Friday, March 23, 2012

UTC's Clipper Sale Underscores Harsh Wind Power Market Realities

Hartford, Conn.-based United Technologies Corp. (UTC) announced on March 15 that it was selling off Carpinteria, Calif.-based wind turbine manufacturer Clipper Windpower as part of a strategy to acquire Goodrich Corp., a supplier of systems and services to the aerospace and defense industries.

To help fund the Goodrich acquisition, UTC is also divesting its Pratt & Whitney, Rocketdyne, Milton Roy, Sullair and Sundyne business units.

UTC acquired 49.5% of Clipper in December 2009 for about $270 million. Less than a year later, UTC spent an additional $112 million to acquire Clipper's remaining shares.

At the time of the acquisition, it was expected that Clipper could leverage UTC's management and operational expertise, as well as its technology in blades, turbines and gearbox design. Further, it was thought that Clipper could build on UTC’s existing portfolio of energy-efficiency products and power generation systems, which are manufactured by UTC’s Pratt & Whitney business unit.

Despite the synergistic potential, the current market challenges in the wind industry call into question not only the sector's short- and long-term viability, but also UTC's long-term strategy for Clipper.

The crushing market realities
While UTC characterized Clipper as no longer core to its operations, Gregory J. Hayes, the company's senior vice president and chief financial officer, was far more candid during an analyst call last week.

"We got into this business with the thought that there was going to be a renewable energy mandate in this country - and there has not been one," he said. "We entered into this business thinking that the growth we've seen in the last five years would continue as a push for renewables in this country. And, in fact, that has not happened. It really has made wind power less economic than anybody had anticipated two years ago."

Market realities aside, Hayes also questioned if UTC should invest further in Clipper's turbine technology to go heavily into the offshore wind market.

"If we're going to stay in this business, it requires significant additional investment," he said. “Clipper makes a very good machine in the 2.5 MW class. But where growth is going to come is in the higher 5 MW class, and it's going to come from offshore [which will] require hundreds of millions of dollars of investment. And quite frankly, we're not going to do it."

Shortly after UTC's announcement, industry reaction was mixed.

"Given the market's uncertainty, UTC concluded that a low-margin, high-risk, highly capital intensive business is not where they wanted to spend their investment dollars," Brian Redmond, managing director at Paragon Energy Holdings, a principal investment firm that provides financial advisory and commercial asset management services in the energy sector, told NAW.

"The current low energy prices negatively impact energy sale margins, and the uncertainty around a long-term [production tax credit and investment tax credit] and/or comprehensive renewable energy mandate adds market risk,” he added.

However, UTC’s announcement came as a surprise to some.

"I was surprised by a few things," Dan Shreve, a principal at MAKE Consulting, told NAW. "Firstly, [i] that UTC does not recognize that there are growth markets in the Americas outside of the U.S. - especially in Mexico, where Clipper has had success in the past. Further, I would assume that a large conglomerate such as UTC would take advantage of the near-term market weakness in the U.S. to retool Clipper and make a strong push when the market recovers in the mid term."

Shreve speculated that UTC's motivation for the sale may have been an offshore wind-only strategy similar to that of AREVA.

However, he said, UTC is "spot-on" when it comes to development spending being quite significant, as evidenced by recent announcement from Vestas indicating the wind turbine manufacturer would be willing to entertain a strategic partner to help offset the development costs of the massive V164 turbine model.

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