Capstone Turbine Corporation

Company Overview

Capstone Turbine Corporation® states it is the world’s leading producer of highly efficient, low-emission, resilient microturbine energy systems. Capstone microturbines serve multiple vertical markets worldwide, including natural resources, energy efficiency, renewable energy, critical power supply, transportation and microgrids.

Capstone offers a comprehensive product line-up, providing scalable systems focusing on 30 kWs to 10 MWs that operate on a variety of gaseous or liquid fuels, including natural gas, renewable natural gas, and hydrogen to provide solutions for distributed power generation needs. The company is pivoting its focus to further emphasise energy as a service (EaaS), which is comprised of growing its rental fleet and aftermarket service and components business described as a Factory Protection Plan (FPP).

Our Insight

The Opportunities

Preliminary 2Q21 results were announced on 10/2/20 and on 9/30/20, but with limited information. On November 30th Capstone announced new microturbine gross product orders were approximately $9.5 million for the 2Q21 ending September 30, 2020, compared to $5.5 million in 1Q21, representing a 73% improvement in bookings. On October 2nd, the company announced that for the second quarter ended September 30, 2020, it posted positive cash generated from operations and total cash on hand increased to $16.7 million, up from $16.2 million in the prior quarter ended June 30, 2020. The takeaways are that business is recovering off the pandemic bottom as shown by bookings and importantly the company’s cash balance managed to increase without any dilution. Management attributed the positive cash flow to lower operating expenses and better management of working capital in combination with improving aftermarket service margins and a further rebound in product shipments. It is worth noting that this is the first time the company has produced positive cash from operations since the quarter ended March 31, 2018.

As we pointed out in our Initiation of Coverage Report on September 30, maintaining cash levels and reaching positive operational cash flow are key milestones. Although results could fluctuate quarter to quarter, holding around breakeven on operational cash flow should reduce the need for any dilutive capital unless required for additional growth opportunities.

The second notable event occurred today when the company announced it has refinanced and expanded its Note Purchase Agreement (NPA) with Goldman Sachs in which Capstone issued $20 million in additional notes from the $30 million in place already to a total of $50 million. The overall rate on the $50 million note is now LIBOR Rate plus 8.75% per annum (approximately 9.75% based on current rates) and is due on October 1, 2023 compared to 13% before. More importantly however, is that Capstone now has access to additional capital, which is critical to the company’s ability to grow its Energy as a Service (EaaS) platform. Specifically, the expanded $20 million note will be used to grow the long-term rental fleet from today’s 8.6 MW to 21 MW as well as some corporate expenses. The covenants include requiring Capstone to expand its long-term rental fleet by at least 6.25 MW by the 9-month anniversary of the closing date and 12.5 MW by the 18-month anniversary of the closing date.

The EaaS strategy, if successful, could have numerous benefits including more predictable and stable cash flows and margin expansion, despite product orders and backlog experiencing variability quarter to quarter. A critical factor in making this an attractive business to Capstone is having access to capital at a reasonable rate, which this amended agreement facilitates.

The Obstacles

Execution and the economy remain important variables. Specifically, to meet the covenants of the note, Capstone must secure additional wins as cited above. The company will also have to absorb approximately $1 million in additional interest expense on an annual basis. However, to add perspective, the cash returns on the rental business are attractive and successful execution on the additional 12.5 MW of rental business should boost cashflow meaningfully above the additional cash interest payment.