lian, Hong Zhang, Jianbin Zhou and Huakang Xiong. We will pay salary in accordance with the actual working time of each of them in the event of termination initiated by them and we will pay the compensation based on the
number of years they each worked for our company at the rate of one month’s salary for each full year in the event of termination by the company. We have also entered into employment agreements with Gang Meng, You Li, Lianghong Tu, Jin Cao and Shu Zhang. Each of these employment agreements can be terminated under circumstances stipulated under the PRC Labor Contract Law. The agreements with Mr. Lian, Mr. Zhang, Mr. Zhou, Mr. Xiong, Mr. Meng, Mr. Li, Ms Tu, Ms. Cao and Ms. Zhang refer to the confidentiality obligations provided under the PRC Labor Contract Law. Dr. Lin entered into a letter agreement with us, which contains, among others, confidentiality,
non-competition and non-solicitation provisions. 136
C. Board Practices Our board of directors currently has seven directors. Our board has determined that Mr. Anthony H. Dixon, Dr. Yong Cao, Mr. Stephen Outerbridge, Mr. Shadron Lee Stastney and Mr. Richard Hochman are independent directors under NYSE rules. Terms of Directors and Executive Officers Our directors are divided into three classes and are subject to a term of office of three years and shall automatically retire from office (unless vacated sooner) on the expiry of such term, unless appointed for an additional term. Directors may be removed from office by an ordinary resolution of the
shareholders. A director will be removed from office automatically if, among other things, the director becomes bankrupt or makes any arrangement or composition with his creditors, or dies or is found by our company to be or to have become of unsound mind. Our officers are appointed by and serve
at the discretion of our board of directors. Committees of the Board of Directors Our board of directors has established an audit committee, a compensation committee and the corporate governance and nominating committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below. Audit Committee Our audit committee consists of Mr. Dixon, Dr. Cao and Mr. Outerbridge, each of whom we believe satisfies the “independence” requirements under current NYSE rules and Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Mr. Dixon acts as the chairman of our audit committee.
Our board of directors has determined that Mr. Dixon qualifies as an “audit committee financial expert” under applicable SEC rules. The audit committee oversees our accounting and financial reporting processes and audits of the financial statements of our company. The audit committee is responsible
for, among other things:
•
selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; • reviewing with the independent auditors any audit problems or difficulties and management’s response; • reviewing and approving all proposed related party transactions, which term refers to transactions that would be required to be disclosed pursuant to Item 7B of Form 20-F, regardless of the dollar amount involved in such transactions; • discussing the annual audited financial statements with management and the independent auditors; • reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; • annually reviewing and reassessing the adequacy of our audit committee charter; and • meeting separately and periodically with management and the independent auditors. Compensation Committee Our compensation committee consists of Mr. Hochman and Mr. Stastney. Mr. Hochman acts as the chairman of our compensation committee. Our board has determined that both Mr. Hochman and Mr. Stastney qualify as an independent director of our company within the meaning of the current
NYSE rules. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. The compensation committee is responsible for, among other things:
•
reviewing and approving the total compensation package for our three most senior executives;
137
• reviewing and recommending to the board of directors with respect to the compensation of our directors; and • reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. Corporate Governance and Nominating Committee Our corporate governance and nominating committee consists of Dr. Cao, Mr. Hochman and Mr. Dixon, each of whom satisfies the “independence” requirements under current NYSE rules. Dr. Cao acts as the chairman of our corporate governance and nominating committee. The corporate
governance and nominating committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:
identifying and recommending qualified candidates as director nominees for selection of directors, nominees for election to the board of directors, or for appointment to fill any vacancy; • reviewing annually with the board of directors the current composition of the board of directors with regards to characteristics such as independence, age, skills, experience and availability of service to us; • monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. Duties of Directors Under Cayman Islands law, our directors have a fiduciary duty to act honestly in good faith with a view to the best interests of the Company. Our directors also have a duty to exercise the skill they actually possess with the care and diligence that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our Amended and Restated Memorandum and Articles of Association. The Company has the right to seek damages if a duty owed by our directors is breached. The functions and powers of our board of directors include, among others:
•
convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings; • declaring dividends and distributions; • appointing officers and determining the term of office of officers; • exercising the borrowing powers of our company and mortgaging the property of our company; and • approving the transfer of shares of our company, including the registering of such shares in our share register. Interested Transactions Our directors will abstain from any discussion or vote on transactions in which they are interested. Remuneration The directors may determine remuneration to be paid to the directors. The compensation committee assists the directors in reviewing and approving the compensation structure for the directors. 138
•
Power to Obligate our Company The directors may exercise all the powers of our company to raise or borrow money and to mortgage or charge all or any part of its undertaking, property and assets (present and future) and uncalled capital, and to issue debentures, bonds or other securities whether outright or as collateral security
for any debt liability or obligations of our company or of any third party. Qualification There is no shareholding qualification for directors. Indemnification Agreements We have entered into indemnification agreements with our directors. Each of the indemnification agreements provides the directors with contractual rights to indemnification and expense advancement rights. Pursuant to our Amended and Restated Memorandum and Articles of Association and the indemnification agreements, our directors are indemnified to the fullest extent permitted under the law and public policy of the Cayman Islands for all judgments, fines, settlements, legal fees and other
expenses actually and reasonably incurred in connection with pending or threatened legal proceedings because of such director’s position with us or another entity that the director serves at our request, subject to various conditions. Corporate Governance Our board of directors has adopted a code of business conduct and ethics that is applicable to all of our directors, officers and employees. Our code of business conduct and ethics is publicly available on our website. D. Employees As of December 31, 2010, we had entered into written employment contracts with 697 employees. The following table sets forth the number of employees categorized by function as of December 31, 2010:
Number of
(%) Management
34
5.0 Finance
36
5.2 Project Construction, Operations and Management
484
69.3 Administrative and Human Resources
143
20.5 Total:
697
100.0 As of December 31, 2010, we had 35 employees working at our headquarters, 175 employees working in Zhejiang province, 4 employees working in Sichuan province, 148 employees working in Yunnan province, 312 employees working in Fujian province and 24 employees working in Henan province,
respectively. As required by PRC regulations, our full-time employees in China participate in various employee benefit plans that are organized by municipal and provincial governments, including housing funds, pension, work-related injury benefits, maternity insurance, medical and unemployment benefit
plans. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the respective local government authorities where we operate our businesses.
Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. In November 2008, our New York office established a 401(k) retirement plan, which requires a dollar by dollar matching contribution from the employer, up to
3% of the employee’s annual salary. The total amount of 139
Employees
contributions we made to employee benefit plans for the years ended December 31, 2008, 2009 and 2010 was $0.4 million, $0.6 million and $0.9 million, respectively. Each of our executive officers, including Mr. Kuhns, Dr. Lin, Mr. Li and Mr. Gan, has entered into a confidentiality and non-competition agreement with us. The non-competition provisions prohibit the executive officers from engaging in any activities that compete with our business during, and for
certain periods after, their employment with our company. We granted 3,897,000 stock options in August 2008, of which the options granted to one employee to purchase 5,000 ordinary shares expired as the employee terminated his services to us before the option became exercisable, 35,000 stock options in January 2009 and 7,000,000 stock options in
December 2009 to our current and former directors, officers, consultants and key employees under our 2008 Share Incentive Plan. We have not been subjected to any strikes or other labor disturbances that have interfered with our operations, and we believe that we have a good relationship with our employees. Our employees are not covered by any collective bargaining agreement. E. Share Ownership The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares, as of March 31, 2011, by:
•
each of our directors and executive officers; and • each person known to us to own beneficially more than 5% of our ordinary shares. Beneficial ownership includes voting or investment power with respect to securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all ordinary shares shown as beneficially
owned by them. Percentage of ordinary shares beneficially owned by each person is based on 153,295,516 ordinary shares outstanding as of March 31, 2011. All ordinary shares owned by such person, including ordinary shares underlying share options and warrants that are exercisable within 60 days after
March 31, 2011 are deemed to be outstanding and beneficially owned by that person for the purpose of computing the percentage ownership of that person, but are not considered outstanding for the purpose of computing the percentage ownership of any other person.
Name
Ordinary Shares
Number
Percent Directors and Executive Officers John D. Kuhns(1)
3,084,461
2.0 Dr. Yong Cao
*
* Anthony H. Dixon
*
* Richard H. Hochman(1)
1,002,211
0.7 Dr. You-Su Lin(1)
*
* Shadron Lee Stastney
*
* Stephen Outerbridge
*
* “James” Tie Li(1)
*
* Mary E. Fellows(1)
*
* Wu Gan
*
* Xinchun Lian
*
* You Li
*
* Lianghong Tu
*
* Jin Cao
*
* Huangkang Xiong
*
* Hong Zhang
*
* Jianbin Zhou
*
* Gang Meng
*
* Shu Zhang
*
* All Directors and Executive Officers as a Group(2)
8,811,948
5.7 140
Beneficially Owned
Name
Ordinary Shares
Number
Percent Principal Shareholders: CPI Ballpark Investments Ltd.(3)
30,858,964
20.1 Jennison Utility Fund(4)
19,334,754
12.6 Vicis Capital Master Fund(5)
48,882,716
31.9 Swiss Re Financial Products Corporation(6)
10,114,506
6.6 Morgan Joseph & Co. Inc.(7)
8,473,185
5.5 Blue Ridge Investments LLC(8)
7,885,431
5.1 Prudential Financial, Inc.(9)
19,334,754
12.6
*
Upon exercise of all options and warrants exercisable within 60 days after March 31, 2011, would beneficially own less than 1.0% of our outstanding ordinary shares. (1) Pursuant to the Amended and Restated Limited Liability Company Agreement of China Hydro, LLC dated as of November 6, 2006, John D. Kuhns and Richard H. Hochman have the power to direct the voting of ordinary shares of our company held by China Hydro, LLC. All of the members,
including but not limited to, John D. Kuhns, “James” Tie Li, Mary E. Fellows, Dr. You-Su Lin and Richard H. Hochman, have a right to receive certain number of our shares in proportion to their pro rata interest in China Hydro, LLC. The shares of our company held by China Hydro, LLC were
distributed to its members and John D. Kuhns received 1,722,470 shares, Richard H. Hochman will received 988,553 shares, “James” Tie Li received 532,967 shares, Mary E. Fellows received 416,667 shares, and You-Su Lin received 949,634 shares. The shares held by China Hydro, LLC consisted of
8,708,333 ordinary shares and 750,000 ordinary shares issuable upon the exercise of a warrant granted to China Hydro, LLC were all distributed to its shareholders in 2010. (2) Includes ordinary shares held by all of our directors and executive officers as a group and ordinary shares issuable upon the exercise of all of the options and warrants that are exercisable within 60 days after March 31, 2011, held by all of our directors and executive officers. (3) Based on a Schedule 13D/A filed by Bank of America Corporation on February 14, 2011. CPI Ballpark Investments Ltd. is a limited liability company organized under the laws of Mauritius. The mailing address of CPI Ballpark Investments Ltd. is 4th Floor, IBL House, Caudan, Port Louis, Republic
of Mauritius. CPI Ballpark Investments Ltd. is wholly owned by Indopark Holdings Ltd., which is registered in the Republic of Mauritius. The mailing address of Indopark Holdings Limited is 4th Floor, IBL House, Caudan, Port Louis, Republic of Mauritius. The sole shareholder of Indopark Holdings
Limited is Merrill Lynch L.P. Holdings Inc., a company incorporated in the State of Delaware, USA. Merrill Lynch L.P. Holdings Inc. is wholly owned by Merrill Lynch Group, Inc., a company incorporated in the State of Delaware, USA. Merrill Lynch Group, Inc. is wholly owned by Merrill Lynch &
Co., Inc., a non-bank subsidiary of Bank of America Corporation, a public company listed on the NYSE. Bank of America Corporation, through its subsidiaries, beneficially owns 25.3% of our ordinary shares. Through publicly available information, we are aware of a potential share transfer between
CPI Ballpark Investments Ltd. and Blue Ridge Investments, LLC. (4) Based on a Schedule 13G filed by Jennison Associates LLC, investment advisor to Jennison Utility Fund, on February 14, 2011. Jennison Utility Fund, a series of Jennison Sector Funds, Inc., is an affiliate of Pruco Securities, LLC, Prudential Equity Group, LLC, Prudential Investment Management
Services LLC, American Skandia marketing, Incorporated, Prudential Bache Securities, LLC and Prudential Bache Commodities, LLC, each a broker-dealer registered under Section 15 of the Securities Exchange Act of 1934, as amended. Jennison Associates LLC is the sub-advisor to Jennison Utility
Fund, a series of Jennison Sector Funds, Inc., an investment company registered under the Investment Company Act of 1940. Shaun Hong, a portfolio manager of Jennison Utility Fund and a Managing Director of Jennison Associates LLC has the authority to vote the shares owned by the Jennison
Utility Fund. The address of Jennison Utility Funds, Inc. is c/o Jennison Associates, LLC, 466 Lexington Avenue, New York, New York 10017. 141
Beneficially Owned
(5) Includes 30,216,050 ordinary shares and 18,666,666 ordinary shares upon the exercise of a warrant granted to Vicis Capital Master Fund that is exercisable within 60 days after March 31, 2011. Vicis Capital Master Fund is a sub-trust of the Vicis Capital Master Series Trust, a unit trust organized under
the laws of the Cayman Islands. The address of Vicis Capital Master Fund is Tower 56, Suit 700, 126 E. 56th Street, 7th Floor, New York, NY 10022. The address of Capital Master Series Trust is P. O. Box 1043GT, Caledonian House, First Floor, 69 Dr Roys Dr, George Town, Grand Cayman,
Cayman Islands, BWI. Vicis Capital, LLC is the investment adviser to Vicis Capital Master Fund. John Succo, Shadron Lee Stastney and Sky Lucas have voting and investment control over the securities beneficially owned by Vicis Capital Master Fund and Victus Capital, LP. Shadron Lee Stastney in
his capacity as the managing director of Vicis Capital Master Fund and Vicis Capital, LP has the voting and investment power over the shares listed. Victus Capital, LP is affiliated with a broker-dealer. (6) Based on a Schedule 13G filed by Swiss Re Financial Products Corporation on February 11, 2011. Swiss Re Financial Products Corporation is a limited liability company organized under the laws of Delaware. The mailing address of Swiss Re Financial Products Corporation is 55 East 52nd Street, New
York, New York 10055. Swiss Re Financial Products Corporation is an indirect, wholly owned subsidiary of Swiss Reinsurance Company, a limited liability company organized under the laws of Switzerland. The mailing address of Swiss Reinsurance Company is Mythenquai 50/60, CH-8022, Zurich,
Switzerland. Swiss Reinsurance Company is a publicly registered company that trades on the SIX Swiss Exchange. (7) Includes 8,134,233 ordinary shares to be issued upon the exercise of warrants granted to Morgan Joseph & Co. Inc. and 10,000 ordinary shares to be issued upon the exercise of options granted to Dennis Galgano that are exercisable within 60 days after March 31, 2011. Morgan Joseph & Co. Inc. is a
wholly owned subsidiary of Morgan Joseph Holdings Inc. Morgan Joseph Holdings Inc. is in turn owned by the employees, former employees and investors in Morgan Joseph Holdings Inc. The Board of Directors of Morgan Joseph Holdings Inc. has the power to direct the voting and disposition of our
shares held by Morgan Joseph & Co. Inc. The board consists of Mary Lou Malanoski, John Sorte, Roger T. Briggs, John A. Morgan, Steven D. Blecher, and Edmund A. Hajim. The address of Morgan Joseph & Co. Inc. is 600 Fifth Avenue, 19th Floor, New York, New York 10020 (8) Based on a Schedule 13D/A filed by Bank of America Corporation on February 14, 2011. Blue Ridge Investments, LLC is a limited liability company organized under the laws of Delaware. Blue Ridge Investments, LLC is wholly owned by BANA Holding Corporation, a company incorporated in the
State of Delaware, USA. BANA Holding Corporation is wholly owned by BAC North America Holding Company, a company incorporated in the State of Delaware, USA. BAC North America Holding Company is wholly owned by NB Holdings Corporation, a non-bank subsidiary of Bank of
America Corporation, a public company listed on the NYSE. The mailing address of Blue Ridge Investments, LLC is c/o Bank of America Securities, 1633 Broadway, 27th Floor, New York, New York 10019. Bank of America Corporation, through its subsidiaries, beneficially owns 25.3% of our
ordinary shares. Through publicly available information, we are aware of a potential share transfer between CPI Ballpark Investments Ltd. and Blue Ridge Investments, LLC. (9) Based on Schedule 13G filed by Prudential Financial, Inc. (“Prudential”) on January 31, 2011. Prudential may be deemed the beneficial owner and may have direct or indirect voting and/or investment discretion over 6,444,918 ADSs (representing 19,334,754 ordinary shares) of the Company which are
held for Prudential’s own benefit or for the benefit of its clients by its separate accounts, externally managed accounts, registered investment companies, subsidiaries and/or other affiliates. Prudential Financial, Inc. is a parent holding company and the direct or indirect parent of Jennison Associates
LLC, investment advisor to Jennison Utility Fund. Prudential is a New Jersey Corporation having its principal business office at 751 Broad Street, Newark, New Jersey 07102-3777. 142
None of our existing shareholders has voting rights that will differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders Please refer to Item 6.E, “Directors, Senior Management and Employees—Share Ownership” B. Related Party Transactions The following describes our related party transactions since inception. Transactions with China Hydro, LLC China Hydro, LLC is a limited liability company formed under the laws of the State of Delaware. China Hydro, LLC was set up for the purpose of establishing the operation and financing for our company. Our founders own their equity of our company through China Hydro, LLC. On November 10,
2006, China Hydro, LLC, on behalf of our founders, invested $2.3 million in us by paying $1.0 million cash, incurring a $25,000 payable to us and releasing the $1.3 million amount due from us in exchange for 375,000 ordinary shares and 750,000 warrants, each to purchase one ordinary share. The $25,000
payable was settled by China Hydro, LLC on September 9, 2008. For the year ended December 31, 2007, we incurred $23,000 payable to China Hydro, LLC pursuant to a short-term loan to us. The loan from China Hydro, LLC was unsecured and interest-free. The loan was fully repaid on February 4, 2008. Transactions with Kuhns Brothers, Inc. John D. Kuhns, our Chairman and Chief Executive Officer, is a member of the board of directors of Kuhns Brothers, Inc. Kuhns Brothers, Inc. is not a member of China Hydro, LLC and does not own a beneficial interest in any of our ordinary shares or any securities convertible into or
exchangeable for our ordinary shares. During the period from December 31, 2008 to December 31, 2010, the Company rented office space from Kuhns Brothers, Inc. The rental expenses for the years ended December 31, 2008, 2009 and 2010 were $257,000, $288,000 and $288,000 respectively, which were expensed in our consolidated
statements of operations. In November 2009, we paid $0.2 million to Kuhns Brothers, Inc. as consideration for its financial advisory services in connection with our Series C convertible redeemable preferred shares offering. During the period from January 1, 2008 to December 31, 2010, Kuhns Brothers, Inc. paid for certain general and administrative services provided to us on a reimbursement basis. The general and adminiistrative services were $70,185, $75,405 and $97,927 respectively for the year ended December 31,
2008, 2009 and 2010, which were expensed in our consolidated statements of operations. These amounts were subsequently repaid in full by us. Transactions with China Carbon Investment Consulting Ltd. and China Silicon Zhuo-Xin Investment Consulting Ltd. China Carbon Investment Consulting Ltd. and China Silicon Zhuo-Xin Investment Consulting Ltd. are companies that are controlled by Mr. John D. Kuhns, our chairman and Chief Executive Officer. During the year ended December 31, 2008, we paid $81,000 and $32,000 of miscellaneous expenses
on behalf of China Carbon Investment Consulting Ltd. and China Silicon Zhuo-Xin Investment Consulting Ltd., respectively. As of December 31, 2009, $1,000 was due to China Carbon 143
Investment Consulting Ltd. Such balances are unsecured, interest free and repayable on demand. The balance was fully repaid to the Company in June, 2010. Transactions with Henan Lantian Group Co., Ltd. During the year ended December 31, 2010, Wuyue made a prepayment of US$1,251 to Henan Lantian Group Co., Ltd, the original controlling shareholder, for the construction of Wuyue’s hydroelectric project. Transactions with Sanming City Chenyang Hydroelectric Co., Ltd. Sanming City Chenyang Hydroelectric Co., Ltd. is a minority shareholder of Wangkeng. We received a deposit of $0.2 million in the year ended December 31, 2008 from Sanming City Chenyang Hydroelectric Co., Ltd. which represented the guarantee provided to us by Sanming City Chenyang
Hydroelectric Co., Ltd. Such balances to Sanming City Chenyang Hydroelectric Co., Ltd. as of December 31, 2009 were unsecured and interest free. This amount is to be returned to Sanming City Chenyang Hydroelectric Co., Ltd. by us within ten days following the date that the original shareholders of
Wangkeng provide us with final documentation relating to the acquired power station and related dam and reservoir. While the original shareholders were required to provide such documentation to us prior to August 9, 2009, pursuant to the equity transfer purchase agreements of Wangkeng, they have
not yet done so. We have requested the original shareholders to provide us with such documentation and we anticipate we will receive the documentation in the year of 2011. In November and December 2010, Xiaopengzu borrowed RMB6 million ($0.9 million) and RMB9 million ($1.3 million) respectively from Sanming City Chenyang Hydroelectric Co., Ltd. as fund for working capital. As of December 31, 2010, the balance of RMB15 million ($2.2 million) is unsecured,
interest free and repayable on demand. In November 2010, Fujian Huabang paid RMB31 million ($4.6 million) to Sanming City Chenyang Hydroelectric Co., Ltd. as depsosit for the acquisition of the remaining 10% noncontrolling interest in Wangkeng. The balance of $4.6 million due from Sanming City Chenyang Hydroelectric Co., Ltd.
is unsecured and interest free. Payable balances to Nanping City Xingshui Co., Ltd. and Xiamen Youen Hydropower Development Co., Ltd. Nanping City Xingshui Co., Ltd. is a minority shareholder of Jinlong, and Xiamen Youen Hydropower Development Co., Ltd. are minority shareholders of Jintang and Jinwei. In December 2010, we completed our purchase of Shaowu City Jinling Hydropower Co. Ltd. (hereafter “Jinling”), together
with Jinling’s 55% controlling interest in Jinlong, Jinling’s 74% controlling interest in Jintang, and Jinling’s 74% controlling interest in Jinwei. As of December 31, 2010, the amount of RMB9.4 million (US$1.4 million) due to Nanping City Xingshui Co., Ltd., and RMB59.3 million (US$8.9 million) due to
Xiamen Youen Hydropower Development Co., Ltd. as of December 31, 2010 represent the current liabilities acquired in the acquisition of Jinlong, Jintang and Jinwei. These amounts are unsecured, and bear a float interest of 6.0% and 7.2% per annum respectively. Transactions with Bank of America Corporation In November 2009, the company paid $0.8 million to Merrill Lynch Far East Limited, an entity beneficially owned by Bank of America Corporation, as consideration for its financial advisory services in connection with the Series C convertible redeemable preferred shares offering. Legal Services Provided by Zhongsheng Law Firm We paid $60,000, $12,000 and $12,005 in 2008, 2009 and 2010, respectively, for legal services provided by Zhongsheng Law Firm. Gang Li, the brother of Mr. “James” Tie Li, is a partner of Zhongsheng Law Firm and provided legal services to us. 144
Consulting Services Provided by Anthony H. Dixon We received consulting services from Mr. Dixon, currently a director of our company, in connection with investment advice for the Binglangjiang acquisition in 2007, for which we compensated him $20,000. Private Placements In July 2006, we issued one ordinary share to Reid Services Limited, the incorporator of our company, which was transferred to China Hydro, LLC in November 2006. In November 2006, we issued 8,499,999 ordinary shares to China Hydro, LLC. In November 2006, we issued in total $50.0 million principal amount of secured exchangeable notes with the maturity date on May 10, 2008, among which, a note of $41.0 million was issued to Vicis Capital Master Fund, a note of $4.0 million was issued to JMG Triton Offshore Fund, Ltd., and a
note of $5.0 million was issued to JMG Capital Partners, L.P. In November 2006, we issued 375,000 ordinary shares plus 750,000 warrants to purchase ordinary shares, to China Hydro, LLC, pursuant to the note purchase agreement, for an aggregate consideration of $2.3 million. In November 2006, we issued a total of 833,333 units granting the right to receive ordinary shares and warrants to purchase ordinary shares to Morgan Joseph & Co. Inc., in consideration of their services as the placement agent in the notes offering and the Series A convertible redeemable preferred
shares offering pursuant to the engagement letters. In April 2007, we issued 6,833,333 ordinary shares and 18,666,666 warrants to purchase ordinary shares to Vicis Master Capital Fund, pursuant to note purchase agreement and letter agreement, in exchange for the $41.0 million in notes held by Vicis Master Capital Fund. In April 2007, we issued a total of 666,666 warrants to purchase ordinary shares to JMG Triton Offshore Fund, Ltd. and JMG Capital Partners, L.P., pursuant to note purchase agreements and letter agreements with the two JMG entities. In January 2008, we issued to Morgan Joseph & Co. Inc. a warrant exercisable for the purchase of 15,000 Series A convertible redeemable preferred shares of our company, exercisable at 110% of the issue price of the Series A convertible redeemable preferred shares or the conversion price thereof, as
applicable under the terms of the warrant in consideration of their services as the placement agent in the notes offering and the Series A convertible redeemable preferred shares offering pursuant to the engagement letters. In January 2008, we issued in a private placement to seventeen institutional investors an aggregate of 150,025 Series A convertible redeemable preferred shares at $1,000 per share for an aggregate consideration of $150.0 million. The seventeen institutional investors and their respective purchases are
as follows: CPI Ballpark Investments Ltd., 50,000 shares; Jennison Utility Fund, 30,000 shares; Vicis Capital Master Fund, 28,500 shares; Swiss Re Financial Products Corporation, 10,000 shares; Citigroup Global Markets Inc., 10,000 shares; Sandelman Partners Multi-Strategy Master Fund, Ltd., 5,000
shares; HSBC GEM Common Fund, 1,750 shares; HSBC Global Investment Fund—New World Income Fund, 2,275 shares; Jayhawk Private Equity Co.—Invest Fund, LP, 207 shares; Jayhawk Private Equity Fund, LP, 3,293 shares; each of Rosebud Trust—Green, AGE Trust—Green, Kazak II Trust—Green,
Tehachapi Pass Trust—Green and NISA Revocable Trust, 600 shares; Radcliffe SPC, Ltd., 3,000 shares; and Concordia Asia Pacific Multi-Strategy Master Fund LP, 3,000 shares. Upon the closing of the initial public offering, each Series A convertible redeemable preferred share and the dividends paid
thereon was be converted into 337.8 ordinary shares. In May 2008, we issued stock dividends to each of the holders of the Series A convertible redeemable preferred shares at the rate of 0.0145 share per Series A convertible redeemable preferred share for the period from January 23, 2008 through March
15, 2008. In connection with the issuance of the Series A convertible redeemable preferred shares in January 2008, the Company paid Morgan Joseph & Co. Inc. a placement agent fee pursuant to a previously executed placement agent agreement. From early 2008 through November 2009, Richard
Hochman, a director of the 145
Company, was an associated registered representative with Morgan Joseph & Co. Inc. (but not an employee, officer, director or controlling person of Morgan Joseph & Co. Inc.). In that capacity, in April 2008, Morgan Joseph & Co. Inc. paid Mr. Hochman commissions in the amount of $308,000. In July 2008, we issued in a private placement to five institutional investors an aggregate of 101,000 Series B convertible redeemable preferred shares at $1,000 per share for an aggregate consideration of $101.0 million. The five institutional investors and their respective purchases are as follows: CPI
Ballpark Investments Ltd. 25,000 shares; Vicis Capital Master Fund 25,000 shares; Blue Ridge Investments, LLC 20,000 shares; Jennison Utility Fund 16,000 shares; and Swiss Re Financial Products Corporation 15,000 shares. In August 2008, we issued in a private placement to three institutional investors
an aggregate of 28,000 Series B convertible redeemable preferred shares at $1,000 per share for an aggregate consideration of $28.0 million. The Three institutional investors and their respective purchases are as follows: China Environment Fund III, LP 20,000 shares; Abrax 5,000 shares; and IWU
International Ltd. 3,000 shares. In connection with the issuance of the Series B convertible redeemable preferred shares in July 2008, the Company paid Morgan Joseph & Co. Inc. a placement agent fee pursuant to a previously executed placement agent agreement. From early 2008 through November 2009,
Richard Hochman, a director of the Company, was an associated registered representative with Morgan Joseph & Co. Inc. (but not an employee, officer, director or controlling person of Morgan Joseph & Co. Inc.). In that capacity, in October 2008, Morgan Joseph & Co. Inc. paid Mr. Hochman commissions
in the amount of $100,000. In October 2009, we issued in a private placement to Aqua Resources Asia Holdings Limited 20,000 Series C convertible redeemable preferred shares at $1,000 per share for a total consideration of $20.0 million. In December 2009, we agreed to issue upon the closing of the initial public offering to Broadband Capital Management LLC a warrant exercisable for the purchase of units equal to an aggregate of 4.0% of the units sold in the initial public offering at an exercise price equal to 120% of the offering
price of the units sold in the initial public offering, or $19.20 per unit. Each such unit consists of one ADS (which consists of three ordinary shares) and one warrant to purchase three ordinary shares. The warrant issued to Broadband Capital Management LLC will become exercisable commencing 540
days from January 25, 2010 for a total of 1,440,000 ordinary shares. The warrants underlying the units issuable upon exercise of Broadband Capital Management LLC’s warrant are equivalent to the warrants issued in the initial public offering, except that such warrants are exercisable at 120% of the initial
public offering warrant exercise price ($17.76 for three ordinary shares), are exercisable on a cashless basis, are non-redeemable and have a five-year term. Shareholders Agreement Under the terms of an amended and restated shareholders agreement with our former Series A, Series B and Series C convertible redeemable preferred shareholders, among others, at any time six months after the closing of our initial public offering, any shareholder(s) holding of record at least 15%
of Series A, Series B or Series C registrable securities then outstanding may, on three occasions only, request us to effect the registration, on a form other than Form F-3, of all or part of the Series A, Series B or Series C registrable securities then outstanding. Series A, Series B and Series C registrable
securities are ordinary shares issued or issuable to the holders of our Series A, Series B and Series C convertible redeemable preferred shares or their respective transferees. In addition, upon our company becoming eligible for using Form F-3, any holder of registrable securities may request us to effect a registration statement on Form F-3 for a public offering of registrable securities and we are entitled to use Form F-3, or a comparable form, for such offering. Holders
of registrable securities may demand a registration on Form F-3 on unlimited occasions, although we are not obligated to effect more than two such registrations in any 12-month period. Holders of registrable securities also have “piggyback” registration rights, whereby they may request us to register all or any part of the registrable securities then held by such holders when we register any of our ordinary shares. If any of the offerings involves an underwriting, the managing
underwriter of any such offering has certain rights to limit the number of shares included in such registration. However, the number of registrable securities included in an underwritten public 146
offering subsequent to our initial public offering pursuant to “piggyback” registration rights may not be reduced to less than 25% of the aggregate securities included in such offering. However, no specific damages, payment, transfer or any other consideration to holders of registrable securities is provided
for in the event of non-performance to effect a registration statement. 2008 Share Incentive Plan We have granted share options to some of our directors, officers and related parties. See “Management—2008 Share Incentive Plan.” C. Interests of Experts and Counsel Not applicable. A. Consolidated statements and other financial information. We have appended consolidated financial statements filed as part of this annual report. See Item 18, “Financial Statements.” Legal Proceedings See Item 4, “Information on the Company—Business Overview—Legal Proceedings.” Dividend Policy We have never declared or paid cash dividends on our ordinary shares. We currently intend to retain all of our available funds and future earnings for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Under the terms of our
Amended and Restated Memorandum and Articles of Association the declaration and payment of any dividends in the future will be determined by our board of directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements and overall financial condition
and our ability to receive dividends from our operating subsidiaries. If we pay any dividends, we will pay our ADS holders dividends with respect to their underlying shares to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses
payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars. Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of their respective accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these subsidiaries to make
dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange laws and other laws and regulations. In particular, wholly foreign-owned enterprises in China are required to set aside at least 10% of their after-tax profits each year, if any, to fund their
reserve fund unless such reserve fund has reached 50% of their respective registered capital and to set aside a percentage of their after-tax profits, if any, to their employee bonus and welfare fund which is decided by their respective boards of directors. Sino-foreign equity joint ventures are also required
to set aside a percentage of their annual after-tax profits, if any, to their reserve fund, enterprise development fund and employee bonus and welfare fund at percentages that are decided by their respective boards of directors. PRC domestic companies are required to set aside at least 10% of their after-
tax profits each year, if any, to fund their respective statutory reserve fund unless such fund has reached 50% of their respective registered capital. Such cash reserve may not be distributed as cash dividends. In addition, if any of our PRC operating subsidiaries incurs further debt on its own behalf in the
future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Some of our subsidiaries are restricted from paying dividends by the terms of outstanding loan agreements. See “Risk Factors—Risks Relating to our Company and the PRC Hydropower
Industry—Certain of our operating 147
subsidiaries are parties to loan agreements that provide for lender rights that may adversely affect our ability to operate our business and restrict our ability to pay dividends.” B. Significant Changes ITEM 9. THE OFFER AND LISTING. A. Offering and listing details. Price Range of Our ADSs Our ADSs are listed for trading on the New York Stock Exchange under the symbol “CHC” since January 25, 2010. The following table sets forth the high and low trading prices of our ADSs on the New York Stock Exchange for the periods indicated:
High
Low Yearly highs and lows Year 2010
$
14.80
$
5.60 Quarterly highs and lows First Quarter 2010
14.80
8.51 Second Quarter 2010
9.85
7.12 Third Quarter 2010
8.09
5.60 Fourth Quarter 2010
7.90
5.82 First Quarter 2011
7.64
6.90 Monthly highs and lows January 2010
14.80
12.28 February 2010
12.66
8.58 March 2010
10.49
8.51 April 2010
9.54
8.26 May 2010
9.85
7.14 June 2010
8.21
7.12 July 2010
8.09
5.60 August 2010
6.27
5.63 September 2010
6.19
5.68 October 2010
7.70
5.82 November 2010
7.90
6.69 December 2010
7.65
6.99 January 2011
7.47
6.92 February 2011
7.64
6.90 March 2011 (March 1, 2011 through March 30, 2011)
7.72
7.04 On April 1, 2011, the
closing sale price of our ADSs as reported on the New York Stock Exchange was $7.25
per ADS. Our warrants are listed for trading on the New York Stock Exchange under the symbol “CHCWS” since January 25, 2010. The following table sets forth the monthly high and low trading prices of our ADSs on the New York Stock Exchange for the periods indicated: 148
High
Low Yearly highs and lows Year 2010
1.77
0.28 Quarterly highs and lows First Quarter 2010
1.77
0.35 Second Quarter 2010
1.19
0.35 Third Quarter 2010
1.20
0.45 Fourth Quarter 2010
0.85
0.28 First Quarter 2011 (January 1, 2011 through March 28, 2011) 0.38 0.26 Monthly highs and lows January 2010
$
1.77
$
1.20 February 2010
1.55
0.95 March 2010
1.33
0.35 April 2010
1.10
0.35 May 2010
1.19
0.49 June 2010
0.97
0.48 July 2010
1.20
0.54 August 2010
0.80
0.45 September 2010
0.52
0.42 October 2010
0.72
0.39 November 2010
0.85
0.46 December 2010
0.58
0.28 January 2011
0.39
0.25 February 2011
0.38
0.26 March 2011 (March 1, 2011 through March 28, 2011)
0.35
0.26 On March 28, 2011, the closing sale price of our warrants as reported on the New York Stock Exchange was $0.31 per warrant. B. Plan of Distribution Not applicable. C. Markets See Item 9.A above. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. 149
ITEM 10. ADDITIONAL INFORMATION. A. Share capital Not applicable. B. Memorandum and Articles of Association The following are summaries of material provisions of our amended and restated memorandum and articles of association, as well as the Companies Law (2010 Revision) insofar as they relate to the material terms of our ordinary shares. Registered Office and Objects The Registered Office of our company is situated at the offices of Appleby Trust (Cayman) Ltd., Clifton House, 75 Fort Street, P.O. Box 1350, George Town, Grand Cayman, KY-1108 or at such other place in the Cayman Islands as the directors of the Company may from time to time decide. The
objects for which our company is established are unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law (2010 Revision), as amended from time to time, or any other law of the Cayman Islands. Board of Directors Our board of directors consists of seven directors, including four independent directors. Directors who are in any way, whether directly or indirectly, interested in a contract or proposed contract with our company shall declare the nature of their interest at a meeting of the board of directors.
