Canadian Solar Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: Canadian Solar (CSIQ)

Canadian Solar (NASDAQ:CSIQ)

Q2 2013 Earnings Call

August 08, 2013 8:00 am ET

Executives

Ed Job - Director of Investor Relations

Shawn Qu - Chairman, Chief Executive Officer and President

Michael G. Potter - Chief Financial Officer, Senior Vice President and Director

Analysts

Philip Shen - Roth Capital Partners, LLC, Research Division

Nitin Kumar - Nomura Securities Co. Ltd., Research Division

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Daniel Ries - Maxim Group LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Canadian Solar Second Quarter 2013 Earnings Conference Call. My name is Clinton, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I'll turn the call over to Mr. Ed Job, Canadian Solar's Investor Relations Director. Please go ahead.

Ed Job

Thank you, operator. Thank you, everyone. Welcome to Canadian Solar's Second Quarter Earnings Conference Call. Joining us on the call today are Dr. Shawn Qu, our Chairman and Chief Executive Officer; and Mr. Michael G. Potter, Senior Vice President and Chief Financial Officer. Before we begin, may I remind our listeners that, in today's call, management's prepared remarks will contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management's expectations today and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's annual report on Form 20-F filed with the Securities and Exchange Commission.

In addition, any projections as to the company's future performance represent management's estimates as of today, August 8, 2013. Canadian Solar assumes no obligation to update these projections in the future unless otherwise required by applicable law. at this time, I would like to turn the call over to Dr. Shawn Qu. Shawn, please go ahead.

Shawn Qu

Thank you, Ed, and thank you, all, for joining us on the call today. I would like to welcome many new investors and analysts joining us on the call for the first time today. We thank you for your support during this exciting period of our company's development. We are very pleased with our results for the second quarter, which exceeded the high end of our guidance, both for revenue and gross margin.

In Q2, we shipped 455-megawatt, comfortably exceeding our guidance of 388 to 428 megawatt for the quarter. Importantly, we improved our gross margin to 12.8%. Strength and demand for our high-quality solar modules came from Japan where the volume up 95% compared to Q1, as well as from U.S., Canada and other emerging markets in Asia. Our module sales to Japan reached 162-megawatt this quarter, representing 35.7% of total deliveries in the quarter. This includes about 18 megawatt of integrated residential rooftop kits, which deliver higher per watt sales volume and higher profit margin. We expect to maintain such volume and to grab around 8% to 10% market shares in Japan.

Gross margin improvement in Q2 reflect the benefit of our geographic exposure to Japan and U.S., our project business in Canada, as well as our continuous efforts to reduce our manufacturing cost.

Returning to profitability for the full year 2013 remains our driving focus in everything we do at Canadian Solar. We are encouraged by our progress and remain on track. In Q2, we substantially reduced our reliance on the European market, which represented less than 11% of our total revenue. This follows the action we took starting in late Q1 to minimize the risk associated with trade dispute between EU and China, as well as to focus on more profitable opportunities in other markets.

The balance of our Q2 revenue came from North America, representing 37.8%, and Asia accounting for 51.6% of total revenue. It is worth mentioning that our diversified global sales network and brand reputation allow us to do this without any impact of our total shipment volume.

On the other hand, Europe is still an important market to us. We expect to benefit from the trade deal just reached between EU and China as uncertainty is now removed.

The real story in the quarter for us was our continuous execution of our project pipeline. We have taken major steps over the past few years to move away from being a pure module supplier and into becoming a solar system solutions provider.

During the quarter, we completed the sale of the 10-megawatt Brockville 1 PV power plant valued at over CAD 55 million to TransCanada Corporation. We also announced an agreement to sell 4 solar power plants, totaling 53.9 megawatt DC for over CAD 270 million to BluEarth Renewables. We will receive milestone payment, and these sales will be recognized as revenue in 2014.

In addition, subsequent to the end of the quarter, we announced the agreement to sell 5 solar power plants totaling 68 megawatt DC, valued at over CAD 290 million to Concord Green Energy. These sales will also be recognized in 2014.

