Canadian Project Revenue-module shipment recognition

odyd12

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Tuesday, April 2nd 2013, 4:23pm

Canadian Project Revenue-module shipment recognition

I discussed this here before, and I have further clarity to offer on matters of module shipments for projects. So no shipments are actually recognized until project is either sold under project completed-contract, as those for TransCanada, or percentage of completion for everything else. So in general terms no module shipped in 2012 were parts of projects. This should not be confused with system sales. All values associated with those shipments are sitting in project assets and this part was explained, the same as project liabilities are sitting in the liabilities on the balance sheet. What is really interesting that 300 to 500MW of these type shipments will be recognized in 2013, and what is really cool that when project is sold, modules shipments obviously were already done long time ago.
This of course adds a bit of twist to export data, since we may see a lot of deliveries for the company but actual revenue recognition in shipments is not matched. Particularly those investors who focus on CSIQ when reviewing export data should keep this in mind.

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nanofrogfish_spf

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Wednesday, April 3rd 2013, 5:35pm

Thanks Odyd for that update

I don't follow you though on the export data part. Less than 100MW DC will be from TransCanada this year, and 1/3 of this is already installed...all the rest as you noted will be percentage of completion. I wouldn't expect anymore delays in revenue recognition using % of completion than with any other type of shipment...or do you think there would be some delay?

Regardless, it doesn't matter much when it comes to the export data, since all modules for Ontario come from the Canadian assembly plant, and therefore don't show up on the export data anyways.

That leaves about 100MW+ for the US market this year, plus a little elsewhere...but again will be on % of completion.

So I don't see any additional twist on interpolating the data, at least in regards to CSIQ's present situation.

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odyd12

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Wednesday, April 3rd 2013, 7:02pm

nano,
What I am stating project modules are recognized as shipped with the revenue recognition. Export data shows delivery and becomes unrelated to revenue recognition.
Example:
So say there is a US project CSIQ ships for installation in March. It takes 21 to 30 days on sea to get to the US port.
The delivery I see in February shows 50MW to the US.
If this was TSL I would expect this 50MW to be part of Q1 report. In CSIQ case this delivery may not be recognized until September, when partial or % of project completion is recognized as revenue. This is my point.

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Pop2mollys

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Wednesday, April 3rd 2013, 7:14pm

Keep in mind CSIQ gave pretty weak guidance in Q1 compared to Q4...

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odyd12

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Wednesday, April 3rd 2013, 8:05pm

Quoted from "Pop2mollys"

Keep in mind CSIQ gave pretty weak guidance in Q1 compared to Q4...

I am explaining, the unique condition for CSIQ, accounting for modules which are delivered to projects but are not recognized as shipments until revenue comes in. What one should look for in the company like CSIQ is the behavior of the project assets line. From Q3 to Q4 that line increased by $88M. How many MW of modules have been hiding under this figure, until asset will be sold like in project complete- scenario? it could be easily 50MW or more just for single Q. If you think of this number of $400M and simply add 20% this is locked revenue, which has not been recognized to date.
In my opinion they did not give week guidance, they did very balance one. First they have said 1.2 to 1.4GW will be sold to third parties. Then they have said they will recognize up to 300 to 500MW of modules for projects on the top of it.
If anyone is paying attention this means they will sell that much of the projects (300-500) at 20% over the COGS in 2013.
They guided 290 to 310 to "third parties" they said very little to nothing recognized in Q1. That does not mean modules will not be shipped to projects, so we should continue to check the project line.
Lastly, You have seen export data (even without March), now compare this to guidance. The balance of it is the project work to a certain level of accuracy, and we have to go through March yet. They ship a lot to Japan, and it takes only 5 days to get the module there from China and they are very strong in India, which is only few more days, so their March is a huge credit to their project opportunities in the US and not being part of the guidance but being part of export data.

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Pop2mollys

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Wednesday, April 3rd 2013, 8:46pm

You would think then they would give more clarity on this during CC. The street just see headlines with pretty dramatic shipment guidance decline QoQ and punishes them. The more transparency the better during these CC's.

