Microturbine Firm Hopes IPO Generates $115 Million
A lot of Internet companies like to boast that they’re powering the economy. Capstone Turbine Corp. dreams of someday making that claim--literally.
The Woodland Hills firm spent 10 years developing a microturbine that’s about the size of a refrigerator and generates 30 kilowatts of electricity, enough to power a Laundromat or a fast-food restaurant. Capstone has sold at least 673 of its microturbines since they went on sale in December 1998.
Though a relatively untested technology, the energy industry has high hopes for microturbines. Like glorified windmills, they spin tens of thousands of times a minute, driving generators that convert mechanical energy into electricity while producing few pollutants.
Small businesses aren’t Capstone’s only target market. Larger companies can use the Capstone MicroTurbine to generate some of their own power, especially during hot summer afternoons when electricity from the grid is most expensive. Oil drillers can use them to burn the methane gas that is released with oil and convert it into usable energy. The microturbines can be installed in electric buses and vans to keep their batteries charged. Companies also could use the devices to provide backup power in the event of a blackout.
But Capstone needs to generate some cash before its microturbines can generate more power. It has raised more than $260 million from venture capitalists, including Microsoft Corp. co-founders Bill Gates and Paul Allen and Compaq Computer Corp. Chairman Ben Rosen, who serves on Capstone’s board. But after racking up cumulative losses of more than $144 million, the company is looking for some help from the stock market. Earlier this spring, Capstone filed to raise as much as $115 million in an initial public offering.
Capstone is aiming for the so-called micropower market, which includes devices that generate less than 250 kilowatts of power and are generally deployed at the point of consumption, such as an office building.
Producing power on site is more efficient than transmitting it over the grid. Transmission alone accounts for 20% to 30% of the cost of electricity, and some power is lost as it travels along transmission wires, said Angelina Galiteva, executive director of strategic planning for the Los Angeles Department of Water and Power.
Capstone was the first company to make a microturbine commercially available, but it’s no longer the only supplier. Industrial and engineering giants Honeywell International Inc., Ingersoll-Rand Co., Siemens Corp., Hitachi and ABB are also in the microturbine business, as are a few small players.
Then there’s the competition from fuel cells. They offer many of the same advantages as microturbines: high efficiency, low maintenance and environmental friendliness. They can be small enough to power a home or automobile, but they aren’t yet ready for commercial markets.
Today, most of the micropower market belongs to devices called reciprocating engines that are similar to car engines and run on natural gas. Though they produce relatively inexpensive electricity, they are noisy, they can be unreliable, they typically require major maintenance after 10,000 to 12,000 hours of operation, and they emit a relatively high amount of the greenhouse gas nitrous oxide, which depletes the Earth’s protective ozone layer, said Neal Elliott, a senior associate with the American Council for an Energy Efficient Economy, a nonprofit think tank in Washington.
Microturbines became a promising alternative thanks to new ceramic materials that can tolerate very high temperatures. Originally developed for the military, the ceramics are useful for commercial microturbines because they operate more efficiently when they reach higher temperatures.
Capstone MicroTurbines can run on fuels like natural gas, propane, diesel and kerosene. The fuel is mixed with air and then burned. As the temperature rises, the air and fuel expand, turning the combustor as many as 96,000 times a minute. Capstone’s patented microturbine has only one moving part and should be able to last more than 40,000 hours without requiring major maintenance. When operating at full power, the microturbine’s exhaust has less than 1% as many harmful emissions as a reciprocating engine running on diesel, according to Capstone’s filing with the Securities and Exchange Commission.
“They should be able to produce a more reliable stream of energy at a lower cost,” Elliott said. “It’s compact, it’s quiet, and potentially it’s clean. The thing is, it’s going to have to compete against fuel cells.”
Fuel cells could be even cleaner than microturbines if they use the proper fuel. (The cells use hydrogen and oxygen to produce electricity, but hydrogen isn’t commercially available yet.) They are silent and extremely reliable because they have no moving parts. But they are about three times as expensive as microturbines, Elliott said, although prices for both devices are expected to drop over time.
Customer interest in distributed power systems such as microturbines and fuel cells has been heating up since deregulation hit the energy industry in 1998, making prices much more volatile. On very hot summer days, energy prices can spike to 10 times their normal levels.
“Suddenly, an investment in a generator to shield you from [those prices] starts looking like a good risk-mitigation strategy,” said Nathanael Greene, an energy policy analyst with the Natural Resources Defense Council in Washington.
At least that’s what Capstone is betting. In June, the company will move from Woodland Hills to a new facility in Chatsworth so it can double its production to 20,000 microturbines a year. That’s quite optimistic for a company that currently has about 200 customers, according to industry estimates.
Capstone officials declined to discuss their business plans because the company is in the “quiet period” imposed by the SEC before and after an initial public offering. According to its SEC filing, Capstone has about 10 distribution partners to help it boost sales, and it also hopes to gain new customers by developing a range of microturbines that can produce up to 125 kilowatts of power. The company will begin selling a 60-kilowatt microturbine this summer, the filing said.
Today, Capstone sells four models of its stationary 30-kilowatt microturbine: one for high-pressure gas, one for low-pressure gas, another that runs on liquid fuel and a rugged version for deployment in places such as oil fields. At 6 feet tall and 1,100 pounds, the Capstone MicroTurbine resembles a mainframe computer, with an average selling price of about $30,000.
Apparently, they cost more than that to produce. While Capstone took in $6.7 million in revenue last year, it spent $15.6 million on the materials, facilities and labor needed to make the microturbines it sold. Including its operating expenses, the company had a net loss of $29.5 million last year, according to its SEC filing.
In 1998, its net loss was $33.1 million on revenue of just $84,000.
Microturbines are still a niche market, and most customers won’t find them cost effective for another three to five years, said Dave Potter, director of marketing for Los Angeles-based New Energy, an energy service provider and Capstone distributor. But some of his customers are already satisfied, including one who runs his Capstone Turbine 24 hours a day, seven days a week. “The guy calls us every week to 10 days and says, ‘Yep, it’s still running,’ ” Potter said.
Steve Cannistraci, senior heavy-duty equipment mechanic for the Los Angeles Department of Transportation, is also enthusiastic. His department has ordered four hybrid electric Dash buses whose batteries will be powered by a pair of Capstone MicroTurbines. The first of them will go into service this week.
“It’s the simplest engine I’ve ever seen,” Cannistraci said. “It only has one moving part. It has no oil, no coolant, there are no fluids to check, and the only maintenance required is periodic cleaning of the air filter.”
The biggest risk for Capstone is that its technology won’t be widely accepted in the marketplace, said Tom Taulli, a Santa Ana-based stock analyst for Internet.com who follows initial public offerings. Right now, the microturbines seem to be doing well with “early adopters,” he said, but the road ahead could be “a roller-coaster ride.”
“It’s kind of like the Internet in a way--it’s a bet on the future,” Taulli said.
Capstone has not yet specified how many shares it plans to sell to the public or how much the shares will cost. Goldman Sachs & Co. is the lead underwriter, with Merrill Lynch & Co. and Morgan Stanley Dean Witter also working on the deal. Capstone’s shares would trade on Nasdaq under the symbol WATS.
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Times staff writer Karen Kaplan can be reached at karen.kaplan@latimes.com. Note that initial public offerings are highly speculative and not suitable for all investors.