Another important take away from today's call is that we are executing on strategic opportunities on a larger scale. One example is our historical EPC agreement to build a 130-megawatt utility-scale solar power plant in Ontario, Canada on behalf of Samsung Renewable Energy. This is the largest EPC agreement ever for Canadian Solar and is expected to generate revenues of over CAD 310 million. These contracts may be extended to Phase 2 and 3, each expected to be 130 megawatt DC once these 2 phases receive permitting from Ontario Power Authority. We are proud of our collaborating relationship with Samsung, which we've developed over the past 3 years and we believe this agreement is a testament to our track record of success and our strong competitive position in the Canadian market.

Our pipeline of fully permitted and late stage utility-scale projects now stands at over 796 megawatt DC, with approximately 370 megawatt in Canada, 220 megawatt in U.S., 166 megawatt in Japan and 36 megawatt under construction in China. We currently have buyers lined up for all of our projects in Canada and expect to be making additional announcement as sales contracts are finalized.

In addition, we have multiple-gigawatt of early and mid-stage projects under development in U.S., Japan and China. In summary, we continue to gain momentum in our total solution business. We planted the seeds for our success a few years ago as we search for opportunities to differentiate our business model from the ME2 commodity module suppliers. This was not an obvious move to many. Our focus and determination in executing our differentiated strategy is now paying off for Canadian Solar and our investors.

Meanwhile, we have also been actively diversifying our geographic exposure. Our focus on new growth markets give us a first mover advantage. This allows us to build our distribution network and to establish our brand. We have successfully leveraged the same strategy in other key markets, which has contributed to our volume and gross margin improvement in the quarter. Clearly, our strategic position in the solar power industry is differentiated and strong. And as we continue to execute our existing project pipeline, we are also focused on securing new opportunities in low-risk countries such as Canada, U.S. and Japan, as well as our success in opening new markets in Asia. We remain well positioned to return to profitability and emerge from the current cycle as a strong, global industry leader.

Now let me comment on our guidance for Q3 and the full year 2013.

We expect Q3 shipments will be in the range of approximately 410 to 430 megawatt. We expect Q3 demand to be mainly driven by Japan, Canada, the U.S., as well as other emerging markets in Asia.

Our gross margin in Q3 is expected to be in the range of 10% to 12%. Three of our solar power projects in Ontario, William Rutley, Brockville 2 and Burritts Rapids have reached commercial operation. These projects are connected to the grid, and have been generating stable and higher than expected feed-in tariff income for us. These 3 projects are in acceptance tests, which is part of the sales closing process with the end buyer. We expect to realize approximately $60 million additional revenue, with 20% to 25% gross margin for each project once the transactions are completed.

However, our current guidance for Q3 does not include the potential sales and revenue recognition for any of these 3 projects. For full year 2013, we maintain our module shipment guidance of approximately 1.6 to 1.8 gigawatt, including modules used in our own projects. Our focus in shipment volume remains and maintains our track record of continuous annual shipment growth. But as I said, our main focus for 2013 is to return to profitability for the full year.

Now let me turn the call over to our CFO, Michael Potter, for a more detailed review of our financials. Michael, please go ahead.

Michael G. Potter

Thank you, Shawn. Net revenue for the second quarter of 2013 was $304 million, up 44.3% sequentially and up 9.2% compared to the year ago period.

Gross profit in Q2 was $48.7 million compared to $25.6 million in Q1 and $43.2 million in the comparable period of last year. The sequential increase in gross profit was driven by higher module shipments, helped by lower manufacturing cost and stable ASPs, as well as the contribution from the sale of our Brockville 1 solar plant.

Our gross profit in Q2 is net of a $4.4 million depreciation charge for underutilization, representing 1.2% of revenue. Gross margin in Q2 was 12.8% compared to 9.7% in Q1 and 12.4% in the second quarter of 2012.

Operating expenses were $36.4 million in Q2 compared to $7.5 million in Q1 and $46.2 million in the comparable period of last year. In Q1 of this year, we had a reversal of approximately $30 million for a reserve that was set up for a lawsuit.