Following such declaration, a director may vote in respect of any contract or proposed contract notwithstanding his interest. Directors are not required to hold shares; however, a minimum share requirement for directors may be established at a general meeting. Directors may exercise all powers of our
company to borrow money, under our Amended and Restated Memorandum and Articles of Association, in a variety of ways, including issuing bonds and other securities either outright or as security for any debt liability or obligation of our company or of any third party. Ordinary Shares General. The ordinary shares of the Company are issued in book-entry form only. Our shareholders who are nonresidents of the Cayman Islands may freely hold and vote their ordinary shares. Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by the board of directors subject to the Companies Law. All dividends or distributions will be paid out of our realized or unrealized profits, or out of the share premium account or other reserve account
permitted by the Companies Law. Voting Rights. Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show of hands unless a poll is demanded or required by the rules of the designated stock exchange. A poll may be demanded by
(i) the chairman of the meeting, (ii) a shareholder or shareholders present in person by its duly authorized representative or by proxy, and holding not less than one-tenth of the issued share capital of our voting shares; (iii) by at least three shareholders present in person or represented by proxy, or (iv)
any shareholder, present in person or represented by proxy, holding shares conferring the right to vote at such meeting, being shares on which as aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all such shares conferring such right. A quorum required for a meeting of shareholders consists of one or more shareholders present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative, holding not less than one-third of the total voting rights of ordinary shares represented at a
general meeting. Shareholders’ meetings are held annually and may be convened by 150
our board of directors on its own initiative or by one or more members holding an aggregate of one-third of the issued and outstanding shares. Advance notice of at least twenty-one days is required for the convening of a general meeting. No business may be transacted at a general meeting, other than business that is specified in a notice given at the direction of, or otherwise properly brought before the meeting by, our board of directors or is properly brought by a shareholder who provides us with advance notice, in accordance with
our Amended and Restated Memorandum and Articles of Association, describing the business desired to be conducted at the general meeting. An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the
ordinary shares. A special resolution is required for important matters such as a change of name or an amendment to our Amended and Restated Memorandum and Articles of Association. Transfer of Shares. Subject to the restrictions of our Amended and Restated Memorandum and Articles of Association, as more fully described below, any of our shareholders may transfer all or any of his or her ordinary shares by executing an instrument of transfer and, upon approval by the board
in writing, the name of the transferee is entered into the register of shareholders in order for the transfer to become effective. If a shareholder dies, the legal representative of the deceased shareholder is the only person recognized as having title to his share interest. Any person entitled to a share as a result of death or bankruptcy or liquidation or dissolution of a shareholder (or in any other way than by transfer) may, upon
providing evidence of such right, elect to become the holder of the share or nominate someone as the transferee. In either case, our directors have the same right to decline or suspend registration as they would have in the case of a transfer of the share by the shareholder before his death or bankruptcy,
unless the transferee is an immediate family member of the shareholder or a trust for their benefit. Liquidation. On a return of capital on winding-up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among the holders of ordinary shares will be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available
for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately. Redemption of Shares. Subject to the provisions of the Companies Law and our Amended and Restated Memorandum and Articles of Association and to any special rights conferred on the holders of any shares or class of shares, the board of directors may issue shares on terms that they are subject
to redemption at the option of the board or at the option of the holders, on such terms and in such manner as may be determined by ordinary resolution, before the issue of the shares. Variations of Rights of Shares. The rights attached to any class of shares may, subject to the provisions of the Companies Law and to any special rights attached to any class of shares, be varied with the sanction of a special resolution passed at a separate general meeting of the holders of the shares
of that class at which the necessary quorum shall be one or more persons holding or representing by proxy not less than one-third of the issued shares of that class. Cumulative Voting. Under Cayman Islands law, cumulative voting is allowed. However, under our Amended and Restated Memorandum and Articles of Association cumulative voting is not allowed. Cumulative voting potentially facilitates the representation of minority shareholders on a board of
directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. Designations and Classes of Shares. Upon the closing of this offering all of our issued shares will be ordinary shares. Our Amended and Restated Articles of Association provide that our authorized 151
unissued shares shall be at the disposal of our board of directors, which may subject to any special rights conferred on the holders of any shares or class of shares, offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms
and conditions as our board may in its absolute discretion determine. In particular, our board of directors is empowered to redesignate from time to time authorized and unissued ordinary shares as other classes or series of shares, to authorize from time to time the issuance of one or more series of
preferred shares and to fix the designations, powers, preferences and relative, participating, optional and other rights, if any, and the qualifications, limitations and restrictions thereof, if any, including without limitation, the number of shares constituting each such class or series, dividend rights, conversion
rights, redemption privileges, voting powers and liquidation preferences, and to increase or decrease the size of any such class or series, to the extent permitted by the Amended and Restated Articles of Association and the Companies Law. Preferred Shares Our board of directors will have the authority, without further action by our shareholders, to issue new preferred shares in one or more tranches, which may have powers and rights, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, greater than
the rights associated with our ordinary shares. These new preferred shares could thus be issued quickly, and could have terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues new preferred shares, the market
price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected. C. Material Contracts We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4, “Information on the Company” and in Item 7, “Major Shareholders and Related Party Transactions” or elsewhere in this annual report on Form 20-F. D. Exchange Controls Please refer to Item 4, “Information on the Company—Regulation”. E. Taxation (The final shall be the same as in the Audit Financial) The following summary of the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our securities is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal
with all possible tax consequences relating to an investment in our securities, such as the tax consequences under state, local, non-U.S., non-PRC and non-Cayman Islands tax laws. Cayman Islands Taxation The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to the Company levied by the Government of the
Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double taxation treaties, save for a Double Taxation Arrangement with the United Kingdom which was signed
on 16 June 2009 but which is not, as of the date hereof, in force. There are no exchange control regulations or currency restrictions in the Cayman Islands, apart from standard anti-money laundering legislation. No Cayman Islands stamp duty will be payable by you in respect of the issue or transfer of ordinary shares or warrants. However, an instrument transferring title to an ordinary share or 152
warrant, if brought to or executed in the Cayman Islands, would be subject to Cayman Islands stamp duty. People’s Republic of China Taxation Under the Enterprise Income Tax Law of 2007 and its Implementation Regulations, both of which became effective on January 1, 2008, an enterprise established outside the PRC with its “de facto management body” within the PRC is considered a resident enterprise. The “de facto management
body” is defined as an organization that exercises material and full management and control over matters including the enterprise’s production and operations, personnel, finance and property. At present, the PRC tax authorities have not issued any guidance on the application of the new EIT Law and its
Implementation Regulations on non-Chinese enterprises or non-Chinese group enterprises and their controlled entities. As a result, it is unclear what factors will be used by the PRC tax authorities to determine whether we are a “de facto management body” in China. However, a substantial number of
our management members reside in the PRC, and almost all of our revenues derive from our operations in the PRC. We may therefore be treated as a resident enterprise for PRC tax purposes and be subject to an enterprise income tax rate of 25% on our worldwide income. Dividends received directly
from another PRC tax resident enterprise may be exempted from the taxable income. Moreover, the Enterprise Income Tax and its Implementation Regulations provide that an income tax rate of 10% will be applicable to dividends payable to non-PRC shareholders that are derived from sources within the PRC, unless a tax treaty exists between the PRC and the relevant jurisdictions
where such non-PRC shareholders reside and such treaty provides for a reduction or exemption of the relevant tax. If we are considered a non-resident enterprise, dividends we received from our PRC resident subsidiaries will be subject to the 10% PRC income tax. Cayman Islands, where our company
was incorporated, has not concluded any tax treaty with the PRC. Furthermore, if we are treated as a resident enterprise for PRC tax purposes, it is unclear whether dividends you receive on our ordinary shares or ADSs, or the gain you may realize from the disposition of our ordinary shares, ADSs or
warrants, would be treated as income derived from sources within the PRC and would be subject to PRC tax. It is also unclear whether, if we would be treated as a resident enterprise for PRC tax purposes, holders of our ordinary shares, ADSs or warrants might be able to enjoy the benefit of income
tax treaties entered into between the PRC and other countries. On February 20, 2009, the State Administration of Taxation promulgated the Notice on Relevant Issues of Implementing Dividend Clauses under Tax Treaties, or the Notice. According to the 2009 Notice, no enterprise is entitled to enjoy preferential treatment on dividend withholding tax rates
pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the major purpose for which is to obtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the applicable tax rates, if it determines
that any tax payer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. Since the 2009 Notice is newly issued, it remains unclear how the PRC tax authorities will implement it in practice and to what extent it will affect the dividend withholding tax rates for
dividends distributed by our subsidiaries in the PRC to our Hong Kong subsidiary. If the relevant tax authority determines that our Hong Kong subsidiary was set up for the purpose of taking advantage of the preferential tax rates on dividends, the higher 10% withholding tax rate may apply to such
dividend, which will reduce the funds ultimately available to pay dividends to our shareholders. On August 24, 2009, the State Administration of Taxation promulgated the Administrative Measures for Enjoyment of Tax Treaty Treatments by Non-residents (Trial), or the Administrative Measures, with the effective date on October 1, 2009. Pursuant to the Administrative Measures, the treatment
under tax treaties refers to the tax liabilities that should be paid according to the PRC tax laws but can be reduced or exempted under tax treaties. Where non-residents, including non-resident enterprises and non-resident individuals, enjoy special treatment under tax treaties in terms of dividends, interest,
royalties or property gains, such non-residents shall apply to the competent tax 153
authorities for examination and approval in accordance with the Administrative Measures; otherwise, they will not be able to enjoy the treatment under the tax treaties. We expect to receive approval of our preferential dividend withholding rate for our Hong Kong subsidiary. However if the preferential
rate were for any reason not approved, it would reduce the funds ultimately available to pay dividends to our shareholders. U.S. Federal Income Taxation Introduction The following discusses the material U.S. federal income tax consequences of the purchase, ownership and disposition of the ordinary shares, ADSs or warrants, which we refer to collectively as our securities, by U.S. Holders, as defined below. This discussion applies only to U.S. Holders that
purchase and hold the securities as capital assets. This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject
to change, possibly with retroactive effect, or to different interpretation. This discussion does not address all of the tax considerations that may be relevant to specific holders in light of their particular circumstances or to holders subject to special treatment under U.S. federal income tax law, such as
banks, other financial institutions, insurance companies, tax-exempt entities, persons who acquired the securities pursuant to the exercise of employee stock options, participation in an employee stock purchase plan or otherwise as compensation, regulated investment companies, real estate investment trusts,
dealers in securities, brokers, U.S. expatriates, persons subject to the alternative minimum tax, persons who have acquired the securities as part of a straddle, hedge, conversion transaction or other integrated investment, persons that have a “functional currency” other than the U.S. dollar or persons that
own, or are deemed to own, 10% or more, by voting power, of our stock. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our securities through such entities. If a partnership holds securities, the consequences to a partner
will depend upon the status of the partner and upon the activities of the partnership. A partner of a partnership holding securities should consult its own tax adviser regarding the U.S. tax consequences of its investment in the securities through the partnership. This discussion does not address any U.S.
state or local or non-U.S. tax considerations or any U.S. federal estate, gift or alternative minimum tax considerations. Further, the discussion below assumes that any distributions made (or deemed made) on the securities and any consideration received by a holder in consideration for the sale or other
disposition of the securities will be in U.S. dollars. As used in this discussion, the term “U.S. Holder” means a beneficial owner of the securities that is, for U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes,
created or organized in or under the laws of the United States or of any state or political subdivision thereof or therein, including the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of the source thereof, or (iv) a trust with respect to which a court
within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or certain electing trusts that were in existence on August 19, 1996 and were treated as domestic trusts on that date. If a
beneficial owner of the securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The U.S. federal income tax consequences applicable specifically to Non-
U.S. Holders are described below under the heading “Tax Consequences to Non-U.S. Holders of Ordinary Shares and Warrants”. The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement have and will be complied with in accordance with their terms. For U.S. federal income tax purposes, a holder of an ADS
should be treated as the beneficial owner of the ordinary shares represented by the ADSs and 154
exchanges of ordinary shares for ADSs, and ADSs for ordinary shares, should not be subject to U.S. federal income tax. The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming by U.S. Holders of ADSs of foreign tax credits for U.S. federal income tax purposes. Such actions would also be inconsistent with the claiming of the
reduced rate of tax applicable to dividends received by certain non-corporate U.S. Holders, including individual U.S. Holders, as described below. Accordingly, the availability of foreign tax credits or the reduced tax rate for dividends received by certain non-corporate U.S. Holders, including individual
U.S. Holders, could be affected by future actions that the U.S. Treasury or parties to whom ADSs are pre-released may take. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSIDERATIONS APPLICABLE TO THEM RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE SECURITIES, INCLUDING THE
APPLICABILITY OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS OR NON-U.S. TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS. Tax Consequences to U.S. Holders of Ordinary Shares and Warrants Exercise of a Warrant Subject to the PFIC rules discussed below, a U.S. Holder generally will not recognize gain or loss upon the exercise of a warrant. Ordinary shares acquired pursuant to the exercise of a warrant for cash generally will have a tax basis equal to the U.S. Holder’s tax basis in the warrant (that is, the
portion of the U.S. Holder’s purchase price for a unit that is allocated to the warrant), increased by the amount paid to exercise the warrant. The holding period of such ordinary shares generally would begin on the day after the date of exercise of the warrant. Sale, Taxable Exchange, Redemption or Expiration of a Warrant Subject to the PFIC rules discussed below, upon a sale, taxable exchange (but not exercise), or redemption of a warrant, a U.S. Holder will recognize gain or loss in an amount equal to the difference between (i) the amount realized upon such disposition (or, if the warrant is disposed of through the
disposition of a unit, the portion of the amount realized on such disposition that is allocated to the warrant based on the then fair market values of the warrant and the ordinary share included in the unit) and (ii) the U.S. Holder’s tax basis in the warrant (that is, the portion of the U.S. Holder’s
purchase price for a unit that is allocated to the warrant). Upon expiration of a warrant, a U.S. Holder will recognize a loss in an amount equal to the U.S. Holder’s tax basis in the warrant. Any such gain or loss would generally be treated as capital gain or loss and will be long-term capital gain or loss
if the warrant was held by the U.S. Holder for more than one year at the time of such disposition or expiration. As discussed below in “Sale or other Disposition of Ordinary Shares or ADSs,” the deductibility of capital losses is subject to various limitations, as is the deduction for losses upon a taxable
disposition by a U.S. Holder of a warrant (whether or not held as part of a unit) if, within a period beginning 30 days before the date of such disposition and ending 30 days after such date, such U.S. Holder has acquired (by purchase or by an exchange on which the entire amount of gain or loss was
recognized by law), or has entered into a contract or option so to acquire, substantially identical securities. If PRC taxes apply to any gain from the disposition of a warrant by a U.S. Holder (see “Taxation—People’s Republic of China Taxation,” above), such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and a
U.S. Holder may be entitled to certain benefits under the income tax treaty between the United States and the PRC. The rules relating to the U.S. foreign tax credit are complex. U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the
benefits of the income tax treaty between the United States and the PRC. 155
Dividends Subject to the discussion below under “—Passive Foreign Investment Company” and “—Controlled Foreign Corporation,” the gross amount of any distribution made by us on the ordinary shares or ADSs, other than certain pro rata distributions of ordinary shares or ADSs or rights to acquire ordinary
shares or ADSs and certain distributions in redemption of ordinary shares or ADSs, will be treated as a dividend includible in the gross income of a U.S. Holder as ordinary income to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles,
when actually or constructively received by the U.S. Holder, in the case of ordinary shares, or when actually or constructively received by the depositary, in the case of ADSs. To the extent the amount of such distribution exceeds our current and accumulated earnings and profits as so computed, it will
be treated first as a non-taxable return of capital to the extent of such U.S. Holder’s adjusted tax basis in such ordinary shares or ADSs and, to the extent the amount of such distribution exceeds such adjusted tax basis, will be treated as gain from the sale of such ordinary shares or ADSs. We, however,
may not calculate earnings and profits in accordance with U.S. federal income tax principles. In this case, U.S. Holders may have to treat all distributions as dividends. Certain dividends received by non-corporate U.S. Holders, including individuals, in taxable years beginning before January 1, 2011, will be subject to a maximum income tax rate of 15%. This reduced income tax rate is applicable to dividends paid by “qualified foreign corporations” and only with
respect to ordinary shares or ADSs held for a minimum holding period of at least 61 days during a specified 121-day period, and if certain other conditions are met. A qualified foreign corporation is any non-U.S. corporation if (a) either (i) its stock is readily tradable on an established securities market
in the United States or (ii) it is eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program, and (b) it is not a passive foreign investment company (as discussed below) for both the taxable year in which the dividend is paid and the
preceding taxable year. We expect to be considered a qualified foreign corporation because our ADSs will be listed on the NYSE. Accordingly, subject to the discussions below under “—Passive Foreign Investment Company” and “—Controlled Foreign Corporation,” dividends paid by us on our ADSs should
be eligible for the reduced income tax rate. In addition, if we are treated as a “resident enterprise” for PRC tax purposes under the EIT Law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC, see “Taxation—People’s Republic of China Taxation”.
Dividends paid by us will not be eligible for the “dividends received” deduction allowed to corporate shareholders with respect to dividends received from U.S. corporations. The U.S. Treasury Department has announced its intention to promulgate rules pursuant to which U.S. Holders of the ordinary
shares or ADSs and intermediaries through whom such ordinary shares or ADSs are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such rules have not yet been issued, it is not clear whether we will be in a position to
comply with them. U.S. Holders should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their particular circumstances. Dividends paid by us will constitute income from sources outside the United States for U.S. foreign tax credit limitation purposes and will be categorized as “passive category income” or, in the case of certain U.S. Holders, as “general category income” for U.S. foreign tax credit purposes. If PRC
withholding taxes apply to dividends paid to a U.S. Holder with respect to our ADSs or ordinary shares, see “Taxation—People’s Republic of China Taxation”, subject to certain conditions and limitations, such PRC withholding taxes may be treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability. The rules relating to the U.S. foreign tax credit are complex. U.S. Holders should consult their own tax advisors regarding the effect of these rules in their particular circumstance. Certain distributions of additional ordinary shares or ADSs to U.S. Holders with respect to their ordinary shares or ADSs that is made as part of a pro rata distribution to all shareholders will not be subject to U.S. federal income tax. 156
Sale or Other Disposition of Ordinary Shares or ADSs Subject to the discussion below under “—Passive Foreign Investment Company” and “—Controlled Foreign Corporation,” a U.S. Holder will recognize gain or loss for U.S. federal income tax purposes upon a sale or other disposition of the ordinary shares or ADSs in an amount equal to the difference
between the amount realized from such sale or disposition and the U.S. Holder’s adjusted tax basis in such ordinary shares or ADSs. Such gain or loss will be a capital gain or loss and will be long-term capital gain, taxable at a reduced rate for non-corporate U.S. Holders, including individuals, or loss if,
on the date of sale or disposition, such ordinary shares or ADSs were held by such U.S. Holder for more than one year. The deductibility of capital losses is subject to limitations under the Code. Any gain or loss on the sale or disposition by a U.S. Holder will be treated as U.S. source income or loss for
U.S. foreign tax credit limitation purposes, subject to certain exceptions and limitations. However, if we are treated as a “resident enterprise” for PRC tax purposes, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC tax were to be
imposed on any gain from the disposition of the ADSs or ordinary shares, see “Taxation—People’s Republic of China Taxation”, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income. The U.S.
foreign tax credit rules are complex. Therefore, U.S. Holders should consult their own tax advisors regarding the application of such foreign tax credit rules. Controlled Foreign Corporation Special rules may apply to certain U.S. Holders if we are considered a controlled foreign corporation. A controlled foreign corporation, or CFC, is a foreign corporation in which U.S. Holders, who each own directly, indirectly or constructively at least 10% of the voting power of the foreign
corporation (each a U.S. 10% shareholder), collectively own more than 50% of the total combined voting power or total value of the corporation. Under the aforementioned constructive ownership rules, a U.S. Holder’s warrants (or other options to acquire shares or ADSs) will be taken into account in
determining whether such U.S. Holder is a U.S. 10% shareholder. There is a possibility that we may be a CFC following the issuance of the ADSs. If we were a CFC for an uninterrupted period of 30 days or more during a taxable year, a U.S. 10% shareholder on the last day of our taxable year on
which we were a CFC must include in income its pro rata share of our subpart F income and may be required to include in income its pro rata share of investment by us in U.S. property. Subpart F income includes, among other things, interest, dividends and other types of passive investment income.
Further, if we were a CFC, some or all of the gain from the sale of our stock by a U.S. 10% shareholder may be characterized as ordinary dividend income rather than capital gain and the taxation of distributions made by us to such a shareholder would be subject to special rules. The particular
consequences of CFC status for a U.S. 10% shareholder cannot be determined until the last day of our taxable year on which we were a CFC. However, our status as a CFC would not affect the tax treatment of a U.S. Holder that is not a U.S. 10% shareholder. Prospective investors should consult their
own tax advisors to determine whether an ownership interest in us would cause them to become a U.S. 10% shareholder of our company or any of our subsidiaries and to determine the impact of such a classification. Passive Foreign Investment Company Although we are unable to predict our income and the composition of our assets with certainty, based on the composition of our assets and income and the current expectations regarding the amount of the proceeds of the initial public offering, we believe that we should not be treated as a PFIC for
U.S. federal income tax purposes with respect to our 2009 or 2010 taxable year and we do not intend or anticipate becoming a PFIC for any future taxable year. However, the determination of PFIC status is a factual determination that must be made annually at the close of each taxable year and
depends on our current, future and projected financial data, the composition of our income and assets and, without limitation, on how quickly and to what extent we are and will be able to spend the cash and working capital raised in the initial public offering. In addition, a decrease in the 157
trading price of the securities may cause us to be considered a PFIC in the current or any subsequent year. Therefore, there can be no assurances that we will not be treated as a PFIC for 2009, 2010 or any other taxable year. A non-U.S. corporation will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of its gross income (including the gross income of certain 25% or more-owned corporate subsidiaries) is “passive income” or (ii) at least 50% of the value
(including the assets of certain 25% or more-owned corporate subsidiaries) of its assets, including any cash and working capital that may be raised in an offering such as the initial public offering, based on an average of the quarterly values of the assets during such year, is attributable to assets that
produce passive income or are held for the production of passive income. Passive income for this purpose includes, among other things, dividends, interest, royalties, rents and gains from commodities and securities transactions. Passive income does not include rents and royalties derived from the active
conduct of a trade or business. If we are a PFIC in any year during which a U.S. Holder owns the securities, such U.S. Holder may experience certain adverse tax consequences. Such U.S. Holder could be liable for additional taxes and interest charges (i) upon “excess distributions,” which include distributions received by the U.S.
Holder on our securities during the year, but only to the extent that the aggregate of the distributions for the taxable year exceeds 125% of the average amount of distributions received by the U.S. Holder in the preceding three years, or (ii) upon a sale or other disposition of the securities at a gain,
whether or not we continue to be a PFIC. The tax will be determined by allocating the excess distribution or recognized gain ratably to each day of the U.S. Holder’s holding period. The amount allocated to the current taxable year and any taxable year with respect to which we were not a PFIC will be
taxed as ordinary income, rather than capital gain, earned in the current taxable year. The amount allocated to other taxable years will be taxed at the highest marginal rates applicable to ordinary income for such taxable years and, in addition, an interest charge will be imposed on the amount of such
taxes. With respect to U.S. Holders of ADSs, these adverse tax consequences may be avoided if the U.S. Holder is eligible to and does elect to annually mark-to-market the ADSs. If a U.S. Holder makes a mark-to-market election with respect to the ADSs, such holder will include as ordinary income the excess, if any, of the fair market value of the ADSs at the end of each taxable year over their adjusted basis, and will be permitted an ordinary loss in respect of the excess, if
any, of the adjusted basis of the ADSs over their fair market value at the end of the taxable year, but only to the extent of the net amount of previously included income as a result of the mark-to-market election. Any gain recognized on the sale or other disposition of the securities will be treated as
ordinary income. The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange or other market, as defined in the applicable Treasury regulations. We expect
the ADSs to be “marketable stock” because our ADSs will be listed on the NYSE. Alternatively, a U.S. Holder of stock (but not warrants) in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder that makes a valid qualified electing fund election with respect to a PFIC will include in gross
income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if the PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable
U.S. Treasury regulations, and we do not intend to prepare or provide the information that would entitle U.S. Holders to make a qualified electing fund election. If we are regarded as a PFIC, a U.S. Holder of ordinary shares or ADSs must make an annual return on IRS Form 8621, reporting distributions received and gains realized with respect to these interests. The reduced tax rate for dividend income, as discussed above under “—Dividends,” is not
applicable to dividends paid by a PFIC. Further, if we are regarded as a PFIC, under Code Section 1289(f), which was added to the Code on March 18, 2010, a U.S. Holder of ordinary shares or ADSs may be required to file an annual information return even if such person did not recognize gain on 158
the sale of such PFIC stock received a distribution from such PFIC, or made a QEF election with respect to such PFIC. A PFIC that is also a CFC (see “Controlled Foreign Corporation”, above) will not be treated as a PFIC with respect to certain 10% U.S. Holders. For the exception to apply, (i) the corporation much be a CFC within the meaning of section 957(a) of the Code and (ii) the U.S. Holder must be
subject to the current inclusion rules of Subpart F with respect to such corporation (i.e., the U.S. Holder is a U.S. Holder is a U.S. 10% shareholder—see “Controlled Foreign Corporation”, above). If we were to be considered a PFIC during a taxable year in which we are also considered a CFC, U.S. Holders who are U.S. 10% shareholders with respect to our securities will not be subject to the PFIC rules with respect to the same stock. The PFIC rules will however continue to apply to U.S.
