Capstone: A Turbine Maker with a Fat Wallet

Flush with cash from an IPO early in the summer, a California-based micro-turbine pioneer yet to record a profit, is hoping to keep up with increasing demand and move into the black financially by the end of next year, spurred along at least partially by this summer's electricity supply and price problems.

In the short-term, it is seeking to expand growing off-grid markets in transportation and oil/gas field power production.

Capstone Turbine Corp., Chatsworth, CA, Thursday completed consolidation of a half-dozen production locations scattered around Southern California into a single, 40,000-square-foot production facility and headquarters about 30 miles from downtown LA. Seven of its 30 kW micro-turbines help supplement power from the local utility, the City of Los Angeles Department of Water and Power (LADWP).

"This gives us a much bigger, concentrated area in which to increase our manufacturing capacity to 20,000 units annually," said Keith Field, a Chatsworth-based spokesperson for Capstone.

LA's political and energy leaders turned out at ceremonies marking the official opening of the new facilities Thursday in which the LADWP's 74-year-old General Manager, S. David Freeman, noted that although he has been a long-time alternative energy advocate, he never thought he would be alive when distributed generation became a commercial reality.

He noted that Capstone has been the "beneficiary of the premature, halting and not-yet-successful efforts with deregulation. The price of electricity as a scarcity is such that the old order is sputtering and making room for technology today that we previously saw as decades away."

After almost two decades of development for transportation and other applications, Capstone has the first commercially available 30 kW electricity producing turbines that it claims can operate on eight different gaseous and liquid fuels --- natural gas being the most common. A 60 kW unit is set to be introduced to the market later this year, according to Capstone officials.

While the company has found niche markets in the resource recovery (oil/gas field and biomass applications) and hybrid electric bus areas, longer term the prospect of cogeneration, supplements to grid power, power quality and standby generation application on or off of the transmission grid is where Capstone is betting its future lies, and initially the bulk of that will be in Asian and European markets.

A combination of environmental and economic advantages are being heavily promoted by the company in selling to distributors, energy companies and utilities in Japan and elsewhere outside of North America.

Capstone has about $200 million in cash to advance its strategy: $150 million for a June 28 IPO in which its stock was offered at $16, closed in the $40 range and has been selling recently between $85 and $95/share. Another $50 million in cash was on the company's balance sheet earlier this summer.

Ultimately, distributed generation needs changes in regulatory rules that make it uneconomic to apply the technology, and Capstone officials said the company will be among the leaders in state, regional and national coalition efforts.

But the company's sales growth over the next 12 to 15 months is based more on other applications of the micro-turbines, and it expects to maintain gross margins in the 40% range, according to CFO Jeff Watts. Single units retail for about $25,000 and there are discounts for large orders by distributors and others.

The high first cost is offset by its virtual "maintenance-free" operating history, Field said. For bus operators, for example, repairs and maintenance on more traditional diesel and gasoline models is traditionally a major expense.

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