A New Spin
California’s energy problems are opening new vistas for Chatsworth-based Capstone Turbine Corp., which makes small generators that can keep the power on during rolling blackouts.
The company on Feb. 21 announced the formation of a wholly owned subsidiary called Capstone California to specialize in the California market, and on Feb. 26 it announced a distribution to buy 250 Capstone microturbines over the next two years.
Capstone also is working with California legislators supporting a proposed state law that would reduce or eliminate so-called “exit fees” of 65 cents to $6.40 a month per kilowatt hour that companies that generate their own electricity are required to pay utilities such as Edison that maintain the state’s power grid.
Capstone manufactures microturbines that generate 30 to 60 kilowatts of electricity--enough to power a fast-food restaurant, a hotel, a small office building or medical building. The turbines generally run on natural gas, but can also run on other fuels.
Financial analysts and energy experts say that turbines like Capstone’s, which are about the size of a refrigerator and thus can be installed almost anywhere, represent one of the logical choices for companies that need backup electricity supplies.
Capstone also stands to benefit, experts say, from a rethinking of the approach to power generation in California and the nation.
This emerging approach, known as “distributed” power generation, would include traditional central power plants in combination with smaller local plants and on-site power generators that in many cases are more efficient than central power plants.
California’s energy crunch and the notion of distributed power have thrust Capstone into the spotlight. However, the company doesn’t necessarily have a clear field.
Capstone faces competition from other microturbine manufacturers, from companies that make reciprocating engines used as generators, and from other types of alternative power supplies that are available or in development, such as solar power or fuel cells that use hydrogen and oxygen to produce electricity.
But analysts say Capstone has a number of factors working in its favor--even though the company has yet to show a profit since going public last year.
“I am a big believer in distributed power as at least part of the solution, not only to the California crisis but around the country,” said Merrill Lynch analyst Sam Brothwell. “California’s situation is the most visible right now, but there are a lot of other electric utility grids around the country that are stretched to their limits.”
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Brothwell believes Capstone will show a profit some time next year. The company reported a loss of $591.3 million for the year ended Dec. 31, compared with a net loss of $56.2 million in 1999. Revenue that increased to $23.2 million in 2000 from $6.7 million in 1999. The stock closed Monday at $27.75, up $3.06. That compares with a 52-week high of $98.50 and a low of $17.75.
Most of Capstone’s red ink wasn’t an out-of-pocket loss; it was a one-time paper loss associated with converting the company’s private stock to public shares when Capstone went public last summer, according to Brothwell.
“Capstone is sitting on more than $200 million in cash right now, so the company is very well capitalized. It’s right on the cusp of moving from a development-stage company to a commercial company,” Brothwell said, explaining that businesses developing a new product often lose money until they are able to produce it in large enough quantities to sell it at a profit.
Goldman Sachs analyst Mas Siddiqui said that the $237 million in cash on hand “should be more than sufficient to allow the company to execute its business plan” until it becomes profitable.
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Siddiqui considers Capstone “one of the few power tech companies that will actually see upside from the California crisis,” although he expects the company to lose money this year. Like Brothwell, he anticipates that Capstone will show its first profits next year.
But what about the prospect of a bigger company pursuing the microturbine market and crushing Capstone?
“Capstone has established an early lead in the microturbine market, so if a large company were to come in and want to get into this business, I think that company would be just as inclined to try to take Capstone over rather than drive it under,” Brothwell said. Besides, he added, “There is room for more than one company in the market.”
Capstone’s microturbines cost about $30,000 to $35,000 for the 30-kilowatt model and “offer a very attractive option for small businesses and institutions,” said Neal Elliott, a senior associate with the Washington, D.C.-based American Council for an Energy Efficient Economy, a nonprofit think tank.
“We feel that microturbines and other forms of distributed generation will play an increasingly important role in the country’s power grid,” Elliott said.
Microturbines burn cleaner than the diesel-powered reciprocating engines that have traditionally been the preferred backup power supply, Elliott explained, meaning they are environmentally preferable to diesel-fueled generators.
Capstone also will benefit if California reduces or eliminates exit fees that utility customers pay for generating their own power, said Elliott, who noted that a number of states already have dropped such charges.
California’s energy problem has focused attention on Capstone, but the company was promoting its microturbine solution long before the problem reached crisis proportions, according to Mark Kuntz, the company’s vice president of marketing. He noted that Capstone began as a private company in 1988 and has invested more than $250 million in developing its microturbines.
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“We’ve been promoting our solution for the past couple of years, but the easiest thing for a potential user was to do nothing,” Kuntz said. “The California energy crisis has raised our profile and given us a chance to get the attention of people who were somewhat indifferent before.”
Capstone’s microturbines can produce power for about 10 cents to 12 cents per kilowatt hour, Kuntz said, slightly more than the cost of buying it from a big supplier such as Edison. The cost per kilowatt hour is only one issue in the power crisis, he pointed out, because having a reliable source of electricity is more important to many businesses than saving a few pennies per kilowatt hour.
Even without the power crisis, Kuntz said, Capstone would still envision a large market for its products in the form of businesses that are extremely sensitive to power interruptions, such as continuous manufacturing operations, plastics, metal plating, and other industries in which a temporary power outage can cause big financial losses.
Capstone is working to capitalize on the California power problem and hoping that, if its turbines prove successful here, “it will accelerate the use of microturbines all around the country,” Kuntz said.
