Capstone Turbine Corporation Business Information, Profile, and History

Company Perspectives:

With over 3,200 Capstone MicroTurbines worldwide, Capstone Turbine is the leading provider of microturbine cogeneration systems for clean, continuous energy management, energy conservation and biogas-fueled renewable energy.

History of Capstone Turbine Corporation

Capstone Turbine Corporation is a Chatsworth, California company that develops, manufactures, and markets 30-kilowatt and 60-kilowatt micr oturbine generators, capable of supplying the electricity needs of co mmercial and small industrial users. The units, roughly the size of a refrigerator, can be connected to the utility grid or operated as st and-alone units. They are also versatile in terms of the fuels they u se, including natural gas, diesel, kerosene, propane, and waste gases from sewage plants, landfills, and oil and gas drilling operations. The turbine generators operate in much the same way as a jet engine. Fuel is mixed with air to create combustion. A magnet generator, comp ressor, and turbine wheel, all fitted on a single shaft, is then turn ed, generating electricity. The exhaust from the units can also be us ed in a cogeneration system, producing both heat and power. Other adv antages of the microturbines are low emissions and no need for water. All told, there are more than 3,200 Capstone microturbine generators in the field worldwide. Although yet to produce a profit, the compan y is cash-rich and has no debts, the recipient of backing from such d eep-pocketed investors as Microsoft's Paul Allen and Compaq Computer' s Benjamin Rosen. Capstone is a public company listed on the NASDAQ.

Formation in Late 1980s

Capstone was cofounded in 1988 as NoMac Energy Systems by James C. No e and Robin Mackay, who fused their last names to coin "NoMac." Both men brought considerable experience with turbines to the venture. Noe worked at Douglas Aircraft company from 1957 to 1961, involved with aircraft thermodynamic systems. He then spent 17 years at the Garrett Corporation, which became Allied Signal Aerospace, and where Mackay was a colleague. At Garrett, Noe held a number of engineering positio ns, working on aircraft environmental systems as well as seeking out commercial and industrial applications for the company's high technol ogy aerospace systems. In 1979 he became president of Alpha National, Inc., a California company that pursued turbines that could use alte rnate fuels. Two years later he became president of parent company Al pha United, Inc., which developed compact plate-fin heat exchangers a nd cold plates for electronic cooling in the automotive and aerospace industries. Noe struck out on his own in 1986, establishing Creative Energy Concepts in Los Angeles, California, to work on low-cost turb ines that could be used in a range of industrial and aerospace applic ations. Mackay, who held a degree in mathematics and economics from C anada's McGill University, had worked for The Boeing Company's Indust rial Products Division, which made small gas turbines for use in cars and industrial applications. His job was to develop concepts and mar kets for the turbines, the same role he would play during his 24-year tenure at Garrett (Allied Signal), where he served as Director of In dustrial Market Development.

When Noe and Mackay teamed up in 1988 to form NoMac they obtained thr ee master patents related to work the men had done together at Allied Signal. The patents related to a heat pump, a solar power generator, and an interruptible power unit, basic elements of a turbine engine. Noe became president of the start-up and Mackay vice-president of ma rketing. NoMac's mission was to research and develop innovative energ y concepts. In particular, the company wanted to mass produce microtu rbines. In the early years NoMac received financing from Ford Motor C ompany, NASA, and a few others, but it faced a difficult task in crea ting a microturbine. As the Huber Mills Digital Power Report i ndicated in a 2000 article, "A turbine certainly looks simpler [than a reciprocating internal combustion engine], and once it's fin ally built right, it indeed is. A reciprocating engine has far more m oving parts ... but the parts themselves are pretty simple. A turbine 's complex, curved blades, by contrast, are very difficult to machine . And they have to be exceptionally strong, because they just don't g enerate any serious power until they're rotating very fast. A car eng ine redlines at 5,000 rpm; Capstone's microturbine spins at 96,000 rp m. This required advanced materials, very sophisticated machining, an d superb, high-speed bearings." But NoMac struggled to develop such a n engine, its early prototypes consuming more energy than they produc ed. At this stage the focus was on stationary applications, such as p roviding backup power for a building.

