FW: Cashing In on the World's Energy Hunger

From brian carroll <human@electronetwork.org>
Date Tue, 29 May 2001 22:26:30 -0800
In-Reply-To <20010523183211.3B33B15C29@email4.lga2.nytimes.com>
User-Agent Microsoft-Outlook-Express-Macintosh-Edition/5.02.2022

Cashing In on the World's Energy Hunger



AFAYETTE, Ind.  Ted Lewis lowers a gigantic iron block into place,
clamps it down, and begins drilling holes in the skeleton of what
will become an 8,000-pound diesel engine.

 That engine, an array of bolts, fuel lines, filters and pistons,
rolls off the assembly line at the Caterpillar plant here, ready to
be bolted onto a two-megawatt electric generator that will create a
machine capable of delivering the power that everyone seems to
crave these days.

 The generators, which are nearly twice as big as a midsize car,
are being shipped to California so that Internet server centers
there will have the uninterrupted power they need to keep the
digital age humming; they are going to hospitals and police
departments, which are obligated to have emergency power; and they
are being installed at big manufacturing operations and office
buildings, which are bracing in a few parts of the country for a
summer of rolling blackouts.

 "These companies are saying, `We can't rely on the utilities
anymore; we're going to put our own standby units in,' " said Jim
Parker, director of electric power generation at Caterpillar, which
is based in Peoria, Ill. "And they're saying, `How much power do
you have and how fast can you get it here?' "

 For Caterpillar, the world's largest manufacturer of construction
and earthmoving equipment, soaring demand for diesel-powered
generators is bolstering profits in a fast- growing unit and
helping stabilize a company that is coping with slowing sales of
construction and mining equipment.

 Analysts say the growth of the engine business is making
Caterpillar much less of a roller coaster ride than it was in past
downturns, when it invariably lost money at the low points. And
they say that global energy demand is expected to continue to rise
for several years, raising the company's long- term prospects. By
2006, if power generation sales continue to grow by 20 percent a
year, as they have for the last six years, they could account for a
fifth of the company's revenues.

 The strength of its engine business is helping Caterpillar
transform itself into a diversified equipment supplier and service
provider; it is no longer just a builder of its traditional yellow
earthmovers, tractors and other equipment. Indeed, all the
company's energy-related businesses  turbines, diesel-engine
generators, oil and gas exploration equipment, and coal mining
trucks  are growing rapidly, benefiting from the nation's energy

 "One of the reasons Caterpillar's profits in this downturn are
better than the downturn in the early 90's is their strength in the
energy business," said David Bleustein, an analyst at UBS Warburg .

 The value of Caterpillar shares has nearly doubled in the last
eight months and is up 18 percent this year. The stock, which is
still well below its 1999 high of $64 a share, closed yesterday at
$55.70, up 45 cents.

 Of course, with the overall economy weakening, Caterpillar is
still too heavily tied to the construction industry to avoid a
downturn entirely. Profits on about $20 billion in global sales are
expected to drop about 14 percent this year, according to Wall
Street analysts.

 Others are gaining from the energy shortages as well. Cummins
Engine and Detroit Diesel  the nation's other big diesel engine
makers  have also experienced strong demand for the large engines
that power small electric generators, though demand has weakened a
bit lately. But Caterpillar dominates the world market in
diesel-powered generators, which the company says are selling just
as strongly overseas.

 "You have to understand that the guts of the energy story is
offshore," John McGinty, an analyst at Credit Suisse, said. "In the
developing world, it's primary power."

 Caterpillar has been building diesel engines  for trucks, buses
and locomotives, as well as power generators  for decades. The
acquisition of Perkins Engines in 1997 strengthened the company's
grip on the market. By 1999, Caterpillar was the world's biggest
maker of diesel and natural gas engines, with nearly $7 billion in

 Over all, the company was riding high, bolstered by explosive
demand for large trucks and buses. But now, with large truck sales
down sharply in the last year, it is Cat Power, as the company
calls the power division, that is insulating the company from a
steeper downturn and giving Caterpillar a new image.

 Much of the generator sales growth a few years ago came from Year
2000 computer concerns. Now it is coming from demand in the western
United States, where power shortages are most feared.

 Major corporations, hospitals and manufacturing operations are
installing backup generators. The diesel-powered generators are
used primarily for standby or emergency use, largely because they
are relatively expensive to operate and maintain; in some states
there are also restrictions on the emissions that come from diesel

 Internet server centers are among the biggest purchasers of
Caterpillar diesel engines and generators. They not only want
continuous power, they need the power modulated so the electric
flow does not fluctuate with power spikes and dips.