Holders who are not U.S. 10% shareholders of a CFC and U.S. Holders who cease to be U.S. 10% shareholders to a CFC. Prospective investors should consult their own tax advisors regarding the U.S. federal income tax consequences of an investment in a PFIC. Tax Consequences to Non-U.S. Holders of Ordinary Shares and Warrants Dividends paid to a Non-U.S. Holder in respect of ADSs or ordinary shares generally will not be subject to U.S. federal income tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States). In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of ADSs, ordinary shares or warrants unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by
an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other disposition and certain other
conditions are met (in which case, such gain from United States sources generally is subject to tax at a 30% rate or a lower applicable tax treaty rate). Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject to tax in
the same manner as for a U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate. The U.S. federal income tax treatment of a Non-U.S. Holders’s exercise of a warrant generally will correspond to the U.S. federal income tax treatment of the exercise of a warrant by a U.S. Holder, as described under “Tax Consequences to U.S. Holders of Ordinary Shares and Warrants—Exercise of
Warrants” above. Backup Withholding and Information Reporting Dividend payments made to U.S. Holders and proceeds paid from the sale or other disposition of their ordinary shares or ADSs may be subject to information reporting to the Internal Revenue Service and possible U.S. federal backup withholding at a current rate of 28%. Certain exempt recipients,
such as corporations, are not subject to these information reporting requirements. Backup withholding will not apply to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification, or who is otherwise exempt from backup withholding. U.S. Holders who
are required to establish their exempt status must provide IRS Form W-9 (Request for Taxpayer Identification Number and Certification). 159
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a holder’s U.S. federal income tax liability. A holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with
the Internal Revenue Service in a timely manner and furnishing any required information. Prospective investors should consult their own tax advisors as to their qualification for an exemption from backup withholding and the procedure for obtaining this exemption. F. Dividends and Paying Agents Not applicable. G. Statement by Experts. Not applicable. H. Documents on Display We previously filed with the Securities and Exchange Commission our registration statement on Form F-1. We have filed this annual report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Statements made in this annual report as to the contents of any document referred to are not necessarily complete. With respect to each such
document filed as an exhibit to this annual report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. We are subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information which we filed with the Securities and Exchange Commission, including this annual report on Form 20-F, may
be inspected and copied at the public reference room of the Securities and Exchange Commission at 450 Fifth Street N.W. Washington D.C. 20549. You can also obtain copies of this annual report on Form 20-F by mail from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and
Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is 1-800-SEC-0330. I. Subsidiaries Information Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Quantitative and Qualitative Disclosures about Market Risk Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, and foreign currency exchange rates. Interest rate risk Our exposure to interest rate risk primarily relates to the interest rates for our outstanding debt and the interest income generated by excess cash, which is held primarily in interest-bearing bank deposits or investment products provided by PRC banks. The long-term loans outstanding as of 160
December 31, 2010 totaled 285.1 million, relating to RMB denominated loans of $18.6 million, $17.4 million, $13.5 million, $20.7 million, $29.5 million, $18.1 million, $9.5 million, $10.0 million, $12.5 million, $19.9 million, $10.7 million, $23.5 million, $40.6 million, $18.4 million and $22.0 million obtained by
Binglangjiang, Hengda, Xineng, Xiaopengzu, Wuliting, Yingchuan, Zhougongyuan, Shapulong, Ruiyang, Jiulongshan, Yuanping, Yuheng, Banzhu, Wangkeng, Jingling and its subsidiaries respectively. The average interest rate on our long-term loans for the 2010 was 6.26%. Assuming the principal amount
of the outstanding long-term borrowings remains approximately the same as of December 31, 2010 a 1.0% increase in each applicable interest rate would add approximately $2.9 million to our interest expense in 2010. We have not used derivative financial instruments in our investment portfolio. Interest-
bearing instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in market interest rates. However, our future interest income, in particular interest income on the proceeds from the initial public offering and from
other equity financings, may fall short of expectations due to changes in market interest rates. Foreign currency risk The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic condition. Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Currently the Renminbi exchange rate versus the U.S. dollar is
restricted to a rise or fall of no more than 0.5% per day and the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate. This change in policy has resulted in an appreciation of the RMB against the U.S. dollar of
approximately 6.5%, 6.4%, 0.1%, and 3.0% in 2007, 2008, 2009 and 2010, respectively. The Renminbi may appreciate or depreciate significantly in value against the U.S. dollar. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate
and reduce their level of intervention in the foreign exchange market. Because substantially all of our earnings and cash assets are denominated in Renminbi and the net proceeds from our initial public offering were denominated, and we maintain our consolidated financial statements in U.S. dollars,
fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of these proceeds and our balance sheet and earnings per share. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollars without giving effect to any underlying change in our business or results of operations. Fluctuations in the Renminbi/U.S. dollar exchange rate will also affect the relative value of any dividend we reserve that will be exchanged into U.S. dollars and earnings from, and the
value of, any Renminbi-denominated investments we make in the future. We have not entered into any hedging transactions that would reduce or increase our exposure to this foreign currency exchange risk. If the value of the Renminbi was to increase before we invested the proceeds from our initial
public offering in assets denominated in Renminbi or to pay Renminbi-denominated expenses, the value of those U.S. dollar-denominated proceeds would be proportionally less. Inflation In recent years, China has not experienced significant inflation, and therefore inflation has not had a significant effect on our business. According to the National Bureau of Statistics of China, the change in the Consumer Price Index in China was 4.8%, 5.9%, 5.2% and 3.3% in 2007, 2008, 2009 and
2010, respectively. Based on the upward change of the Consumer Price Index in late 2007, the PRC government announced measures to restrict bank lending and investment in China in order to reduce inflationary pressures on China’s economy. The People’s Bank of China’s benchmark loan interest rate
for one-year RMB denominated loans was 6.12%, 7.47%, 5.31% and 5.81% in 2007, 2008, 2009 and 2010, respectively. 161
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. A. Debt securities Not applicable. B. Warrants and Rights Not applicable. C. Other securities Not applicable. D. American Depositary Shares Fees and Charges Our ADS holders May Have to Pay The Bank of New York Mellon, the depositary of our ADS program, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making
distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-
entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares or
For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
•
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
•
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
$0.02 or less per ADS (or portion )
•
Any cash distribution made pursuant to the deposit agreement
•
Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to registered ADS holders
•
Depositary services
•
Expenses of the depositary
•
Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
•
Converting foreign currency to U.S. dollars
Registration or transfer fees
Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
Any charges incurred by the depositary or its agents for servicing the deposited securities
As necessary
Taxes and other governmental charges the depositary or the As necessary custodian has to pay on any ADS or share underlying an ADS, for
example, stock transfer taxes, stamp duty or withholding taxes
As necessary 162
ADS holders must pay:
Fees and Other Payments Made by the Depositary to Us The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses they incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for its continuing annual stock exchange listing fees. The depositary has
also agreed to pay the standard out-of-pocket maintenance costs up to certain amount for the ADRs, which consist of the standard out-of-pocket legal fees and disbursements, including preparing and deposit Agreement and Form F-6. It also agreed to waive us certain value-added services fees,
certain technology services fees, and certain administration and ongoing ADR holder servicing fees. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary
collects from investors. From December 31, 2009 through December 31, 2010, the depository reimbursed us a gross amount of $600,000. The depository also waived us an amount of $97,718 for certain technology services fees such as ADR insight and certain administration ADR holder servicing fees. ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. None of these events occurred in any of the years ended December 31, 2008, 2009 and 2010. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. Not applicable. ITEM 15. CONTROLS AND PROCEDURES. Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”))
as of December 31, 2010 (the "Evaluation Date"), the end of the fiscal year covered by this annual report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the evaluation date, our disclosure controls and procedures were effective, to ensure that
information required to be disclosed by our company in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria in the Internal Control-Integrated Framework issued by the
Committee on Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that, as of December 31, 2010, our internal control over financial reporting was effective 163
in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. In view of the limited timeframe between date of acquisition and December 31, 2010, management has excluded from our assessment of internal control over financial reporting at Henan WuYue Storage Power Generating Co., Ltd., YingJiang County QinRui HuSaHe Hydropower Power Co.,Ltd.,
FuGong County HengDa Hydroelectric Development Co., Ltd., FuGong County XiNeng Hydroelectric Development Co., Ltd., LuQuan XiaoPengZu Electric Power Development Co., Ltd., Shaowu City Jinling Hydropower Co., Ltd., Shaowu City Jinlong Hydropower Co., Ltd., Shaowu City Jintang
Hydropower Co., Ltd. and Shaowu City Jinwei Hydropower Co., Ltd., which were acquired by us on the date illustrated in the following table and whose aggregated financial statements constitute 30 percent of total assets and 7 percent of revenues of the consolidated financial statement amounts as of
and for the year ended December 31, 2010. Management was also of the view that any potential risk from these acquired entities is manageable and should not be a key concern for the year.
Acquired Company Name
Acquisition Date
Henan WuYue Storage Power Generating Co., Ltd.
23 March, 2010
YingJiang County QinRui HuSaHe Hydropower Co.,Ltd.
19 April, 2010
FuGong County HengDa Hydroelectric Development Co., Ltd.
22 June,2010
FuGong County XiNeng Hydroelectric Development Co., Ltd.
16 Aug, 2010,
LuQuan XiaoPengZu Electric Power Development Co., Ltd.
8 September, 2010
Shaowu City Jinling Hydropower Co., Ltd.
30 December, 2010
Shaowu City Jinlong Hydropower Co., Ltd.
30 December, 2010
Shaowu City Jintang Hydropower Co., Ltd.
30 December, 2010
Shaowu City Jinwei Hydropower Co., Ltd.
30 December, 2010 This annual report does not include an attestation report of our registered public accounting firm, Ernst & Young Hua Ming, regarding our internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that permit us, non-accelerated filer, to provide only management’s report in this annual report. Changes in Internal Control over Financial Reporting We previously disclosed in our annual report on Form 20-F for the year ended December 31, 2009 that we had identified the following material weaknesses in internal control over financial reporting:
(i)
Insufficient U.S. GAAP qualified accounting and finance personnel and (ii) Ineffective process for documenting and applying key accounting policies and procedures. During 2010, we implemented the following remediation measures to address the weaknesses described above:
(i)
Hired a financial controller and tax accountant with sufficient U.S. GAAP competence in our financial reporting function to improve the quality of our U.S. GAAP accounting books and records, primarily in the area of income tax accounting and acquisition accounting; A U.S. GAAP reporting
team consisted of 6 personnel with rich U.S. GAAP working experiences and practices, under the leadership of our Chief Financial Officer, has been formed; (ii) Provided additional training to our existing financial and accounting personnel, including areas of new and emerging accounting standards, to furnish them with adequate knowledge of U.S. GAAP and SEC rules and disclosure requirements; (iii) Established a Significant Accounting Policies and Accounting Estimates manual as a critical accounting guidance to address significant accounting issues and assist accounting and finance personnel across all subsidiaries in preparing financial statements in compliance with U.S. GAAP and SEC
requirements; 164
(iv) Standardized the period-end closing checklist as well as the consolidation and reporting package across all subsidiaries with specific timing and content requirements to enhance controls over period closing and financial reporting processes; (v) Hired a director of internal compliance and set up internal audit function. Engaged a professional consulting company to work with our internal audit and information technology resources in evaluating, implementing and testing of internal control over financial reporting on a full scale; (vi) Held regular meetings of the audit committee to discuss significant accounting issues and approve the financial statements and others; and (vii) Established anonymous whistleblower systems for reporting violations of our governance policies, including policies regarding internal controls. As of December 31, 2010, management determined that the applicable controls were effectively designed and operating so as to enable management to conclude that the aforementioned material weaknesses have been remediated. Except for the remedial measures described above, there have been no significant changes in our internal control over financial reporting during the year ended December 31, 2010 that have materially affected, or a reasonably likely to materially affect, our internal control over financial reporting. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT. Our audit committee consists of Mr. Anthony Dixon, Dr. Yong Cao and Mr. Stephen Outerbridge, each of whom we believe satisfies the “independence” requirements under current NYSE rules and Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Mr. Dixon acts as the chairman
of our audit committee. Our board of directors has determined that Mr. Dixon qualifies as an “audit committee financial expert” under applicable SEC rules. Our board of directors has adopted a code of business conduct and ethics that is applicable to all of our directors, officers and employees. Our code of ethics and our code of conduct are publicly available on our website. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Ernst & Young Hua Ming, our independent registered public accounting firm, for the periods indicated. We did not pay any other fees to our independent auditors
during the periods indicated below.
For the Year
2009
2010
(In US $ thousands) Audit fees(1)
$
3,153
$
1,807 Audit-related fees(2)
86
— Tax fees
—
— Other fees
$
—
$
—
(1) 165
Ended December 31,
Audit fees consist of fees billed associated with the annual audit, the reviews of our interim financial statements, the audit and report on the financial statements of the entities acquired by the Company. They also include the audit and review of financial statements and other assurance services
rendered in connection with our initial public offering on January 25, 2010. Fees billed for those services that are normally provided by the independent auditors in connection with regulatory filings are also included.
(2) Audit-related fees consist of the fees paid to the independent accountants for the review of our entity level controls. The policy of our audit committee is to pre-approve all audit and non-audit services provided by Ernst & Young Hua Ming, including audit services, audit-related services, tax services and other services as described above are approved by the Audit Committee prior to the commencement to services. ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. None. ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. None. ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT. Not applicable. ITEM 16G. CORPORATE GOVERNANCE. Differences Between the Our Current Corporate Governance Practices and the NYSE Corporate Governance Requirements Applicable to Domestic US Companies Our American Depositary Shares are listed on the New York Stock Exchange (the “NYSE”). As such, we are subject to corporate governance requirements imposed by the NYSE. Under Section 303A of the NYSE’s Listed Company Manual, NYSE-listed non-US companies such as ourselves may, in
general, follow their home country corporate governance practices in lieu of some of the NYSE corporate governance requirements. A NYSE-listed non-US company is simply required to provide a general summary of the significant differences to its US investors either on the company website or in its
annual report distributed to its US investors. We are committed to a high standard of corporate governance. As such, we endeavor to comply with the NYSE corporate governance practices and there is no significant difference between our corporate governance practices and what the NYSE requires of
domestic US companies. 166
ITEM 17. FINANCIAL STATEMENTS. We have elected to provide financial statements pursuant to Item 18. ITEM 18. FINANCIAL STATEMENTS. Our consolidated financial statements are included at the end of this annual report. ITEM 19. EXHIBITS.
1.1
Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to Exhibit 3.1 to our Report on Form 6-K filed with the SEC on October 1, 2010)
2.1
Form of Ordinary Share Certificate (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
2.2
Form of Deposit Agreement between the Registrant and the Bank of New York Mellon as depositary (incorporated by reference to Exhibit 4.2 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
2.3
Form of American depositary receipt evidencing American depositary shares (included in Exhibit 2.2)
2.4
Amended and Restated Shareholders Agreement, dated October 27, 2009, amongst the Registrant and its shareholders (incorporated by reference to Exhibit 4.4 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
2.5
Amended and Restated Right of First Offer and Co-Sale Agreement, dated October 27, 2009, amongst the Registrant and its shareholders (incorporated by reference to Exhibit 4.5 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on
December 8, 2009)
2.6
Form of Unit Certificate (incorporated by reference to Exhibit 4.6 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
3.1
Amended and Restated Limited Liability Company Agreement of China Hydro, LLC, adopted as of November 6, 2006 (incorporated by reference to Exhibit 9.1 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8,
2009)
4.1
Warrant to Purchase Common Shares of the Registrant by China Hydro, LLC, dated November 10, 2006 (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.2
2008 Share Incentive Plan of the Registrant and form of Option Agreement (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.3
Form of Indemnification Agreement between the Registrant and its directors (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009) 167
4.4
Sino-Foreign Equity Joint Venture Contract entered into by the Registrant, Zhejiang Water Resources and Hydroelectric Investment Group Co., Ltd. and Zhejiang Guangning Hydroelectric Development Co., Ltd. on November 6, 2007 (incorporated by reference to Exhibit 10.4 to our
Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.5
Contract for Transfer of Fifty Percent of the Equity Interests of Yunhe County Shapulong Hydropower Generation Co., Ltd. entered into by Yunhe County Yunhe State-Owned Assets Management Co., Ltd. and the Registrant on October 12, 2007 (incorporated by reference to Exhibit
10.5 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.6
(Intentionally left blank)
4.7
Share Transfer and Capital Increase Contract entered into by the Registrant, and Ye Jian Hua, Zhou Jian Bin and Zhejiang Dahua Construction Group Co., Ltd. on March 15, 2007 (incorporated by reference to Exhibit 10.7 to our Registration Statement on Form F-1 (file no. 333-163558),
as amended, initially filed with the SEC on December 8, 2009)
4.8
Supplemental Agreement entered into by the Registrant, Ye Jian Hua, Zhou Jian Bin and Zhejiang Dahua Construction Group Co., Ltd. on March 27, 2007 (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially
filed with the SEC on December 8, 2009)
4.9
Share Transfer Agreement for Pingnan County Wangkeng Hydroelectric Co., Ltd. entered into by Sanming City Chenyang Hydroelectric Co., Ltd., Sanming City Fufeng Industrial Co., Ltd, Beijing Xunjing Interactive Technology Co., Ltd., Huang Shao Jian, Yu Rong Ji, Zhang Rong Bin,
Sun Xiao Dong, Xie Fang Wu, Ye Chang He and the Registrant on August 9, 2008 (incorporated by reference to Exhibit 10.9 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.10
Equity Joint Venture Contract for the establishment of Pingnan County Wangkeng Hydroelectric Co., Ltd. entered into by the Registrant and Sanming City Chenyang Hydroelectric Co., Ltd. on August 10, 2008 (incorporated by reference to Exhibit 10.10 to our Registration Statement on
Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.11
Equity Interest Transfer Contract entered into by Guangsha Construction Group Co., Ltd., Lu Chunliang and the Registrant regarding Qingtian Wuliting Hydropower Development Co., Ltd. on December 13, 2007 (incorporated by reference to Exhibit 10.11 to our Registration Statement
on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.12
Equity Interest Transfer Contract entered into by Zhejiang Guangsha Stock Co., Ltd., Zhejiang Guangsha Hydropower Investment Co., Ltd. and the Registrant regarding Zhejiang Province Jingning Yingchuan Hydropower Development Co., Ltd. on December 13, 2007 (incorporated by
reference to Exhibit 10.12 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.13
Equity Interest Transfer Contract entered into by Guangsha Construction Group Co., Ltd., Lu Chunliang and the Registrant regarding Suichang County Jiulongshan Hydropower Development Co., Ltd. on December 13, 2007 (incorporated by reference to Exhibit 10.13 to our Registration
Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009) 168
4.14
Agreement relating to the Sale and Purchase of the equity of Sunpower Asia Limited entered into by the Registrant and Sanming Ruifeng Hydropower Investment Co., Ltd. on July 11, 2008 (incorporated by reference to Exhibit 10.14 to our Registration Statement on Form F-1 (file no.
333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.15
Equity Interest Transfer Contract entered into by the Registrant, Sanming Ruifeng Hydropower Investment Co., Ltd. and Yong’an Ruifeng Hydroelectric Ltd. on July 11, 2008 (incorporated by reference to Exhibit 10.15 to our Registration Statement on Form F-1 (file no. 333-163558), as
amended, initially filed with the SEC on December 8, 2009)
4.16
Contract on Transfer of Ten Percent Equity Interests of Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. entered into by China Hydroelectric Corporation (Hong Kong) Limited and Sanming Ruifeng Economic Technological Development Ltd. on January 30, 2009 (incorporated by
reference to Exhibit 10.16 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.17
Supplemental Agreement of the Contract on Transfer of Ten Percent Equity Interests of Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. entered into by Sanming Ruifeng Economic Technological Development Ltd., China Hydroelectric Corporation (Hong Kong) Limited, Sanming
Ruifeng Hydropower Investment Co., Ltd. and the Registrant on January 30, 2009 (incorporated by reference to Exhibit 10.17 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.18
Joint Venture Contract Among Foreign Investors for Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. entered into by the Registrant, China Hydroelectric Corporation (Hong Kong) Limited and Sunpower Asia Limited in February 2009 (incorporated by reference to Exhibit 10.18 to our
Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.19
Share Transfer Agreement for Pingnan County Yuheng Hydropower Co., Ltd. entered into by the Registrant and Fujian Province Anheng Assets Management Co., Ltd., Shanghai Yufeng Hotel Management Co., Ltd., Chen Can Ling, Wang Jiang, Zhang Rong Bin and Zhou Jian Biao on
August 15, 2008 (incorporated by reference to Exhibit 10.19 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.20
Share Transfer Agreement for Pingnan County Yuanping Hydroelectric Co., Ltd. entered into by the Registrant and Lin Yun, Wu Ting Li, Zhang Yao Fang and Zhou Jian on August 15, 2008 (incorporated by reference to Exhibit 10.20 to our Registration Statement on Form F-1 (file no.
333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.21
Consulting Agreement with Michael H. Best entered into on August 1, 2009† (incorporated by reference to Exhibit 10.21 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.22
Power Purchase Contract entered into by Yunnan Huabang Electric Power Development Co., Ltd. and Yunnan Dehong Electric Power Co., Ltd. on June 19, 2009 (incorporated by reference to Exhibit 10.22 to our Registration Statement on Form F-1 (file no. 333-163558), as amended,
initially filed with the SEC on December 8, 2009) 169
4.23
Supplemental Agreement to Power Purchase and Sale Contract entered into by Yunnan Huabang Electric Power Development Co., Ltd. and Yunnan Dehong Electric Power Co., Ltd. on June 19, 2009 (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form F-1
(file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.24
Grid Connection and Dispatching Agreement entered into by Yunnan Dehong Electric Power Co., Ltd. and Yingjiang County Huafa Electric Power Development Co., Ltd. (formerly Yunnan Huabang Electric Power Development Co., Ltd.) on January 15, 2004 (incorporated by reference
to Exhibit 10.24 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.25
Grid Connection and Dispatching Agreement entered into by Sichuan Cangxi Electric Power Co., Ltd. and Sichuan Huabang Hydroelectric Development Co., Ltd. on May 17, 2009 (incorporated by reference to Exhibit 10.25 to our Registration Statement on Form F-1 (file no. 333-163558),
as amended, initially filed with the SEC on December 8, 2009)
4.26
Power Purchase and Sale Contract entered into by Sichuan Cangxi Electric Power Co., Ltd. and Sichuan Huabang Hydroelectric Development Co., Ltd. on May 16, 2009 (incorporated by reference to Exhibit 10.26 to our Registration Statement on Form F-1 (file no. 333-163558), as
amended, initially filed with the SEC on December 8, 2009)
4.27
Grid Connection Economic Agreement entered into by Lishui Electric Power Bureau and Yunhe County Shapulong Hydropower Generation Co., Ltd. in October 2008 (incorporated by reference to Exhibit 10.27 to our Registration Statement on Form F-1 (file no. 333-163558), as
amended, initially filed with the SEC on December 8, 2009)
4.28
Grid Connection and Dispatching Agreement for Wangkeng Hydropower Station entered into by Fujian Province Ningde Electric Power Industry Bureau and Pingnan County Wangkeng Hydroelectric Co., Ltd. on July 21, 2008 (incorporated by reference to Exhibit 10.28 to our
Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.29
Power Purchase and Sales Contract for Wangkeng Hydropower Station entered into by Fujian Province Electric Power Co., Ltd. and Pingnan County Fushun Hydroelectric Co., Ltd. on October 28, 2004 (incorporated by reference to Exhibit 10.29 to our Registration Statement on Form F-
1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.30
Grid Connection and Dispatching Agreement for Wuliting Hydropower Station entered into by Lishui Electric Power Bureau and Qingtian Wuliting Hydroelectric Development Co., Ltd. on November 20, 2008 (incorporated by reference to Exhibit 10.30 to our Registration Statement on
Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.31 Grid Connection Economic Agreement entered into by Lishui
Electric Power Bureau and Qingtian Wuliting Hydroelectric Development Co., Ltd. in November, 2007 (incorporated by reference
to Exhibit 10.31 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the
SEC on December 8, 2009) 170
4.32
Grid Connection and Dispatching Agreement for Jingning Yingchuan Hydropower Station entered into by Lishui Electric Power Bureau and Zhejiang Province Jingning Yingchuan Hydroelectric Development Co., Ltd. on November 20, 2008 (incorporated by reference to Exhibit 10.32to
our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.33
Grid Connection Economic Agreement entered into by Lishui Electric Power Bureau and Zhejiang Province Jingning Yingchuan Hydroelectric Development Co., Ltd. in November 2007 (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1 (file no. 333-
163558), as amended, initially filed with the SEC on December 8, 2009)
4.34
Intent Agreement of Conformity of Power Purchase and Supply in Rongping Supply Area entered into by Fujian Province Pingnan County Power Supply Co., Ltd., Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd., Pingnan County Hengli Hydroelectric Co., Ltd. and
Pingnan County Yuheng Hydropower Co., Ltd. on August 31, 2007 (incorporated by reference to Exhibit 10.34 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.35
Grid Connection and Dispatching Agreement for Pingnan Yuanping Hydropower Station of Fujian Province entered into by Fujian Province Pingnan County Power Supply Co., Ltd. and Pingnan County Yuheng Hydropower Co., Ltd. on December 26, 2008 (incorporated by reference to Exhibit
10.35 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.36
Power Purchase and Sale Contract for old Yuanping Hydropower Station entered into by Fujian Province Pingnan County Power Supply Co., Ltd. and Pingnan County Yuheng Hydropower Co., Ltd. in December 2008 (incorporated by reference to Exhibit 10.36 to our Registration
Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.37
Grid Connection and Dispatching Agreement for Yuanping Technological Upgrading Hydropower Station of Fujian Province entered into by Fujian Province Pingnan County Power Supply Co., Ltd. and Pingnan County Yuanping Hydroelectric Co., Ltd. on December 26, 2008
(incorporated by reference to Exhibit 10.37 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.38
Power Purchase and Sale Contract for Technological Upgrading Project of Yuanping Hydropower Station entered into by Fujian Province Pingnan County Power Supply Co., Ltd. and Pingnan County Yuanping Hydroelectric Co., Ltd. in December 2008 (incorporated by reference to
Exhibit 10.38 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.39
Grid Connection and Dispatching Agreement for Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. entered by Fujian Province Sanming Power Industry Bureau and Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. on September 22, 2006 (incorporated by reference to Exhibit 10.39 to
our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.40
Grid Connection and Power Purchase Agreement entered into by Fujian Province Sanming Power Industry Bureau and Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. on April 30, 1997 (incorporated by reference to Exhibit 10.40 to our Registration Statement on Form F-1 (file no.
333-163558), as amended, initially filed with the SEC on December 8, 2009) 171
4.41
Share Transfer Contract for Longquan Ruiyang Cascade II Hydroelectric Co., Ltd. entered into by Zhejiang Province Jingning Yingchuan Hydroelectric Development Co., Ltd., Guangdong Qingneng Power Generation Group Co., Ltd. and Yao Lin Fu on August 11, 2009 (incorporated by
reference to Exhibit 10.41 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.42
Share Transfer Contract for Thirteen Percent of the Equity Interests of Yunhe County Shapulong Hydropower Generation Co., Ltd. entered into by Zhejiang Province Water Resources and Hydroelectric Investment Group Co., Ltd. and the Zhejiang Province Jingning Yingchuan
Hydroelectric Development Co., Ltd. on June 29, 2009 (incorporated by reference to Exhibit 10.42 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.43
Share Transfer Contract for Yunhe County Shapulong Hydropower Generation Co., Ltd. entered into by Zhejiang Guangning Hydroelectric Development Co., Ltd. and the Zhejiang Province Jingning Yingchuan Hydroelectric Development Co., Ltd. on July 22, 2009 (incorporated by
reference to Exhibit 10.43 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.44
Grid Connection Economic Agreement entered into by Longquan Ruiyang Cascade II Hydroelectric Co., Ltd. and Lishui Power Industry Bureau in April 2007 (incorporated by reference to Exhibit 10.44 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially
filed with the SEC on December 8, 2009)
4.45
Grid Connection and Dispatching Agreement entered into by Longquan Ruiyang Cascade II Hydroelectric Co., Ltd. and Lishui Power Industry Bureau, Dispatching and Communication Center, on October 18, 2003 (incorporated by reference to Exhibit 10.45 to our Registration Statement
on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.46
Renminbi Loan Agreement (Long/Medium Term) entered into by Qingtian Wuliting Hydroelectric Development Co., Ltd. and Bank of China Limited, Lishui City Dayang Sub-branch, on March 19, 2009 (incorporated by reference to Exhibit 10.46 to our Registration Statement on Form F-
1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.47
Medium/Long-Term Renminbi Loan Contract entered into by Pingnan County Wangkeng Hydroelectric Co., Ltd. and Industrial Bank Co., Ltd., Ningde Branch, on March 24, 2009 (incorporated by reference to Exhibit 10.47 to our Registration Statement on Form F-1 (file no. 333-163558),
as amended, initially filed with the SEC on December 8, 2009)
4.48
Renminbi Loan Contract (Medium/Long Term) entered into by Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. and Bank of China Limited, Fujian Province Branch, on June 16, 2009 (incorporated by reference to Exhibit 10.48 to our Registration Statement on Form F-1 (file no. 333-
163558), as amended, initially filed with the SEC on December 8, 2009)
4.49
Loan Contract entered into by Suichang County Jiulongshan Hydroelectric Development Co., Ltd. and Agricultural Bank of China, Lishui City Branch, on June 19, 2009 (RMB9.0 million) (incorporated by reference to Exhibit 10.49 to our Registration Statement on Form F-1 (file no. 333-
163558), as amended, initially filed with the SEC on December 8, 2009) 172
4.50
Loan Contract entered into by Suichang County Jiulongshan Hydroelectric Development Co., Ltd. and Agricultural Bank of China, Lishui City Branch, on June 19, 2009 (RMB216.0 million) (incorporated by reference to Exhibit 10.50 to our Registration Statement on Form F-1 (file no.
333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.51
Memorandum of Understandings entered into by Bank of China, Fujian Branch, and China Hydroelectric Corporation in July 2009 (incorporated by reference to Exhibit 10.51 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on
December 8, 2009)
4.52
Employment Agreement entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and Fang Chen on July 1, 2008 (incorporated by reference to Exhibit 10.52 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8,
2009)
4.53
Employment Agreement entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and You-Su Lin on July 1, 2008 (incorporated by reference to Exhibit 10.53 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8,
2009)
4.54
Employment Agreement entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and Gan Wu on July 1, 2008 (incorporated by reference to Exhibit 10.54 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8,
2009)
4.55
Employment Agreement entered into by China Hydroelectric Corporation and Mary E. Fellows on January 1, 2009 (incorporated by reference to Exhibit 10.55 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.56
Employment Agreement entered into by China Hydroelectric Corporation and “James” Tie Li on January 1, 2009 (incorporated by reference to Exhibit 10.56 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.57
Employment Agreement entered into by China Hydroelectric Corporation and John D. Kuhns on January 1, 2009 (incorporated by reference to Exhibit 10.57 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.58
Employment Agreement entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and Xinchun Lian on October 1, 2008, as amended on January 13, 2009 (incorporated by reference to Exhibit 10.58 to our Registration Statement on Form F-1 (file no. 333-163558), as amended,
initially filed with the SEC on December 8, 2009)
4.59
Labor Contract entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and Shu Zhang on May 12, 2009 (incorporated by reference to Exhibit 10.59 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.60
Labor Contract entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and Gang Meng on April 7, 2008, as amended on November 1, 2008† (incorporated by reference to Exhibit 10.60 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with
the SEC on December 8, 2009)
4.61
Capital Increase Agreement for Henan Wuyue Storage Power Generation Co., Ltd. entered into by China Hydroelectric Corporation and Henan Lan Tian Group Co., Ltd. on October 22, 2009 (incorporated by reference to Exhibit 10.61 to our Registration Statement on Form F-1 (file no.
333-163558), as amended, initially filed with the SEC on December 8, 2009) 173
4.62
Form of Warrant to Purchase Ordinary Shares of the Registrant by Broadband Capital Management LLC to be dated the closing of the initial public offering (incorporated by reference to Exhibit 10.62 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially
filed with the SEC on December 8, 2009)
4.63
Warrant to Purchase Units Consisting of Ordinary Shares and Warrants to Purchase Ordinary Shares of the Registrant by Morgan Joseph & Co. Inc. dated November 10, 2006 (283,333 Units) (incorporated by reference to Exhibit 10.63 to our Registration Statement on Form F-1 (file no. 333-
163558), as amended, initially filed with the SEC on December 8, 2009)
4.64
Warrant to Purchase Units Consisting of Ordinary Shares and Warrants to Purchase Ordinary Shares of the Registrant by Morgan Joseph & Co. Inc. dated November 10, 2006 (550,000 Units) (incorporated by reference to Exhibit 10.64 to our Registration Statement on Form F-1 (file no. 333-
163558), as amended, initially filed with the SEC on December 8, 2009)
4.65
Warrant to Purchase Common Shares of the Registrant by JMG Capital Partners, L.P. dated September 28, 2007 (incorporated by reference to Exhibit 10.65 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.66
Warrant to Purchase Common Shares of the Registrant by JMG Triton Offshore Fund, Ltd. dated September 28, 2007 (incorporated by reference to Exhibit 10.66 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8,
2009)
4.67
Warrant to Purchase Preferred Shares or Ordinary Shares, as Applicable, of the Registrant by Morgan Joseph & Co. Inc. dated January 28, 2008 (incorporated by reference to Exhibit 10.67 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the
SEC on December 8, 2009)
4.68
Letter Agreement between the Registrant and Vicis Capital Master Fund dated April 11, 2007 (incorporated by reference to Exhibit 10.68 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.69
Form of warrant agreement (incorporated by reference to Exhibit 10.69 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
4.70
Share Transfer Contract for Yingjiang County Qingrui Husahe Power Co., Ltd. dated as of March 2, 2010 between Dehong Qinrui (Group) Power Investment and Development Co., Ltd. and Yunnan Huabang Electric Power Development Co., Ltd. (incorporated by reference to Exhibit
4.70 of our Annual Report on Form 20-F filed with the SEC on May 24, 2010)
4.71
Share Transfer Contract for Fugong County Hengda Hydropower Generation Co., Ltd. (Aluhe Hydropower Station and Zilenghe Hydropower Station) dated as of April 14, 2010 between Yunnan Minfa Hydroelectric Development Group Co., Ltd., Xiamen Minrui Investment Co., Ltd. and
Fujian Huabang Hydroelectric Investment Co., Ltd. (incorporated by reference to Exhibit 4.71 of our Annual Report on Form 20-F filed with the SEC on May 24, 2010)
4.72
Share Transfer Contract for Fugong Xineng Power Development Co., Ltd. (Latudihe Hydropower Station) dated as of April 14, 2010 between Yunnan Minhe Hydroelectric Investment Co., Ltd. and Fujian Huabang Hydroelectric Investment Co., Ltd. (incorporated by reference to Exhibit
4.72 of our Annual Report on Form 20-F filed with the SEC on May 24, 2010) 174
4.73
Supplemental Agreement on the Power Purchase and Sale Contract for the Year of 2010 (Contract Number: De Dian Si 2010-011) for Binglangjiang Power Station and Binglangjiang Expanded Power Station dated as of March 31, 2010 between Yunnan Huabang Electric Power
Development Co., Ltd. and Dehong Power Supply Co., Ltd. (incorporated by reference to Exhibit 4.73 of our Annual Report on Form 20-F filed with the SEC on May 24, 2010)
4.74
Supplemental Agreement on the Power Purchase and Sale Contract for the Year of 2010 (Contract Number: 2010-009) for Husahe Cascade III & VI Power Station and Mangxian Power Station (incorporated by reference to Exhibit 4.74 of our Annual Report on Form 20-F filed with the
SEC on May 24, 2010)
4.75
Power Purchase Agreement (contract Number: De Dian Si 2009-079) (Binglangjiang expanded Power Station) dated as of November 4, 2009 between Dehong Power Supply Co., Ltd. and Yunnan Huabang Electric Power development Co. (incorporated by reference to Exhibit 4.75 of our
Annual Report on Form 20-F filed with the SEC on May 24, 2010)
4.76
Supplemental Agreement on the Power Purchase and Sale Contract for the Year of 2009 (Contract Number: De Dian Si 2009-079) (Binglangjiang expanded Power Station) dated as of November 4, 2009 between Dehong Power Supply Co., Ltd. and Yunnan Huabang Electric Power Development
Co., Ltd. (incorporated by reference to Exhibit 4.76 of our Annual Report on Form 20-F filed with the SEC on May 24, 2010)
4.77
Grid Connection Agreement (Serial Number: De Dian Ru Wang No. 2009-003) dated as of July 16, 2009 between Yunnan Dehong Electric Power Co., Ltd. and Yunnan Huabang Electric Power Development Co., Ltd. (incorporated by reference to Exhibit 4.77 of our Annual Report on Form
20-F filed with the SEC on May 24, 2010)
4.78
Share Transfer Contract for Luquan Xiaopengzu Power Generation Co., Ltd. dated as of April 23, 2010 among Fujian Huabang Hydroelectric Investment Co., Ltd. and various individual parties thereto (incorporated by reference to Exhibit 4.78 of our Annual Report on Form 20-F filed
with the SEC on May 24, 2010)
4.79
Shaowu City Qianling Hydroelectric Station Grid Connection Agreement dated as of October 19, 2000 between Shaowu Power Supply Bureau (hereinafter “Party A”) and Shaowu City Jinling Power Generation Co., Ltd.
