United States

United States

A DIFFERENT MARKET APPROACH

New World Power Corp of Lime Rock, Connecticut, is steadily gaining ground in both the USA and worldwide as a major wind plant developer. It has given itself two years to get on its feet and so far plans seem to be on schedule. New World is manifesting itself as more of a holding firm than a manufacturer. It buys up smaller firms and a majority interest in larger ones. New World is relatively debt free on a holding level and is moving from a cash poor state to a positive cash flow condition now.

According to New World its powerful alliance with Westinghouse Electric Corp opens huge overseas markets. The article lists a large number of initiatives completed or underway in New World's attempt to build a large business and financial framework.

Two years after it became the first wind company to go public, New World Power Corp of Lime Rock, Connecticut is growing at a fast clip that makes it an increasingly serious contender in the worldwide wind market. As well as the US company's powerful alliance with Westinghouse Electric Corp, announced this summer, the closely held public company is strategically edging towards overseas markets in Europe, Latin America and Asia as well as gaining a secure foothold at home.

Its tack is different from Kenetech Corp of California, the only other publicly traded wind company. In July New World announced an exclusive worldwide joint venture with the giant Pittsburgh-based Westinghouse to corner and complete contracts, operation and maintenance of renewable projects in both developed and the Third World countires. But aside from this alliance, New World is more a holding rather than manufacturing company, concentrating on selling power and farming out functions to subsidiaries or outside companies. It consists of the Grid Power Company, headed by Clare Lees of New World-owned Field Service and Maintenance in Palm Springs, the Village Power Company overseen by Bruce Levy, formerly of O'Brien Energy, and the Wireless Company led by Robert Kauffman of Photocomm Inc.

In the last few years, New World has bought up marginal wind farms in California and Hawaii while talking of major future development overseas. In contrast to Kenetech, its stock is closely held, mostly with larger longer term institutional equity investors in the United Kingdom, Canada and the US.

This calendar year, New World is on schedule in its overseas projects, if not its domestic retrofitting business. But revenues are growing more slowly than predicted nine months ago when they were bullishly budgeted at $35.4 million for 1994 and $101 million in 1995, according to a report paid for by the company and issued in March by Redington Inc. John Kuhns, founder and chief executive officer, said in mid October that it was too early to predict revenues for this year. Others, however, say they may be $20 million and $45 million next year.

Some of the discrepancy between the predictions and reality may be lag, attributable to market uncertainties in California and Mexico and, for example, a slower pace of doing business in China, which New World expects to become its largest overseas market after Latin America. The impact of other factors is unclear -- electricity market deregulation, environmental and political hurdles in Europe, and difficulties of doing business, construction and maintenance in the Third World apart from China.

Projects planned

Still, New World's plans and announcements seem impressive. It will undertake an approximately $50 million public offering next year, which the company hopes will be underwritten by Morgan Stanley & Co, says John Kuhns. "It's part of our plan of taking two years to get on our feet." The former sculptor adds confidently "We're shooting for before the summer."

New World has just signed a $29.5 million joint venture, in mid October, with China's sixth largest industrial group, while in Mexico, the company hopes to build 100 MW of wind plant in 1995, not for the grid but for government entities for uses such as water-pumping from aquifers. The International Finance Corp of the World Bank may apparently be the lead underwriter. Ultimately, the company says the capacity in that area of Mexico, La Ventosa, is a mind-boggling 20,000 MW, an amount so astonishingly high that some are sceptical, especially when the figure appears in financial reports about New World as a future "power project." The company does acknowledge, realistically, that it expects to develop 200 MW a year for the next decade.

In October, New World acquired a majority interest in Photocomm Inc, a rapidly growing supplier of wireless solar systems in Arizona. Also in October it bought all of the common stock held by two of New World's minority owned subsidiaries, Arcadian Power Corp, which operates 400 wind turbines in California's Altamont Pass, and Wolverine Power Corp, which owns four hydro facilities in Michigan totalling 10.5 MW in capacity. The two purchases followed about $11-12 million raised in August in a private so-called "regulation S" placement with investors primarily in Europe and Canada. Also in October, New World acquired 51% of the stock of Argentina's Solartec SA, a photovoltaics fabricator and distributor. And the company signed an agreement with Alaskan Native Corp for the development of a 2-4 MW wind-diesel project on St Paul Island.

In California, the Biennial Resource Project Update process is still hugely complicating future development throughout the state, not only for New World, but also for the entire wind industry. And in Mexico, the uncertainties surrounding the federal election on August 21 and January's Indian uprising in Chiapas, not that far from the Oaxaca region of La Ventosa, have delayed financing for projects, say sources. The uprising, however, may underscore the need for rapid, decentralised development in Mexico, New World contends.