 "Anybody in the data business has to be thinking seriously about
this," said Sam Bogoch, the chief executive of Big Storage, which
provides storage systems for Internet and other companies.

 Standby generators are also in vogue in New York City, which some
utility experts say could face power shortages this summer. By some
estimates, 80 percent of all skyscrapers in New York are equipped
with standby or emergency generators.

 Though sales to telecommunications and Internet companies have
slowed in the New York region, other corporations and even
residences are buying up smaller generators, according to Jim
Delaney, a vice president at H. O. Penn Machinery, the region's
Caterpillar dealer.

 Even utility companies themselves are renting or purchasing
standby generators. Some want to plug them into their power grids.
Others are buying mobile power modules as Caterpillar calls them:
trailers equipped with a generator set with switching gear that can
speed to a site to supply backup power. Production of the modules
has quadrupled in the last nine months, the company says.

 Two years ago, Commonwealth Edison, the big Chicago utility,
rented about 200 power modules from Caterpillar for emergency use.
This summer, the utility says it expects to have enough power; but
nearly a dozen trailers are strategically positioned around the
Chicago area, just in case.

 Exactly how many diesel generator sets are in operation in the
United States is unclear.

 Caterpillar's popular two-megawatt diesel generators  enough to
supply the average needs of 2,000 homes  sell for about $250,000
each. One generator can supply electricity to a hospital; larger
buildings often have three, four, even eight generators.

 In New York, Goldman Sachs just placed eight Caterpillar
generators atop its downtown headquarters at 85 Broad Street. The
World Trade Center hoisted four units atop one of its buildings.
And AT&T purchased dozens of generator sets to back up the Web
hosting sites it opened around the nation early this year.

 In California, Caterpillar's standby power is not connected to
local utility grids. Instead, it is hooked up to individual
factories, office towers and other buildings.

 Rental power is also a lucrative business for Caterpillar and its
independent dealers. Operating, maintaining, servicing and selling
the parts for the units is typically far more profitable than
simply selling them.

 The generators Caterpillar builds this year are capable of
producing 25 gigawatts of power, enough to supply electricity to
about 25 million homes. And about half of the company's electric
power sales are going overseas, to places like India and Brazil.

 "One-third of the world's population still has no access to
electricity," said Mr. Parker at Caterpillar.

 There are drawbacks, though, to relying on the generators as a
primary source of power. Diesel generators create much more
pollution than other sources of electricity. In California and New
York, where emissions standards are high, some generators are only
allowed to operate for about 200 hours a year. New York State is
moving to expand the use of such diesel generators when brownouts
or blackouts loom. California is facing similar questions about

 "It'll supply the electricity if it's needed, but it's going to
create a huge smog cloud," said Robert Burns, a senior researcher
at the National Regulatory Research Institute, which does studies
for state public utility commissions.

 Caterpillar officials point out that diesel engines do not belch
out the black clouds of smoke they did a decade ago. But they are
aware that cleaner and more efficient modes of power may eventually
topple the diesel engine. Caterpillar is already researching
alternative sources of power, everything from dual-fuel engines to
alternative fuels.

 "There are alternative technologies that are some day going to
challenge this market, like fuel cells and microturbines," Mr.
Bleustein at UBS Warburg said. "But right now, in today's market,
it's diesel engines."

 Caterpillar says that more of the generators it sells over the
next decade will run on natural gas, a much cleaner fuel. Today,
about 10 percent of its two-megawatt generators are powered by
natural gas; that figure is expected to jump to 50 percent within a
decade, the company says.

 Diesel-powered generators are not the only source of excitement at
Caterpillar these days. Sales of coal mining equipment, like large
trucks, shovels and mobile power generators, are soaring because of
a resurgence in demand for coal-powered electricity.

 Oil and gas exploration is also booming, and Caterpillar sells
engines that power offshore rigs and compressors that gather, store
and pump gas through pipelines. The company's financing unit is
also growing, with profits of $182 million last year. These
strengths are offsetting a 50 percent drop in orders for truck
engines, and a marked slowdown in demand for construction equipment
so far this year.

 With its growing emphasis on energy equipment, is Caterpillar less
cyclical than it was a decade ago? It seems so, though it is still
hard to tell how much more it will suffer if this economic downturn
turns out to be as long and difficult as the recession and slow
initial recovery of the early 1990's. Still, most analysts are
confident that Caterpillar is in a good position to ride out the

 "Energy stuff is giving you some offset," Mr. Bleustein said. "Cat
may be the only company I follow that hasn't had a significant
profit revision."


Copyright 2001 The New York Times Company

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