4.80
Shaowu Power Supply Bureau Grid Connection and Dispatching Agreement dated December 20, 2002 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jinling Power Generation Co., Ltd.
4.81
Shaowu Power Supply Bureau Grid Connection and Dispatching Agreement dated December 15, 2003 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jinling Power Generation Co., Ltd.
4.82
Shaowu Power Supply Bureau Grid Connection and Dispatching Agreement dated October 15, 2004 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jintang Hydroelectric Co., Ltd.
4.83
Shaowu Power Supply Bureau Grid Connection and Dispatching Agreement dated October 15, 2004 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jinlong Hydroelectric Co., Ltd.
4.84
Power Purchase and Sale Contract for Jinwei Hydropower Station dated as of January 2007 between Fujian Province Nanping Electric Power Industry Bureau and Shaowu City Jinwei Hydroelectric Co., Ltd.
4.85
Power Purchase and Sale Contract for Dongguan Hydropower Station dated as of March 2007 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jinling Power Generation Co., Ltd. 175
4.86
Power Purchase and Sale Contract for Qianling Hydropower Station dated as of March 2007 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jinling Power Generation Co., Ltd.
4.87
Power Purchase and Sale Contract for Jinjiu Hydropower Station dated as of March 2007 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jinling Power Generation Co., Ltd.
4.88
Power Purchase and Sale Contract for Jinlong Hydropower Station dated as of March 2007 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jinlong Hydroelectric Co., Ltd.
4.89
Power Purchase and Sale Contract for Sanming Banzhu Power Station entered into by Fujian Province Electric Power Co., Ltd. and Sanming Zhongyin Banzhu Hydroelectric Co., Ltd. on August 18, 2008
4.90
Grid Connection Economic Agreement entered into by Lishui Electric Power Bureau and Qingtian Wuliting Hydroelectric Development Co., Ltd. in October 2008
4.91
Grid Connection Economic Agreement entered into by Lishui Electric Power Bureau and Zhejiang Province Jingning Yingchuan Hydroelectric Development Co., Ltd. in October 2008
4.92
Grid Connection and Dispatching Agreement dated as of November 2008 between Lishui Electric Power Industry Bureau and Yunhe County Shapulong Hydropower Generation Co., Ltd.
4.93
Power Purchase and Sale Contract for Jintang Hydropower Station dated as of December 2008 between Fujian Province Shaowu Power Supply Bureau and Shaowu City Jintang Hydroelectric Co., Ltd.
4.94
Employment Agreement dated as of October 1, 2008 entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and Hong Zhang
4.95
Grid Connection and Dispatching Agreement of Zhougongyuan Cascade I Power Station dated as of April 21, 2009 between Lishui Electric Power Industry Bureau and Suichang County Jiulongshan Hydroelectric Development Co., Ltd.
4.96
Grid Connection and Dispatching Agreement of Zhougongyuan Cascade II Power Station dated as of April 21, 2009 between Lishui Electric Power Industry Bureau and Suichang County Jiulongshan Hydroelectric Development Co., Ltd.
4.97
Grid Connection and Dispatching Agreement of Zhougongyuan Cascade III Power Station dated as of April 21, 2009 between Lishui Electric Power Industry Bureau and Suichang County Jiulongshan Hydroelectric Development Co., Ltd.
4.98
Power Purchase and Sale Contract dated as of June 19, 2009 between Yunnan Dehong Power Co., Ltd. and Yingjiang County Qinrui Husahe Hydropower Co., Ltd.
4.99
Power Purchase and Sale Contract dated as of January 1, 2010 between Yunnan Nujiang Grid Co., Ltd. and Fugong Xineng Power Development Co., Ltd.
4.100
Power Purchase and Sale Contract dated as of January 1, 2010 between Yunnan Nujiang Grid Co., Ltd. and Fugong County Hengda Hydroelectric Development Co., Ltd.
4.101
Power Purchase and Sale Contract of Xiaopengzu Power Plant for the Year of 2011 dated as of March 2011 between Yunnan Grid Company and Luquan Xiaopengzu Power Generation Co., Ltd.
4.102
Labor Contract entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and Lianghong Tu on April 6, 2010
4.103
Grid Connection and Dispatching Agreement dated as of May 14, 2010 between Yunnan Nujiang Grid Co., Ltd. and Fugong Xineng Power Development Co., Ltd. 176
4.104
Grid Connection and Dispatching Agreement dated as of May 14, 2010 between Yunnan Nujiang Grid Co., Ltd. and Fugong County Hengda Hydroelectric Development Co., Ltd.
4.105
Power Purchase and Sale Contract entered into by Sichuan Cangxi Electric Power Co., Ltd. and Sichuan Huabang Hydroelectric Development Co., Ltd. on May 17, 2010
4.106
Grid Connection and Dispatching Agreement entered into by Sichuan Cangxi Electric Power Co., Ltd. and Sichuan Huabang Hydroelectric Development Co., Ltd. on May 18, 2010
4.107
Labor Contract entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and You Li on June 17, 2010
4.108
Power Purchase and Sales Contract for Wangkeng Hydropower Station entered into by Fujian Province Electric Power Co., Ltd. and Pingnan County Wangkeng Hydroelectric Co., Ltd. on June 28, 2010
4.109
Fixed Assets Loan Contract dated as of July 15, 2010 between Fugong Xineng Power Development Co., Ltd. and Bank of China Limited, Fujian Branch
4.110
Power Purchase and Sale Contract dated as of July 16, 2010 between Lishui Electric Power Industry Bureau and Suichang County Zhougongyuan Hydroelectric Development Co., Ltd.
4.111
Power Purchase and Sale Contract dated as of July 16, 2010 between Lishui Electric Power Industry Bureau and Suichang County Jiulongshan Hydroelectric Development Co., Ltd.
4.112
Grid Connection and Dispatching Agreement dated as of August 11, 2010 between Dehong Power Supply Co., Ltd. and Yunnan Huabang Electric Power Development Co., Ltd.
4.113
Grid Connection and Dispatching Agreement for Husahe III Power Station dated as of August 11, 2010 between Dehong Power Supply Co., Ltd. and Yingjiang County Qinrui Husahe Hydropower Co., Ltd.
4.114
Grid Connection and Dispatching Agreement for Husahe IV Power Station dated as of August 11, 2010 between Dehong Power Supply Co., Ltd. and Yingjiang County Qinrui Husahe Hydropower Co., Ltd.
4.115
Grid Connection and Dispatching Agreement for Mangxian Power Station dated as of August 11, 2010 between Dehong Power Supply Co., Ltd. and Yingjiang County Qinrui Husahe Hydropower Co., Ltd.
4.116
Agricultural Bank of China Fixed Assets Loan Contract and Installment Repayment Agreement dated as of August 26, 2010 between Yunnan Huabang Electric Power Development Co., Ltd. and Agricultural Bank of China, Yingjiang County Sub-branch
4.117
Share Purchase Agreement for Shaowu City Jinling Power Generation Co., Ltd. dated as of September 28, 2010 among Fujian Huabang Hydroelectric Investment Co., Ltd., Fujian Taiyu Investment (Group) Co., Ltd., Shaowu City Fengyi Power Development Co., Ltd. and Jianyang City
Xinguang Power Development Co., Ltd.
4.118
Grid Connection and Dispatching Agreement for Wangkeng Hydropower Station entered into by Fujian Province Electric Power Co., Ltd. Ningde Electric Power Industry Bureau and Pingnan County Wangkeng Hydroelectric Co., Ltd. on September 30, 2010
4.119
Share Transfer Contract for Jinping Kanghong Hydroelectric Development Co., Ltd. dated as of November 6, 2010 among Luquan Xiaopengzu Power Generation Co., Ltd. and various individual parties thereto 177
4.120
Transfer Contract Regarding 10% of the Equity of Pingnan County Wangkeng Hydroelectric Co., Ltd. dated as of November 22, 2010 between Sanming City Chenyang Hydroelectric Co., Ltd. and Fujian Huabang Hydroelectric Investment Co., Ltd.
4.121
Fixed Assets Loan Contract dated as of December 24, 2010 between Pingnan County Yuheng Hydroelectric Co., Ltd. and Bank of China Limited, Fujian Branch
4.122
Supplemental Agreement on the Power Purchase and Sale Contract for the Year of 2011 (Contract Number: De Dian Si 2011-079) (Binglangjiang expanded Power Station) dated as of December 29, 2010 between Dehong Power Supply Co., Ltd. and Yunnan Huabang Electric Power
Development Co., Ltd.
4.123
Grid Connection and Dispatching Agreement for Jinwei Hydropower Plant dated as of December 24, 2010 between Fujian Province Electric Power Co., Ltd. Nanping Electric Power Industry Bureau and Shaowu City Jinwei Hydroelectric Co., Ltd.
4.124
Supplemental Agreement on Power Purchase and Sale Contract for the Year of 2011 dated as of December 29, 2010 between Dehong Power Supply Co., Ltd. and Yingjiang County Qinrui Husahe Hydropower Co., Ltd.
4.125
Supplemental Agreement to Power Purchase and Sale Contract entered into by Yunnan Huabang Electric Power Development Co., Ltd. and Yunnan Dehong Electric Power Co., Ltd. on December 29, 2010
4.126
Fixed Assets Loan Contract dated as of December 31, 2010 between Fugong County Hengda Hydroelectric Development Co., Ltd. and Bank of China Limited, Yunnan Branch
4.127
Labor Contract entered into by Beijing A.B.C. Investment Consulting Co., Ltd. and Jin Cao on 1 January 2011
4.128
Fixed Assets Loan Contract dated as of January 7, 2011 between Fugong County Hengda Hydroelectric Development Co., Ltd. and Bank of China Limited, Fujian Branch
4.129
Grid Connection and Dispatching Agreement dated as of March 2010 between Yunnan Grid Company and Luquan Xiaopengzu Power Generation Co., Ltd.
4.130
Grid Connection and Dispatching Agreement dated as of September 30, 2010 between Fujian Province Electric Power Co., Ltd. Sanming Power Industry Bureau and Sanming Zhongyin Banzhu Hydroelectric Co., Ltd.
4.131
Employment Agreement dated August 1, 2010 entered into between Beijing A.B.C. Investment Consulting Co., Ltd. and Jianbin Zhou
4.132
Employment Agreement entered into between Beijing A.B.C. Investment Consulting Co., Ltd. and Huakang Xiong
8.1
Subsidiaries of the Registrant
11.1
Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 to our Registration Statement on Form F-1 (file no. 333-163558), as amended, initially filed with the SEC on December 8, 2009)
12.1
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1
Calculation of Effective Tariff Rate, Effective Utilization Rate and Weighted Average Effective Utilization Rate
15.2
Consent of Independent Registered Public Accounting Firm 178
SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. Date: April 4, 2011 CHINA HYDROELECTRIC CORPORATION /s/ “JAMES” TIE
LI Name: “James” Tie Li 179
Title: President and Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CHINA HYDROELECTRIC CORPORATION F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of We have audited the accompanying consolidated balance sheets of China Hydroelectric Corporation as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Hydroelectric Corporation at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young Hua Ming F-2
China Hydroelectric Corporation
Beijing, People’s Republic of China
April 4, 2011
CHINA HYDROELECTRIC CORPORATION
Notes
December 31,
2009
2010 ASSETS Current assets: Cash and cash equivalents
31,618
33,457 Accounts receivable (net of allowance for doubtful accounts of US$nil as of December 31, 2009 and 2010)
4
8,434
4,359 Deferred tax assets
13
489
1,260 Amounts due from related parties
26
—
5,950 Prepayments and other current assets
5
4,582
9,486 Total current assets
45,123
54,512 Non-current assets: Deferred initial public offering costs
6
12,774
— Property, plant and equipment, net
7
384,493
583,686 Land use rights
10
38,707
48,944 Intangible assets, net
8
4,513
6,249 Goodwill
9
107,824
135,219 Deferred tax assets
13
—
512 Other non-current assets
399
709 Total non-current assets
548,710
775,319 TOTAL ASSETS
593,833
829,831 LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable
1,305
4,784 Short-term loans
14
7,098
17,742 Current portion of long-term loans
14
56,809
60,798 Warrant liability
17
14,333
— Amounts due to related parties
26
242
12,866 Deferred tax liabilities
1
— Accrued expenses and other current liabilities
11
21,679
66,905 Total current liabilities
101,467
163,095 Non-current liabilities: Long-term loans
14
172,469
224,297 Deferred tax liabilities
13
18,599
25,350 Other non-current liabilities
15
104
106 Total non-current liabilities
191,172
249,753 Total liabilities
292,639
412,848 Commitments and contingencies
22 F-3
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2010
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION
Notes
December 31,
2009
2010 Convertible redeemable preferred shares Series A (par value US$0.001 per share; 2,500,000 shares authorized; 152,193 shares issued and outstanding as of December 31, 2009)
16
184,541
— Series B (par value US$0.001 per share; 2,500,000 shares authorized; 129,000 shares issued and outstanding as of December 31, 2009)
16
148,943
— Series C (par value US$0.001 per share; 1,000,000 shares authorized; 20,000 shares issued and outstanding as of December 31, 2009)
16
20,356
— Shareholders’ equity China Hydroelectric Corporation shareholders’ equity (deficit): Ordinary shares (par value US$0.001 per share, 130,000,000 and 400,000,000 shares authorized as of December 31, 2009 and 2010; 15,541,666 and 153,295,516 shares issued and outstanding as of December 31, 2009 and 2010)
18
16
153 Additional paid-in capital
36,251
495,652 Accumulated other comprehensive income
11,065
22,922 Accumulated deficit
(100,767
)
(112,840
) Total China Hydroelectric Corporation shareholders’ (deficit) equity
(53,435
)
405,887 Noncontrolling interests
789
11,096 Total shareholders’ (deficit) equity
(52,646
)
416,983 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
593,833
829,831 The accompanying notes are an integral part of these consolidated financial statements. F-4
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2010 (Continued)
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION
Notes
For the Years Ended December 31,
2008
2009
2010 Revenues
14,715
36,175
66,653 Cost of revenues
(6,025
)
(17,183
)
(24,845
) Gross profit
8,690
18,992
41,808 Operating expenses: General and administrative expenses
(6,761
)
(9,099
)
(19,440
) Total operating expenses
(6,761
)
(9,099
)
(19,440
) Operating income
1,929
9,893
22,368 Interest income
1,340
510
1,191 Interest expense
21
(5,847
)
(14,228
)
(15,852
) Change in fair value of derivative financial liabilities and warrant liability
17
420
(13,793
)
365 Exchange loss
(1,067
)
(23
)
(855
) Share of losses in an equity investee
(503
)
(70
)
— Other income (loss), net
23
144
(225
)
128 (Loss) income before income tax expense
(3,584
)
(17,936
)
7,345 Income tax expense
12
(444
)
(1,492
)
(3,360
) Consolidated net (loss) income
(4,028
)
(19,428
)
3,985 Less: Net loss (income) attributable to noncontrolling interests
41
32
(243
) Net (loss) income attributable to China Hydroelectric Corporation shareholders
(3,987
)
(19,396
)
3,742 F-5
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION
Notes
For the Years Ended December 31,
2008
2009
2010 Less: Cumulative dividends on Series A convertible redeemable preferred shares
16
(14,680
)
(19,836
)
(1,989
) Cumulative dividends on Series B convertible redeemable preferred shares
16
(5,531
)
(14,412
)
(1,412
) Cumulative dividends on Series C convertible redeemable preferred shares
16
—
(356
)
(162
) Accretion of beneficial conversion feature on Series A convertible redeemable preferred shares
16
—
—
(6,990
) Accretion of beneficial conversion feature on Series B convertible redeemable preferred shares
16
—
—
(5,040
) Accretion of beneficial conversion feature on Series C convertible redeemable preferred shares
16
—
—
(222
) Changes in redemption value of Series A convertible redeemable preferred shares
16
(10,569
)
—
— Changes in redemption value of Series B convertible redeemable preferred shares
16
(4,134
)
—
— Changes in redemption value of Series C convertible redeemable preferred shares
16
—
(1,872
)
— Loss attributable to ordinary shareholders
(38,901
)
(55,872
)
(12,073
) Basic and diluted net loss attributable to ordinary shareholders per share
19
(2.50
)
(3.59
)
(0.08
) Weighted average ordinary shares used in basic and diluted net loss attributable to ordinary shareholders per share computation
19
15,554,416
15,541,666
143,253,450 Basic and diluted net loss attributable to ordinary shareholders per ADS (equivalent to three ordinary shares)
(0.25
) Weighted average ADS used in basic and diluted net loss attributable to ordinary shareholders per ADS computation
47,751,150 The accompanying notes are an integral part of these consolidated financial statements. F-6
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010 (Continued)
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION
For the Years
2008
2009
2010 Cash flows from operating activities: Consolidated net (loss) income
(4,028
)
(19,428
)
3,985 Adjustments to reconcile consolidated net (loss) income to net cash (used in) provided by operating activities: Depreciation of property, plant and equipment
4,131
11,645
15,834 Amortization of land use rights
624
754
935 Amortization of intangible assets
108
182
161 Deferred income taxes
46
795
(656
) Share of losses in an equity investee
503
70
— Amortization of long-term notes discounts
139
—
— Change in fair value of derivative financial liabilities and warrant liability
(420
)
13,793
(365
) Amortization of debt issuance costs
47
23
19 Accretion of guarantee fee payable
105
10
— Accretion of guarantee deposit
—
45
391 Amortization of unfavorable contract obligations
(3
)
(660
)
(586
) Amortization of government grant
(11
)
—
(6
) Share-based compensation expense
—
571
3,615 Loss from disposal of property, plant and equipment
—
276
73 Remeasurement gain on pre-existing interest in an equity investee at acquisition-date fair value
—
(105
)
— Exchange loss
1,067
23
855 Changes in operating assets and liabilities: Accounts receivable
(8
)
(3,674
)
5,426 Amounts due from an equity investee
(1,560
)
(125
)
— Amounts due from related parties
28
13
(1,487
) Prepayments and other current assets
2,166
304
3,703 Other non-current assets
42
969
(138
) Accounts payable
(2,068
)
(1
)
690 Amounts due to related parties
88
(2
)
— Change in other non-current liabilities
—
—
584 Accrued expenses and other current liabilities
1,374
(4,265
)
10,089 Net cash provided by operating activities
2,370
1,213
43,122 Cash flows from investing activities: Acquisition of subsidiaries, net of cash acquired
(183,268
)
(32,283
)
(43,213
) Cash advancement to an acquired business prior to the acquisition date
—
—
(43,548
) Cash deposit for potential acquisitions
—
—
(9,475
) Acquisition of an intangible asset
—
(1,025
)
— Acquisition of land use rights
(14
)
—
(223
) Acquisition of property, plant and equipment
(32,930
)
(1,757
)
(2,927
) Proceeds from disposal of property, plant and equipment
—
190
3 Payment to contractors for construction projects
(2,394
)
(13,380
)
(4,223
) Loans to an equity investee
(2,802
)
(3,937
)
— Repayment of loans by an equity investee
—
3,486
— Net cash used in investing activities
(221,408
)
(48,706
)
(103,606
) F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
Ended December 31,
CHINA HYDROELECTRIC CORPORATION
For the Years
2008
2009
2010 Cash flows from financing activities: Purchase of subsidiary shares from noncontrolling interests
—
(2,490
)
— Proceeds from issuance of convertible redeemable preferred shares
279,025
20,000
— Proceeds from loans from related parties
—
—
2,247 Proceeds from short-term loans
—
4,391
8,327 Proceeds from long-term loans
4,280
129,234
23,805 Proceeds from government grant
115
—
— Proceeds from initial public offering
—
—
96,000 Payment of deferred initial public offering costs
(4,224
)
(7,142
)
(10,012
) Payment of convertible redeemable preferred shares issuance costs
(13,804
)
(1,872
)
— Payment of debt issuance costs
(307
)
(299
)
— Payment of equity issuance costs
(46
)
—
— Repayment of short-term loans
(606
)
(6,082
)
(7,206
) Repayment of long-term loans
(12,185
)
(95,287
)
(50,717
) Repayment of long-term notes
(9,907
)
—
— Net cash provided by financing activities
242,341
40,453
62,444 Net increase (decrease) in cash and cash equivalents
23,303
(7,040
)
1,960 Effect of changes in exchange rate on cash and cash equivalents
(216
)
(35
)
(121
) Cash and cash equivalents at the beginning of the year
15,606
38,693
31,618 Cash and cash equivalents at the end of the year
38,693
31,618
33,457 Supplementary disclosure of cash flow information Interest paid
9,134
14,051
15,812 Income taxes paid
171
1,015
1,261 Non-cash activities: Non-cash portion of deferred initial public offering costs
1,808
1,640
1,036 Convertible redeemable preferred shares issued as dividends
20,211
34,604
3,563 Conversion of convertible redeemable preferred shares into ordinary shares
—
—
119,754 Non-cash portion of acquisition of subsidiaries
4,143
720
11,333 Non-cash portion of acquisition of property, plant and equipment
5,809
1,072
2,741 Warrants issued in exchange for advisory services
899
—
— The accompanying notes are an integral part of these consolidated financial statements. F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010 (Continued)
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
Ended December 31,
CHINA HYDROELECTRIC CORPORATION
China Hydroelectric Corporation shareholders
Noncontrolling
Total
Comprehensive
Number of
Ordinary
Additional
Accumulated
Accumulated Balance at December 31, 2007
15,708,333
16
38,241
2,143
(5,994
)
—
34,406
(2,417
) Repurchase of ordinary shares
(166,667
)
—
—
—
—
—
—
— Cumulative dividends on Series A convertible redeemable preferred shares
—
—
—
—
(14,680
)
—
(14,680
)
— Cumulative dividends on Series B convertible redeemable preferred shares
—
—
—
—
(5,531
)
—
(5,531
)
— Changes in redemption value of Series A convertible redeemable preferred shares
—
—
—
—
(10,569
)
—
(10,569
)
— Changes in redemption value of Series B convertible redeemable preferred shares
—
—
—
—
(4,134
)
—
(4,134
)
— Noncontrolling interest in an acquired subsidiary
—
—
—
—
—
791
791
— Foreign currency translation adjustment
—
—
—
8,676
—
—
8,676
8,676 Net loss
—
—
—
—
(3,987
)
(41
)
(4,028
)
(4,028
) Balance at December 31, 2008
15,541,666
16
38,241
10,819
(44,895
)
750
4,931
4,648 The accompanying notes are an integral part of these consolidated financial statements. F-9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
interests
shareholders’
equity (deficit)
income (loss)
ordinary
shares
shares
paid-in
capital
other
comprehensive
income
deficit
CHINA HYDROELECTRIC CORPORATION
China Hydroelectric Corporation shareholders
Noncontrolling
Total
Comprehensive
Number of
Ordinary
Additional
Accumulated
Accumulated Cumulative dividends on Series A convertible redeemable preferred shares
—
—
—
—
(19,836
)
—
(19,836
)
— Cumulative dividends on Series B convertible redeemable preferred shares
—
—
—
—
(14,412
)
—
(14,412
)
— Cumulative dividends on Series C convertible redeemable preferred shares
—
—
—
—
(356
)
—
(356
)
— Changes in redemption value of Series C convertible redeemable preferred shares
—
—
—
—
(1,872
)
—
(1,872
)
— Purchase of subsidiary shares from noncontrolling interests
—
—
(2,561
)
—
—
71
(2,490
)
— Share-based compensation expenses
—
—
571
—
—
—
571
— Foreign currency translation adjustment
—
—
—
246
—
—
246
246 Net loss
—
—
—
—
(19,396
)
(32
)
(19,428
)
(19,428
) Balance at December 31, 2009
15,541,666
16
36,251
11,065
(100,767
)
789
(52,646
)
(19,182
) The accompanying notes are an integral part of these consolidated financial statements. F-10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010 (Continued)
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
interests
shareholders’
equity (deficit)
income (loss)
ordinary
shares
shares
paid-in
capital
other
comprehensive
income
deficit
CHINA HYDROELECTRIC CORPORATION
China Hydroelectric Corporation shareholders
Noncontrolling
Total
Comprehensive
Number of
Ordinary
Additional
Accumulated
Accumulated Issuance of ordinary shares upon initial public offering
18,000,000
18
65,083
—
—
—
65,101
— Issuance of warrants (Note 17)
—
—
7,200
—
—
—
7,200
— Reclassification of warrant liability upon initial public offering (Note 17)
—
—
13,968
—
—
—
13,968
— Cumulative dividends on Series A convertible redeemable preferred shares
—
—
—
—
(1,989
)
—
(1,989
)
— Cumulative dividends on Series B convertible redeemable preferred shares
—
—
—
—
(1,412
)
—
(1,412
)
— Cumulative dividends on Series C convertible redeemable preferred shares
—
—
—
—
(162
)
—
(162
)
— Conversion of Series A convertible redeemable preferred shares into ordinary shares
63,016,780
62
186,467
—
—
—
186,529
— Conversion of Series B convertible redeemable preferred shares into ordinary shares
50,795,457
51
150,304
—
—
—
150,355
— Conversion of Series C convertible redeemable preferred shares into ordinary shares
5,941,613
6
20,512
—
—
—
20,518
— Beneficial conversion feature on Series A convertible redeemable preferred shares upon conversion into ordinary shares
—
—
6,990
—
—
—
6,990
— Accretion of beneficial conversion feature on Series A convertible redeemable preferred shares
—
—
—
—
(6,990
)
—
(6,990
)
— Beneficial conversion feature on Series B convertible redeemable preferred shares upon conversion into ordinary shares
—
—
5,040
—
—
—
5,040
— Accretion of beneficial conversion feature on Series B convertible redeemable preferred shares
—
—
—
—
(5,040
)
—
(5,040
)
— Beneficial conversion feature on Series C convertible redeemable preferred shares upon conversion into ordinary shares
—
—
222
—
—
—
222
— Accretion of beneficial conversion feature on Series C convertible redeemable preferred shares
—
—
—
—
(222
)
—
(222
)
— Non-controlling interest in acquired subsidiaries
—
—
—
—
—
10,064
10,064
— Share-based compensation expenses
—
—
3,615
—
—
—
3,615
— Foreign currency translation adjustment
—
—
—
11,857
—
—
11,857
11,857 Net income
—
—
—
—
3,742
243
3,985
3,985 Balance at December 31, 2010
153,295,516
153
495,652
22,922
(112,840
)
11,096
416,983
15,842 F-11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010 (Continued)
(Amounts in thousands of U.S. dollars (“US$”), except for number of shares and per share data)
interests
shareholders’
equity (deficit)
income (loss)
ordinary
shares
shares
paid-in
capital
other
comprehensive
income
deficit
CHINA HYDROELECTRIC CORPORATION 1. ORGANIZATION AND PRINCIPAL ACTIVITIES China Hydroelectric Corporation (the “Company”) was incorporated on July 10, 2006 under the laws of the Cayman Islands to serve as a vehicle for the acquisition of equity interests in companies with hydroelectric assets in the People’s Republic of China (the “PRC” or “China”). The Company and
its subsidiaries (the “Group”) are principally engaged in the operation and development of hydroelectric assets and the generation of hydroelectric power in the PRC. On January 25, 2010, the Company completed an initial public offering (“IPO”), whereby the Company issued 6,000,000 units of securities at US$16.00 per unit. Each unit consists of one American Depository Share (“ADS”) priced at US$14.80 and one warrant priced at US$1.20. Each ADS
represents three ordinary shares and each warrant entitles the holder to purchase three ordinary shares for an exercise price of US$15.00. The IPO yielded aggregate gross proceeds of US$96,000. The proceeds, net of applicable expenses are used to acquire hydroelectric operating companies and assets
and for the development of new hydroelectric power projects in China, for working capital and for general corporate purposes. The Company does not conduct any substantive operation of its own and conducts its primary business operations through its subsidiaries. During the years ended December 31, 2008, 2009 and 2010, the Company made seven, three and six acquisitions of hydroelectric entities, respectively. Details of
each acquisition made in 2010 are disclosed in Note 3. As of December 31, 2010, the Company’s subsidiaries included the following entities:
Place of
Date of
Percentage
Principal
Subsidiaries
Beijing A.B.C. Investment
PRC
April 19, 2007
100%
Provision of general and
Yunnan Huabang Electric Power
PRC
April 25, 2007
100%
Operation and development of
Sichuan Huabang Hydroelectric
PRC
May 21, 2007
100%
Operation and development of
Zhejiang Province Jingning
PRC
January 31, 2008
100%
Operation and development of
Qingtian Wuliting Hydroelectric
PRC
January 31, 2008
100%
Operation and development of
Suichang County Jiulongshan
PRC
January 31, 2008
100%
Operation and development of
China Hydroelectric Corporation
HK
June 25, 2008
100%
Investment holding company
Pingnan County Yuheng
PRC
October 21, 2008
100%
Operation and development of
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Incorporation
Establishment/
Acquisition
of
Ownership
Activities
Consulting Co., Ltd. (“ABC”)
administrative services to group
companies
Development Co., Ltd. (“Binglangjiang”)
hydroelectric assets
Development Co., Ltd.
(“Liyuan”)
hydroelectric assets
Yingchuan Hydroelectric
Development Co., Ltd.
(“Yingchuan”)
hydroelectric assets
Development Co., Ltd.
(“Wuliting”)
hydroelectric assets
Hydroelectric Development Co.,
Ltd. (“Jiulongshan”)
hydroelectric assets
(Hong Kong) Limited (“CHC
HK”)
Hydropower Co., Ltd.
(“Yuheng”)
hydroelectric assets
CHINA HYDROELECTRIC CORPORATION
Place of
Date of
Percentage
Principal
Pingnan County Wangkeng
PRC
October 21, 2008
90%
Operation and development of
Pingnan County Yuanping
PRC
October 22, 2008
100%
Operation and development of
Sanming Zhongyin Banzhu
PRC
October 22, 2008
100%
Operation and development of
Sun Power Asia Limited
HK
November 14,2008
100%
Investment holding company
Yunhe County Shapulong
PRC
August 3, 2009
100%
Operation and development of
Zhejiang Longquan Ruiyang
PRC
August 20, 2009
100%
Operation and development of
Suichang County Zhougongyuan
PRC
December 3, 2009
100%
Operation and development of
Fujian Huabang Hydroelectric
PRC
January 14, 2010
100%
Investment holding
Henan Wuyue Storage Power
PRC
March 23, 2010
79%
Development of
Yingjiang County Qinrui Husahe
PRC
April 19, 2010
100%
Operation and development of
Fugong County Hengda Electric
PRC
June 22, 2010
100%
Operation and development of
Fugong County Xineng Electric
PRC
August 16, 2010
100%
Operation and development of
Luquan Xiaopengzu Power Generation Co., Ltd. (“Xiaopengzu”)
PRC
September 8, 2010
100%
Operation and development of
Shaowu City Jinling Power
PRC
December 30, 2010
100%
Operation and development of
Shaowu City Jinlong Hydropower
PRC
December 30, 2010
55%
Operation and development of
Shaowu City Jintang Hydropower
PRC
December 30, 2010
74%
Operation and development of
Shaowu City Jinwei Hydropower
PRC
December 30, 2010
74%
Operation and development of F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Incorporation
Establishment/
Acquisition
of
Ownership
Activities
Hydroelectric Co., Ltd.
(“Wangkeng”)
hydroelectric assets
Hydroelectric Co., Ltd.
(“Yuanping”)
hydroelectric assets
Hydroelectric Co., Ltd.