Running out of money in 1992 NoMac was fortunate that its efforts cau ght the eye of Harold Rosen, former chief engineer for Hughes Electro nics who had done pioneering work on geostationary satellites, making possible contemporary global communications. After Hughes was acquir ed by General Motors in 1986 some of his colleagues began work on ele ctric-powered cars. Rosen's contribution to the project was a control ler, entitling him to a ride in an early experimental vehicle. He fou nd the concept intriguing, but believed that it would never be viable until something better than batteries provided the power. According to Fortune in a 1996 article, he began looking for an energy s ystem that would be emission-free like batteries but would produce mo re power. Soon he zeroed in on hybrids. A friend at NASA passed along a paper by an engineer who described a proposed high-speed turbogene rator that could be used in a hybrid. Recalls Harold: "It had on pape r everything I was looking for." The author was Robin Mackay. Rosen p aid him a visit and was won over by Mackay's presentation, so much so that he pitched the NoMac turbine to Hughes's automotive section. Be cause GM was committed to batteries, however, Hughes passed. Next, Ro sen called his brother, Benjamin Rosen, an electronics engineer who h ad switched to investing and founded Compaq Computer Company.

Rosen Brothers Buying into Company: 1993

In semi-retirement Benjamin Rosen was closing out his investment fund and looking for a new challenge, having already whittled down his go lf handicap to 18. A car enthusiast--he owned a Porsche 928 and Merce des-Benz SL600--he readily agreed to start a company with his brother and pursue the development of a turbine-powered electric hybrid car. Together, along with funding from venture capital firms Sevin Rosen Funds and Canaan Partners, the Rosen brothers bought NoMac in 1993.

After the Rosens took over NoMac, they installed their own man as CEO , a Hughes' retiree, Paul Craig. The company name did not meet with a pproval from the new owners, but they struggled to think of an altern ative. Ben Rosen had always enjoyed good fortune investing in compani es with two-syllable names that started with "C," such as Compaq, Cyr ix, Citrix, and Cypress Semiconductor. With some help from a CEO of a company that sold naming software he finally decided on Capstone Tur bine Corporation. Noe now became vice-president of engineering, but l eft in 1994 to become president of another microturbine company, Crea tive Energy Concepts, Inc. Mackay left in 1995, eventually founding A gile Turbine Technology, LLC to work on advanced gas turbines. The Ro sens also wasted little time in forming a car company, Rosen Motors, incorporated in May 1993, to develop a complete power train while Cap stone developed the engine.

With Craig in charge, Capstone moved quickly to complete its first pr ototype, a 24-kilowatt turbine (the equivalent of 32 horsepower) unve iled in 1994. The company now attracted additional investors. In 1995 New Zealand conglomerate Fletcher Challenge Ltd. acquired a 20 perce nt stake, and a year later the company completed a $50 million pr ivate placement of stock with such investors as Microsoft billionaire Paul Allen's Vulcan Northwest, as well as his old partner Bill Gates , who took $5 million of the action. The Capstone microturbine al so caught the attention of Ford Motor Company, which bought a unit to evaluate for use in its hybrid vehicles.

But Capstone was also attracting interest from parties looking to use the microturbine to generate power. Fletcher's involvement proved to be a turning point for the company, since Fletcher was looking for w ays to bring power to remote oil and gas fields, far removed from the electrical grid. Utilities were also interested in trying out the mi croturbines as satellite power plants, and some industrial customers wanted to test the units as part of cogeneration systems, providing b oth electricity and heat, and others sought to make use of garbage du mp methane to produce power through the microturbines. In 1996 Capsto ne placed 37 beta units in the field. The company was still banking o n the automotive market in the long run, viewing the power market as a means to an end: lowering costs and contributing to the development of technology that could apply to the automotive units that were exp ected to emerge around 2005. Although Rosen Motors successfully teste d an automotive power train that used a Capstone turbine in 1997, it was unable to convince any of the major automakers to back the compan y and it ceased operations later in the year. For Capstone, it meant that its focus was now completely directed toward power generation.