New World has said it will sell its Mexican power to state governments in Oaxaca, Tabasco and Veracruz for about $0.10/kWh and any excess will be sold to the national utility in Mexico for about $0.06/kWh, according to a friendly investment report by Oakes, Fitzwilliams & Co Ltd of London (Herbert Oakes is on New World's board and is a large shareholder). But no bidding has yet taken place, says the utility. And if it does, as it must for any wind project over 20 MW, it will be competitive with no preconceived outcome, says Roberto Cadenas of the Comision Federal de Electricidad.

Observers wary

Outside views of New World vary. Kuhns, who took two companies public before New World, is known on Wall Street for his ability to raise financing. "You've got to remember, electricity is the second biggest user of capital in the US after real estate -- it takes a lot of capital to pull it together," says one financial man close to the company. After Kuhns founded Catalyst Energy Corp in 1982, its revenues grew from $10 million when he took it public in December 1984 to $400 million in 1988, making it the fastest-growing company in the mid eighties, said Inc Magazine. According to the New York Times, Kuhns' success was in part due to fancy footwork and an ability to exploit loopholes in regulations.

But the fall was sudden too -- the stock, once as high as 30, plummeted to 3 3/4 during the Wall Street crash of 1987, before rising again to 11 1/2. Key investors were alienated, some worrying that Kuhns had stretched himself too thin; lawsuits were filed by disgruntled investors. Ultimately, he sold to a group led by EdPer Bronfmans of Canada and T Boone Pickens Jr.

"He hosed a ton of people with Catalyst," said one well informed Wall Street man. "Catalyst had fallen on its sword and a lot of people got hurt." Another financial observer, who watches wind, commented on New World's strategy of sifting though the wreckage of fast growth California wind farms and buying seemingly marginal projects. "They're picking up scrap projects. I think it's a viable strategy if they can buy them cheaply enough," he said.

New World, however, differs significantly from Catalyst in crucial ways. "It's relatively debt free at a holding company level," says one observer. Non-recourse debt is raised at the facility level. In addition, stock in the company is mostly foreign owned. About 65-70% of the institutions -- which Kuhns describes as "high-quality and deep-pocket" -- holding its stock are British, 10% in Canada, and the remainder are American. Such companies are, says Kuhns, less likely to sell on the first quarter of bad news and less likely to buy on a whim.

Although New World has reportedly been cash poor in the past, its California wind farms -- the Fayette project in the Altamont Pass and Smith Wind in Palm Springs -- are now what is called "cash flow positive." But questions remain within the wind industry. One observer said only about 50% of the Smith Wind turbines were operating this summer. "Why wouldn't they fix that, unless they have no money?" he asks. "It would be immediate income during the wind season and they'd recoup any investment on repairs within a year."

Kuhns responds, "As I look at Smith Wind, it's operating profitably." The response of Clare Lees, president of Grid Power, is also quick. He says the project is being refurbished jointly with Nevada Power. But since it is on a lucrative Standard Offer 4 contract to expire in April, New World is cautious about refurbishing unless absolutely necessary, says Lees. "We've been select about what we're taking off line to rework," he says. On October 27 he said 14 of the 22 ESI turbines were finished and 16 or 17 of the 52 Vanguards. Another 8 MW in Palm Springs will also be built out when the California market is more predictable, he says.

The Fayette machines -- on a more-complex Standard Offer 1 contract -- will be retrofitted soon and the project ultimately expanded, says Kuhns. The company's three British projects, too, will generate cash when the combined total of 13 MW comes on line in November, apparently at a very profitable rate.

Long term alliance

In the longer term Kuhns stresses overseas markets and New World's alliance with Westinghouse. He notes that for a nascent industry such as wind, electric utilities and financial markets are more trusting with involvement from a major company they know. However, he says New World did not buy into Hawaii with a view to forging the alliance. New World, by acquiring Hawaiian Electric Renewable Systems, got the licence to market and manufacture the Westinghouse turbine in Hawaii. It had also been retained to modify the turbines through Northern Power Systems (NPS). New World asked Westinghouse if it could make and market the Westinghouse machine worldwide after modifications. But, to the surprise of Kuhns, Westinghouse instead offered the exclusive agreement. (The Fortune 10 giant, according to Kuhns, apparently did not want a wind turbine being sold with its name on it.) New forward-looking top executives were brought in at Westinghouse in 1992, continues Kuhns. "I didn't think in a million years that would have happened without their new management." After a year of negotiations, the deal was announced.