(“Banzhu”)
hydroelectric assets
(“Sunpower”)
Hydropower Generation Co., Ltd. (“Shapulong”)
hydroelectric assets
Cascaded II Hydropower Plant
Co., Ltd. (“Ruiyang”)
hydroelectric assets
Hydroelectric Development Co.,
Ltd. (“Zhougongyuan”)
hydroelectric assets
Investment Co., Ltd. (“Fujian
Huabang”)
Generation Co., Ltd. (“Wuyue”)
hydroelectric assets
Power Co., Ltd. (“Husahe”)
hydroelectric assets
Power Development Co., Ltd.
(“Hengda”)
hydroelectric assets
Power Development Co., Ltd.
(“Xineng”)
hydroelectric assets
hydroelectric assets
Generation Co., Ltd. (“Jinling”)
hydroelectric assets
Co., Ltd. (“Jinlong”)
hydroelectric assets
Co., Ltd. (“Jintang”)
hydroelectric assets
Co., Ltd. (“Jinwei”)
hydroelectric assets
CHINA HYDROELECTRIC CORPORATION 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”). Certain comparative amounts have been reclassified to conform with the current year’s presentation. (b) Principles of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtained control and continued to be consolidated until the date that such control
ceases. Investments in entities that the Company does not control, but has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Investments in entities in which the Company does not have the ability to exercise significant influence are
accounted for under the cost method. All significant intercompany transactions and balances have been eliminated upon consolidation. For business combinations with the acquisition date on or after January 1, 2009, the Group accounted for the transactions in accordance with ASC sub-topic 805-10 (“ASC 805-10”), Business Combinations: Overall. ASC 805-10 requires the acquiring entity in a business combination to recognize all
assets acquired and liabilities assumed in the transaction, establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. (c) Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from those estimates. (d) Fair value of financial instruments Financial instruments include cash and cash equivalents, accounts receivable, certain other current assets, accounts payable, certain other liabilities, short-term loans, long-term loans, convertible notes, convertible redeemable preferred shares, derivative financial liabilities and warrants. The carrying
values of these financial instruments, other than long-term loans, convertible redeemable preferred shares, and warrants approximate their fair values due to their short-term maturities. The warrants issued in connection with the convertible notes and the IPO were recorded in equity at the fair value as
determined on the day of issuance (Note 17). The convertible redeemable preferred shares were initially recorded at issue price net of issuance costs. The Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying value of the convertible redeemable
preferred shares to equal the redemption value at the end of each reporting period (Note 16). The warrants issued in connection with the convertible redeemable preferred shares were recorded as a liability at fair value as determined on the day of issuance and subsequently adjusted to the fair value at
each reporting date (Note 17). Upon the closing of the Company’s IPO on January 25, 2010, these warrants were reclassified from liability to equity at the fair value immediately prior to such reclassification (Note 17). The Group, with the F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION assistance of independent third party valuation firms, determined the fair values of the convertible notes and related derivative financial liability, convertible redeemable preferred shares and warrants. The carrying values of long-term loans approximate their fair values due to the fact that the interest rates on these loans are reset each year based on prevailing market interest rates. The Group adopted the provisions of ASC sub-topic 820-10 (“ASC 820-10”), Fair Value Measurements and Disclosures: Overall, on January 1, 2008. ASC 820-10 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of
ASC 820-10 did not impact the Group’s financial condition, results of operations, or cash flow. ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2—Include other inputs that are directly or indirectly observable in the marketplace. Level 3—Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 describes three main approaches to measure the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable
assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be
required to replace an asset. In accordance with ASC 820-10, the Group measures the fair value of money market funds included in cash equivalents using the market approach based on quoted market prices. Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 are summarized below:
Quoted price in
Significant
Significant
US$
US$
US$ Money market funds in cash equivalent
6,811
—
— Total
6,811
—
— The preferred shares warrants, which were reclassified from liability to equity upon the Company’s IPO on January 25, 2010, were valued using the income approach based on inputs that are unobservable in the market (Level 3). F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
active market for
identical assets
(Level 1)
other
observable
inputs
(Level 2)
unobservable
inputs
(Level 3)
CHINA HYDROELECTRIC CORPORATION The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs for the year ended December 31, 2010:
Preferred
Total
US$
US$ Balance as of December 31, 2009
14,333
14,333 Realized or unrealized gain
(365
)
(365
) Reclassification of warrant from liability to equity upon IPO
(13,968
)
(13,968
) Balance as of December 31, 2010
—
— Realized and unrealized gain of US$ 365 for the year ended December 31, 2010 was recorded in “Changes in fair value of derivative financial liabilities and warrant liability” in the consolidated statements of operations. ASC sub-topic 825-10 (“ASC 825-10”), Financial Instruments: Overall, became effective for the Group at the beginning of 2008. ASC 825-10 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair
value. The Group did not elect to utilize voluntary fair value measurements as permitted by ASC 825-10. (e) Foreign currency The Company determined its functional currency to be the US$ while its subsidiaries determine their functional currency based on the criteria of ASC sub-topic 830-10 (“ASC 830-10”), Foreign Currency Matters: Overall. All of the Company’s subsidiaries determined their functional currency to be
their respective local currency, except for CHC HK and Sunpower which determined their functional currency to be the US$. The Company uses the US$ as its reporting currency. Each entity in the Group maintains its financial records in its own functional currency. Transactions denominated in foreign currencies are measured at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are remeasured at the
exchange rates prevailing at the balance sheet date. Exchange gains and losses are included in the consolidated statements of operations. Non-monetary items that are measured in terms of historical cost in a foreign currency are remeasured using the exchange rates at the dates of the initial transactions. The assets and liabilities of the Company’s subsidiaries are translated into the reporting currency of the Company at the exchange rates prevailing at the balance sheet date. The statements of operations of the Company’s subsidiaries are translated into the reporting currency of the Company at the
weighted average exchange rates for the year. The resulting translation gains (losses) are recorded in accumulated other comprehensive income as a component of shareholders’ equity. For the purpose of the consolidated statements of cash flows, cash flows of the Company’s subsidiaries are translated into the reporting currency of the Company at the exchange rates prevailing on the dates of the cash flows. Frequently recurring cash flows of the Company’s subsidiaries, which arise
throughout the year, are translated into the reporting currency of the Company at the weighted average exchange rates for the year. F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Shares
Warrants
(Note 17)
CHINA HYDROELECTRIC CORPORATION (f) Cash and cash equivalents Cash and cash equivalents include cash on hand and short-term deposits with original maturity of three months or less at the date of purchase. None of the Group’s cash and cash equivalents is restricted as to withdrawal and use. (g) Accounts receivable Accounts receivables are carried at net realizable value. In evaluating the collectability of receivable balances, the Group considers many factors, including the aging of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. An estimate for doubtful
accounts is made when collection of the full amount is no longer probable. Accounts receivable are written off after all collective efforts have ceased. (h) Investment in equity investee Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting under ASC sub-topic 323-10, (“ASC 323-10”), Investments—Equity Method and Joint Ventures: Overall, and
included as investment in equity investees in the balance sheets. Under the equity method, the Company’s proportionate share of each equity investee’s net income or loss is included as share of income (losses) in equity investees in the statements of operations. The difference between the cost of the equity investee and the amount of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill and included as part of the Company’s investment in equity investees in the balance sheets. The Company evaluated the
investment in equity investee for impairment under ASC 323-10. An impairment loss on the investment in equity investee is recognized in the statements of operations when the decline in value is determined to be other-than-temporary. (i) Property, plant and equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the following estimated useful lives:
Dams and reservoirs
30-49 years
Buildings
8-50 years
Machinery
1-30 years
Transportation equipment
1-11 years
Electronic equipment and others
1-15 years For property, plant and equipment acquired through a business combination, depreciation is recorded on a straight-line basis over their respective remaining estimated useful lives. All direct and indirect costs that are related to the construction of property, plant and equipment and incurred before the
assets are ready for their intended use are capitalized as construction in progress. Construction in progress is transferred to specific property, plant and equipment accounts and commences depreciation when these assets are ready for their intended use. Interest costs are capitalized if they are incurred during the acquisition, construction or production of a qualifying asset and such costs could have been avoided if expenditures for the assets have not been made. Capitalization of interest costs commences when the activities to prepare the asset are in
progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended use. Interest costs of US$1,426 and US$nil were capitalized for the years ended December 31, 2009 and 2010, respectively. F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION Repair and maintenance costs are charged to expense when incurred, whereas the cost of renewals and betterment that extend the useful life of fixed assets are capitalized as additions to the related assets. Retirement, sale and disposals of assets are recorded by removing the cost and accumulated
depreciation, with any resulting gain or loss reflected in the consolidated statements of operations. (j) Goodwill and intangible assets Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of acquired businesses. ASC sub-topic 350-10 (“ASC 350-10”), Intangibles—Goodwill and Other: Overall, requires that goodwill be tested for impairment
annually or more frequently if events or changes in circumstances indicate that it might be impaired. The Group assigns and assesses goodwill for impairment at the reporting unit level. The Group determines that each reporting unit is identified at the component level, which is one level below the
operating segment. The performance of the impairment test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to
be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the Group performs the second step of the goodwill impairment test to determine the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and
liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, the Group would then recognize an impairment loss. Intangible assets are carried at cost less accumulated amortization. Intangible assets acquired in a business combination are recognized initially at fair value at the date of acquisition. Intangible assets with a finite useful life are amortized using the straight-line method over the estimated economic life
of the intangible assets. The estimated useful life for the intangible assets as of December 31, 2010 is as follows:
Development right of Binglangjiang Phase II
30 years
Water use right of Jinzaoqiao station
40 years
Water use right of Wanquan Power Generation Co., Ltd.
30 years
Dam use right of Dongguan
40 years The Group reviews and adjusts the carrying value of the intangible assets if facts and circumstances suggest the intangible assets may be impaired (Note 2(m)). The Group assessed and concluded that there was no impairment for goodwill and intangible asset in any of the years presented. (k) Land use rights The land use rights represent the amounts paid and relevant costs incurred for the right to use land in the PRC and are recorded at purchase cost less accumulated amortization. Amortization is provided on a straight-line basis over the terms of the respective land use rights agreements, which are 50
years. For land use rights acquired through a business combination, amortization is recorded on a straight-line basis over their respective remaining estimated useful lives, which range from 41 to 50 years. F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION (l) Asset retirement obligations ASC sub-topic 410-20 (“ASC 410-20”), Asset Retirement Obligations, requires companies to record the present value of obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. The value of the liability is capitalized as part of the carrying amount of
the related long-lived asset. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset. The Group’s asset retirement obligations relate primarily to the restoration of leased lands under land use rights
granted by the local government to their original condition. Asset retirement obligations as of December 31, 2009 and 2010 were insignificant. (m) Impairment of long-lived assets The Group evaluates its long-lived assets, including property, plant and equipment, land use rights and intangible assets with finite lives, for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets)
indicate that the carrying amount of an asset may not be recoverable in accordance with ASC sub-topic 360-10 (“ASC 360-10”), Property, Plant, and Equipment: Overall. When these events occur, the Group assesses the recoverability of long-lived assets by comparing the carrying amount of the assets to
the expected future undiscounted cash flows resulting from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the
assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. No impairment of long-lived assets was recognized for any of the years presented. (n) Derivative instruments ASC sub-topic 815-10 (“ASC 815-10”), Derivatives and Hedging: Overall, requires all contracts which meet the definition of a derivative to be recognized in the consolidated financial statements as either assets or liabilities and recorded at fair value. Changes in the fair value of derivative financial
instruments are either recognized periodically in income/loss or in shareholders’ equity as a component of other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Changes in fair values of derivatives not qualified as hedges are reported in the
consolidated statements of operations. The estimated fair values of derivative instruments are determined at discrete points in time based on the relevant market information. These estimates are calculated with reference to the market rates using industry standard valuation techniques. (o) Comprehensive income (loss) Comprehensive income is defined as the change in shareholders’ equity of the Group during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Comprehensive income (loss) is reported in the
consolidated statements of shareholders’ equity. Accumulated other comprehensive income (loss) of the Group includes the cumulative foreign currency translation adjustments. (p) Revenue recognition The Group’s revenue is derived from the sale of electricity. Revenues are recognized when the following four criteria are met as prescribed by ASC sub-topic 605-10 (“ASC 605-10”), Revenue Recognition: Overall: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. The Group considers the terms of each arrangement to determine the appropriate accounting treatment. Revenue is generally earned and recognized upon transmission of
electricity to the power grid controlled and owned by the respective regional or provincial grid companies. For transactions in which electricity has been transmitted to the power grid without a fixed or determinable unit price per kWh while the tariff is pending approval of the regional or provincial
pricing bureau, cash received in exchange for the transmission of electricity to the power grid controlled by the respective regional or provincial grid companies has been recorded as customer deposits until such time the price becomes fixed and determinable. When the price becomes fixed and
determinable, all or a portion of the customer deposits will be recognized as revenue. The Group does not defer the related cost of revenues, which is charged to expense as incurred. No customer deposits were recognized as of December 31, 2009 and 2010. The Group has not offered any discounts or
rebates to its customers nor does it provide for refunds in its sales contracts with customers except for Yuheng (Note 15). The Company’s subsidiaries are subject to withholding value-added tax (“VAT”) on the revenues earned in the PRC. The applicable rate of VAT is 6% for small hydroelectric power projects with a total installed capacity of 50 megawatts or less and 17% for large hydroelectric power projects with a
total installed capacity of over 50 megawatts. For the year ended December 31, 2008, the lower VAT rate of 6% was applied to the hydroelectric power projects of Binglangjiang, Liyuan, Yingchuan, Wuliting, Jiulongshan, Yuheng and Yuanping and the VAT rate of 17% was applied to the hydroelectric
power projects of Banzhu and Wangkeng. For the year ended December 31, 2009, the lower VAT rate of 6% was applied to the hydroelectric power projects of Binglangjiang, Liyuan, Yingchuan, Wuliting, Yuheng, Shapulong, Ruiyang and Yuanping and the VAT rate of 17% was applied to the
hydroelectric power projects of Banzhu, Wangkeng, Jiulongshan and Zhougongyuan. For the year ended December 31, 2010, the lower VAT rate of 6% was applied to the hydroelectric power projects of Binglangjiang, Liyuan, Yingchuan, Wuliting, Yuheng, Yuanping, Jiulongshan, Zhougongyuan,
Shapulong, Ruiyang, Husahe, Hengda, Xineng, Xiaopengzu, Jinling, Jinlong, Jintang and Jinwei, and the VAT rate of 17% was applied to the hydroelectric power projects of Banzhu, and Wangkeng. VAT on revenues earned from the sale of electricity by the Group to its customers for the years ended
December 31, 2008, 2009 and 2010 were US$1,001, US$3,742 and US$5,728, respectively. The Group has recognized revenues net of VAT in the consolidated statements of operations. (q) Cost of revenues Cost of revenues consists primarily of depreciation expense of hydroelectric power projects and related operating costs and overhead expenses directly attributable to the production of electricity. (r) Leases In accordance with ASC sub-topic 840-10 (“ASC 840-10”), Lease: Overall, leases are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: (i) ownership is transferred to the lessee by the end of the
lease term, (ii) there is a bargain purchase option, (iii) the lease term is at least 75% of the property’s estimated remaining economic life or (iv) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the
inception date. A capital lease is accounted for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed on a straight-line basis over the lease periods. The Group has no capital leases for any of the years presented. F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION (s) Income taxes The Group follows the liability method of accounting for income taxes in accordance with ASC sub-topic 740-10 (“ASC 740-10”), Income Taxes: Overall. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of
assets and liabilities, net operating loss carry forwards and credits, using enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The Group records a valuation allowance against the amount of deferred tax assets if based on the weight of available evidence, it
is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in the consolidated statements of operations in the period that includes the enactment date. The Company accounts for uncertainty in income taxes in accordance with ASC 740-10. Interests and penalties arising from underpayment of income taxes are computed in accordance with the related PRC tax law. The amount of interest expenses is computed by applying the applicable statutory rate
of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return. Interest recognized from the accounting for uncertainty in income taxes is classified in the financial statements as interest expenses, while penalties recognized from
the accounting for uncertainty in income taxes are classified in the financial statements as other expenses. The Group recognizes in its financial statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to prevail, which is defined as a likelihood of more than fifty percent of being sustained upon audit, based on the technical merits of the tax position.
Tax positions that meet the “more likely than not” threshold are measured, using a probability weighted approach, at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. The Group’s estimated liability for unrecognized tax benefits is periodically assessed for adequacy and may be affected by changing interpretation of laws, rulings by tax authorities, certain changes and/or developments with respect to audits, and expiration of the statute of limitations. The outcome for
a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from the Group’s estimates. As each audit is concluded, adjustments, if any, are appropriately recorded in the
Group’s financial statements. Additionally, in future periods, change in facts, circumstances, and new information may require the Group to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the
period in which the change occurs. (t) Net (loss) income per share In accordance with ASC sub-topic 260-10 (“ASC 260-10”), Earnings Per Share: Overall, basic (loss) income per share is computed by dividing net (loss) income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted (loss) income
per share is calculated by dividing net (loss) income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary share equivalents outstanding during the period. Ordinary share equivalents
consist of the ordinary shares issuable upon the Group’s convertible redeemable preferred shares (Note 16), using the if-converted method, and ordinary shares issuable upon the conversion of the warrants (Note 17) and share options (Note 25), using the treasury stock method. F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION (u) Segment reporting The Group follows ASC sub-topic 280-10 (“ASC 280-10”), Segment Reporting: Overall, for the presentation of segment information. The Group’s chief operating decision maker, who has been identified as the chief executive officer (“CEO”), relies upon financial information by provinces with
operations in the PRC when making decisions about allocating resources and assessing the performance of the Group. As a result, the Group operates and manages its business as four operating and reportable segments, namely the Yunnan Province segment, the Sichuan Province segment, the Zhejiang
Province segment and the Fujian Province segment. As the Group’s long-term assets are substantially all located in and derived from the PRC, no geographical segments are presented. (v) Government grant Government grants are recognized where there is reasonable assurance that the attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the period necessary to match the grant on a systematic basis to the related costs. Where the grant
relates to an asset acquisition, it is recognized as deferred government grant and recognized as income in proportion to depreciation of the related assets. Grant income is recognized on a net basis as a reduction to cost of revenues in the accompanying consolidated statements of operations. (w) Share-based payment The Company accounts for share awards issued to employees in accordance with ASC sub-topic 718-10 (“ASC 718-10”), Compensation-Stock Compensation: Overall. In accordance with the fair value recognition provision of ASC 718-10, share-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as an expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. The Company has elected to recognize share-based compensation expense for share awards granted to employees using the straight-line
method. The Company uses a binomial option pricing valuations model in determining the fair value of the options granted. The Company accounts for share awards issued to non-employees in accordance with the provisions of ASC 718-10 and ASC sub-topic 505-50 (“ASC 505-50”), Equity: Equity-Based Payment to Non-employees. The Company’s share awards issued to non-employees are subject to graded vesting
provisions. The Group recognizes share-based compensation expense for share awards granted to non-employees using the accelerated recognition method over the requisite service period of the award. In accordance with ASC 718-10 and ASC 505-50, the Company uses the binomial option pricing
valuations model to measure the value of options granted to non-employees at each vesting date to determine the appropriate charge to share-based compensation. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-
based awards that are expected to vest. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. (x) Recently issued accounting standards In April 2010, the FASB issued revised guidance on “Compensation-Stock Compensation (ASC 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades—a consensus of the FASB Emerging F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION Issues Task Force”. The revised guidance addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The
revised guidance is effective for interim and annual periods beginning on or after December 15, 2010. Earlier application is permitted. The Company has not early adopted the new guidance and is currently evaluating the impact on its consolidated financial statements of adopting this guidance. In December 2010, the FASB issued revised guidance on “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The revised guidance specifies that an entity with reporting units that have carrying amounts that are zero or negative
is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those
reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the revised guidance should be included in earnings as required by Section
350-20-35. The revised guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance. In December 2010, the FASB issued revised guidance on the “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The revised guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the
combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The revised guidance also expands the supplemental pro forma disclosures to include a description of the nature and
amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The revised guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance. 3. ACQUISITIONS During the year ended December 31, 2010, the Company completed the acquisitions of 100% ownership interest in (i) Husahe, (ii) Hengda, (iii) Xineng, (iv) Xiaopengzu and (v) Jinling. As a result of these acquisitions, the Company is expected to further expand its hydroelectric power generation
capacity in the PRC. (i) Husahe On March 2, 2010, Yunnan Huabang entered into an equity transfer purchase agreement with Dehong Qinrui Power Investment and Development Co., Ltd. to acquire 100% of the equity interest in Husahe. The total purchase price for the acquisition is RMB114,980 (US$16,844), which comprises a
cash purchase price of RMB106,000 (US$15,528) and an additional cash payment of RMB8,980 (US$1,316) to acquire certain receivables of Husahe which were not originally included as part of the acquired assets in the equity transfer purchase agreement. Prior to the acquisition completion F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION date, Fujian Huabang and Binglangjiang advanced RMB57,000 (US$8,350) and RMB51,000 (US$7,471) cash, respectively, as a capital injection to Hengda. The capital injection is to fund the future operations of Husahe. The Company concluded that the capital injection transferred to Hengda represents
an advance to a subsidiary prior to the consummation of its acquisition rather than a cost directly related to its acquisition. Since the capital injection is not a liability incurred by the Group to former owners of Hengda, the payment does not form part of the total purchase consideration. Husahe owns
and operates three hydroelectric stations located in Dehong Country, Yunnan Province, which have been in operation since March 1995. The acquisition was completed and Yunnan Huabang took effective control of Husahe on April 19, 2010. The acquisition of Husahe meets the definition of a business
acquisition and the results of operations of the acquired business have been included in the Company’s consolidated financial statements since April 19, 2010. Based on the available and obtainable information as of April 19, 2010, which is subject to further refinement, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition on April 19, 2010.
US$ Cash purchase price
16,844 Total purchase consideration
16,844 Cash
7,478 Property, plant and equipment, net
14,089 Other assets
9,958 Goodwill
1,826 Total assets acquired
33,351 Other liabilities
(15,998
) Deferred tax liabilities—non-current
(509
) Total liabilities assumed
(16,507
) Net assets acquired
16,844 The US$1,826 goodwill from the acquisition of Husahe was assigned to the Yunnan Province segment. The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of Husahe. None of the goodwill is expected to be deductible for tax purposes. The Company recognized US$54 of acquisition-related costs that were expensed in the year ended December 31, 2010. These costs are included in “General and administrative expenses” in the consolidated statements of operations. The amounts of revenue and net profit of Husahe included in the Company’s consolidated statement of operations from April 19, 2010, the acquisition date, to December 31, 2010 are as follows:
US$ Revenue
1,698 Net profit
706 (ii) Hengda On April 14, 2010, Fujian Huabang entered into an equity transfer purchase agreement with Yunnan Minfa Hydroelectric Development Co., Ltd. and Xiamen Minrui Investment Co., Ltd. to acquire 100% equity interest in Hengda. The total purchase price for the acquisition is RMB65,000 (US$9,562)
cash. Prior to the acquisition completion date, Fujian Huabang and Banzhu advanced RMB74,521 (US$10,962) and RMB1,130 (US$166) cash, respectively, as a capital injection to Hengda. The capital injection is to fund the future operations of Hengda. The Company concluded F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION that the capital injection transferred to Hengda represents an advance to a subsidiary prior to the consummation of its acquisition rather than a cost directly related to its acquisition. Since the capital injection is not a liability incurred by the Group to former owners of Hengda, the payment does not form
part of the total purchase consideration. Hengda owns and operates two hydroelectric stations located in Fugong County, Yunnan Province, which have been in operation since June and October 2007, respectively. The acquisition was completed and Fujian Huabang took effective control of Hengda on
June 22, 2010. The acquisition of Hengda meets the definition of a business acquisition and the results of operations of the acquired business have been included in the Company’s consolidated financial statements since June 22, 2010. Based on the available and obtainable information as of June 22, 2010, which is subject to further refinement, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition on June 22, 2010.
US$ Cash purchase price
9,562 Total purchase consideration
9,562 Cash
1 Property, plant and equipment, net
38,653 Intangible assets
342 Other assets
407 Goodwill
428 Total assets acquired
39,831 Current portion of long-term loans
(3,015
) Other liabilities
(12,598
) Long-term loans
(14,269
) Deferred tax liabilities—non-current
(387
) Total liabilities assumed
(30,269
) Net assets acquired
9,562 The US$428 goodwill from the acquisition of Hengda was assigned to the Yunnan Province segment. The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of Hengda. None of the goodwill is expected to be deductible for tax purposes. The Company recognized US$169 of acquisition-related costs that were expensed in the year ended December 31, 2010. These costs are included in “General and administrative expenses” in the consolidated statements of operations. The amounts of revenue and net loss of Hengda included in the Company’s consolidated statement of operations from June 22, 2010, the acquisition date, to December 31, 2010 are as follows:
US$ Revenue
1,497 Net loss
58 (iii) Xineng On April 14, 2010, Fujian Huabang entered into an equity transfer purchase agreement with Yunnan Minhe Hydroelectric Investment Co., Ltd. to acquire 100% equity interest in Xineng. The total purchase price for the acquisition is RMB31,250 (US$4,591) cash. Prior to the acquisition completion
date, Fujian Huabang and Hengda advanced RMB13,630 (US$2,003) and RMB6,134 (US$901) cash, respectively, as a capital injection to Xineng. The capital injection is to fund the F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION future operations of Xineng. The Company concluded that the capital injection transferred to Xineng represents an advance to a subsidiary prior to the consummation of its acquisition rather than a cost directly related to its acquisition. Since the capital injection is not a liability incurred by the Group to
former owner of Xineng, the payment does not form part of the total purchase consideration. The hydroelectric project of Xineng is located in Fugong County, Yunnan Province, and has been in operation since February 2009. The acquisition was completed and Fujian Huabang took effective control of
Xineng on August 16, 2010. The acquisition of Xineng meets the definition of a business acquisition and the results of operations of the acquired business have been included in the Company’s consolidated financial statements since August 16, 2010. Based on the available and obtainable information as of August 16, 2010, which is subject to further refinement, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition on August 16, 2010.
US$ Cash purchase price
4,591 Total purchase consideration
4,591 Property, plant and equipment, net
19,847 Intangible Assets
124 Other assets
255 Goodwill
1,004 Total assets acquired
21,230 Current portion of long-term loans
(73
) Other liabilities
(3,231
) Long-term loans
(13,149
) Deferred tax liabilities—non-current
(186
) Total liabilities assumed
(16,639
) Net assets acquired
4,591 The US$1,004 goodwill from the acquisition of Xineng was assigned to the Yunnan Province segment. The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of Xineng. None of the goodwill is expected to be deductible for tax purposes. The Company recognized US$104 of acquisition-related costs that were expensed in the year ended December 31, 2010. These costs are included in “General and administrative expenses” in the consolidated statements of operations. The amounts of revenue and net loss of Xineng included in the Company’s consolidated statement of operations from August 16, 2010, the acquisition date, to December 31, 2010 are as follows:
US$ Revenue
556 Net loss
80 (iv) Xiaopengzu On April 23, 2010, Fujian Huabang entered into an equity transfer purchase agreement with eight individual shareholders to acquire 100% of the equity interest in Xiaopengzu. The total purchase price for the acquisition is RMB150,000 (US$22,089). Prior to the acquisition completion date, Fujian
Huabang, Binglangjiang, Yingchuan, Banzhu, Wangkeng and Yuanping advanced RMB42,500 (US$6,259), RMB13,000 (US$1,914), RMB10,000 (US$1,473), RMB6,500 (US$957), RMB20,000 (US$2,945) and RMB1,000 (US$147) cash, respectively, as a capital injection to F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION Xiaopengzu. The capital injection is to fund the future operations of Xiaopengzu. The Company concluded that the capital injection transferred to Xiaopengzu represents an advance to a subsidiary prior to the consummation of its acquisition rather than a cost directly related to its acquisition. Since the
capital injection is not a liability incurred by the Group to former owners of Xiaopengzu, the payment does not form part of the total purchase consideration. The hydroelectric project of Xiaopengzu is located in Luquan County, Yunnan Province and has been in operation since December 2009. The
acquisition was completed and Fujian Huabang took effective control of Xiaopengzu on September 8, 2010. The acquisition of Xiaopengzu meets the definition of a business acquisition and the results of operations of the acquired business have been included in the Company’s consolidated financial
statements since September 8, 2010. Based on the available and obtainable information as of September 8, 2010, which is subject to further refinement, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition on September 8, 2010.
US$ Cash purchase price
22,089 Total purchase consideration
22,089 Cash
2,350 Property, plant and equipment, net
45,592 Other assets
569 Goodwill
12,398 Total assets acquired
60,909 Current portion of long-term loans
(1,878
) Other liabilities
(16,420
) Long-term loans
(20,210
) Deferred tax liabilities—non-current
(312
) Total liabilities assumed
(38,820
) Net assets acquired
22,089 The US$12,398 goodwill from the acquisition of Xiaopengzu was assigned to the Yunnan Province segment. The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of Xiaopengzu. None of the goodwill is expected to be deductible for tax purposes. The Company recognized US$27 of acquisition-related costs that were expensed in the year ended December 31, 2010. These costs are included in “General and administrative expenses” in the consolidated statements of operations. The amounts of revenue and net loss of Xiaopengzu included in the Company’s consolidated statement of operations from September 16, 2010, the acquisition date, to December 31, 2010 are as follows:
US$ Revenue
876 Net loss
202 (v) Jinling On November 3, 2010, Fujian Huabang entered into an equity transfer purchase agreement with Fujian Taiyu Investment (Group) Co., Ltd., Shaowu City Fengyi Power Development Co., Ltd. and Jianyang City Xinguang Power Development Co., Ltd. (collectively referred to as “the Original F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION Shareholders of Jinling”) to acquire 100% equity interest in Jinling, which held 55%, 74% and 74% of controlling interest in Jinlong, Jintang and Jinwei, respectively. The total purchase price for the acquisition is RMB75,060 (US$11,333) cash. These hydroelectric projects are located in Shaowu City, Fujian Province, and have been in operation since 1985.The acquisition was completed and Fujian Huabang took effective control of Jinling and its subsidiaries on
December 30, 2010. The acquisition of Jinling and its subsidiaies meets the definition of a business acquisition and the results of operations of the acquired business have been included in the Company’s consolidated financial statements since December 30, 2010. Based on available and obtainable information as of December 30, 2010, which is subject to further refinement, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition on December 30, 2010:
US$ Cash purchase price
11,333 Total purchase consideration
11,333 Cash
26 Property, plant and equipment, net
78,953 Intangible assets
1,759 Other assets
2,930 Goodwill
7,925 Total assets acquired
91,593 Short-term loans
(9,286
) Current portion of long-term loans
(5,964
) Long-term loans
(16,081
) Other liabilities
(40,924
) Deferred tax liabilities—non-current
(4,274
) Total liabilities assumed
(76,529
) Non-controlling interest
(3,731
) Net assets acquired
11,333 The Company used the income approach to measure the fair value of the noncontrolling interest at the acquisition date. Significant inputs include estimated future revenue and costs to calculate future operating cash flows as well as internal rate of return to compute the present value of operating
cash flows. The US$7,925 goodwill from the acquisition of Jinling and its subsidiaries was assigned to the Fujian Province segment. The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of Jinling and its subsidiaries. None of the goodwill is expected to be deductible
for tax purposes. The Company recognized US$51 of acquisition-related costs that were expensed in the year ended December 31, 2010. These costs are included in “General and administrative expenses” in the consolidated statements of operations. The amount of revenue and earnings of Jinling and its subsidiaries included in the Company’s consolidated statements of operations from December 30, 2010, the acquisition date, to December 31, 2010 are insignificant. Unaudited pro forma consolidated financial information The following unaudited pro forma consolidated financial information reflects the results of the operations of the Group for the years ended December 31, 2009 and 2010, as if the acquisitions in F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION 2010 described above had been completed at the beginning of the years presented. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisitions actually taken place on the dates indicated
and may not be indicative of future operating results. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable.
