UPDATE 2-Canadian Solar returns to profit, eyes power plant spinoff

Wed Nov 13, 2013 11:47am EST

* Says turned profitable on sales of power plants

* Third-quarter profit $0.56/share vs loss $1.01/share year earlier

* Expects full-year panel shipments at high end of forecast

* Shares rise 12 pct to four-year high (Adds executive, analyst comments)

By Swetha Gopinath

Nov 13 (Reuters) - Canadian Solar Inc is considering spinning off a unit to operate some of the high-margin solar power plants that helped the company to its first profit in nine quarters.

Canadian Solar's shares rose 12 percent to a four-year high on Wednesday after the company posted a quarterly profit that Chief Executive Shawn Qu said had laid the ground for its first full profitable year since 2010.

By moving into power plant construction, Canadian Solar has cut its dependence on the more competitive business of selling panels and other solar products. Its stock has risen eightfold this year, making it the best performer in the solar industry.

The Guelph, Ontario-based company, which has most of its manufacturing operations in China, plans to create a unit that would hold and operate these plants after construction, Chief Financial Officer Michael Potter said on a post-earnings call.

"As an operating company, (with) the cost of capital we have, it doesn't make the greatest sense to hold and operate projects within the current Canadian Solar structure," said Potter. He said such a unit could potentially be taken public.

Solar companies are exploring new financing structures to lower the cost of capital and maximize returns.

SunEdison Inc, a U.S. competitor, has also announced plans to spin off some power plants into a listed company next year, while SolarCity Corp has launched bonds backed by solar assets.

Canadian Solar's "total solutions business", the unit that includes its power plant operations, contributed 41 percent of the company's total revenue in the third quarter, up from 21.5 percent a year earlier.

"They are going to continue to grow this portion of their business and, as they improve their cost of capital, there is a healthy profit driver here," said Colin Rusch, analyst at Northland Capital Markets.

PRICING POWER

In the eight quarters prior to its latest reporting period, Canadian Solar had racked up cumulative losses of about $316 million, in part due to a slump in panel prices resulting from excess capacity in China and the loss of European subsidies.

The slump has halted in the last two quarters, giving solar companies a renewed confidence.

"The industry is emerging from a very challenging period, with improved pricing power and growing demand," Qu, the chief executive, said in a statement.

For the third quarter ended Sept. 30, net income attributable to Canadian Solar was $27.7 million, or 56 cents per share, compared with a net loss of $43.7 million, or $1.01 per share, a year earlier.

Revenue rose 51 percent to $490.9 million.

Canadian Solar said it had increased its project pipeline to 1,015 megawatts (MW) by the close of the quarter from 971 MW at the end of the second quarter.

The company also said it expects its full-year panel shipments to be between 1.75 gigawatts (GW) and 1.77 GW, near the top end of its prior forecast of 1.6-1.8 GW.

In the fourth quarter alone, the company expects to ship 480-500 MW of panels, driven by demand from China and Japan. It expects to begin construction of its first Japanese solar power project early next year.

In the third quarter, the company sold two solar power plants to TransCanada Corp for about C$95 million ($91 million) and two utility-scale solar power plants to BlackRock Inc for about C$120 million.

Canadian Solar said its backlog of utility-scale projects in Canada totaled 499 MW of direct current at the end of the third quarter, with an estimated resale value of more than C$1.7 billion once the projects are functional.

"They are going to see some outsized margins for this year and next year on projects from Canada," said Rusch.

Canadian Solar's shares were up 10.3 percent at $31.13 in morning trading on the Nasdaq. ($1 = 1.0493 Canadian dollars) (Editing by Savio D'Souza and Robin Paxton)