Of the South American market, Paul Tobin of Westinghouse notes that his company especially sees near term potential in Mexico and Brazil and is very active in Argentina, Venezuela, Ecuador and Peru. In the next ten years, 50% of the new electricity capacity needed in the world will be in the Pacific Rim, and half of that in China alone, he says. Village power systems also hold much potential, particularly for repowering in the US. He also mentions Taiwan and Vietnam. Amazingly, the deal with New World is only the eighth major alliance for Westinghouse, a Fortune 100 and Dow 30 company, since its first with Mitsubishi in 1924, confirms Tobin. The venture with New World, however, is of a vastly different scale than Westinghouse's other alliances with household name companies such as Rolls Royce, he says.

In the meantime New World is steadily developing its business and financial framework, with a number of initiatives completed or underway:

¥ Next year, the company expects to undertake a large public offering. The secondary offering will be larger than anything the company has so far done, says Kuhns. It might be about the same scale as that of southern California wind company Zond Systems Inc, which is trying to get government approval for a stock offering of almost $47 million. Nothing has been finalised, but he says he would like Morgan Stanley & Co to underwrite the offer. Earlier this year New World, which is too small to be well known yet in the investment community, engaged Morgan Stanley as its investment bankers to raise some $250 million of non-recourse project financing.

¥ In mid October New World formed a $25.9 million joint venture with Chinese and Taiwan companies to develop renewable energy projects in China. Shenzen Chang Jiang New World Power Company will be held 65% by New World, 30% by China Chang Jiang Energy Co Group of China -- the sixth largest industrial group in China -- and 5% by Metropolitan Enterprise Corp of Taiwan. The deal, announced October 15, follows a letter of intent signed this summer with the companies. Letters of intent have been signed with two power companies to purchase a total of 75 MW of wind. The projects will be built in 1995 if the government authorities authorise them, he says. "We know the projects are feasible and will be built. We're just refining our data," he says. The venture, based near Hong Kong, will expand tenfold in three years, Chang Jiang president Yu Zhian said when it was announced. Business will start in China but expand throughout the Pacific Rim, he said.

¥ New World's alliance with Westinghouse, which now owns 5% of the renewable energy company, includes production of a turbine licensed by Enercon but made in the United States, possibly Texas, at least initially, according to an unconfirmed report. In addition a Westinghouse brochure on the New World alliance, pictures Enercon turbines exclusively -- apart from one photo of New World's Hawaii facility of Westinghouse 500 kW turbines -- but does not name them. "New World Power Corporation is one of the world's most experienced generators of wind power and is the developer of the world's largest wind facility," says the brochure. "That expertise is complemented by Westinghouse's global leadership in power generation and reinforced by an advanced design, meticulously engineered wind energy converter."

¥ TU Electric of Dallas submitted its 1995 Integrated Resource Plan to the Public Utility Commission of Texas on October 25. The utility has chosen New World to build an 80 turbine plant near Big Spring. The project, financed by General Electric Credit Corp, which will also own the equity in the project, will reportedly consist of Westinghouse-New World turbines. Enercon is apparently unable to use its Deutschebank financing for turbines made in the US. New World is expected to make $500,000 a year as facilitator of the project with little risk involved.

¥ New World has secured project financing for its Wales wind farm, one of three it is developing in Britain with a total capacity of 13 MW, from Hambros Bank Ltd of the United Kingdom. The Welsh wind plant is to cost some $7 million. By October 26, four of the 11 Nordtank turbines had been installed at the site, near Whitland, Dyfed. The project will be completed this month. Kuhns believes the British Isles market is some 2000 MW.

¥ New World's Village Power Unit, which is targeting Alaska, northern Canada, Mexico and Central and South America, has agreed to exclusive terms to develop a wind-diesel project with publicly traded Tanadgusix Corp on an Alaska island where the Alaskan Native Corporation is the main landholder.

¥ New World will only manufacture wind turbines at its Vermont NPS site in situations where the company cannot work out an arrangement for manufacturing with Westinghouse, says Kuhns. "We don't want to be a manufacturing company. We think others are better at it," he says. NPS offers a North Wind 250 as well as hybrid or solar packages, according to current company literature. Kuhns has predicted that by the year 2000, NPS will be a billion dollar operation because of the size of the remote market.

¥ New World acquired a 51% interest in Solartec SA of Argentina, which is being considered for a $2.4 million rural electrification scheme in the state of Santa Fe. Although the Argentinean company is involved in solar, the move is significant. "There are no barriers to independent power [development] in Argentina," says Kuhns.

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