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Capstone Turbine Eyes IPO as State Prepares New Rules

Capstone Turbine Eyes IPO as State Prepares New Rules

As state regulators and utilities gear up for the advent of distributed generation, one of California's native sons and the first company in the nation to market commercial distributed power generation systems for businesses, Capstone Turbine Corp., is preparing for its own $115 million IPO later this spring.

Woodland Hills, CA-based Capstone is one of several dozen special interests from both the private and public sectors that filed testimony with state regulators earlier this month as part of year-long effort to facilitate a smooth entrance for distributed generation into California's restructured electricity market. The first of two phases of hearings begins next month in San Francisco with everyone from Enron to the Turlock (municipal) Irrigation District putting in its two-cents-worth of advice.

Despite the advent of new state rules and a head start on most of its competitors, 12-year-old Capstone is awash in red ink and expects to stay that way at least through fiscal year 2001, according to documents it filed with the Securities and Exchange Commission as part of its preparations for going public. A spokesperson for the 156-employee firm said an SEC-imposed "quiet period" prohibits Capstone from commenting on either the state regulatory proceedings or the pending IPO.

Capstone's 1999 results produced $6.6 million in revenues, but a net loss of $29.5 million, for the calendar year ended Dec. 31, 1999. This compared to revenues of $84,000 the previous year and a $5.3 million loss. Commercial sales began in December 1998, so before that the company essentially spent a decade in a research and development mode. In 1999, it said 211 units were shipped on customer orders of 521 units, leaving an order backlog of 310 units at the end of last year.

From its inception, Capstone has received more than $260 million in private equity capital, some coming in the mid-1990s from Microsoft co-founder Paul Allen's venture capital group, supporting a series of national beta tests, according to Capstone's IPO filing and its president/CEO Ake Almgren. Operating losses over its 12-year history top $120 million.

Nevertheless, the mostly natural gas-fired small power generating turbines in the long run are going to be produced and distributed profitably, according to the company's filing

"Since the commercial release of the Capstone Micro Turbine, demand has continued to grow and it is anticipated to accelerate as successful results from early adapters and new applications are recognized in the distributed generation market," Capstone stated. "To accommodate this increased demand we are increasing the scale of our operations, including the hiring of additional personnel, resulting in higher operating expenses. We believe these increased operating expenses will enable us to realize accelerated revenue growth."

Capstone makes a 30 kW microturbine, sub-assemblies and components that can be fueled by natural gas, or in part by propane, sour gas, kerosene and diesel. It is committed to developing other products, however, including some cogeneration applications.

The California Public Utilities Commission is in the midst of a proceeding begun at the end of last year to tackle the politically and economically sensitive issues inherent in distributed generation, including the question of whether incumbent regulated distribution utilities by virtue of their market power should be excluded from the emerging small-scale power generator business.

In establishing a formal proceeding expected to result in new rules and the need for some new state laws, the CPUC took a more cautious approach to the broader issue of whether there eventually should be competition in local electricity distribution, the so-called "wires" business monopolized by either private or public sector utilities for the past 100 years.

In the midst of all of these tricky issues, some of the participants, such as Enron and the major natural gas utilities in California, want to have some discussion of distributed generation's projected impact on the state's natural gas infrastructure, too. To date, the gas companies are embracing the advent of distributed generation as another means of assuring their role in the production of electricity in the state.

Richard Nemec, Los Angeles

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