DJN: BARRON'S: Fired Up: Capstone Turbine Generates Investor Enthusiasm, But
Not Profits
By Bill Alpert
With electric power in short supply from California to Brazil, alternative
energy stocks have caught the eye of investors. Fuel cells and fly wheels
have sparked flights of fancy share prices.
While most new energy technologies aren't yet commercial, one blackout
remedy is available right now. It is the microturbine, a clean-burning
miniature of the gas-fired turbine used in utility plants. Small enough to
fit inside a commercial building or apartment house, microturbines are
cleaner, quieter and easier to maintain than the diesel engines
traditionally used for onsite electricity generation.
And there's been just one play on the microturbines: Capstone Turbine. After
its initial public offering a year ago, Capstone's shares shot up to nearly
100, putting a stock market value of $7.5 billion on the little turbine
engineer. The Nasdaq-traded shares have fallen steeply since last autumn,
yet at recent prices around 23, Capstone still enjoys a market valuation of
$1.7 billion. That's hardly cheap. Although the Chatsworth, California-based
firm has steadily expanded sales -- to $23 million last year -- its target
customers have been disappointingly slow to take the turbines in volume.
Fans of Capstone don't expect the firm to earn profits for at least another
year. And within that time period, deep-pocketed rivals like Ingersoll-Rand
and ABB will jump into Capstone's yet-small market. Such concerns caused
Merrill Lynch's energy technology analyst, Sam Brothwell, to trim his
financial forecasts this month, though he still maintains that Capstone is a
"core energy tech holding."
After a decade of development, Capstone sold its first three microturbines
in 1998. Shipments rose to 211 units in 1999 and 790 last year. In this
year's quarter ending in March, Capstone sold 307 units for total revenue of
$9 million. It also rolled out a larger-size unit, able to generate 60
kilowatts.
While solid-state fuel cells have captured public imagination, Capstone
chief executive Ake Almgren, notes that fuel cells are far from commercial.
The capital cost of today's experimental fuel cells is well over $4,000 per
kilowatt. A microturbine costs about $1,000 per kilowatt, says Almgren,
while a traditional diesel generator costs $500 to $800 per kilowatt.
Without exhaust scrubbers, however, traditional generators are awful
polluters. Therefore, microturbines offer the best value for clean onsite
generation, he says.
When California was short power last year, Wall Street anticipated quick
adoption of microturbines. Some analysts forecast that Capstone sales would
triple in 2001. Sales have risen, but not as strongly as hoped.
So Merrill's Brothwell has reduced this year's unit-sale forecast from 2,800
to 2,100, while almost halving his forecast for next year from 7,900 to
4,100. He now sees Capstone running a 40-cent loss this year, and a
five-cent loss in 2002.
Installation hurdles have slowed penetration. Permits and fees required to
connect to existing power grids can cost tens of thousands of dollars and
take months to obtain. Only New York and Texas have set uniform connection
standards for generators. Last week, California Governor Gray Davis extended
the lives of dirty alternatives to Capstone by easing air-emission
restrictions. And the energy initiative recently announced by President Bush
focuses on conservation and expansion of power lines, pipelines and
coal-fired power plants.
The savings from generating power instead of buying it from the grid also
vary with local prices of gas and electricity. This so-called spark spread
must far exceed installation costs, says Goran Mornhed, president of the
energy developer U.S. Energy Systems: "If you'd only save someone $30,000 a
year, it doesn't get them excited."
Capstone chief executive Almgren says microturbines make electricity at an
average cost of 10.5 cents per kilowatt, at a gas price of $5 per million
BTUs. If a customer can also use the exhaust for heating or cooling, costs
drop to between six and eight cents per kilowatt.
Yet the world hasn't really beaten a path to Capstone's door. Many customers
want to test a few units for a year or two, before deciding whether to order
in volume. "People endorse the technology," says Capstone spokesman Keith
Field, "but there's a lot of tire kicking."
Capstone may have to fight for its pioneer's reward, moreover, as
established power-generation firms enter the market. Turbec, a joint venture
of Switzerland's ABB and Volvo, has been testing a 100-kilowatt unit.
Honeywell International and Caterpillar want in. And in this year's fourth
quarter Ingersoll-Rand will enter the California market with a "total
solution" that encompasses engineering, fuel contracts and equipment
financing that takes advantage of its deep pockets.
"The next 24 months will be a very revealing period," says Rone Lewis III,
president of Ingersoll-Rand's independent power business, "as some of the
major players come into the marketplace with total solutions."
Almgren says he's ready for competition. "You can never relax," he says,
"even if you are very much ahead, which we think we are."
(END) DOW JONES NEWS 06-16-01
12:45 AM
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