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Drive train retrofit means more delays -- Further bad news from Clipper on Liberty component problems

Trouble for American wind turbine manufacturer Clipper continues. In yet more news that will lead to delays in meeting customer orders, the company is reporting what it describes as a "supplier quality deficiency" in the secondary stage of the drive train in the company's flagship Liberty 2.5 MW turbine. The problem could affect the component's operating life. Turbines already turning may be affected and repair costs are expected to run to $10-15 million.

Company CEO Jim Dehlsen says it is still in the process of identifying units that may require a retrofit. Field assessment of 57 units is expected to be completed by early 2008.

The drive train component deficiency is the third component problem since Clipper began ramping up its manufacturing, says stock analyst Michael McNamara with investment bank Jefferies & Co. He cites earlier problems, reported by Clipper late last year, relating to machining tolerances in the housing of the first gearboxes, as well as a more recently reported gearbox issue with pinion cartridges, which are part of the mechanism to step-up rotational speed between the rotor and the generator. The Liberty's gearbox is supplied by Brad Foote Gear Works, a well established company in Illinois with relatively little experience in the wind industry. Clipper has set aside a further $2.9 million to solve the pinion problem. Together the two most recently reported component defects have cost the company $40.8 million, it reports.

The pinion issue was minor but the drive train item is larger, says McNamara. "The only thing that worries me -- and I don't believe this is the case -- but one question you have to ask yourself is: is this a supply issue or a design issue?" McNamara believes it is purely the component supply issue Clipper says it is and calls the issue a classic teething problem. He adds that hopefully it is the last one.

Confidence

Clipper's biggest customer, BP Alternative Energy, says it is satisfied with the company's responses so far. "We continue to have confidence in the Liberty turbine and are satisfied with the technical changes Clipper made to the gearbox," says BP's Bob Lukefahr, which inked a contingent deal last year for 1706 Clipper turbines. Last month BP activated part of that deal, ordering 120 units for delivery in 2009. BP is in the process of building the 60 MW Silver Star project in Texas, which, he says, will use Liberty turbines with gearboxes manufactured using new processes. Lukefahr did not comment on the more recent drive train issue.

McNamara cautions that the Clipper drive train problem will have a wider impact, slowing down both development and needed capital infusions. Clipper stands to gain a major reinsertion of cash once it commissions and sells its Endeavor wind project to FPL Energy, a 100 MW plant being built in Iowa's Osceola and Dickenson counties. Clipper missed its original completion date on the project, which was set for spring 2007, and will now face a further delay coping with the drive train repair work.

The run of negative news had its impact on Clipper's share price, which last month was sent down to £497, close to its 52-week low of £488 (page 75). But McNamara calls the high of over £900 in the previous month "very overvalued" and says his bank is comfortable with the lower stock price. Clipper is traded on the Alternative Investment Market (AIM) of the London Stock Exchange.

Clipper says the quality deficiencies are not related to turbine design, specifications, or the assembly process but are attributable to the component suppliers' manufacturing processes. "We got on this thing with a vengeance, we probably had 30 engineers involved in the process both internally and from various suppliers," says Dehlsen, who describes Clipper's action as an "exemplary response."

Positive news

In the midst of issuing bad news on its technology to shareholders, Clipper also announced the hiving off of its wind development business into a separate company dubbed CAPGEN, or Clipper Capitol and Generation. CAPGEN is a partnership with Helium, the renewables division of Hemeretik, a large Spanish construction and real estate group. While Helium's share makes up less than 10% of Capgen's total portfolio of 10,500 MW, mainly in the US, the appointment as CEO of Pedro Barriuso, a veteran of the wind development industry, is a major part of the deal for Clipper, says Dehlsen.

Barriuso previously ran IberRenova, the renewables division of Iberdrola, today the owner of more wind assets than any other company. He left Iberdrola to start Helium in June 2006 and was soon joined by a group of former Iberdrola colleagues. They make up "a sizeable chunk" of Helium's staff of 25, he says. Via Helium, Hemeretik brings 1020 MW to CAPGEN's total portfolio. About 60 MW is from photovoltaics, with the rest from wind in Europe, says Barriuso.

Through Helium, CAPGEN is already building 15 MW in Spain, where most of the European portfolio is located, says Barriuso, though he declines to identify the location of that or any other project, citing "confidentiality." Other projects are located in Romania, Bulgaria and Greece. The Spanish build-out does not use Clipper turbines but technology from Spain's Ecotècnia, which was recently acquired by Alstom, an engineering multinational headquartered in France.

Outside the framework deal with Clipper, CAPGEN "is not bound to any technology and we have freedom to negotiate the best turbine," says Barriuso. He is almost exactly quoting himself from his days at Iberdrola, when the company nonetheless consistently chose turbines from Gamesa, in which Iberdrola is the biggest single shareholder. Clipper's 72% stake in CAPGEN gives it absolute control of the joint venture.

Full order books

Dehlsen is not concerned about Clipper's ability to meet orders. He characterises the BP contracts as near-term while much of CAPGEN adds demand farther out around the three to four year mark. "All this stuff is pretty well scheduled out," Dehlsen says. "We think we've made pretty good progress in our manufacturing considering you always have a few bumps in the road as you start up but I think the overall trajectory that we're on is a pretty strong one." Separation of project development into CAPGEN will help Clipper focus its efforts and technical talent on ramping up manufacturing, he says.

Ever since his days leading wind project developer and turbine maker Zond in the 1980s, Dehlsen says he has always had a preference for being both a turbine manufacturer and a power producer. "The most basic thing with Zond was that we wanted to be power producers and I think that really served us well because when times got tough we had power production there to get us through," Dehlsen says, adding that this approach is a much stronger model than being just a turbine manufacturer or just a developer, partly because it diversifies the income stream and provides more opportunities to re-inject financing into the company.

McNamara does not buy Dehlsen's concept. "They're two different businesses and the capital needs are tremendously different -- I'm just not sure how well these two go together," he says.

First half year

Clipper's cash burning tendencies reached new heights in the first six months of the year, with the company posting a net loss for the period of $78 million on revenues of $20.3 million. Losses last year were $11 million for the same period. About half of this year's deficit resulted from fixing problems with drive train components. "Key production risks continue to be the ability of component suppliers to meet quality standards and required delivery schedules," says Clipper. Another $23 million in losses was related to the two US wind projects built or building that use Clipper wind turbines (Windpower Monthly, September 2007). Clipper has reduced its expected production capacity from 200-250 units for 2007 to between 125-145 turbines. Investors had been given fair warning of the poor half year results and Clipper's share price on AIM was largely unaffected by their release on September 28.

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