For the Years
Ended
2009
2010
US$
US$ Revenues
50,526
78,075 Loss before income taxes
(20,840
)
(5,188
) Net loss attributable to ordinary shareholders
(58,145
)
(7,653
) Basic and diluted loss per share
(3.74
)
(0.05
) (vi) Wuyue On October 22, 2009, the Company entered into a capital injection agreement (the “Agreement”) with Henan Lantian Group Co., Ltd. (“Lantian”) to subscribe 79% equity interest in Wuyue, which owns the right to develop a pumped storage hydropower project of 1,000 megawatts in the Henan
Province. Pursuant to the Agreement, the Company is obligated to pay a first installment of RMB32,500 (US$4,771) and to transfer an additional RMB130,000 (US$19,629) cash as capital injections to Wuyue within two years after obtaining the certificate of approval from the government to fund the
construction of the pumped storage hydroelectric power project. The Company completed the first capital injection of RMB32,500 (US$4,771) on March 23, 2010. Pursuant to the capital injection agreement, the Company controls a majority of the board of directors and manages the daily business
operations of Wuyue subsequent to the first capital injection on March 23, 2010. As a result, Wuyue has been accounted for as a subsidiary and included in the Company’s consolidated financial statements since March 23, 2010. The acquisition of Wuyue does not meet the definition of a business acquisition and is accounted for as an asset acquisition. Wuyue is in the development stage during the year ended December 31, 2010. As a result, no revenue and earnings of Wuyue are included in the Company’s consolidated
statement of operations from March 23, 2010 to December 31, 2010. 4. ACCOUNTS RECEIVABLE The Group’s trading terms with its customers are mainly on credit. The credit terms are generally within 60 days after the delivery of electricity. The Group does not offer extended payment terms and all accounts receivable balances are non-interest-bearing. As of December 31, 2009, substantially all of the accounts receivable balances were within credit terms except for a receivable of US$570 from Fujian Province (Pingnan) Rongping Chemical Industry Co., Ltd. (“Rongping Chemical”) which the Company acquired as part of the purchase business
combination of Yuheng in October 2008, a receivable of US$4,853 from Lishui Electric Bureau, the local power grid for Jiulongshan electricity sales and a receivable of US$220 from Guangyuan Electric Bureau, the local power grid for Liyuan electricity sales. The US$570 receivable balance from
Rongping Chemical was aged over two years but its collectability is guaranteed by the original shareholders of Yuheng in accordance with a debt settlement agreement signed in October 2008. The US$4,853 receivable balance from Lishui Electric Bureau and the US$220 receivable balance from
Guangyuan Electric Bureau, which were less than one year overdue, are collectible as the electricity bureaus are PRC state-owned enterprises. As a result, an allowance for doubtful accounts was not provided on the receivable balances from Rongping Chemical, Lishui Electric Bureau and Guangyuan
Electric Bureau as of December 31, 2009. All of the accounts receivable balances as of December 31, 2009 were fully collected in 2010. As of December 31, 2010, all of the accounts receivable balances were within credit terms. F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
December 31,
CHINA HYDROELECTRIC CORPORATION 5. PREPAYMENTS AND OTHER CURRENT ASSETS Prepayments and other current assets consist of the following:
December 31,
December 31,
US$
US$ Prepayments
135
424 Acquisition deposits
—
4,832 Guarantee deposit—current portion
2,297
— Amounts due from original shareholders of acquired subsidiaries
273
2,403 Others
1,877
1,827 Total
4,582
9,486 Prepayments as of December 31, 2009 and 2010 mainly represent advances to contractors for construction projects. Acquisition deposits as of December 31, 2010 represent a deposit of US$3,020 advanced by Fujian Huabang to Taiyu in March 2010 for the acquisition of certain hydroelectric power projects, namely Fujian Shunchang Yangkou Power Company Ltd. and Jianyang Xinghu Hydropower Company Ltd.,
and a deposit of US$1,812 advanced by Xiaopengzu to the individual shareholders of Jinping Kanghong Hydroelectric Development Company Limited (“Dazhaihe”) in November 2010 for the acquisition of the Dazhaihe hydropower project. These acquisitions have not been completed as of December 31,
2010. Guarantee deposit as of December 31, 2009 represents an interest free amount paid by Yuheng to Rongping Chemical as part of an electricity supply arrangement amongst Yuheng, Rongping Chemical and the power grid from 2007 (Note 11), which the Company assumed as part of the Yuheng
acquisition. Pursuant to the electricity supply agreement, Yuheng is obligated to supply an agreed volume of 300 million kilowatt hour (“kWh”) of electricity to the power grid which in turn transmits such electricity to Rongping Chemical for a contractual term of 3.5 years. Yuheng provided a guarantee
deposit of US$4,389 (RMB30,000) to Rongping Chemical to guarantee the supply of electricity over the contractual term. Rongping Chemical is required to refund the guarantee deposit to Yuheng for every kWh of electricity supplied to Rongping Chemical through the power grid up to 300 million kWh
over 3.5 years. The guarantee deposit is recognized at its fair value on the date of acquisition of Yuheng and accreted to its face value of US$4,389 (RMB30,000) over the remainder of the contractual term of 3.5 years based on the volume of electricity supplied. The Company did not recognize any
interest income from accretion of the guarantee deposit in the statement of operations from the date of acquisition of Yuheng to December 31, 2008 as the power grid did not transmit any electricity to Rongping Chemical during that period. The Company recognized an interest income of US$45
(RMB307) for the year ended December 31, 2009. Rongping Chemical refunded US$1,128 (RMB7,705) guarantee deposit to Yuheng for 77,054,538 kWh of electricity transmitted during the year ended December 31, 2009. The Company recognized an interest income of US$391(RMB2,630) for the year
ended December 31, 2010. Rongping Chemical refunded US$1,124 (RMB7,559) guarantee deposit to Yuheng for 60,456,773 kWh of electricity transmitted during the year ended December 31, 2010. The electricity supply agreement expired in May 2010 when the cumulative volume of 300 million kWh of
electricity supply was reached. Amounts due from original shareholders of acquired subsidiaries as of December 31, 2009 represent the remaining balance of US$60 receivable from the original shareholders of Yuanping and US$213 receivable from the original shareholders of Banzhu for arable land occupation tax and social
insurance which should be borne by the original shareholders in accordance with the equity purchase agreements, it remained outstanding as of December 31, 2010. Amounts due from original shareholders of acquired subsidiaries as of December 31, 2010 mainly represents US$1,895 receivable F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2009
2010
CHINA HYDROELECTRIC CORPORATION from the original shareholders of Jinling prior to the acquisition, and US$354 from Sanming Ruifeng Economic Technological Development Ltd. the original shareholder of Banzhu, for social insurance which should be borne by the original shareholder in accordance with the equity purchase agreements. 6. DEFERRED INITIAL PUBLIC OFFERING COSTS Direct costs incurred by the Company attributable to the IPO of the Company’s ordinary shares in the United States had been deferred until January 25, 2010 and charged against the gross proceeds from such offering (Note 1). 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment and its related accumulated depreciation as of December 31, 2009 and 2010 are as follows:
December 31,
December 31,
US$
US$ Dams and reservoirs
207,176
286,450 Buildings
81,713
166,896 Machinery
109,001
147,252 Transportation equipment
951
1,394 Electronic equipment and others
477
3,812 Less: Accumulated depreciation
(16,441
)
(32,984
)
382,877
572,820 Construction in progress
1,616
10,866 Total
384,493
583,686 Construction in progress as of December 31, 2009 and 2010 is as follows:
Jiulongshan
Liyuan
Wuliting
Binglangjiang
Wuyue
US$
US$
US$
US$
US$
Balance as of December 31, 2008
93,000
—
31
4,888
— Acquisition during the year
—
—
—
—
— Addition to construction in progress
930
1,615
36
7,632
— Transfer to property, plant and equipment
(93,974
)
—
(67
)
(12,522
)
— Foreign currency translation adjustment
44
1
—
2
—
Balance as of December 31, 2009
—
1,616
—
—
— Acquisition during the year
—
—
—
8,875 Addition to construction in progress
32
346
—
571
1,352 Transfer from property, plant and equipment
—
—
—
449
— Transfer to property, plant and equipment
(1,985
)
—
(756
)
— Foreign currency translation adjustment
1
23
—
4
293
Balance as of December 31, 2010
33
—
—
268
10,520 F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2009
2010
CHINA HYDROELECTRIC CORPORATION Construction in progress as of December 31, 2009 and 2010 is as follows:
Yingchuan
Ruiyang
Zhougongyuan
Jinling
Total
US$
US$
US$
US$
US$
Balance as of December 31, 2008
—
—
—
—
97,919 Acquisition during the year
—
—
—
—
— Addition to construction in progress
—
—
—
—
10,213 Transfer to property, plant and equipment
—
—
—
—
(106,563
) Foreign currency translation adjustment
—
—
—
—
47
Balance as of December 31, 2009
—
—
—
—
1,616 Acquisition during the year
—
—
—
8
8,883 Addition to construction in progress
9
9
19
—
2,338 Transfer from property, plant and equipment
—
—
—
—
449 Transfer to property, plant and equipment
—
—
—
—
(2,741
) Foreign currency translation adjustment
—
—
—
—
321
Balance as of December 31, 2010
9
9
19
8
10,866 Interest costs qualifying for capitalization in the years ended December 31, 2008, 2009 and 2010 were US$3,467, US$1,426 and US$nil, respectively. Depreciation expenses for the years ended December 31, 2008, 2009 and 2010 were US$4,131, US$11,645 and US$15,834, respectively. Accumulated depreciation as of December 31, 2009 and 2010 included foreign currency translation adjustment of US$147 and US$899, respectively. Depreciation
expenses have been reported in the following accounts:
December 31,
December 31,
December 31,
US$
US$
US$ Cost of revenues
(4,085
)
(11,507
)
(15,607
) General and administrative expenses
(46
)
(138
)
(227
) Total
(4,131
)
(11,645
)
(15,834
) 8. INTANGIBLE ASSETS In connection with the acquisition of Binglangjiang in 2007, the Company acquired a legal right to develop and operate Phase II of Binglangjiang’s hydroelectric power project. The development right allows the Company to expand the power generation capacity of Binglangjiang by utilizing the
existing water dam of Binglangjiang, which has a useful life of 30 years. The Company recognized the fair value of US$2,909 of the development right as a separate intangible asset apart from goodwill in accordance with ASC 805-10. The estimated useful life of the development right is 30 years. In connection with the acquisition of Yuanping in 2008, the Company acquired a contractual right to use water from the dam and reservoir of the Jinzaoqiao station, which has a useful life of 40 years. The Company recognized the fair value of US$563 of the water use right as a separate intangible
asset apart from goodwill in accordance with ASC 805-10. The estimated useful life of the water use right is 40 years. On August 12, 2009, Yuheng acquired a contractual right to use water from the dam and reservoir of Wanquan Power Generation Co., Ltd. for a purchase price of US$1,025. The term of the water use right is 30 years. F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2008
2009
2010
CHINA HYDROELECTRIC CORPORATION In connection with the acquisition of Jinling, the Company acquired a right to use the dam of the Dongguan hydropower project which has a useful life of 40 years. The Company recognized the fair value of US$1,759 for the dam use right as a separate intangible asset apart from goodwill in
accordance with ASC 805-10. The estimated useful life of the dam use right of Dongguan is 40 years. Intangible assets and their related accumulated amortization as of December 31, 2009 and 2010 are as follows:
December 31, 2009
Gross
Accumulated
Foreign
Net Development right of Binglangjiang Phase II
2,909
(282
)
372
2,999 Water use right of Wanquan Power Generation Co., Ltd.
1,025
(58
)
—
967 Water use right of Jinzaoqiao station
563
(16
)
—
547 Total
4,497
(356
)
372
4,513
December 31, 2010
Gross
Accumulated
Foreign
Net Development right of Binglangjiang Phase II
2,909
(393
)
462
2,978 Water use right of Wanquan Power Generation Co., Ltd.
1,025
(93
)
30
962 Water use right of Jinzaoqiao station
563
(31
)
18
550 Dam use right of Dongguan
1,759
—
—
1,759 Total
6,256
(517
)
510
6,249 Amortization expenses for the years ended December 31, 2008, 2009 and 2010 were US$108, US$182 and US$161, respectively. Amortization expenses have been reported in the following accounts:
December 31,
December 31,
December 31,
US$
US$
US$ Cost of revenues
(2
)
(72
)
(50
) General and administrative expenses
(106
)
(110
)
(111
) Total
(108
)
(182
)
(161
) The estimated annual amortization expenses for each of the five succeeding fiscal years are as follows:
US$ 2011
208 2012
208 2013
208 2014
208 2015
208 9. GOODWILL Goodwill of US$135,219 as of December 31, 2010 represents the excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired relating to the acquisition of Binglangjiang during 2007, the acquisitions of Yingchuan, Wuliting, Yuheng, F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Carrying
Value
Amortization
Currency
Translation
Adjustment
Carrying
Value
Carrying
Value
Amortization
Currency
Translation
Adjustment
Carrying
Value
2008
2009
2010
CHINA HYDROELECTRIC CORPORATION Wangkeng, Yuanping and Banzhu during 2008, the acquisitions of Shapulong and Ruiyang during 2009 and the acquisitions of Husahe, Hengda, Xineng, Xiaopengzu and Jinling and its subsidiaries during 2010 (Note 3), net of foreign currency translation adjustment. Goodwill is not deductible for tax
purposes. In accordance with ASC 350-10, goodwill is not amortized but is tested for impairment at least annually. The changes in the carrying amount of goodwill by operating and reportable segments for the years ended December 31, 2009 and 2010 are as follows:
Yunnan
Sichuan
Fujian
Zhejiang
Total
US$
US$
US$
US$
US$ Balance as of December 31, 2008
2,878
—
64,977
28,678
96,533 Goodwill acquired during the year
—
—
—
11,232
11,232 Adjustments during allocation period
—
—
(36
)
—
(36
) Foreign currency translation adjustment
3
—
60
32
95 Balance as of December 31, 2009
2,881
—
65,001
39,942
107,824 Goodwill acquired during the year
15,656
—
7,925
—
23,581 Adjustments during allocation period
—
—
—
59
59 Foreign currency translation adjustment
499
—
2,016
1,240
3,755 Balance as of December 31, 2010
19,036
—
74,942
41,241
135,219 On January 30, 2009, Sanming Ruifeng, one of the original shareholders of Banzhu, agreed to forego US$1,024 of the current assets that Sanming Ruifeng is entitled to receive from the Company as part of the acquisition of 90% equity interest in Banzhu in October 2008. On June 18, 2009, the
Company settled all outstanding balances associated with the acquisition of Banzhu and incurred additional restructuring costs related to involuntary employee termination and other liabilities of US$295 and US$141, respectively. On August 17, 2009, upon obtaining the approved unit price of RMB0.29
per kWh (inclusive of VAT) from the regional pricing bureau in the Fujian Province for electricity transmitted by Yuanping to the provincial power grid prior to July 8, 2009, the Company determined that US$648 is payable to the original shareholders of Yuanping for electricity sold by Yuanping prior
to its acquisition by the Company in October 2008 pursuant to an agreement entered into between the Company and the original shareholders. In October, 2009, the Company settled all outstanding balances associated with the acquisition of Yuanping and Wangkeng with their original shareholders in
accordance with the equity transfer purchase agreement and determined that an additional US$214 is receivable from and an additional US$118 is payable to the original shareholders of Yuanping and Wangkeng, respectively. As a result, the Company recorded a net decrease in goodwill of US$36 during
the year ended December 31, 2009. In March 2010, Shapulong determined that an accrued water resource fee of US$149 was deductible for tax purposes and the related deferred tax asset of US$37 should be recognized at the acquisition date. In March 2010, Ruiyang submitted its 2009 income tax return and determined that an
additional US$96 tax payable should be recognized at the acquisition date. As a result, the Company recorded a net increase in goodwill of US$59 during the year ended December 31, 2010. 10. LAND USE RIGHTS Land use rights and their related accumulated amortization as of December 31, 2009 and 2010 are as follows: F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Province
Province
Province
Province
CHINA HYDROELECTRIC CORPORATION
December 31,
December 31,
US$
US$ Land use right
38,648
48,542 Less: Accumulated amortization
(1,449
)
(2,384
) Foreign currency translation adjustment
1,508
2,786 Total
38,707
48,944 The estimated annual amortization expenses for each of the five succeeding fiscal years are as follows:
US$ 2011
1,114 2012
1,114 2013
1,114 2014
1,114 2015
1,114 11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following:
December 31,
December 31,
US$
US$ Accrued payroll expenses
2,297
4,148 Retainage due to contractors
2,408
2,351 Purchase consideration payable
2,701
14,119 Employee termination costs
—
792 Guarantee deposits from original shareholders of acquired subsidiaries
4,316
4,299 Taxes payable
1,844
4,023 Guarantee liabilities
—
28 Amounts due to original shareholders of acquired subsidiaries
881
22,422 Unrecognized tax benefits
1,304
1,932 Accrued water resource fee
823
1,506 Current portion of unfavorable contract obligation (Note 15)
579
— Other liabilities
4,526
11,285 Total
21,679
66,905 Retainage due to contractors represents the portion of the payment due to contractors that is withheld until final inspection and acceptance of the construction projects. Purchase consideration payable as of December 31, 2010 represents the US$2,767, US$18, US$11,334 outstanding unpaid portion of the purchase consideration for the acquisitions of Wuliting, Ruiyang, and Jinling and its subsidiaries, respectively. Guarantee deposits of US$4,299 from original shareholders of acquired subsidiaries as of December 31, 2010 represent security deposits received by the Company from original shareholders of Husahe, Wuliting, Yingchuan and Wangkeng which will be returned by the Company within ten days when
the original shareholders of the acquired subsidiaries furnish the Company with final documentation relating to the acquired hydroelectric power projects and dams and reservoirs. Pursuant to the equity transfer purchase agreements of Husahe, Wuliting, Yingchuan and Wangkeng, the original shareholders
are required to provide such documentation within one year from the F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2009
2010
2009
2010
CHINA HYDROELECTRIC CORPORATION respective dates of acquisition. The final documentation has not been provided as of December 31, 2010 and the Company will retain the guarantee deposits until receipt of such documentation. Amounts due to original shareholders of acquired subsidiaries as of December 31, 2010 represent (i) US$1,326 payable to the original shareholders of Xiaopengzu, Wuliting, Wangkeng, and Banzhu for their entitlement to the net working capital surplus of Xiaopengzu, Wuliting, and Wangkeng and to
the current assets of Banzhu immediately prior to the consummation of the acquisitions in accordance with the supplemental equity transfer purchase agreements; (ii) US$442 payable to the original shareholders of Hengda and Xineng for their entitlement to the revenue from electricity sales before the
consummation of the acquisitions; and (iii) liabilities assumed in the acquisition of Jinling (Note3), which consisted of amounts payable to Fujian Taiyu Investment Co., Ltd. (“Taiyu”), Jianyang City Xinguang Power Development Co., Ltd. (“Jianyang”) and Shaowu City Fengyi Power Development Co.,
Ltd. (“Fengyi”) of US$19,919 (RMB131,917), US$145 (RMB957) and US$591 (RMB3,912), respectively. The amounts payable to Taiyu, Jianyang, Fengyi are related to borrowings from the original shareholders before the acquisition date and are repayable on demand. Pursuant to the share transfer
agreement signed with the original shareholders of Jinling, these balances, after deducting an amount of RMB20,000 (US$3,020), are subject to an interest rate of 6% per annum for a period of eight months from the acquisition date and an annualized rate of 10% per annum afterward. Employee termination costs as of December 31, 2010 represent involuntary employee termination benefits assumed by the Company as part of the Jinling acquisition. 12. INCOME TAX EXPENSE Cayman Islands Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed. Hong Kong Under the current laws of Hong Kong, CHC HK and Sunpower is subject to tax on income or capital gain. In addition, upon payments of dividends by CHC HK and Sunpower to the Company, no Hong Kong withholding tax will be imposed. PRC During the 5th section of the 10th National People’s Congress, which was conducted on March 16, 2007, the PRC Corporate Income Tax Law (the “New CIT Law”) was approved and has become effective on January 1, 2008. On November 28, 2007, the regulation on the implementation of the New
CIT Law was approved at the 197th Executive Meeting of the States Council. The New CIT Law and the Implementation regulation introduce a wide range of changes which include, but are not limited to the unification of the income tax law for domestic-invested and foreign invested enterprise at 25%.
The New CIT Law provided a transition period for enterprises, whether foreign-invested or domestic, that received certain preferential tax treatments granted by relevant tax authorities. Under the transition rule, an enterprise subject to an enterprise income tax rate lower than 25% prior to January 1,
2008 is eligible to continue enjoying the lower rate and gradually transition to 25% within five years after the effective date of the New CIT Law. Pursuant to the new CIT Law, entities which originally enjoyed the two years tax exemption and three years 50% reduction tax treatments are eligible to continue following the original tax laws and administrative regulations until their respective expiration dates. Binglangjiang, Liyuan, Husahe, F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION Hengda, Xineng and Xiaopengzu are wholly-owned foreign enterprises (“WOFEs”) located in the Western Development area and were granted to a preferential tax rates prior to January 1, 2008 whereby (i) Binglangjiang was entitled to a lower corporate income tax rate of 15% as its corporate income
tax rate from 2007 to 2010; (ii) Liyuan was entitled to tax exemption in 2007 and 2008 and a tax rate of 7.5% from 2009 to 2010; (iii) Husahe was entitled to a lower corporate income tax rate of 15% as its corporate income tax rate from 2007 to 2010; (iv) Hengda was entitled to tax exemption in 2007
and 2008 and a tax rate of 7.5% from 2009 to 2010; (v) Xineng and Xiaopengzu were entitled to tax exemption in 2009 and 2010. Accordingly, Binglangjiang, Liyuan, Husahe, Hengda, Xineng and Xiaopengzu will continue to be subject to a lower corporate income tax rate until 2010 as grandfathered by
the New CIT Law. All of the Company’s remaining subsidiaries located in the PRC are subject to the statutory tax rate of 25% beginning in 2008. Banzhu was entitled to tax exemption in 2008 and 2009 and a corporate income tax rate of 12.5% from 2010 to 2012 based on the tax preferential treatment
granted by the PRC government on May 15, 2009. In accordance with the New CIT Law, enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC territory are considered PRC resident enterprises and subject to the PRC income tax at the rate of 25% on worldwide
income. The definition of “place of effective management” refers to an establishment that exercises, in substance, overall management and control over the production and business, personnel, accounting, properties, etc. of an enterprise. As of December 31, 2010, no detailed interpretation or guidance has
been issued to define “place of effective management”. If the Company’s non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax under the New CIT Law. As of December 31, 2010, the Company has analyzed the applicability of this law and has not
accrued for PRC tax on such basis. The Company will continue to monitor changes in the interpretation or guidance of this law. The Group had minimal operations in jurisdictions other than the PRC. (Loss) income before income taxes consists of:
For the Year
For the Year
For the Year
US$
US$
US$ Cayman Islands
(4,353
)
(18,648
)
(11,072
) PRC
769
712
18,417
(3,584
)
(17,936
)
7,345 Income tax expenses consist of:
For the Year
For the Year
For the Year
US$
US$
US$ Current income tax expenses
398
697
4,016 Deferred income tax expenses (benefits)
46
795
(656
) Income tax expenses
444
1,492
3,360 F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Ended
December 31,
2008
Ended
December 31,
2009
Ended
December 31,
2010
Ended
December 31,
2008
Ended
December 31,
2009
Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION A reconciliation of the effective income tax provisions to the amount computed by applying the statutory tax rate to (loss) income before income taxes in the consolidated statements of operations is as follows:
For the Year
For the Year
For the Year
US$
US$
US$ Taxation at PRC effective income tax statutory rate (25% for the years ended December 31, 2008, 2009 and 2010)
(896
)
(4,483
)
1,836 Impact of tax rate differences
1,089
4,663
3,083 Effect of tax holidays in the PRC
—
505
(301
) Preferential tax treatment
(286
)
(169
)
(210
) Deemed interest income
103
510
705 Non-deductible expenses
95
211
542 Change in valuation allowance
339
255
(2,295
) Income tax provision
444
1,492
3,360 Effective Tax Rate (%)
(12.4
%)
(8.3
%)
45.8
% As of December 31, 2010, in accordance with ASC 740-10, the Group has recognized total additional income tax provisions of US$1,443 for unrecognized tax benefits, mainly related to transfer pricing issues and non-deductible expenses. The Group also recognized a decrease of unrecognized tax
benefits of US$122 related to the settlement with the tax authority of Yinchuan in 2010. The Company has US$2,329 cumulative unrecognized tax benefits as of January 1, 2010. A reconciliation of accrued unrecognized tax benefits is as follows:
US$ Balance as of January 1, 2010
2,329 Additions for tax positions taken in the current period
88 Additions for tax positions of prior years
973 Additions for tax positions from newly acquired entities
382 Reduction for settlement of prior year tax positions
(122
) Foreign currency translation
93 Balance as of December 31, 2010
3,743 As of December 31, 2010, the Group recorded unrecognized tax benefit of US$3,743, of which US$3,542 of the unrecognized tax benefit, if ultimately recognized, will impact the effective tax rate. Of the US$3,542, US$1,811 is presented on a net basis on the face of the balance sheet against deferred
tax asset related to net operating loss, for which a full valuation allowance would otherwise be recorded. It is possible that the amount of unrecognized tax benefits will change in the next 12 months, pending factors such as changes in PRC tax law or administrative practices and precedents, or tax authority inquiries. An estimate of the change cannot be made at this time. The Group recognizes interest accrued related to unrecognized tax benefits in interest expenses. During the year ended December 31, 2009 and 2010, the Group recognized US$183 and US$237 in interest expense, respectively. 13. DEFERRED TAX ASSETS / DEFERRED TAX LIABILITIES Deferred tax assets and deferred tax liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and F-38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Ended
December 31,
2008
Ended
December 31,
2009
Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION the amounts used for income tax purposes. Significant components of deferred tax assets and deferred tax liabilities are as follows:
December 31,
December 31,
US$
US$ Deferred tax assets—current Allowance for uncollectible other receivables
7
41 Accrued water resource fee
254
607 Guarantee deposit
96
— Accrued maintenance fund
19
3 Disposal of fixed assets
10
7 Other payable
377
602 Total deferred tax assets—current
763
1,260 Deferred tax liabilities—current Unfavorable contract obligation—electricity supply contract
(132
)
— Total deferred tax liabilities—current
(132
)
— Valuation allowance
(142
)
— Net deferred tax assets—current
489
1,260 Deferred tax assets—non-current Net operating loss carry-forwards
1,360
772 Investment tax credit carry-forwards
470
166 Depreciation of property, plant and equipment
1,280
1,268 Pre-operation expenses
26
15 Guarantee deposit
—
— Unfavorable contract obligation—water use right
426
427 Government grant
26
25 Other
1
1 Total deferred tax assets—non-current
3,589
2,674 Deferred tax liabilities—non-current Fair value step-up of property, plant and equipment
(18,836
)
(25,450
) Unfavorable contract obligation—electricity supply contract
8
8 Amortization of acquired intangible assets
(737
)
(932
) Total deferred tax liabilities—non-current
(19,565
)
(26,374
) Valuation allowance
(2,623
)
(1,138
) Net deferred tax liabilities—non-current
(18,599
)
(24,838
) F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2009
2010
CHINA HYDROELECTRIC CORPORATION Deferred tax assets of US$847 and deferred tax liabilities of US$5,053 were recognized as a result of the acquisition of Shapulong, Yuanping, and Ruiyang during the year ended December 31, 2009. The Group recognized a full valuation allowance of US$187, US$83,and US$434 on the deferred tax
asset of Shapulong, Ruiyang and Yuanping at the acquisition date as it is more likely than not that the benefit in the future earning will not be realized. Post-acquisition adjustments of US$51 and US$35 to the deferred tax assets valuation allowance that was recognized at the time of the acquisitions of
Shapulong and Yuanping, respectively, were recognized in income tax expense during the year ended December 31, 2009. Deferred tax assets of US$713 and deferred tax liabilities of US$5,668 were recognized as a result of the acquisition of Husahe, Hengda, Xineng, Xiaopengzu and Jinling during the year ended December 31, 2010. The Group recognized a full valuation allowance of US$213, US$210, US$149, and
US$42 on the deferred tax assets of Hengda, Xineng, and Xiaopengzu, and Jinling at the acquisition date as it is more likely than not that the benefit in the future earning will not be realized. Post-acquisition adjustments of US$562, US$420, US$136, US$83, U$$89 and US$399 to the deferred tax assets
valuation allowance that was recognized at the time of the acquisitions of Binglangjiang, Wuliting, Shapulong, Ruiyang, Jiulongshan and Yuanping, respectively, were recognized in income tax expense during the year ended December 31, 2010. The Group records a valuation allowance on its deferred tax assets that is sufficient to reduce the deferred tax assets to an amount that is more likely than not to be realized. Future reversal of the valuation allowance will be recognized either when the benefit is realized or when it has been
determined that it is more likely than not that the benefit in future earnings will be realized. The Group recognized a change in valuation allowance of US$339, US$255 and US$2,295 during the years ended December 31, 2008, 2009 and 2010, respectively. A foreign currency translation adjustment of US$52, US$3 and US$54 on deferred tax asset and the related valuation allowance was
recognized in accumulated other comprehensive income as of December 31, 2008, 2009 and 2010, respectively. Net operating loss carry-forward of US$3,088 as of December 31, 2010 will expire in years 2014 to 2015. Investment tax credit carry-forward of US$166 as of December 31, 2010 will expire in year 2011. Deferred tax liabilities have not been provided on the undistributed earnings of the Company’s foreign subsidiaries during 2009 and 2010, as the Company intends to indefinitely reinvest such earnings into its foreign subsidiaries. The amount of recognized deferred tax liabilities for temporary
differences related to investments in foreign subsidiaries is not determined because such a determination is not practicable. The benefit of tax holiday on basic and diluted loss per share is as follows:
For the Year
For the Year
US$
US$ Basic and diluted
0.02
0.002 F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Ended
December 31,
2009
Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION 14. BORROWINGS Total borrowings as of December 31, 2009 and 2010 consist of:
December 31,
December 31,
US$
US$ Short-term: Secured
4,394
15,779 Unsecured
2,704
1,963 Long-term: Current portion, secured
56,809
60,798 Non-current, secured
172,469
224,297 Total borrowings
236,376
302,837 The short-term loans outstanding as of December 31, 2009 related to RMB denominated loans of US$2,116, US$588, and US$4,394 of Yuheng, Yuanping and Jiulongshan, respectively. The short-term loan of Yuheng was obtained from the original shareholders and is unsecured, interest-free and has
no fixed term of repayment. The short-term loan of Yuanping was obtained from Fujian Dachuang Hydroelectric Group, Ltd. (“Dachuang Group”), the original entrusted management of Yuanping, and is unsecured, interest-free and has no fixed term of repayment. The short-term loan of Jiulongshan was
obtained from Agricultural Bank of China with an annual interest of 5.84% and is due in June 2010. The short-term loan is secured by the pledge of future electricity sales of Jiulongshan and the pledge of property, plant and equipment of Jiulongshan and Zhougongyuan of US$92,520. The short-term loans outstanding as of December 31, 2010 related to RMB denominated loans of US$3,020, US$755, US$4,681, and US$9,286 of Yingchuan, Zhougongyuan, Fujian Huabang and Jinling, respectively. The short-term loans of Yingchuan were obtained from Shanghai Pudong
Development Bank with annual interest rates between 7.784% and 8.134%. The short-term loans are due in August 2011and guaranteed by Wuliting. The short-term loan of Zhougongyuan was obtained from Agricultural Bank of China with an annual interest rate of 7.65% and is due in June 2011. The
short-term loan is secured by the pledge of property, plant and equipment of Zhougongyuan. The short-term loan of Fujian Huabang was obtained from Bank of China with an annual interest rate of 5.35% and is due in February, 2011. The short-term loan is secured by the pledge of a US$475 certificate
of deposit of Fujian Huabang. The short-term loan of Jingling amounting to US$2,869 was obtained from Agricultural Bank of China with an annual interest rate of 6.1065%. The short-term loan is due in March 2011 and is guaranteed by Taiyu, the original shareholder of Jingling. The short-term loan of
Jingling amounting to US$4,454 was obtained from Agricultural Bank of China with an annual interest rate of 5.841%. The short-term loan is due in November 2011 and is secured by the pledge of property, plant and equipment of Jingling. The short-term loan of Jingling amounting to US$1,963 was
obtained from China Construction Bank with an annual interest rate of 6.116%. The short-term loan is due in December 2011 and is unsecured. The long-term loans outstanding as of December 31, 2009 of US$229,278 related to RMB denominated bank loans obtained by Binglangjiang, Yingchuan, Wuliting, Jiulongshan, Yuheng, Wangkeng, Yuanping, Banzhu and Ruiyang from financial institutions. As of December 31, 2009, Wuliting and
Yingchuan were in violation of certain debt covenant provisions relating to the use of funds. As a result, the banks have the right to call the entire outstanding loan balances at any time. Accordingly, the Company recorded loan balances of Wuliting and Yingchuan in the amount of US$29,671 and
US$2,929, respectively, as current portion of long-term loans in the consolidated balance sheets as of December 31, 2009. F-41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2009
2010
CHINA HYDROELECTRIC CORPORATION The long-term loans of US$285,095 outstanding as of December 31, 2010 related to RMB denominated bank loans obtained by Binglangjiang, Hengda, Xineng, Xiaopengzu, Yingchuan, Wuliting, Jiulongshan, Ruiyang,Zhougongyuan, Yuheng, Wangkeng, Yuanping, Banzhu and Jingling from financial
institutions. During the year ended December 31, 2010, the portion of the loan of Wuliting that was not in compliance with certain debt covenants provisions as of December 31, 2009 was repaid in full and the remaining non-current portion of the loan was reclassified as long-term loan accordingly. The
loan balances of Yinchuan that were not in compliance with certain debt covenants as of December 31, 2009 were not settled during the year ended December 31, 2010 and remained classified as current portion of long-term loans as of December 31, 2010. The interest rates on these long-term loans are variable based on the benchmark rate published by the People’s Bank of China each year. The average interest rate on the long-term loans for the year ended December 31, 2009 and 2010 was 6.16% and 6.26%, respectively. The long-term loans are due
from 2011 to 2027 and are secured by the following: (a) Corporate guarantee by third parties Long-term loans amounted to US$24,750 and US$53,907 as of December 31, 2009 and 2010, respectively, were guaranteed by the following third parties:
December 31,
December 31,
US$
US$ Guaranteed by: Guangsha Construction Group Co., Ltd.