Interest income in Q2 was $9.9 million compared to $14.6 million in Q1 and $15.1 million in the comparable period last year. The sequential decrease in interest expense was the result of lower bank borrowing and higher capitalized interest expense related to projects. The year-over-year decline in interest expense was due to lower bank borrowings and higher project-related capitalized interest expense. Interest income was $3.2 million in Q2 compared to $3.3 million in Q1 and $3.4 million in the year ago period.

In Q2, we recorded a gain in fair value of derivatives of $1.8 million compared to a gain of $1.7 million in Q1 and a loss of $1.0 (sic) [$1.1] million in Q2 of last year.

Net foreign exchange loss in Q2 was $20.5 million compared to a net foreign exchange loss of $14.8 million in Q1 and a net loss of $7.2 million in Q2 of last year. The loss was mainly caused by an increase in the value of the U.S. dollar against most currencies except for the Chinese yuan in Q2. Both intercompany balances between entities with different functional currencies and loans and receivables to and from outside parties caused the loss. We continue to examine our treasury structure to see what we can do to reduce currency volatility and expect further improvements as profitability and cash flow improve, which will allow us to reduce certain intercompany balances.

income tax benefit in the first quarter of 2013 was $5.1 million compared to income tax benefit of $3.4 million in Q1 and income tax expense of $2.1 million in Q2 of 2012.

Net loss attributable to Canadian Solar shareholders for Q2 2013 were $12.6 million or $0.29 per diluted share compared to a net loss of $4.4 million or $0.10 per diluted share in Q1 of 2013 and net loss of $25.5 million or $0.59 per diluted share in Q2 of last year. As a note, with the warrant exercise very near the end of Q2, our issued and outstanding share count has increased to approximately 45.5 million shares.

Moving on to the balance sheet. In Q2, cash and cash equivalents decreased to $141.4 million at the end of Q2 compared to $163.4 million at the end of Q1. The restricted cash balance was $399.2 million at the end of Q2, down from $442.7 million at the end of Q1.

Our receivables balance, net of allowance of doubtful accounts, was $262.9 million at the end of Q2, up from $225.7 million at the end of Q1, driven by higher sales volume.

Inventories decreased to $218.5 million at the end of Q2 compared to $291.3 million at the end of Q1.

Short-term borrowings at the end of Q2 totaled $813.6 million, down from $966.3 million at the end of Q1. Long-term debt at the end of Q2 was $254.6 million compared to $205.3 million at the end of Q1. Short-term borrowings and long-term debt directly related to utility-scale solar power projects totaled $315.6 million.

Let me now take a moment to update you on our total solutions business.

As Shawn mentioned, our EPC, utility-scale projects and solar systems kits business represented about 25.7% of total revenue in Q2 2013. Our residential system kit business in Japan accounted for approximately 40% of our total solution revenue in the quarter, with EPC services and projects sales accounting for the balance.

Starting with our Ontario business. In Q2, we completed the sale of Brockville 1 to TransCanada for approximately CAD 55 million. This is the first sale we have completed out of the 9 projects we agreed to sell to TransCanada. 3 other projects in Ontario: William Rutley, Brockville 2 and Burritts Rapids are in commercial operation and earning the feed-in tariff. These projects are undergoing customer acceptance testing before we can close the sale and recognize revenue.

In addition, 5 other projects are in construction, which we expect to be finished by the end of 2013, while 18 projects are expected to finish construction in 2014 and 2 projects are expected to finish construction in 2015.

In addition to our own projects in Ontario, we signed a landmark EPC agreement to build 130 megawatt DC solar energy plant on behalf of Samsung. We have received the limited notice to proceed LNTP for the Samsung project and expect to be in construction in the fourth quarter of 2013, with the facilities expected to be fully operational in 2015.

As we mentioned in other occasions, we're also building and plan to operate 3 solar power plants totaling 29 megawatt DC as EPC contractor on behalf of Penn Energy Renewables. These 3 projects are expected to be completed in the second half of 2013.

