Analysts question the Capstone buy motives. (Up Front).

Analysts say United Technologies Inc.'s plan to purchase a stake in struggling turbine generator-maker Capstone Turbine Corp. is more about acquiring the state-of-the-art technology than making an investment in the Chatsworth-based company.

On Oct. 28, United Technologies agreed to acquire a 4.9-percent stake in the microturbine maker for an unspecified amount of money. The deal allows the Hartford, Conn.-based firm to market Capstone's gas-fueled electric generators.

The agreement came the same day as an announcement that Capstone founder, chairman, CEO and visionary Ake Almgren would be leaving the company.

United Technologies is a manufacturing conglomerate that builds Otis elevators, Pratt & Whitney aircraft engines, Carrier heating and cooling systems and Sikorsky helicopters.

David Smith, an analyst with Solomon Smith Barney, suggested the Capstone deal is attractive to United Technologies because it could be in a position to get first dibs on the microturbine technology should Capstone call it quits.

"It's still state-of-the-art technology that nobody else has and it's very valuable to whoever has it," Smith said.

Capstone builds 30- to 60-kilowatt generators fueled by natural gas using microturbine technology, similar to that of a jet plane engine, but with one moving part--a turbine that spins while suspended in the air. The technology allows its users to have virtually service-free equipment that lasts for years and can be installed inside a building, unlike diesel-powered generators which are loud and create noxious fumes.

Units retail for $30,000 to $55,000 each.

Capstone has touted its ability to develop relatively quiet generators using turbine technology, while its competitors are only now working on similar devices. In December, General Electric Co. acquired microturbine technology from Honeywell International Inc. to build its own generators.

Despite the state's electricity crisis last year, Capstone was never able to capitalize on the demand for alternative fuel power generators.

Selling just 500 units in 2001, the company is on track to sell only a fraction of that this year, seemingly assuring it of another in a series of losses. In the most recent quarter, Capstone sold just 79 generators, a long way from Merrill Lynch analyst Sam Brothwell's sales projection last year of 4,100 units for 2002.

According to its most recent earnings report, released Oct. 31, Capstone lost $10.8 million on $3.9 million in revenue in the quarter ending Sept. 30, compared to a net loss of $12.5 million on $3.3 million in revenue in the same quarter a year earlier.

While Capstone has continued to struggle, it still has $144.3 million in cash, enough to sustain its current spending rate for several years. However, with Almgren's pending departure, it's unclear how much longer Capstone will continue to operate as an independent entity.

"You have to wonder about where they want to go after that," said Smith.

Almgren will be replaced as chairman by Eliot G. Protsch, a Capstone board member, the company said. Almgren will continue to act as CEO until a replacement is named.

Craig Shere, an analyst with Standard & Poor's who covered Capstone until recently, said United Technologies' move will also give it a foothold in a still fledgling, albeit depressed, energy generator market.

"In any ailing industry, consolidation becomes the path toward survival and the miniturbine market is having problems at every firm," Shere said, "whether that firm is a pure play operation or whether that firm just has a mini-turbine subsidiary."

Shere said that, even if Capstone's technology is superior to that of its competitors, it's still a long way from being a big moneymaker for the company.

"I just don't see this kind of equipment coming back into vogue sooner than '06, and you need power to be constrained again in order to be in demand again," Shere said.

Capstone began its brief life in 1998 when it raised about $144 million in an initial public offering and began trading on the Nasdaq stock exchange. The company went on to develop its state-of-the-art turbine-powered generator that could run on natural gas or waste gases, which hit the market in 2000 just as California's electricity shortage began. But what should have been high volume sales never materialized.

The deal with United Technologies could help Capstone find new markets, given United's experience with marketing energy-efficient heating and cooling systems in commercial buildings. Jan Van Dokkum, president of United Technologies subsidiary UTC Power, said the micro-turbine's ability to cool or heat air will be an added advantage in its work with commercial buildings.