13,181
13,590 Fujian Province Anheng Assets Management Co., Ltd. and Fujian Yuneng Power Group Ltd.
8,494
8,758 Dachuang Group and original shareholders of Yuanping
1,757
— Pingnan County Minfeng Electric Power Co., Ltd.
1,318
— Zhejiang Suichang Jiulongshan Hydroelectric Corporation
—
9,513 Fujian Taiyu Investment (Group) Co., Ltd.
—
1,510 Shaowu City Jinling Power Generation Co., Ltd. and Nanping City Xingshui Co., Ltd.
—
5,436 Fujian Taiyu Investment (Group) Co., Ltd., Shaowu City Jinling Power Generation Co., Ltd. and Xiamen Youen Hydropower Development Co., Ltd.
—
15,100
24,750
53,907 (b) Pledge of property, plant and equipment As of December 31, 2009, long-term loans amounted US$214,486 were secured by the pledge of property, plant and equipment of US$385,665 of Binglangjiang, Yingchuan, Wuliting, Yuheng, Wangkeng, Yuanping, Banzhu, Ruiyang, Jiulongshan and Zhougongyuan. As of December 31, 2010, long-term loans amounted to US$271,506 were secured by the pledge of property, plant and equipment of US$538,581 of Binglangjiang, Hengda, Xineng, Xiaopengzu, Yingchuan, Wuliting, Ruiyang, Jiulongshan, Zhougongyuan, Shapulong, Yuheng, Yuanping, Wangkeng,
Banzhu, Jinling and its subsidiaries. (c) Pledge of proceeds from future electricity sales As of December 31, 2009, long-term loans amounted to US$76,008 were secured by the proceeds from future electricity sales of Binglangjiang, Jiulongshan, Yuanping, Wangkeng and Yingchuan. F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2009
2010
CHINA HYDROELECTRIC CORPORATION As of December 31, 2010, long-term loans amounted to US$135,707 were secured by the proceeds from future electricity sales of Binglangjiang, Hengda, Xineng, Xiaopengzu, Zhougongyuan, Jiulongshan, Yuanping, Wangkeng, Jingling and Jinglong. Maturities of long-term loans for the five years succeeding December 31, 2010 are as follows:
US$ 2011
60,798 2012
33,589 2013
35,884 2014
35,824 2015
30,569 Thereafter
88,431
285,095 15. OTHER NON-CURRENT LIABILITIES Other non-current liabilities as of December 31, 2010 mainly represent deferred government grant of US$101 relating to Banzhu. The government grant of Banzhu is recognized as income over the periods necessary to match it on a systematic basis with the related costs which it is intended to compensate. From the acquisition date to December 31, 2008, and during the years ended December 31, 2009 and 2010, US$11, US$nil
and US$6 has been recognized as a reduction to cost of revenues, respectively. An unfavorable contract obligation was assumed by the Company as part of the Yuheng acquisition on October 22, 2008. The unfavorable contract obligation arose from an electricity supply contract amongst Yuheng, Rongping Chemical and the power grid from 2007 in which the contractual rate at
which Yuheng would sell its electricity output is not at market. Pursuant to the electricity supply agreement, a price of RMB0.181 per kWh (inclusive of VAT), which was not an approved price then, has been set for the supply of an agreed volume of 300 million kWh of electricity from Yuheng to the
power grid which in turn transmits such electricity to Rongping Chemical for a contractual term of 3.5 years. An approved price of RMB0.29 per kWh (inclusive of VAT) has been subsequently approved by the provincial pricing bureau for Yuheng’s electricity supply starting from October 28, 2008.
Pursuant to the electricity supply agreement, Yuheng is only entitled to RMB0.181 per kWh (inclusive of VAT) of the RMB0.29 per kWh revenue received from the power grid and is obligated to remit the portion of revenue above RMB0.181 per kWh, or RMB0.109 per kWh, to Rongping Chemical for
electricity volume transmitted under the supply agreement. The unfavorable contract obligation is amortized and recognized as revenue over the remaining contractual period based on the actual supply volume. For electricity transmitted from Yuheng to Rongping Chemical through the power grid, the
Company recognized revenue based on the contractual price of RMB0.181 per kWh, net of VAT, and a deemed revenue of RMB0.065 per kWh from the amortization of the unfavorable contract obligation until the earlier of reaching the cumulative volume of 300 million kWh or October 2010. The
Company recognized revenue based on the approved price of RMB0.29 per kWh, net of VAT, and did not recognize any deemed revenue from the amortization of the unfavorable contract obligation from the acquisition date to December 31, 2008 as the power grid did not transmit any electricity to
Rongping Chemical during that period. During the years ended December 31, 2009 and 2010, US$734 and US$586 has been recognized as deemed revenue, respectively. The unfavorable contract obligation was fully amortized in May 2010 when the cumulative volume of 300 million kWh of electricity
supply was reached. F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION 16. CONVERTIBLE REDEEMABLE PREFERRED SHARES On January 23, 2008, the Company issued 150,025 Series A convertible redeemable preferred shares (“Series A Preferred Shares”) for an aggregate purchase price of US$150,025 or US$1,000 per share. On July 24, 2008, the Company issued the first batch of 101,000 Series B convertible redeemable preferred shares (“Series B Preferred Shares”) for an aggregate purchase price of US$101,000 or US$1,000 per share. On August 15, 2008, the Company issued the second batch of 28,000 Series B
Preferred Shares for an aggregate purchase price of US$28,000, or US$1,000 per share. On October 27, 2009, the Company issued 20,000 Series C convertible redeemable preferred shares (“Series C Preferred Shares”) for an aggregate purchase price of US$20,000 or US$1,000 per share. The Company used the proceeds of the Series A, Series B and Series C Preferred Shares to fund the Company’s future acquisition of hydroelectric power generating assets and expansion of the Company’s existing hydroelectric power projects in the PRC, to repay all the amounts due and for the
Company’s working capital purposes. The Series A, Series B and Series C Preferred Shares were classified as mezzanine equity from their respective issuance date to the closing of the Company’s IPO on January 25, 2010, as these preferred shares can be redeemed at the option of the holders on or after an agreed upon date. Upon the
listing of the Company’s shares on the New York Stock Exchange on January 25, 2010, all of the issured and outstanding Series A, Series B and Series C Preferred Shares and the related accrued cumulative dividends were automatically converted into ordinary shares. The initial carrying amount of the Series A Preferred Shares is the issue price at the date of issuance of US$150,025 net of issuance costs (including the Morgan Joseph Preferred Shares Warrant (Note 17)) of US$10,569. The initial carrying amount of the Series B Preferred Shares is the issue price at
the date of issuance of US$129,000 net of issuance costs of US$4,134. The initial carrying amount of the Series C Preferred Shares is the issue price at the date of issuance of US$20,000 net of issuance costs of US$1,872. The holders of Series A, Series B and Series C Preferred Shares have the ability to convert the instrument into the Company’s ordinary shares. The Company evaluated the embedded conversion option in the Series A, Series B and Series C Preferred Shares to determine if there were any embedded
derivatives requiring bifurcation and to determine if there were any beneficial conversion features. The conversion option of the preferred shares does not qualify for bifurcation accounting because the conversion option is clearly and closely related to the host instrument and the underlying ordinary
shares are not publicly traded nor readily convertible into cash. Beneficial conversion features exist when the conversion price of the convertible redeemable preferred shares is lower than the fair value of the ordinary shares at the commitment date. When a beneficial conversion feature exists as of the commitment date, its intrinsic value is bifurcated from the
carrying value of the preferred shares as a contribution to additional paid-in capital. The resulting discount to the convertible redeemable preferred shares is then amortized as a deemed dividend through retained earnings from the date of issuance to the earliest conversion date in the absence of a stated
redemption date. The Company determined the fair value of ordinary shares with the assistance of an independent valuation firm. On January 23, 2008, the most favorable conversion price used to measure the beneficial conversion feature of the Series A Preferred Shares was US$7.00. No beneficial conversion feature was recognized for the Series A Preferred Shares as the fair value per ordinary share at the commitment date
was US$2.56, which was less than the most favorable conversion price. F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION On July 24 and August 15, 2008, the most favorable conversion price used to measure the beneficial conversion feature of the Series B Preferred Shares was US$7.00 and no beneficial conversion feature was recognized for the Series B Preferred Shares as the fair value per ordinary share at both
commitment dates was US$2.97, which was less than the most favorable conversion price. On October 27, 2009, the most favorable conversion price used to measure the beneficial conversion feature of the Series C Preferred Shares was US$8.00 and no beneficial conversion feature was recognized for the Series C Preferred Shares as the fair value per ordinary share at the commitment
date was US$2.95, which was less than the most favorable conversion price. The Company chose to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the Series A, Series B and Series C Preferred Shares to equal the redemption value at the end of each reporting period. An accretion charge of US$10,569 and US$4,134
related to Series A and Series B Preferred Shares, respectively, was recorded as a reduction of income available to ordinary shareholders for the year ended December 31, 2008. An accretion charge of US$1,872 related to Series C Preferred Shares was recorded as a reduction of income available to
ordinary shareholders for the years ended December 31, 2009. No cash dividends were declared by the Company on the Series A, Series B and Series C Preferred Shares for the years ended December 31, 2008 and 2009 and for the period from January 1, 2010 to January 25, 2010. A cumulative dividend of US$14,680 and US$5,531 for Series A and Series B
Preferred Shares, respectively, was accrued and recorded as a reduction of income available to ordinary shareholders for the year ended December 31, 2008. A cumulative dividend of US$19,836, US$14,412 and US$356 for Series A, Series B and Series C Preferred Shares, respectively, was accrued and
recorded as a reduction of income available to ordinary shareholders for the year ended December 31, 2009. A cumulative dividend of US$1,989, US$1,412 and US$162 for Series A, Series B and Series C Preferred Shares, respectively, was accrued and recorded as a reduction of income available to
ordinary shareholders for the period from January 1, 2010 to January 25, 2010. Pursuant to the preferred shares subscription agreements, the Series A, Series B and Series C Preferred Shares shall automatically be converted into ordinary shares based on an adjusted conversion price equivalent to 60%, 60% and 70% of the IPO price, respectively, on the date of a qualified IPO.
As a result, upon the closing the Company’s IPO on January 25, 2010, (i) the Series A Preferred Shares and related accrued cumulative dividends amounting to US$186,530 were converted in to 63,016,780 ordinary shares at an adjusted conversion price of US$2.96, or 60% of the IPO price of US$4.93;
(ii) the Series B Preferred Shares and related accrued cumulative dividends amounting to US$150,355 were converted in to 50,795,457 ordinary shares at an adjusted conversion price of US$2.96, or 60% of the IPO price of US$4.93; and (iii) the Series C Preferred Shares and related accrued cumulative
dividends amounting to US$20,518 were converted in to 5,941,613 ordinary shares at an adjusted conversion price of US$3.45, or 70% of the IPO price of US$4.93. In accordance with ASC subtopic 470-20 (“ASC 470-20”), Debt: Debt with Conversion and Other Options, changes to the conversion terms that would be triggered by future events not controlled by the issuer are accounted for as contingent beneficial conversion features and the intrinsic value of such
conversion options would not be recognized until and unless a triggering event occurred. Since the terms of the Series A, Series B and Series C Preferred Shares do not permit the number of shares that would be received upon conversion if an IPO occurs to be calculated at the commitment date, the
conversion price adjustment triggered by the occurrence of an IPO was accounted for as a contingent beneficial conversion feature and was recognized upon the Company’s IPO based on the excess number of ordinary shares that would be received upon conversion at the adjusted conversion price over
the number of shares that would have been received prior to the occurrence of the contingent event multiplied by the commitment date share F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION price. A contingent beneficial conversion feature of US$6,990, US$5,040 and US$222 was recognized for the Series A, Series B and Series C Preferred Shares, respectively, through a credit to additional paid-in capital on January 25, 2010. In accordance with ASC 470-20, a discount resulting from the accounting for a beneficial conversion option for convertible instruments that do not have a stated redemption date is amortized from the date of issuance to the earliest conversion date. Since the holders of the Series A, Series B and
Series C Preferred Shares can convert the preferred shares anytime after their respective issuance date, the beneficial conversion features of US$6,990, US$5,040 and US$222 for the Series A, Series B and Series C Preferred Shares, respectively, were immediately amortized as a reduction of income
available to ordinary shareholders upon their recognition on January 25, 2010. The carrying value of the Series A, Series B and Series C Preferred Shares as of December 31, 2009 and 2010 is as follows:
Series A
Series B
Series C
Total
US$
US$
US$
US$ Balance as of December 31, 2008
164,705
134,531
—
299,236 Issuance of preferred shares
—
—
20,000
20,000 Issuance costs
—
—
(1,872
)
(1,872
) Changes in redemption value
—
—
1,872
1,872 Cumulative dividends
19,836
14,412
356
34,604 Balance as of December 31, 2009
184,541
148,943
20,356
353,840 Cumulative dividends
1,989
1,412
162
3,563 Conversion into ordinary shares
(186,530
)
(150,355
)
(20,518
)
(357,403
) Balance as of December 31, 2010
—
—
—
— 17. WARRANTS On November 10, 2006, the Founding Shareholders of the Company purchased 375,000 units of securities issued by the Company through China Hydro LLC, a limited liability company formed under the laws of the State of Delaware which holds the equity interest in the Company for the founding
shareholders. Each unit consists of one ordinary share and two warrants each to purchase one ordinary share of the Company at US$5.00 per share (“Founders’ Warrants”). The exercise period of the Founders’ Warrants commences on the date of issuance and expires on the earlier of November 10, 2011
or the redemption of the warrants by the Company. The Founders’ Warrants can be redeemed at the option of the Company at any time during the exercise period at US$0.001 per warrant, provided that the last independent bid price of the ordinary share exceeds US$8.50 per share. On November 10, 2006, the Company also issued two warrants to Morgan Joseph, as part of the payment for services rendered by Morgan Joseph on the issuance of convertible notes (the “Notes”). One warrant allows Morgan Joseph to purchase 550,000 units of securities (each unit consists of one
ordinary share and two warrants each to purchase one ordinary share of the Company at US$5.00 per share) and the other warrant allows Morgan Joseph to purchase 283,333 units of securities (each unit consists of one ordinary share and four warrants each to purchase one ordinary share of the
Company at US$5.00 per share) issued by the Company at US$6.60 per unit (“Morgan Joseph Warrants”). The exercise period of the Morgan Joseph Warrants commences on the date of issuance and expires on November 10, 2011. The Morgan Joseph Warrants provide for a cashless exercise option. On April 11, 2007, all of the Holders of the Notes approved the consummation of a business combination by the Company. Vicis Capital Master Fund (“Vicis”) converted its US$41,000 Notes into 6,833,333 ordinary shares and 18,666,666 warrants each to purchase one ordinary share at F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION US$5.00 per share while JMG Capital Partners, LLP and JMG Triton Offshore Fund Limited (collectively, “JMG”) elected not to convert its US$9,000 Notes and received 666,666 warrants each to purchase one ordinary share at US$5.00 per share. The warrants issued to Vicis and JMG (collectively, the
“Holders’ Warrants”) have terms identical to the Founders’ Warrants in that the Company has an option to redeem at any time at US$0.001 per warrant, provided that the last independent bid price of the ordinary share exceeds US$8.50 per share, and that the exercise period commences on the date of
issuance and expires on the earlier of November 10, 2011 or the redemption of the warrants by the Company. Under ASC sub-topic 815-40 (“ASC 815-40”), Derivatives and Hedging: Contracts in Entity’s Own Equity, if a contract could potentially be cash settled, and such settlement is not within the control of the issuer, the derivative is accounted for as an asset or liability, and changes in fair value are
recognized in the consolidated statements of operations. Upon issuance of the Founders’ Warrants, Morgan Joseph Warrants and Holders’ Warrants and as of December 31, 2009 and 2010, the Company evaluated ASC 815-40-25-7 to ASC 815-40-25-35 and concluded that the warrants could only be physical settled or net-share settled but not net-cash
settled. Therefore, the Founders’ Warrants, Morgan Joseph Warrants and Holders’ Warrants have been classified as equity since their respective issuance date. Fair value of the Founders’ Warrants, Morgan Joseph Warrants and Holders’ Warrants at their respective commitment date was determined to be
minimal by management with the assistance of an independent valuation firm. The Founders’ Warrants, Morgan Joseph Warrants and Holders’ Warrants will continue to be reported as equity until such time as the warrants are exercised, expire, or become cash-settleable. In the event of a reclassification from equity to liability, the warrants will be measured at a new fair value
as of the reclassification date with the change from the existing carrying value to the new fair value as an adjustment to shareholders’ equity. On January 28, 2008, the Company issued another warrant to Morgan Joseph, as part of the payment for services rendered by Morgan Joseph on the issuance of the Series A Preferred Shares (Note 16). The warrant allows Morgan Joseph to purchase (i) up to 15,000 Series A Preferred Shares at
US$1,100 per share prior to the closing of a qualified public offering or (ii) up to such number of ordinary shares automatically converted into from 15,000 Series A Preferred Shares upon the closing of a qualified public offering at 110% of the then-effective conversion price per Series A Preferred Share
(“Morgan Joseph Preferred Shares Warrant”). The exercise period of the Morgan Joseph Preferred Shares Warrant commences on the date of issuance and expires on January 28, 2013. The Morgan Joseph Preferred Shares Warrant provides for a cashless exercise option. The Morgan Joseph Preferred Shares Warrant was classified as a liability from its issuance date to the closing of the Company’s IPO on January 25, 2010, in accordance with ASC sub-topic 480-10 (“ASC 480-10”), Distinguishing Liabilities from Equity: Overall, as Morgan Joseph is entitled to a
cashless exercise into Series A Preferred Shares which are contingently redeemable for cash. The fair value of the Morgan Joseph Preferred Shares Warrant was US$899, US$14,333 and US$13,968 at the time of issuance and as of December 31, 2009 and January 25, 2010, respectively. An income of
US$359, a loss of US$13,793 and an income of US$365 from the change in fair market value of the Morgan Joseph Preferred Shares Warrant was recognized in the statements of operations during the years ended December 31, 2008, 2009 and 2010, respectively. The fair value of the Morgan Joseph
Preferred Shares Warrant was determined with the assistance of an independent valuation firm. Upon the closing of the IPO on January 25, 2010, all of the outstanding Series A Preferred Shares were automatically converted into ordinary shares (Note 16). As a result, pursuant to the preferred shares subscription agreement, the Morgan Joseph Preferred Shares Warrant automatically became a
warrant that allows Morgan Joseph to purchase up to 5,067,568 ordinary shares at US$3.26 per share and was reclassified from liability to equity (“Morgan Joseph Converted Warrant” which is F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION more fully described below). The Morgan Joseph Converted Warrant commences on the date of the IPO, or January 25, 2010 and expires on January 28, 2013. The Morgan Joseph Converted Warrant provides for a cashless exercise option. On January 25, 2010, the Company completed an IPO, whereby the Company issued 6,000,000 units of securities at US$16.00 per unit. Each unit consists of one American Depositary Share (“ADS”) and one warrant (“IPO Warrant”). Each ADS represents three ordinary shares and each IPO
Warrant entitles the holder to purchase three ordinary shares for an exercise price of US$15.00. The Company determined that the relative fair value of the ADSs and the IPO Warrants was US$14.80 and US$1.20, respectively, and allocated the sales proceeds of US$16.00 per unit of securities to the
ADS and the IPO Warrant based on their relative fair values. The exercise period of the IPO Warrants commences on the date of issuance and expires on the earlier of January 27, 2014 or the redemption of the warrants by the Company. The IPO Warrants can be redeemed at the option of the
Company at any time during the exercise period at US$0.01 per warrant, provided that the sales price per ADS equals or exceeds US$23 for any 20 trading days within a 30-trading day period before the redemption. On January 25, 2010, the Company issued a warrant to Broadband Capital Management LLC (“Broadband Capital”), as part of the payment for services rendered by Broadband Capital on the Company’s IPO, for US$100.00. The warrant allows Broadband Capital to purchase a number of units of
securities equal to an aggregate of 4% of the units of securities sold in the IPO at an exercise price of 120% of the IPO price, or US$19.20 per unit (the “Underwriter’s Warrants”). The warrants underlying the units of securities issuable upon exercise of the Underwriter’s Warrant are equivalent to the
IPO Warrants, except that the Underwriter’s Warrants are exercisable at 120% of the IPO warrant exercise price, or $18 for three ordinary shares. The Underwriter’s Warrants are exercisable on a cashless basis, are non-redeemable and have a five-year term. Upon the closing of the Company’s IPO on January 25, 2010 and as of December 31, 2010, in accordance with ASC 815-40, the Morgan Joseph Converted Warrant, IPO Warrants and Underwriter’s Warrants were concluded to be indexed solely to the Company’s own stock since the Warrants do not
contain an exercise contingency based on an observable market or an observable index, and the settlement amount would equal to the difference between the fair value of a fixed number of the Company’s ordinary shares and a fixed exercise price. In addition, the Company evaluated ASC 81-40-25-7 to
ASC 815-40-25-35 and concluded that the Morgan Joseph Converted Warrant, IPO Warrants and Underwriter’s Warrants could only be physical settled or net-share settled but not net-cash settled. Therefore, the Morgan Joseph Converted Warrant, IPO Warrants and Underwriter’s Warrants have been
classified as equity since the Company’s IPO on January 25, 2010. The fair values of the Founders’ Warrants, Morgan Joseph Warrants, Holders’ Warrants, Morgan Joseph Converted Warrant, IPO Warrants and Underwriter’s Warrants, which are classified as equity, were estimated at their commitment date using the following assumptions:
Founders’
Morgan
Holders’
Morgan
IPO
Underwriter’s
Commitment
November 10,
November 10,
November 10,
January 25,
January 25,
January 25, Average risk-free rate of return
5.11
%
5.11
%
5.11
%
2.40
%
2.40
%
2.40
% Expected term/life
5 years
5 years
5 years
3.00 years
4.99 years
4.99 years Volatility rate
33.70
%
33.70
%
33.70
%
66.00
%
66.00
%
66.00
% Expected dividend yield
—
—
—
—
—
— Fair value of ordinary share
0.11
0.11
0.11
4.93
4.93
4.93 Estimated forfeiture rate
0
%
0
%
0
%
0
%
0
%
0
% F-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Warrants
Joseph
Warrants
Warrants
Joseph
Converted
Warrant
Warrants
Warrants
date/year-end date
2006
2006
2006
2010
2010
2010
CHINA HYDROELECTRIC CORPORATION The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the fair value of the Company’s ordinary shares as of December 31, 2010, for those warrants that have an exercise price currently below the fair value of the Company’s ordinary or
preferred shares. As of December 31, 2010, the Company has warrants outstanding to purchase an aggregate of 47,657,565 ordinary shares. None of these warrants has an exercise price below the fair value of the Company’s ordinary shares, resulting in an aggregate intrinsic value of US$nil. All warrants were vested as of the date they were issued, except for the Underwriter’s Warrants which will be vested 540 days after the IPO. No warrants were redeemed, forfeited, cancelled or exercised for the years ended December 31, 2008, 2009 and 2010. 18. SHARE CAPITAL The Company’s authorized ordinary share capital was 130,000,000 and 400,000,000 shares at par value of US$0.001 per share as of December 31, 2009 and 2010, respectively. There were 15,541,666 and 153,295,516 ordinary shares issued and outstanding as of December 31, 2009 and 2010, respectively. The Company’s authorized preferred shares capital was 6,000,000 shares at par value of US$0.001 per share as of December 31, 2009 and 2010. There were 301,193 and nil preferred shares issued and outstanding as of December 31, 2009 and 2010, respectively. On January 25, 2010, the Company completed an IPO, whereby the Company issued 6,000,000 units of securities at US$16.00 per unit. Each unit consists of one ADS priced at US$14.80 and one warrant priced at US$1.20. Each ADS represents three ordinary shares and each warrant entitles the
holder to purchase three ordinary shares for an exercise price of US$15.00. Upon the closing of the Company’s IPO on January 25, 2010, all of the issued and outstanding Series A, Series B and Series C Preferred Shares and the related accrued cumulative dividends were automatically converted into
63,016,780, 50,795,457 and 5,941,613 ordinary shares, respectively (Note 16). The Group has not paid or declared any dividends on ordinary shares to date. The payment of dividends in the future will be contingent upon the Group’s revenues and earnings, if any, capital requirements and general financial condition subsequent to the completion of a business combination. The
payment of dividends will be subject to the discretion of the Group’s board of directors and subject to the requirements of Cayman Islands’ laws. F-49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION 19. BASIC AND DILUTED LOSS PER SHARE Basic and diluted loss per share for the years ended December 31, 2008, 2009 and 2010 are calculated as follows:
For the
For the
For the
US$
US$
US$ Numerator for basic loss per share: Profit (loss) attributable to ordinary shareholders
(38,901
)
(55,872
)
(12,073
) Cumulative dividends on Series A convertible redeemable preferred shares
—
—
— Cumulative dividends on Series B convertible redeemable preferred shares
—
—
— Cumulative dividends on Series C convertible redeemable preferred shares
—
—
— Accretion of beneficial conversion feature on Series A convertible redeemable preferred shares
—
—
— Accretion of beneficial conversion feature on Series B convertible redeemable preferred shares
—
—
— Accretion of beneficial conversion feature on Series C convertible redeemable preferred shares
—
—
— Changes in redemption value of Series A convertible redeemable preferred shares
—
—
— Changes in redemption value of Series B convertible redeemable preferred shares
—
—
— Changes in redemption value of Series C convertible redeemable preferred shares
—
—
— Numerator for diluted loss per share
(38,901
)
(55,872
)
(12,073
) Denominator: Weighted average number of ordinary shares outstanding—basic
15,554,416
15,541,666
143,253,450 Dilutive effect of convertible securities: Warrants
—
—
— Convertible redeemable preferred shares
—
—
— Share options
—
—
— Weighted average number of ordinary shares outstanding—diluted
15,554,416
15,541,666
143,253,450 Loss per share—basic and diluted
(2.50
)
(3.59
)
(0.08
) The Group had securities outstanding which could potentially dilute basic loss per share in the future, but these securities were excluded from the computation of diluted loss per share in the years ended December 31, 2008, 2009 and 2010, as their effects would have been anti-dilutive. Such
outstanding securities consist of warrants in 2008, 2009 and 2010, convertible redeemable preferred shares in 2008, 2009 and 2010 and share options in 2009 and 2010. 20. EMPLOYEE DEFINED CONTRIBUTION PLAN The Group’s full time employees in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain medical care unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Year Ended
December 31,
2008
Year Ended
December 31,
2009
Year Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION require the Group to accrue for these benefits based on 33.7% to 44.1% of the employees’ salaries, subject to a certain cap limit, depending on the location of employment. The total contribution for such employee benefits, which was expensed as incurred, was US$392, US$605 and US$810 for the years
ended December 31, 2008, 2009 and 2010, respectively. The Group has no additional legal obligations or liabilities for the benefits beyond the paid and accrued amounts. In November 2008, the New York office of the Company established a 401(k) retirement plan, which requires a dollar by dollar matching contribution from the employer up to 3% of the employee’s annual salary. The total contribution for the 401(k) retirement plan, which was expensed as incurred,
was US$7, US$26 and US$77 for the years ended December 31, 2008, 2009 and 2010, respectively. The Group has no additional legal obligation or liabilities for the benefits beyond the paid and accrued amounts. The Company established a defined benefit plan for certain executive officers with an effective date of January 1, 2010. As of December 31, 2010, there was no contributed plan asset and the first required contribution is due on September 15, 2011. The benefit obligation, accrued benefit cost and net
periodic benefit cost as of and for the year ended December 31, 2010 were insignificant. 21. INTEREST EXPENSES Interest expenses for the years ended December 31, 2008, 2009 and 2010 consist of:
For the Year
For the Year
For the Year
US$
US$
US$ Interest on long-term bank loans
5,293
13,013
14,958 Interest on convertible notes
164
—
— Amortization of discount on convertible notes
139
—
— Accrued interest on unrecognized tax benefits (Note 12)
99
183
237 Amortization of debt issuance costs
47
23
19 Accretion of guarantee fee payable
105
10
— Interest penalty to original shareholders of an acquired subsidiary
—
401
129 Interest on loans from unrelated parties
—
133
2 Bank charges
409
343 Others
—
56
164
5,847
14,228
15,852 22. COMMITMENTS AND CONTINGENCIES (a) Operating lease commitments The Group has entered into certain operating leasing arrangements relating to the lease of the Group’s office premises. Payments made under operating leases are expensed on a straight-line basis over the term of the lease. Rental expenses under operating leases for the years ended December 31,
2008, 2009 and 2010 were US$574, US$691 and US$766, respectively. F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Ended
December 31,
2008
Ended
December 31,
2009
Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION Future minimum lease payments for non-cancellable operating leases as of December 31, 2010 are as follows:
US$ 2011
784 2012
446 2013
434 2014 and thereafter
— Total
1,664 (b) Capital commitments Capital commitments as of December 31, 2010 were approximately US$21,812 (RMB144,453), representing contracted but unpaid amounts for construction projects of and for the purchase of property, plant and equipment by Binglangjiang, Husahe, Yuheng and Wuyue. (c) Other commitments On November 6, 2010, Xiaopengzu entered into an equity transfer purchase agreement with several individuals to acquire 100% equity interest in Jinping Kanghong Hydroelectric Development Co., Ltd., which owns and operates the Dazhaihe hydroelectric project, for a purchase price of US$17,818
(RMB 118,000). The Dazhaihe hydroelectric project is a 15 megawatts project in the Yunnan Province. On
November 22, 2010, Fujian Huabang entered into an equity transfer purchase
agreement with Sanming City Chenyang Hydropower Co., Ltd. to acquire the
remaining 10% noncontrolling interest in Wangkeng for a consideration of
US$5,937 (RMB38,967). This acquisition was completed in January 2011. The Company committed to provide continuous financial support to its subsidiaries to ensure that these entities will continue as a going concern. There were no significant contingencies as of December 31, 2009 and 2010. (d) Loan guarantee commitments Pursuant to the equity transfer purchase agreements of Yingchuan, Wuliting and Jiulongshan (collectively the “Zhejiang Entities”), Guangsha Construction Group Co., Ltd. (“Guangsha”), the original shareholder of these acquired subsidiaries, continues to provide guarantee on the bank loans of the
Zhejiang Entities subsequent to the acquisition by the Company. As of December 31, 2009, the outstanding loan balances guaranteed by Guangsha were RMB50,000, RMB224,000 and RMB215,000 for Yingchuan, Wuliting and Jiulongshan, respectively. As of December 31, 2010, the outstanding loan
balances guaranteed by GuangSha was RMB90,000 for Wuliting. In connection with the loan guarantees provided by Guangsha, the Company signed an agreement with Guangsha to provide a counter guarantee on Guangsha’s guarantee obligations. Pursuant to the counter guarantee agreement, the
Company is obligated to reimburse Guangsha for all bank loans, interests, penalties and all other related costs Guangsha guaranteed in the event that the Zhejiang Entities are not able to fulfill their loan payments when become due. The Company recognized a guarantee asset with a corresponding
guarantee liability amounted to US$221 and US$257 in the purchase price allocation of Wuliting and Jiulongshan, respectively. The guarantee asset and the corresponding guarantee liability for Yingchuan was insignificant. The changes in value of the guarantee assets and guarantee liabilities are
recognized through the statements of operations. A gain and a corresponding loss of US$449 resulted from the changes in value of the guarantee liabilities and guarantee assets, respectively, were recognized for the year ended December 31, 2008. A gain and a corresponding loss F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION of US$42 resulted from the changes in value of the guarantee liabilities and guarantee assets, respectively, In addition, pursuant to the counter guarantee agreement, the Company should pay Guangsha an annual guarantee fee based on the prevailing market interest rate of the outstanding loan balances of the Zhejiang Entities at their respective acquisition dates. Since a counter guarantee was given by
the Company to Guangsha in return for the guarantee of Guangsha to the Zhejiang Entities, the guarantee fee did not form part of the guarantee liability in the purchase price allocation of the Zhejiang Entities. Accordingly, the present value of the guarantee fee of US$124, US$620 and US$641 was
treated as part of the purchase consideration of Yingchuan, Wuliting and Jiulongshan, respectively. 23. OTHER INCOME (LOSS), NET Other income (loss), net for the years ended December 31, 2008, 2009 and 2010 consists of:
For the Year
For the Year
For the Year
US$
US$
US$ Change in value of guarantee assets
(449
)
(42
)
— Change in value of guarantee liabilities
449
42
— Fees for supporting service provided to an equity investee
229
32
— Remeasurement gain on pre-existing interest in an equity investee at acquisition date fair value
—
105
— Loss on disposal of property, plant and equipment
—
(276
)
(73
) Reimbursement from ADS depositary bank
—
—
446 Others
(85
)
(86
)
(245
) Other income (loss), net
144
(225
)
128 A net reimbursement amounting to US$446 was received from Bank of New York Mellon, the Company’s ADS depositary bank, for the establishment of an ADS depositary receipt facility after the Company’s IPO. 24. SEGMENT AND GEOGRAPHIC INFORMATION The Group follows ASC 280-10 for disclosure of segment information. The Group’s chief operating decision maker, who has been identified as the CEO, relies upon financial information by provinces with operations in the PRC when making decisions about allocating resources and assessing the
performance of the Group. For the years ended December 31, 2008, 2009 and 2010, the Group operated and managed its business as four operating and reportable segments, namely the Yunnan Province segment, the Sichuan Province segment, the Zhejiang Province segment and the Fujian Province
segment. As the Group’s long-lived assets and revenues are substantially all located in and derived from the PRC, no geographical segments are presented. F-53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
were recognized for the year ended December 31, 2009. Such gain and loss are included in “Other income, net” in the statements of operations. Both the guarantee assets and the guarantee liabilities expired upon the maturity of the related bank loans during the year ended December 31, 2009.