In total, our pipeline of owned projects and EPC contracts in Ontario, Canada now stands at 378 megawatt DCs and 160 megawatt DCs, respectively. We estimate this backlog represents a revenue opportunity in excess of $1.8 billion. And we expect to monetize these assets and recognize revenue over the next 18 to 24 months, giving us good visibility into our business well into 2015.

Turning to our U.S. project business. In Q2, we completed construction of 3 solar power plants totaling approximately 10 megawatts in North Carolina. Subsequent to the end of the quarter, we completed 4 additional solar power plants totaling 21 megawatts DC in Massachusetts and North Carolina. Our project pipeline in the U.S. now totals approximately 222 megawatts DC. Currently, solar power plant totaling 60 megawatts DC are under construction. And we are on target to complete approximately 91 megawatts DC in the U.S. during 2013.

In Japan, during the second quarter of 2013, we expanded our late stage utility-scale power project pipeline to approximately 166 megawatts, of which approximately 60 megawatts were self-developed and approximately 106 megawatts were co-developed or acquired. We're making feasibility assessments on approximately 450 megawatts of additional project that are in early stages of development. We hope to obtain final approval for some of our Japanese utilities scale solar power projects during 2013 and begin construction of our first project to Japan in late 2013 or early 2014.

In China, we're building a 30-megawatt and a 6-megawatt solar power project, and expect to complete construction and recognize revenue in the fourth quarter of 2013 or early in 2014.

Overall, we have an early stage pipeline well over several gigawatts in size. Some example countries where we're examining projects are China, South Africa, Japan, as I previously mentioned, and the U.S.A. Although we do not generally detail early-stage projects, as most do not become realizable projects, we are very active here, and expect to maintain and increase our total pipeline over time.

As a general comment, I am pleased with the progress towards profitability we have been making. We generated almost $41 million of operating cash flow on the quarter. Our gross margins continue to improve, and we are operating income positive without any special items in Q2. If we had not suffered the foreign currency exchange losses in the quarter, we would have been profitable for the quarter. Our focus on tight control over credit risk, pricing and operating costs, plus our transition towards being more of a project company, is starting to pay off.

In summary, we are very pleased with the progress we have made in the transformation of our business from a pure module supplier to a provider of solar energy solutions. As we move through the third quarter, we believe that we're within reach of returning our business to profitability on a GAAP basis for all of 2013.

With that, I'd like to open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Philip Shen of Roth Capital.

Philip Shen - Roth Capital Partners, LLC, Research Division

My first question is about your 3 projects that are connected and are going through acceptance testing. What is the probability that these projects get through that testing process and are concluded by the end of Q3?

Shawn Qu

Philip, this is Shawn speaking. These 3 projects are in slightly different stages. One project has started the testing period long before the starting of Q3. Another will complete the testing period in August, mid or late August, another one in early September. And at this moment, there's a possibility that all 3 projects get recognized in Q3, but there's also possibility that they happen in Q4 because as you know, the closing of the project sales is not as straight forward as the module sales, it includes some technical details and resolving some punch list items but also the land transfer, all those legal details. Therefore, the management doesn't want to indicate a probability but there's a chance they get finished in Q3, but there's also a chance they happen in Q4. But whatever it is, I think they will happen this year.

Philip Shen - Roth Capital Partners, LLC, Research Division

Okay, that's helpful, Shawn. And in terms of Japan, can you provide us an update on margins for Japanese projects? I think on the last call, you mentioned that not many projects have been built and the EPC costs are not well understood. What's the update there?

Michael G. Potter

The estimates we have are still they're expected to be at least as good as our Canadian projects, so in the range of 20%-plus gross margin. As we said in the last call and it's still true today, there's still has not been a very active end buyer market in Japan and not a lot of larger projects built, so the EPC isn't fully understood. We are planning actually on building a small project towards the end of this year in order to gain experience with the EPC costs and be much better at giving a more firm estimate on that. But currently, we don't see any reason why it wouldn't be at least as good as our Canadian projects.

Philip Shen - Roth Capital Partners, LLC, Research Division

Okay, great. And one last for me, in terms of ASPs, I think we backed into $0.67 per watt. How do you expect ASPs to trend in Q3 and Q4?