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explo

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Wednesday, April 3rd 2013, 11:53pm

That's a good point odyd. In q1 they will likely run above their guided shipment, due to shipments to their EPC arm not being recognized. Still they would have capacity to serve 400 mw external shipments in q1. So when they pulled out of China after selling without ability to collect there in q4 they lost some external business volume. So Q1 will look bad on revenue, but who cares, they will probably be the most profitable solar11 during 2013. What I'm curious about is how much their big projects business in 2013 will cause opex to continue trend up. Although all is not certain yet on the project business model chances are very good that it should perform very well, despite increased opex. Note that CSIQ is not depending as much as others on high utilization, so pulling out of China and focus on less, but more collectible and higher ASP, sales is a good strategy for them. YGE for example does not have the same luxury regarding this option.

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nanofrogfish_spf

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Yesterday, 2:42am

Quoted from "odyd12"

Example:
So say there is a US project CSIQ ships for installation in March. It takes 21 to 30 days on sea to get to the US port.
The delivery I see in February shows 50MW to the US.
If this was TSL I would expect this 50MW to be part of Q1 report. In CSIQ case this delivery may not be recognized until September, when partial or % of project completion is recognized as revenue. This is my point.

Odyd, I guess we just have a different view of the % of completion billing timelines. First, the 1-month delay for shipping I apply to all US shipments, so modules for projects are no different. In regards to your example, the project should be 100% finished and commissioned by September if started in February/March. But with % of completion, I would expect either monthly invoicing, or 30%/60%/90%/100% milestones or something like that. And since supplying the modules is one of the first things on the list, it should probably get billed out first.

But the more I think about it, there may be a month or 2 additional delay in the billing turnaround, which may or may not roll into next quarter's numbers. In your example the Feb project shipments would probably be recognized in Q2.

Of course they could be stockpiling for project work...another wild card which is true for all shipments.

I agree 100% with the other excellent points made by yourself/explo...

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nanofrogfish_spf

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Yesterday, 4:21am

Quoted from "nanofrogfish_spf"

But with % of completion, I would expect either monthly invoicing, or 30%/60%/90%/100% milestones or something like that. And since supplying the modules is one of the first things on the list, it should probably get billed out first.

But the more I think about it, there may be a month or 2 additional delay in the billing turnaround, which may or may not roll into next quarter's numbers.

Sorry, my mistake...the external "billing" on % of compl only really happens on pure EPC work. But shouldn't the modules therefore be able to be fully recognized as revenue when they show up at the jobsite each month, with the backend % recognition being more based on installation and start-up costs? Or do they see things differently in the accounting world?

Thanks...

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odyd12

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Yesterday, 5:59am

Quoted from "nanofrogfish_spf"

But shouldn't the modules therefore be able to be fully recognized as revenue when they show up at the jobsite each month

Supplying modules is probably middle of the project work. My point was to highlight that CSIQ shipment guidance is no longer a sole indicator if company is successful or not, because of the project work and should be associated with project asset levels and revenue recognition from it, quarterly. Export data would be an essential confirmation to cover this gap. My example nano was actually project completed method, therefore delivering in January, has no relevance when modules were delivered, since the whole project is being recognized when whole project is completed.
In the % of recognition the good news is that future owner carries financial responsibility for milestones payment which creates better cash flow condition. What is the recipe for the milestones is not known to me but in construction is not on percentile per say but it is structural basis translation to % if you will. At any rate it is a benefit without doubt, since more liquidity and less leverage is present.

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nanofrogfish_spf

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Yesterday, 3:45pm

Quoted from "odyd12"

In the % of recognition the good news is that future owner carries financial responsibility for milestones payment which creates better cash flow condition.

Quoted from "odyd12"

At any rate it is a benefit without doubt, since more liquidity and less leverage is present.

Thanks...this is indeed very positive for CSIQ.

I hadn't thought about it much before, so I was just assuming that all projects would get paid in full during final turnover to owner, and the % of completion was more an accounting method based on increased asset values rather than a real payment schedule. Having a contract with the future owner that includes real milestone payments is much better than I had previously thought. These milestones would be different than a EPC type contract of course, which would usually be monthly...it all depends on the contract language.

This also will help fund their growing pipeline.

thanks again for helping me "see the light"...