Headwinds impede progress of turbine maker AAER

Shares of wind-turbine maker AAER Inc. have hit a patch of turbulence after a strong updraft.

Following several weeks of dramatic price increases where the stock of the Bromont, Que.-based company more than quadrupled on the TSX Venture Exchange to above $1.60, the shares have plunged in the past three days below $1.18.

The start of AAER's runup coincided with the Sept. 19 announcement of the bids for Hydro-Québec's latest call for tenders to build wind farms connected to the province's power grid.

Proposals for more than 7,700 megawatts of wind production were filed, even though Hydro-Québec said it wants to add just 2,000 MW to its grid between 2010 and 2015.

Several wind developers who sent in bids -- including key players TransCanada Energy Ltd. and SkyPower Corp., both of which already have wind farms under way in Quebec -- said they will use AAER turbines if they get the nod from the province for their proposed projects.

Using a local supplier could be an important factor in winning a Hydro-Québec contract, because the utility is very strict in requiring developers to spend at least 60 per cent of their wind farm costs in the province.

AAER's notable presence was a major vote of confidence for a company that has yet to generate any significant revenue and won't likely deliver its first turbines until late next year.

"The fact that so many [developers] specified [AAER] is what really drove the stock up," said MacMurray Whale, an analyst who follows the alternative energy scene for Cormark Securities Inc. in Toronto. "Once people realized who was supplying the turbines [for the Quebec proposals], a lot of retail investors piled in and took positions in the stock."

In the past few days, however, some investors clearly decided the stock had overshot its true value, and there may also be concerns over the company's untested turbines, Mr. Whale said.

AAER chief executive officer Dave Gagnon said in an interview that he thinks the Hydro-Québec process is just one reason for the stock's recent rise. He said AAER was sharply undervalued compared with other turbine makers worldwide, when it was trading below 40 cents, and now "the market is discovering the company."

Another factor that raised AAER's profile was SkyPower's purchase in September of about 21 per cent of the company's stock for $5-million. SkyPower picked up its stake for what now looks like a bargain price: 35 cents for a unit consisting of a share and a warrant to buy another later for 45 cents.

SkyPower, partly owned by New York Investment bank Lehman Bros., is in the process of building a large wind farm in Rivière du Loup, Que. Chief executive officer Kerry Adler said he's not surprised AAER has suddenly caught investors' attention. "As a Canadian manufacturer of turbines, in a turbine-constrained market, they [have] an incredible opportunity to really capture some of that market."

Still, investors in AAER face a number of daunting risks, not the least of which is establishing a value for a company that lost $1.4-million in the first half of 2007, with no revenue stream expected until next year at the earliest.

The company has begun to retrofit an old Hyundai factory in Bromont, southeast of Montreal, as its manufacturing base, but its first turbines won't be delivered until mid-2008 at the earliest. AAER has licensed turbine technology from Germany's Fuhrländer-Pfleiderer, and is using components from a number of other suppliers, but it plans to build more of the parts itself as time goes by.

Until the turbines are in the field and demonstrate they work well in cold Canadian conditions, "there's tons of risk," Mr. Whale said.

He also suggested caution in judging AAER's success in snagging commitments from companies participating in Hydro Quebec's call for proposals. It is so hard for developers to get turbine commitments from big manufacturers such as Vestas or General Electric, that some may have turned to AAER almost in desperation, he said. "That has to raise a lot of cautionary flags."

Already, AAER has fallen into a dispute with one of its customers. British Columbia's Katabatic Power, which had plans to build a wind farm at Mount Hays near Prince Rupert using 17 AAER turbines, recently sent a letter to the Quebec company terminating the deal.

While the exact nature of the conflict is unclear, AAER had originally said it would deliver the turbines in 2007, later changing the delivery date to 2008. Negotiations to end the dispute are now under way.

Matthew Kaplan, an analyst at research firm Emerging Energy Research in Cambridge, Mass., said it will be a "huge step" for AAER if its development partners win a substantial number of contracts in the Quebec tender. The province has said it will announce the winners early in 2008.

Still, "being able to meet their supply deadlines, and getting all the balls rolling at once will be a challenge for them," Mr. Kaplan said.

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Quick facts

EARLY CUSTOMERS 17 turbines for B.C.'s Katabatic Power (in dispute); two turbines for Ontario's Positive Power Co-Op

BIG COMPETITORS General Electric (U.S.), Vestas (Denmark), Enercon (Germany)

BOARD OF DIRECTORS Includes former Cree grand chief Ted Moses, and Kruger Energy Group COO Jacques Gauthier.

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By the numbers

2006 revenue (9 mos.)...$9,300

2006 loss...$1.3-million

2007 2Q revenue...$50

2007 2Q loss...$815,000

Market cap...$80-million

SOURCE: THOMSON DATASTREAM