Michael G. Potter

We expect them to be relatively stable, not taking to the account the potential higher revenue from project sales in Q3.

Shawn Qu

Yes, this is Shawn. Geographic-wise, we get higher ASP in Japan and also in U.S. The ASP in Europe is also healthy, but because of the anti-dumping risk, we intend to limit our shipment. Now meanwhile, the ASP to the Southeastern Asian countries is a little bit low, so in average it's around $0.67 per watt last quarter and as Michael said, we expect this to continue in Q3.

Operator

The next question comes from the line of Nitin Kumar of Nomura.

Nitin Kumar - Nomura Securities Co. Ltd., Research Division

A couple of questions here, one on Canada, actually 2 questions on Canada. One is, could you kind of give us a guideline as to what was the contribution from the project sale on the EBIT line?

Michael G. Potter

Our project was about after certain reserves and such, about $52 million worth of revenue. And in EBIT, it was somewhere in the area of $10 million on EBIT.

Nitin Kumar - Nomura Securities Co. Ltd., Research Division

Great. And secondly is do you have any visibility on next set of projects as to when we should start seeing the next set of feed-in tariff projects coming from Canada?

Michael G. Potter

So do you mean the possibility of the FIT 2.0 or the projects we're building now and when they're going to be recognized?

Nitin Kumar - Nomura Securities Co. Ltd., Research Division

Yes. The project FIT 2.0.

Michael G. Potter

That's still not really decided yet. There was a program announced. But after the World Trade Organization said that domestic content rules were not allowed, the government has had to go back and rethink how they've have to do the program. They have been talking publicly about a couple of different models, some of which relate to more of a community involvement in it, but there's been nothing published or official yet. So we wait to see and are participating in the background in the industry associations on what the government plans on doing.

Shawn Qu

Yes. On one hand, we have a large pipeline in queue for the FIT 2.0. Now meanwhile, we're also exploring other countries. Right now, our focus is in Japan, and also we have developed project in China and in U.S. So we are prepared to move beyond Canada, even if the FIT 2.0 get delayed.

Nitin Kumar - Nomura Securities Co. Ltd., Research Division

Understand. Last question on Canada, other than the 3 projects already connected and undergoing the testing phase, how many new more projects are likely to get to that stage within 3Q?

Michael G. Potter

We have 1 project that's very close to being completed that won't have enough acceptance time testing in Q3, but will be up for Q4. And we have 3 other projects that if we can move the interconnect time up a little bit, we do have a possibility of being in Q4 as well. At least one of the SkyPower projects has a chance of being completed in Q4. And out of the 4 projects we bought off of SunEdison, 2 of them will be in construction and one of them should be pretty close to being completed at the end of the year. The SunEdison projects are a percentage of completion, we expect them to be percentage of completion projects, so we'll recognize revenue from them before the end. All of our other projects in Canada, with the exception of EPC projects, are completed contract or more correctly, full accrual projects.

Nitin Kumar - Nomura Securities Co. Ltd., Research Division

I understand. And shifting to Japan side, there's -- most of the shipments so far for the residential market or do you see some of your modules actually moving into the industrial or utility scale?

Shawn Qu

Yes. For this year, most of our module moved to the commercial utility-scale. This is what they call the mega solar side. But the residential market is always stable, and Canadian Solar has always been a player there. And now, all of the 160-megawatt we delivered in Q2, I will say the vast majority went through the commercial market.

Michael G. Potter

Yes. The first shift we saw when it started to shift towards more commercial was commercial rooftop projects but we're starting to ship more and more to ground mount projects as well.

Nitin Kumar - Nomura Securities Co. Ltd., Research Division

I understand. So we don't really see a lot of financing issue or a buyer issue in Japan, is that a correct assessment? Or I mean, I just want to understand how mature is the Japan market, say compared to Canada or maybe some of the other newer markets.

Shawn Qu

Yes. Right now, we deliver modules, and we don't see any payment issue for our module delivery. And all the projects which our customer is building are well-financed, so I don't see a financing issue in Japan right now.

