powered by GlobeinvestorGold.com

Harry Koza

In this Issue

Power to the people

Harry Koza

TORONTO (GlobeinvestorGOLD) I am a techno-peasant, I freely admit it. My few forays into the sporty world of technology stocks have had mixed results. I made a nice pass once on a little Nasdaq bulletin board fuel cell stock, but I'm also down a ton on an RFID (radio frequency identification) stock that I still own.

In a column for GlobeinvestorGOLD back on October 1, 2004 ("Cash at Work"), I mentioned a little tech company in the U.S. hat I liked:

Capstone Turbines. They make micro-turbines for generating electricity. It's a very, very cool technology, (distributed generation is the wave of the future in electricity I just wish someone would explain that to Queen's Park) but a lot of major global players are entering the market (Volvo, ASEA, Toyota, Ingersoll-Rand) and Capstone is burning through cash at a pretty stiff rate. The company has cash resources for another year or two, and trading at only $1.50 (U.S.), might make a good punt. But don't blow the mortgage money. As my proctologist likes to say: 'watchful waiting is the likely the best thing to do.'

By June this year, the stock was down to a buck a share, and I figured it was starting the death-spiral thing, and was congratulating myself on having had the prescience not to buy it. Then, it being summer and all, I didn't pay much attention to it for a while, being rather more preoccupied with summer things, like sitting in my back garden with a tall gin and tonic and meditating on how high oil prices might go.

Wouldn't you know it, though, about the first of August, the dang thing started to go up, and it closed September 1 at $5.05 (U.S.) a share. Unfortunately, I never noticed until last Friday, when it had already broken above $4. Coulda, shoulda, woulda! That's what you get when you basically follow the old market adage, "sell in May and go away."

The last time I looked at this outfit, they were burning through cash faster than a Montreal advertising company with a federal government sponsorship contract. Had their fortunes changed?

Capstone now has over 3,000 of its microturbine co-generation plants installed worldwide, and on Jan. 1, 2005, had racked up eight million operating hours. There's a counter on the company website: they now have over 9.5 million fleet operating hours.

The Capstone Microturbine is a sleek block-shaped box about the size of a refrigerator. It can stand alone or be hooked up to the power grid to sell excess power, though don't hold your breath waiting for the apparatchiki at OPG to allow that to happen here in Ontario. (That might help explain why there are a handful of Capstone Turbine installations in Alberta, but none in Ontario). They come in two sizes, 30 and 60 KW. The 30 KW model cranks out enough juice to power the average convenience store, with its banks of coolers and slurpee machines, and also generates 300,000 kilojoules an hour of heat. That's enough heat to raise the temperature of 20 gallons of water a minute by 20 degrees Fahrenheit.

The C60-ICHP model is 80 per cent efficient, and produces 60 kW of three-phase power and 120 kW of thermal energy. According to DOE statistics, conventional boilers and utility power generators burn approximately 50 per cent more fuel to create those same energy outputs. A top of the line wind-electric generator, by comparison, such as the ones being built for the Ontario grid, can hit 50 per cent efficiency, assuming the wind is blowing.

If you need more power, you can buy a six-pack of these things and snap them together, as they are completely scaleable. Plus, their patented air-bearing system means they never need lubrication, handy when you've got one stuck out in the middle of nowhere powering a bush camp, and are air-cooled. The advanced combustion technology means they can burn just about anything: propane, kerosene, sour gas, diesel fuel, low BTU gas, agro-digester gas, landfill or sewage gas and far more efficiently than other types of generator. Burning diesel fuel, a Capstone Turbine produces less than a tenth the emissions of a conventional reciprocating diesel generator. NOx emissions are also vastly lower than other types of generation.

Sophisticated electronic controls, including an "air-cooled IGBT-based (insulated-gate bipolar transistor) inverter with advanced digital signal processor-based microelectronics," whatever that is, run the turbine. These controls can start the thing up, manage the load, and co-ordinate it with the electrical grid, while managing the speed, fuel flow and exhaust temperature of the turbine, and converting the electricity into your choice of AC or DC current. You can also operate it by remote control.

The Capstone Turbine was the first to be certified under California's stringent new distributed generation emission standards, and the "Rule 21" grid interconnection standard. It has also been certified for connection with the New York State power grid.

Anyway, while I could wax on all day about how cool these things are, I'll leave it to the interested reader to check it out on the company website. There's a lot of technical info in their 10-K filing, which you can find on the web.

Here's the rub, though and you'll find this kind of thing in the SEC filings of just about any tech start-up:

Since inception, we have incurred annual operating losses. We expect this trend to continue until such time that we can sell a sufficient number of units and achieve a cost structure to become profitable. Our business is such that we have relatively few customers and limited repeat business; therefore, we may not maintain or increase net revenues. We expect cash usage rates to increase in the near-term. We may not have adequate cash resources to reach the point of profitability, and we may never become profitable. Even if we do achieve profitability, we may be unable to increase our sales and sustain or increase our profitability in the future. A sustainable market for microturbines may never develop or may take longer to develop than we anticipate, which would adversely affect our revenues and profitability.

(Emphasis added.)

Yow! That's not exactly brimming with enthusiasm, is it? In their fiscal year ended March 31, 2004, Capstone lost 47.739-million (58 cents a share) on 12.6-million in sales. For fiscal 2005, they lost $39.4-million (47 cents a share) on sales of $17-million. An improvement, but they're still burning cash faster than Ottawa's gun registry.

For the current year the company aims to double sales, reduce the burn rate and generate positive gross margin. By the end of fiscal 2007 (March 31, 2007), they plan to be cash flow positive. By July this year, the company had orders for 9.8 megawatts of turbines, and an order backlog of 17.1 MW (more than they shipped in all of last year).

As of March 31, 2005, they still had $63.5-million in cash and about $73-million in total current assets, so they've likely got enough cash to last them for another couple of years even to profitability, if all goes according to plan.

This is a technology with tremendous potential. I still like it a lot. The units would be ideal to help restore power to areas devastated by Hurricane Katrina, for example, and I like to imagine a four-pack of microturbines powering a handful of houses (and heating and cooling them) in my neighbourhood, while putting excess power into the grid. The idea of getting a cheque for power sales to Hydro One, instead of them sending me a big fat honking bill every month, is one I find completely beguiling. If I owned an apartment building, a farm, a small industrial business, or was still in the exploration trade, I'd be looking into buying one of these units.

Would I buy the stock here? Having passed on it at a buck, it irks me to buy it at $5. Still, the company may have turned the corner, and I'll have to watch it a lot closer now, with a view to maybe picking up a little on a pullback. On the price chart, the stock gapped up last week from $4 to $5, and it's looking a little overbought on the momentum and relative strength indicators, so it could well back up and consolidate a little. I'll be looking for an entry point.

Now, if only Hydro One and OPG would just open the Ontario grid to distributed generation. As we used to like to say back in the sixties, man, Power to the People, right on!

Harry Koza is Senior Analyst in Canadian markets for Thomson Financial/IFR. At various times in his career, Mr. Koza has been a prospector, metallurgist, project manager, engineer, as well as an institutional bond salesman for 15 years. His current area of expertise is in high-yield distressed securities and corporate bonds in general.

Back to top