Ended
December 31,
2008
Ended
December 31,
2009
Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION The Group’s segment information as of and for the year ended December 31, 2008 is as follows:
Yunnan
Sichuan
Zhejiang
Fujian
Unallocated
Eliminations
Consolidated
US$
US$
US$
US$
US$
US$
US$ Revenues
2,746
971
9,635
1,363
—
—
14,715 Cost of revenues
(1,120
)
(478
)
(4,598
)
(1,025
)
—
1,196
(6,025
) General and administrative expenses
(245
)
(223
)
(567
)
(210
)
(5,516
)
—
(6,761
) Interest income
359
84
18
5
877
(3
)
1,340 Interest expenses
(361
)
—
(3,519
)
(1,514
)
(456
)
3
(5,847
) Change in fair value of derivative financial liabilities and warrant liability
—
—
—
—
420
—
420 Exchange (loss) gain
(269
)
172
(165
)
(2
)
(803
)
—
(1,067
) Share of losses in an equity investee
—
—
—
—
(503
)
—
(503
) Other (loss) income, net
(3
)
1
(6
)
(5
)
1,353
(1,196
)
144 Income tax (expenses) benefits
(171
)
9
(447
)
165
—
—
(444
) Consolidated net income (loss)
936
536
351
(1,223
)
(4,628
)
—
(4,028
) Net loss attributable to noncontrolling interests
—
—
—
41
—
—
41 Net income (loss) attributable to China Hydroelectric Corporation shareholders
936
536
351
(1,182
)
(4,628
)
—
(3,987
) Total assets
40,997
13,919
242,057
212,801
337,115
(313,321
)
533,568 Total liabilities
(14,569
)
(32
)
(93,358
)
(119,423
)
(23,249
)
21,230
(229,401
) Capital expenditures
4,589
21
33,789
12
342
—
38,753 Depreciation & amortization expenses
696
305
3,113
718
31
—
4,863 F-54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Province
Province
Province
Province
CHINA HYDROELECTRIC CORPORATION The Group’s segment information as of and for the year ended December 31, 2009 is as follows:
Yunnan
Sichuan
Zhejiang
Fujian
Unallocated
Eliminations
Consolidated
US$
US$
US$
US$
US$
US$
US$ Revenues
2,966
939
18,164
14,106
—
—
36,175 Cost of revenues
(1,193
)
(583
)
(9,774
)
(7,341
)
—
1,708
(17,183
) General and administrative expenses
(330
)
(203
)
(1,178
)
(613
)
(6,775
)
—
(9,099
) Interest income
115
38
57
18
319
(37
)
510 Interest expenses
(303
)
—
(7,020
)
(6,554
)
(388
)
37
(14,228
) Change in fair value of derivative financial liabilities and warrant liability
—
—
—
—
(13,793
)
—
(13,793
) Exchange loss
—
(1
)
(5
)
(7
)
(10
)
—
(23
) Share of losses in an equity investee
—
—
—
—
(70
)
(70
) Other (loss) income, net
(2
)
(1
)
(9
)
(265
)
1,760
(1,708
)
(225
) Income tax expenses
(166
)
(51
)
(403
)
(739
)
(133
)
—
(1,492
) Consolidated net income (loss)
1,087
138
(168
)
(1,395
)
(19,090
)
—
(19,428
) Net loss attributable to noncontrolling interests
—
—
—
32
—
—
32 Net income (loss) attributable to China Hydroelectric Corporation shareholders
1,087
138
(168
)
(1,363
)
(19,090
)
—
(19,396
) Total assets
42,770
14,649
311,685
204,347
337,472
(317,090
)
593,833 Total liabilities
(15,494
)
(556
)
(152,898
)
(112,187
)
(34,506
)
23,002
(292,639
) Capital expenditures
7,661
1,616
1,826
1,732
141
—
12,976 Depreciation & amortization expenses
845
338
6,887
4,432
78
—
12,580 F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Province
Province
Province
Province
CHINA HYDROELECTRIC CORPORATION The Group’s segment information as of and for the year ended December 31, 2010 is as follows:
Yunnan
Sichuan
Zhejiang
Fujian
Unallocated
Eliminations
Consolidated
US$
US$
US$
US$
US$
US$
US$ Revenues
8,822
660
32,959
24,213
(1
)
—
66,653 Cost of revenues
(4,059
)
(597
)
(14,414
)
(8,567
)
1
2,791
(24,845
) General and administrative expenses
(605
)
(148
)
(1,319
)
(1,328
)
(16,040
)
—
(19,440
) Interest income
9
16
8
1,120
557
(519
)
1,191 Interest expenses
(2,945
)
—
(7,493
)
(5,884
)
(49
)
519
(15,852
) Change in fair value of derivative financial liabilities and warrant liability
—
—
—
—
365
—
365 Exchange loss
—
—
—
(452
)
(403
)
—
(855
) Other (loss) income, net
(4
)
29
(133
)
(60
)
3,087
(2,791
)
128 Income tax expenses
204
1
(2,138
)
(1,344
)
(83
)
(3,360
) Consolidated net income (loss)
1,422
(39
)
7,470
7,698
(12,566
)
—
3,985 Net income attributable to noncontrolling interests
—
—
—
(243
)
—
—
(243
) Net income (loss) attributable to China Hydroelectric Corporation shareholders
1,422
(39
)
7,470
7,455
(12,566
)
—
3,742 Total assets
183,888
14,910
305,927
395,763
435,361
(506,018
)
829,831 Total liabilities
(117,138
)
(420
)
(138,055
)
(201,651
)
(20,578
)
64,994
(412,848
) Capital expenditures
879
569
250
317
1,380
—
3,395 Depreciation & amortization expenses
2,660
373
9,392
4,413
92
—
16,930 25. SHARE-BASED PAYMENT On August 18, 2008, the board of directors (the “Board”) of the Company adopted the China Hydroelectric Corporation 2008 Share Incentive Plan (the “2008 Plan”) that provides for the issuance of share-based awards to purchase up to 12,000,000 ordinary shares. The effectiveness of the 2008 Plan
is subject to the approval of the Company’s shareholders within twelve months from the date on which the 2008 Plan is adopted by the Board. Under the 2008 Plan, the Company may grant share options including incentive stock options and non-qualified stock options, equity appreciation rights,
restricted ordinary shares, restricted ordinary share units, performance-based grants of ordinary shares, performance units and other equity-based or cash-based awards to employees of the Group, consultants and other individuals who provide services to the Group, including the Company’s directors. The
administrator, which may be the Board or its authorized designee, has full power and authority to administer, construe and interpret the 2008 Plan. Under the terms of the 2008 Plan, options intended to qualify as incentive shares options must have an exercise price at least equal to the fair market value
as of the date of grant, but all other share options can be granted with an exercise price less than the fair market value. On August 18, 2008, the Board approved the grant of 40,000 options, 260,000 options and 3,597,000 non-qualified stock options to certain directors, consultants and employees of the Group, F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Province
Province
Province
Province
CHINA HYDROELECTRIC CORPORATION respectively. Options granted to employees and consultants have a contractual life of five years, an exercise price of $7.70 and a vesting period of three years. Options granted to directors have a contractual life of five years, an exercise price of $7.70 and a vesting period of one year. The vesting of the
unvested options granted to a director will be accelerated upon the director’s resignation from the Board. On January 20, 2009, the Board approved another grant of 35,000 non-qualified stock options to certain employees of the Group. These options have a contractual life of five years, an exercise price
of $7.70 and a vesting period of three years. The exercise prices of options granted to employees, directors and consultants are denominated in US$. On March 4, 2009, the Board passed a resolution to modify the 2008 Plan for it to be effective without approval by the shareholders of the Company. In
accordance with ASC 718-10, the grant date for the share-based awards issued on August 18, 2008 and January 20, 2009 was March 4, 2009. On December 3, 2009, the Board of Directors approved the grant of 7,000,000 share options to the directors, officer, employees and a consultant of the Group at an exercise price equal to the price at which the ordinary shares underlying the American Depositary Shares are sold in the initial public
offering of the Company; provided that the options shall expire in the event that the Company does not consummate its initial public offering within six months of the approval date. Since the exercise price was not known until IPO was successfully completed on January 25, 2010, the accounting grant
date for the share-based awards issued on December 3, 2009 was not established until January 25, 2010. Accordingly, no compensation expense related to the December 3, 2009 grant was recognized for the year ended December 31, 2009. The fair value of the options granted was estimated using a binomial option pricing model. The binomial model requires the input of highly subjective assumptions, including the expected stock price volatility, the expected price multiple at which the holder is likely to exercise stock options and the
expected employee forfeiture rate. The Company uses historical data and future expectations to estimate forfeiture rate. For expected volatility, the Company has made reference to historical volatilities of several comparable companies. The risk-free rate for periods within the contractual life of the option
is based on U.S. Treasury zero-coupon yield in effect at the grant date. The dividend yield is based on the expected pay-out ratio. Before the closing of the IPO on January 25, 2010, the Company determined the fair value of the ordinary shares at the measurement date with the assistance of an
independent valuation firm using a generally accepted valuation methodology, which incorporates certain assumptions including the financial results and growth trends of the Group, to derive the total equity value of the Group. The valuation model allocated the equity value between the ordinary shares
and the preferred shares and determined the fair value of ordinary shares based on the following assumptions: (i) preferred shares were treated as if they had converted into ordinary shares where conversion into ordinary shares would result in a higher economic value and (ii) preferred shares that have a
value higher than their conversion price were assigned a value that took into consideration their liquidation value. The expected share option life was estimated based on the resulting output of the binomial option pricing model. The option awards are not transferable and the grantees have a limited
amount of time subsequent to their termination of employment or service to exercise the options. These post-vesting restrictions are considered in the binomial option pricing model as a suboptimal exercise factor. F-57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION Options granted to directors The following table summarizes the share options granted to directors as of and for year ended December 31, 2010:
Number of
Weighted-
Weighted-
Aggregate Outstanding at January 1, 2010
40,000
7.70
3.63
— Granted
—
—
—
— Exercised
—
—
—
— Forfeited or cancelled
—
—
—
— Outstanding at December 31, 2010
40,000
7.70
—
— Vested and expected to vest at December 31, 2010
40,000
7.70
2.63
— Exercisable at December 31, 2010
40,000
7.70
2.63
— The explicit service condition of the options granted to directors is considered nonsubstantive since the vesting of share-based payments accelerates in full upon a director’s resignation from the Board. As a result, share-based compensation cost of US$12 for the 40,000 options granted to directors was
immediately recognized on the grant date of March 4, 2009. Two of the directors resigned from the Board and their 20,000 share options became exercisable immediately upon their resignation. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value of the Company’s shares as of December 31, 2009 and 2010, for those awards that have an exercise price currently below the fair value of the Company’s shares. As of
December 31, 2009 and 2010, all of the options granted to directors have an exercise price above the fair value of the Company’s shares, resulting in an aggregate intrinsic value of US$nil. The weighted-average grant-date fair value of options granted to directors of the Group during the year ended December 31, 2009 was US$0.30. The grant-date fair value of the 40,000 options granted to directors during the year ended December 31, 2009 was estimated using the following assumptions: Suboptimal exercise factor
1.5 Risk-free interest rate
3.67% Expected volatility rate
59% Expected dividend yield
0% Expected share option life
4.46 years Estimated forfeiture rate
0% Fair value of ordinary share
US$2.08 F-58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Options
Average
Exercise
Price (US$)
Average
Remaining
Contractual
Life (Years)
Intrinsic
Value (US$)
CHINA HYDROELECTRIC CORPORATION Options granted to consultants The following table summarizes the share options granted to consultants as of and for the year ended December 31, 2010:
Number of
Weighted-
Weighted-
Aggregate Outstanding at January 1, 2010
255,000
7.70
3.63
— Granted
150,000
4.93
—
— Exercised
—
—
—
— Forfeited or cancelled
(60,000
)
—
—
— Outstanding at December 31, 2010
345,000
6.50
3.20
— Vested and expected to vest at December 31, 2010
345,000
6.50
3.20
— Exercisable at December 31, 2010
167,500
7.08
2.92
— As of December 31, 2009 and 2010, all of the options granted to consultants have an exercise price above the fair value of the Company’s shares, resulting in an aggregate intrinsic value of US$nil. The weighted-average fair value of options granted to consultants of the Group during the year ended December 31, 2009 was US$0.05 at December 31, 2010 while the weighted-average fair value of options granted to consultants of the Group during the year ended December 31, 2010 was US$2.03
and US$0.28 at January 25, 2010 and December 31, 2010, respectively. During the years ended December 31, 2009 and 2010, the total fair value of options vested based on the year-end fair value was US$105 and US$16, respectively. One of the consultants terminated her contractual relationship with the Company and her 60,000 share options were forfeited immediately upon termination in 2010. As of December 31, 2010, there was US$19 of unrecognized share-based compensation cost related to options granted to consultants, which will be recognized over a weighted-average vesting period of 1.63 years. To the extent the actual forfeiture rate is different from the original estimate or the
assumptions used in estimating the fair value of options are changed, actual share-based compensation related to these awards granted to consultants may be different from the expectation. The fair value for the options granted to consultants during the years ended December 31, 2009 and 2010 was estimated using the following average assumptions:
December 31,
December 31, Suboptimal exercise factor
1.5
1.5 Risk-free interest rate
2.68%
0.87-1.48% Expected volatility rate
64.00%
40.09% Expected dividend yield
0%
0% Expected share option life
3.63 years
2.63-3.93 years Estimated forfeiture rate
0%
0% Fair value of ordinary share
US$4.93
US$2.46 F-59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Options
Average
Exercise
Price (US$)
Average
Remaining
Contractual
Life (Years)
Intrinsic
Value (US$)
2009
2010
CHINA HYDROELECTRIC CORPORATION Options granted to employees The following table summarizes the share options granted to employees as of and for the year ended December 31, 2010:
Number of
Weighted-
Weighted-
Aggregate Outstanding at January 1, 2010
3,627,000
7.70
3.63
— Granted
6,850,000
4.93
—
— Exercised
— Forfeited or cancelled
(263,000
)
6.23
—
— Outstanding at December 31, 2010
10,214,000
5.88
3.48
— Vested and expected to vest at December 31, 2010
10,124,390
5.87
3.48
— Exercisable at December 31, 2010
4,013,500
6.54
3.17
— As of December 31, 2009 and 2010, all of the options granted to employees have an exercise price above the fair value of the Company’s shares, resulting in an aggregate intrinsic value of US$nil. The weighted-average grant-date fair value of options granted to employees of the Group during the years ended December 31, 2009 and December 31, 2010 was US$0.30 and US$1.44, respectively. During the years ended December 31, 2009 and 2010, the total fair value of options vested based on
the grant date fair value was US$363 and US$4,106, respectively. Two of the employees terminated their employment relationship with the Company and their 263,000 share options were forfeited immediately upon termination in 2010. As of December 31, 2010, there was US$10,530 of unrecognized share-based compensation cost related to options granted to employees, which will be recognized over a weighted-average vesting period of 2.14 years. To the extent the actual forfeiture rate is different from the original estimate, actual
share-based compensation related to these awards may be different from the expectation. The grant-date fair value of the options granted to employees during the years ended December 31, 2009 and 2010 was estimated using the following assumptions:
2009
2010 Suboptimal exercise factor
1.5
1.5 Risk-free interest rate
3.67%-3.8%
3.07% Expected volatility rate
57%-59%
58% Expected dividend yield
0%
0% Expected share option life
4.46-4.88 years
4.86 years Estimated forfeiture rate Founders
0%
0% Senior management
0.8%
8.9% Employees
2.4%
4.3% Fair value of ordinary shares
US $2.08
US $4.63 F-60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Options
Average
Exercise
Price (US$)
Average
Remaining
Contractual
Life (Years)
Intrinsic
Value (US$)
CHINA HYDROELECTRIC CORPORATION Total compensation cost recognized for share options granted to directors, consultants and employees for the years ended December 31, 2009 and 2010:
For the
For the
US$
US$ Cost of revenues
—
— General and administrative expenses
571
3,615
571
3,615 26. RELATED PARTY TRANSACTIONS The principal related parties with which the Group had transactions during the years presented are as follows:
Name of related parties
Relationship with the Group China Hydro LLC
A shareholder of the Company Kuhns Brothers, Inc.
A company owned by the CEO China Carbon Investment Consulting, Ltd.
A company controlled by the CEO China Silicon Zhuo-Xin Investment Consulting, Ltd.
A company controlled by the CEO Sanming City Chenyang Hydropower Co., Ltd.
Noncontrolling interest in Wangkeng Henan Lantian Group Co., Ltd.
Noncontrolling interest in Wuyue Nanping City Xingshui Co., Ltd.
Noncontrolling interest in Jinlong Xiamen Youen Hydropower Development Co., Ltd.
Noncontrolling interest in Jintang and Jinwei (a) The Company had the following related party transactions during the years presented:
For the
For the
For the
US$
US$
US$ Expense paid on behalf by related parties: Kuhns Brothers, Inc.
70
75
98
70
75
98 Expense paid on behalf of related parties: China Carbon Investment Consulting, Ltd.
81
—
— China Silicon Zhuo-Xin Investment Consulting, Ltd.
32
—
—
113
— During the year ended December 31, 2008, the Company paid US$81 and US$32 of miscellaneous expenses on behalf of China Carbon Investment Consulting Ltd. and China Silicon Zhuo-Xin Investment Consulting Ltd., respectively. The amounts were fully repaid to the Company as of December
31, 2009. During the years ended December 31, 2008, 2009 and 2010, Kuhns Brothers, Inc. paid US$70, $75 and $98 of miscellaneous expenses on behalf of the Company, respectively. The amounts were fully repaid by the Company as of December 31, 2010. F-61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Year Ended
December 31
2009
Year Ended
December 31,
2010
Year Ended
December 31,
2008
Year Ended
December 31,
2009
Year Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION
For the
For the
For the
US$
US$
US$ Rental for office space provided by: Kuhns Brothers, Inc.
257
288
288
257
288
288 Fees for financial advisory services provided by: Kuhns Brothers, Inc.
—
200
—
—
200
— During the years ended December 31, 2008, 2009 and 2010, the Company rented office space from the Kuhns Brothers, Inc. and incurred rental expenses of US$257, US$288 and US$288, respectively. During the year ended December 31, 2009, the Company paid US$200 to Kuhns Brothers, Inc. as consideration for its financial advisory services in connection with Series C convertible redeemable preferred shares offering.
For the
For the
For the
US$
US$
US$ Loans from related parties: Sanming City Chenyang Hydropower Co., Ltd.
—
—
2,247
—
—
2,247 Prepayment to related parties for acquisition of noncontrolling interest: Sanming City Chenyang Hydropower Co., Ltd.
—
—
4,643
—
—
4,643 Prepayments to related parties for hydroelectric project construction: Henan Lantian Group Co., Ltd.
—
—
1,251
—
—
1,251 During the year ended December 31, 2010, the Company obtained short-term borrowings amounted to US$2,247 from Sanming City Chenyang Hydropower Co., Ltd. The short-term loans are unsecured, interest-free and repayable on demand. During the year ended December 31, 2010, Fujian Huabang made a prepayment of US$4,643 to Sanming City Chenyang Hydropower Co., Ltd. for the acquisition of the remaining 10% noncontrolling interest in Wangkeng. The acquisition was completed in January 2011. During the year ended December 31, 2010, Wuyue made a prepayment of US$1,251 to Henan Lantian Group Co., Ltd. for the construction of Wuyue’s hydroelectric project. F-62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Year Ended
December 31,
2008
Year Ended
December 31,
2009
Year Ended
December 31,
2010
Year Ended
December 31,
2008
Year Ended
December 31,
2009
Year Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION
For the
For the
For the
US$
US$
US$ Guarantee deposits received from related parties: Sanming City Chenyang Hydropower Co., Ltd.
241
—
—
241
—
— Deposit of US$241 for the year ended December 31, 2008 represents guarantee received by the Company from Sanming City Chenyang Hydropower Co., Ltd., which will be returned by the Company within ten days when the original shareholders of Wangkeng furnish the Company with final
documentation relating to the acquired hydroelectric power project and dams and reservoir. Pursuant to the equity transfer purchase agreements of Wangkeng, the original shareholders are required to provide such documentation within one year from the date of acquisition. The guarantee deposits
remained unsettled as of December 31, 2010 as the required final documentation has not been provided by the original shareholder of Wangkeng. (b) The Company had the following related party balances as of December 31, 2009 and 2010:
December 31,
December 31,
US$
US$ Amounts due from related parties: Sanming City Chenyang Hydropower Co., Ltd.
—
4,680 Henan Lantian Group Co., Ltd.
—
1,270
—
5,950 Amounts due to related parties: China Hydro LLC
—
— China Carbon Investment Consulting Ltd.
1
— Sanming City Chenyang Hydropower Co., Ltd.
241
2,514 Kuhns Brothers, Inc.
—
4 Nanping City Xingshui Co., Ltd.
—
1,419 Xiamen Youen Hydropower Development Co., Ltd.
—
8,929
—
242
12,866 All balances with related parties are unsecured, interest-free and repayable on demand, except for (i) a US$249 balance due to Sanming City Chenyang Hydropower Co., Ltd. which will be returned by the Company within ten days when the original shareholders of Wangkeng furnish the Company
with final documentation relating to the acquired hydroelectric power project and dam and reservoir and (ii) the US$1,419 amount due to Nanping City Xingshui Co., Ltd., and the US$8,929 amount due to Xiamen Youen Hydropower Development Co., Ltd. assumed in the acquisitions of Jinling and its
subsidiaries, which bear a floating interest rate of 6.0% and 7.2% per annum, respectively. 27. STATUTORY RESERVES The Group’s ability to pay dividends is primarily dependent on the Group receiving distributions from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC subsidiaries only out of their retained earnings, if any, as determined in accordance
with PRC accounting standards and regulations. The results of operations reflected in F-63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Year Ended
December 31,
2008
Year Ended
December 31,
2009
Year Ended
December 31,
2010
2009
2010
CHINA HYDROELECTRIC CORPORATION the financial statements prepared in accordance with US GAAP differ from those reflected in the statutory financial statements of the Group’s subsidiaries. In accordance with the Law of the People’s Republic of China on Foreign Invested Enterprises (“FIE”) and its articles of association, a FIE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus
fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A wholly-owned foreign invested enterprise (“WOFE”) is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered
capital based on the enterprise’s PRC statutory accounts. A non-wholly-owned foreign invested enterprise is permitted to provide all the above allocation of annual after-tax profit at the discretion of its board of directors, except for the general reserve fund which has the same requirement as a WOFE.
Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of the subsidiaries of the
Company except Wangkeng, Shapulong, Wuyue, Ruiyang, Husahe, Jinlong, Jintang and Jinwei were acquired or established as WOFEs, and therefore are subject to the above mandated restrictions on distributable profits. Wangkeng was acquired as a non-wholly-owned foreign invested equity; Shapulong
and Wuyue are equity joint ventures established pursuant to the Law of China on Sino-Foreign Equity Joint Ventures, and Ruiyang, Husahe, Jinlong, Jintang and Jinwei are domestic companies established pursuant to the Company Law of China, and therefore are only subject to the 10% general reserve
fund requirement. As a result of the PRC laws, rules and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as general reserve fund, the Group’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets in the form of
dividend payments, loans or advances. The amounts restricted include paid-up capital and statutory reserves as determined pursuant to PRC generally accepted accounting principles, totaling US$311,585 and US$466,792 as of December 31, 2009 and 2010, respectively. Profit appropriations of US$252 and
US$1,255 were made for the years ended December 31, 2009 and 2010, respectively. 28. CONCENTRATION OF RISKS Concentration of credit risk Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. As of December 31, 2009 and 2010, substantially all of the Group’s cash and cash equivalents were managed by financial institutions
located in the United States and the PRC which management believes are of high credit quality. Accounts receivable are typically unsecured and derived from revenue earned from customers in the PRC. As a percentage of total accounts receivable, the top five customers accounted for 97% and 98% as of December 31, 2009 and 2010, respectively. Due to the Group’s dependence on a limited number of customers, any negative events or deterioration in financial strength with the Group’s customers or deterioration of relationship with the Group’s customers, may cause material loss to the Group and have a material adverse effect on the
Group’s financial condition and results of operations. The major customers and the portion of F-64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION revenue from these customers for the years ended December 31, 2008, 2009 and 2010 are listed below:
Segment
December 31,
December 31,
December 31, Yunnan Nujiang Electric Power Co., Ltd.
Yunnan Province
—
—
1
% Yunnan Dehong Electric Power Co., Ltd.
Yunnan Province
19
%
8
%
9
% Yunnan Grid Company, Ltd.
Yunnan Province
—
—
3
% Sichuan Cangxi Electric Power Co., Ltd.
Sichuan Province
7
%
3
%
1
% Lishui Electric Power Bureau
Zhejiang Province
65
%
50
%
49
% Fujian Electric Power Co., Ltd.
Fujian Province
7
%
28
%
24
% Pingnan Power Supply Company
Fujian Province
2
%
11
%
13
%
100
%
100
%
100
% Currency convertibility risk Substantially all of the Group’s businesses are transacted in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China. However, the
unification of the exchange rates does not imply the convertibility of RMB into US$ or other foreign currencies. Under Mainland China’s Foreign Exchange Currency Regulation and Administration, the Group is permitted to exchange RMB for foreign currencies through banks authorized to conduct
foreign exchange business. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s
Bank of China or other institutions requires submitting a payment application form together with invoices and signed contracts. Foreign currency exchange rate risk On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to US$. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an
approximately 6.4%, 0.1% and 3.0% appreciation of the RMB against the US$ in 2008, 2009 and 2010, respectively. On June 19, 2010, the People’s Bank of China announced the end of the RMB’s de facto peg to US$, a policy which was instituted in late 2008 in the face of the global financial crisis, to
further reform the RMB exchange rate regime and to enhance the RMB exchange rate flexibility. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market. While the international reaction to the RMB revaluation has generally been
positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant volatility of the RMB against the US$. Any significant revaluation of RMB may materially and adversely affect the cash flows, revenues, earnings and financial position in US$. Current vulnerability due to certain other concentrations The Group’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for almost 30 years, no assurance can be given that the PRC Government will continue to pursue such
policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s F-65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2008
2009
2010
CHINA HYDROELECTRIC CORPORATION political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective. 29. SUBSEQUENT EVENTS On November 22, 2010, Fujian Huabang entered into an equity transfer purchase agreement with Sanming City Chenyang Hydropower Co., Ltd. to acquire the remaining 10% noncontrolling interest in Wangkeng for a consideration of US$5,937 (RMB38,967). Fujian Huabang completed the
acquisition of the 10% equity interest in January 2011. In accordance with ASC 805-10, transactions with noncontrolling interests are treated as equity transactions among shareholders and no gain or loss is to be recognized in the statements of operations. Any difference between the fair value of the
consideration paid and the carrying value of the noncontrolling interest is to be recognized in additional paid-in capital. F-66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
CHINA HYDROELECTRIC CORPORATION 30. CONDENSED FINANCIAL INFORMATION OF THE COMPANY The following is the condensed financial information of the Company on a non-consolidated basis: Balance sheets
December 31,
December 31,
US$
US$ ASSETS Current assets Cash and cash equivalents
18,328
8,088 Prepayments and other current assets
127
1,541 Total current assets
18,455
9,629 Non-current assets Deferred initial public offering costs
12,774
— Property, plant and equipment, net
14
11 Investment in subsidiaries
305,609
417,166 Other non-current assets
177
157 Total non-current assets
318,574
417,334 TOTAL ASSETS
337,029
426,963 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Amounts due to subsidiaries
16,710
15,940 Accrued expense and other current liabilities
3,020
2,575 Warrant liability
14,333
— Total current liabilities
34,063
18,515 Total liabilities
34,063
18,515 Convertible redeemable preferred shares Series A (par value US$0.001 per share; 2,500,000 shares authorized; 152,193 and nil shares issued and outstanding as of December 31, 2009 and 2010)
184,541
— Series B (par value US$0.001 per share; 2,500,000 shares authorized; 129,000 and nil shares issued and outstanding as of December 31, 2009 and 2010)
148,943
— Series C (par value US$0.001 per share; 1,000,000 shares authorized; 20,000 and nil shares issued and outstanding as of December 31, 2009 and 2010)
20,356
— Shareholders’ equity Ordinary shares (par value US$0.001 per share, 130,000,000 and 400,000,000 shares authorized as of December 31, 2009 and 2010; 15,541,666 and 153,295,516 shares issued and outstanding as of December 31, 2009 and 2010)
16
153 Additional paid-in capital
38,812
498,213 Accumulated other comprehensive income
11,065
22,922 Accumulated deficit
(100,767
)
(112,840
) Total shareholders’ (deficit) equity
(50,874
)
408,448 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
337,029
426,963 F-67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
2009
2010
CHINA HYDROELECTRIC CORPORATION Statements of operations
For the
For the
For the
US$
US$
US$ Revenues
—
—
— Cost of revenues
—
—
— Gross profit
—
—
— Operating expenses: General and administrative expenses
(3,890
)
(4,785
)
(12,016
) Total operating expenses
(3,890
)
(4,785
)
(12,016
) Operating loss
(3,890
)
(4,785
)
(12,016
) Equity in profits (losses) of subsidiaries
366
(747
)
14,814 Share of losses in an equity investee
(503
)
(70
)
— Interest income
873
319
555 Interest expenses
(455
)
(419
)
(19
) Change in fair value of derivatives and warrant liability
420
(13,793
)
365 Exchange loss
(798
)
(6
)
(403
) Other income, net
—
105
446 (Loss) income before income tax expenses
(3,987
)
(19,396
)
3,742 Income tax expenses
—
—
— Net (loss) income
(3,987
)
(19,396
)
3,742 Statements of cash flows
For the
For the
For the
US$
US$
US$ Cash flows used in operating activities
(2,055
)
(3,289
)
(10,157
) Cash flows used in investing activities
(216,265
)
(21,643
)
(86,071
) Cash flows provided by financing activities
250,735
10,787
85,988 Net increase (decrease) in cash and cash equivalents
32,415
(14,145
)
(10,240
) Cash and cash equivalents at the beginning of the year
58
32,473
18,328 Cash and cash equivalents at the end of the year
32,473
18,328
8,088 (a) Basis of presentation In the Company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. Company-only financial statements should be read in conjunction with the Company’s consolidated financial
statements. The Company records its investment in its subsidiaries under the equity method of accounting as prescribed in ASC 323-10. Such investment is presented as “Investment in subsidiaries” on the balance sheet and share of the subsidiaries’ losses or profits is presented as “Equity in (losses) profits of
subsidiaries” on the statements of operations. The subsidiaries did not pay any dividend to the Company for the years presented. F-68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
Year Ended
December 31,
2008
Year Ended
December 31,
2009
Year Ended
December 31,
2010
Year Ended
December 31,
2008
Year Ended
December 31,
2009
Year Ended
December 31,
2010
CHINA HYDROELECTRIC CORPORATION Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted by reference to the disclosures in the consolidated financial statements. (b) Commitments The Company does not have any significant commitments or long-term obligations as of any of the years presented, except for those disclosed in the consolidated financial statements (Note 22). F-69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of U.S. dollars (“US$”) or RMB (“RMB”), except for number of shares and per share data)