Michael G. Potter

And we do have a lot of very interested end buyers for our Japanese projects, but we're not at the stage where we're going to be running a process quite yet and selecting the end buyers, but we do have a fair amount of interest from them. And the quality end buyers is very high, so we don't see a lot of financing risk from that end buyer pool as well.

Operator

[Operator Instructions] The next question comes from the line of Sanjay Shrestha of Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

So a few questions, right. When I -- can you guys sort of give us a slow walk down of all the projects in Canada, given it will be lumpy on a quarterly basis, but what I'm trying to get at is, how should we think about sort of overall profitability for the company? Because even when I look at your Q3 guidance, even without any other Canadian projects it looks like you'll be pretty close to breakeven, so if any of these Canadian project hits, you get to meaningful profitability. It might be Q3, it might be Q4 but that's why, so for full year '14 and for the second half 2013, what is the right modeling from our standpoint for all these project business? I'm not trying to get too far from 1 quarter.

Michael G. Potter

So the TransCanada project, partially because it was the first big contract we signed and partially because of history of the customer, have much more difficult and extended testing times. The projects we sold for SkyPower, the transfer at COD is much more direct. And we're getting milestone payments in the door for the SkyPower project. So although we don't actually recognize revenue until it's all complete in title transfers, the end buyers have a lot more skin in the game from the beginning of that. So we expect the closing to be a little bit more orderly. I think we've got 18 projects being completed in 2014 and 2 projects in 2015. I would expect there would be a little bit more in the summer months being completed as the construction period kind of goes and the weather is a little better for the final test. I don't know exactly when each one will close on a quarterly basis. But for the year, I'm relatively confident we'll get most, if not all, of those 18.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Okay. And so for the second half of this year then the total is 5, correct?

Michael G. Potter

We have a total of 4 TransCanada projects that are either completed or just about to be completed, and 3 more, for a total of 8 projects, that's possible we may be finished before the end of the year. We have 1 project in the SkyPower portfolio that's possible we may complete before the end of the year. And we have at least 2 projects from SunEdison that will be in construction by the end of the year. And they actually started construction in Q2. We probably will start construction on the last 2, depending on what the weather is like towards the end of this year. Those SunEdison projects, we can title transfer it at the beginning of the process, and we can use percentage-of-completion accounting for those. For our projects outside of Canada, in the U.S. and Japan, for example, where we can, we're going to be title transferring upfront as well to enjoy percentage-of-completion accounting. That's much smoother in terms of revenue recognition and it's a lot easier to forecast.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Fair enough. Now guys, when I sort of even look at this P&L right, even without any real contribution from highly profitable Canadian projects, if it wasn't for the foreign currency loss, you actually would've been profitable as you already pointed out. How do we sort of make sure that we don't have -- is there any steps you guys can take so that you won't get hit by like some $20 million of foreign exchange currency loss in the quarter? Is there anything you guys could do about that?

Michael G. Potter

There are some actions we can take. It's a little bit difficult to hedge at the size and scale that was needed to be hedged, but we did eliminate a good amount of the exposure to receivables in Japan. The derivative gain we recorded in Q2 was because of hedging activities to reduce our exposure to fluctuations in Japan. Unfortunately, in Q2, we sort of had a perfect storm. With the possible ending of QE3, the U.S. dollar suddenly got very strong against all currencies except for the Chinese yuan where it weakened against. And that's just about the worst case for us in terms of foreign currency loss. As we continue to generate cash and return to profitability, some of the intercompany balances between our functional currency, different companies will be greatly reduced and that will reduce some of the fluctuation as well. So we're working hard to try and reduce it to a more manageable level, but it'll be very difficult to completely eliminate. The only comment I would make is that so far in Q3, the U.S. dollar has been weakening, so that's actually a beneficial situation for us.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Okay. Not that I'm trying to put any words in your mouth because there's always too much volatility in the sector with sort of the quarterly numbers, but when I just think about, if these 3 projects from Canada, right, based on your module guidance module ASP, I mean if these 3 projects were to hit in Q3, you're looking at an EPS number north of $0.70.

