Canadian Solar, TRP in Sale Deal

Zacks

Canadian Solar Solutions Inc. (“CSSI”), a wholly owned subsidiary of Canadian Solar Inc. (NasdaqGS:CSIQ - News), has entered into a sale agreement with TransCanada Corporation (NYSE:TRP - News) under which the latter will buy an 86 megawatt (“MW”) AC solar project portfolio from the former for approximately C$470 million.

Per the sales contract, CSSI will provide nine fully-operational and commissioned utility-scale solar projects across the Province of Ontario to TransCanada. The solar projects are expected to begin operations between late 2012 and mid-2013.

Under the agreement, the company will facilitate TransCanada to arrange for finance for construction. Moreover, it will provide turnkey engineering, procurement and construction services and will also act as the supplier of major components required for the projects. All solar PV modules used in the portfolio will be manufactured at Canadian Solar's manufacturing facility in Guelph, Ontario.

Solar farm endeavors are contracted under Ontario’s Feed-In Tariff (“FIT”) Program. Ontario's FIT Program is North America's first comprehensive guaranteed pricing structure for renewable electricity production. It offers stable prices under long-term contracts for energy generated from renewable sources.

Canadian Solar is a low cost, vertically integrated solar module producer with predominantly China-based manufacturing assets. The prospects for Canadian Solar look favorable based on a geographically diverse customer base and improving operating efficiencies through its vertically integrated manufacturing operation.

However, near-term fortunes are marred by an industry-wide oversupply glut leading to sharply falling average selling prices, tepid module demand in Europe, and rising competition in the market. Given the high inventory level in the industry, we do not foresee any short-term improvement in the margins of the company. The company presently retains a short-term Zacks #3 Rank (Hold). We have a long-term Underperform recommendation on the stock.

In November this year, Canadian Solar reported an adjusted loss per share of $1.24 in the third quarter of 2011, compared with the Zacks Consensus Estimate of a loss of $0.51 per share. Similarly, its competitor Suntech Power Holdings Company Ltd. (NYSE:STP - News) posted an adjusted loss of 64 cents per American Depositary Share (“ADS”), falling behind the Zacks Consensus Estimate of 21 cents loss per ADS.

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