In 1998 Capstone named a new CEO, Ake Almgren, a Swede who had been p resident of Power Systems for ABB, the giant European engineering con glomerate. He had been involved in the development of such cutting-ed ge technology as fuel cells, flywheels, and mega-powerchip systems. H e recognized that utilities were turning to smaller power plants but was unable to convince ABB to become involved in distributed generati on, producing power on a small-scale basis at multiple locations rath er than in massive installations. In 1997 he bought a Capstone microt urbine, was won over by the technology, and a year later, in July 199 8, he became Capstone's CEO. He soon made key contributions to the re finement of the turbine's design, in particular the addition of solid -state electronics that allowed the turbines to perform seamless hand -offs between the microturbine and the electric grid it might be conn ected to or between a cluster of microturbines. Capstone sold its fir st three commercial units in 1998 to Southern Union in Galveston, Tex as. The company shipped more than 200 units the following year.

Taken Public in 2000

As Capstone geared up for an initial public offering of stock in 2000 , the state of California, where electricity had been deregulated, su ffered from a power shortage that resulted in rolling blackouts. As a result Capstone received a great deal of attention from Wall Street. With Goldman, Sachs & Co. and Merrill Lynch & Co. acting as underwriters, the company sold 9.1 million shares at $16 a share on June 29, 2000. The stock immediately shot upwards, closing at $ ;48 by the end of the day, and as the energy crisis grew worse Capsto ne continued to surge, peaking at $98.50 in August, giving the co mpany an astounding market capitalization of $7.5 billion. Capsto ne also found no difficulty in lining up alliances with major reselle rs. In March 2000 it reached an agreement with Meidensha Corp. and Su mitomo Corp. to distribute the microturbines as part of cogeneration systems. Later, Mitsubishi agreed to distribute the generators in Jap an and Asia. In addition to 16 U.S. distributors, Capstone now had 27 distributors in seven countries and more deals in the works.

Capstone sold 790 30-kilowatt units in 2000 and introduced a larger 6 0 kilowatt microturbine as well. Enthusiasm for the company's prospec ts quickly waned, however. The stock price tumbled to less than $ 18 in late November, rallied back to the $40 level, but as sales tailed off in 2001, due in large measure to an economy slipping into recession, the company's future became uncertain and the price of its stock plummeted below $3.50.

The economy continued to struggle in 2002, as did Capstone, whose sto ck dipped to the $1 level. The company did receive some good news when United Technologies Corp., a $28 billion company serving th e aerospace and building systems industries and a major player in the commercial fuel cell sector, bought a 4.9 percent stake. But Capston e also had to contend with the uncertainty that came with turnover at the top ranks. In October 2002 Almgren announced that he planned to retire.

One factor in Capstone's favor in what was an otherwise bleak year wa s the reported $126 million it held in cash or cash equivalents i n 2003. It was not until August 2003 that the company finally settled on Almgren's replacement, hiring John Tucker, a mechanical engineer by training who had previously served as CEO and chairman of Daimler Benz Aerospace Motoren & Turbine Union in Germany. He had also wo rked at Allied Signal Aerospace. Less than two weeks later, Capstone received a great deal of renewed interest following the power outage that affected large portions of the Northeast and Midwest. Once again the ideas of distributed generations, or buildings generating their own electricity, began gaining currency, just as they had during the California crisis and other major outages. "Now, in the wake of last week's more-sudden blackout, the biggest in U.S. History," reported t he Wall Street Journal, "distributed-generation backers are ar guing that their time has come." Tucker commented, "One couldn't ask for a more exciting marketing and advertising campaign than what happ ened in the Northeast."

Tucker set to work on refining Capstone's distribution operation, par ing down the network of distributors and hiring more in-house salespe ople who were microturbine experts. New York City soon became Capston e's largest growth market, spurred in 2005 by Manhattan's Department of Buildings approval of the company's microturbines without permits. The dramatic rise of fuel price also bolstered the company's prospec ts, but in 2005 Capstone posted sales of just $17 million and a l oss of $39.4 million. At the very least, its future was uncertain .

Principal Competitors: Caterpillar Inc.; Cummins, Inc.; Ingers oll-Rand Company Limited.

Chronology

• Key Dates:
• 1988: Company founded as NoMac Energy Systems.
• 1993: Benjamin and Harold Rosen and investors acquire NoMac, r enamed Capstone Turbine Corporation.
• 1994: Prototype is unveiled.
• 1998: First commercial units are sold.
• 2000: Initial public offering is completed.
• 2003: John Tucker is named CEO.