Michael G. Potter

We don't guide to EPS numbers. But it's 3 projects at about $60 million each at approximately 25% gross margin. Hopefully, in your number, you include the fact that at that level of business, we'll probably paying some taxes in Canada.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Indeed, so 1 last question for me guys then. So when we think about all the projects, right, so in the second half, can you sort of help us also understand the timing of cash payment versus the P&L benefit from some of these projects, so you had a good cash flow quarter in Q2, should we continue to expect that in Q3 and Q4?

Michael G. Potter

Yes. Mechanically, the TransCanada projects we've been financing them through construction financing and it's been negative operating cash flow as we've built them and asset has grown in our balance sheet, and that's negative operating cash flow. When we sell them, you get a big pop in operating cash flow and a negative in financing cash flow as you pay the loans down. For the project in the Sky Power Portfolio, which is 16 of them, those ones will give it a slightly positive cash flow in the beginning as we receive the initial deposits from the customers. And then it will be a negative cash flow on operating cash flow and a positive cash flow on financing because the next few milestones were all going to be debt based through our SBBs. And at the end, when we complete it and sell it, we'll get the P&L, the full P&L impact, which is positive, and a jump in operating cash flow and a drop in financing cash flow as we pay the loans off. For the SunEdison projects and the projects we get percentage of completion accounting, that will be just steady operating cash flow as we recognize revenue because the debt won't be on our balance sheet, it will be on the balance sheet of the end buyers. Is that a good enough explanation?

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

It is, it is. That's great.

Operator

[Operator Instructions] The next question comes from the line of Daniel Ries of Maxim Group.

Daniel Ries - Maxim Group LLC, Research Division

One quick question. Is it all or none with the 3 projects up in Canada? In other words, could you recognize 1 and have 2 fall -- flip into fourth quarter or is it 3 or 0?

Shawn Qu

No, it can be 0, 1, 2 or 3.

Daniel Ries - Maxim Group LLC, Research Division

Okay. And is the 21 megawatts from the U.S., is that recognized in 3Q or were some of that recognized in 2Q?

Michael G. Potter

Most of it's going to be recognized in Q3 and a little bit into Q4. It depends on which specific project. The ones in North Carolina, we completed construction, but we're using full accrual method for those. So we're waiting for the final payment on them.

Daniel Ries - Maxim Group LLC, Research Division

Okay. If I could switch just a little bit to Europe where there's certainly been some developments that I assume you view positively, when do you think you'll get your allocation and know what you will be shipping to, or at least allowed to ship to Europe in the year ahead? When does that start, and wouldn't that become your higher ASP market non-project wise at the level that's been suggested?

Shawn Qu

No, the deal was finally inked on August 6, that was the day before yesterday. We now have a pretty final undertaking agreement in our hand [ph] it's not a final, final. Each company was signed their own undertaking agreement. And the basic principle of dividing the quarter is already set, while the quarter for individual company is still being calculated. And part of the quarter is around, I think, around 65% of the quarter will be decided based on the historical shipping record, and the other 35% will be determined by other factors. So we should get a reasonable amount of quarters, and I expect to know that in the next couple of weeks. So we are getting our gear up and to resume shipment to Europe. And you're right, the ASP will be high. Therefore, the margin will be high in Europe once the new deal is fully implemented. Now on the other hand, we still have to see how this price impacts the European market as a whole because this price, the current minimum import price of $0.56 is higher than what the current prevailing market price, so we'll see how much will this impact the overall European installation market. So in the next couple of weeks, or 2 or 3 months, we'll have a clearer picture.

Operator

[Operator Instructions] I'd now like to hand the call back over to Chairman and CEO, Dr. Shawn Qu, for closing remarks.

Shawn Qu

Thank you, operator, and thank you, everyone, for joining in the call today. And thank you for your continued support. If you have any further follow-up questions after today's call, please contact us, and have a great day.

Operator

Thank you, ladies and gentlemen. That concludes the presentation. You may now disconnect. Good day.

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Canadian Solar (CSIQ): Q2 EPS of -$0.29 misses by $0.09. Revenue of $380.4M misses by $39.43M. (PR)