May 6, 2013

UTC out $227M to unload its fuel cell unit

Contributed Photo
Contributed Photo
After acquiring UTC Power, new owner ClearEdge Power rebranded all of the legacy fuel cells.
Contributed Photo
Before United Technologies paid ClearEdge to take over UTC Power, all of its fuel cells had different branding.
Neal Starling, executive vice president, ClearEdge

Instead of making money selling its fuel cell subsidiary, Hartford conglomerate United Technologies Corp. incurred $227 million in charges and payment to rid itself of UTC Power, including up to a $48 million direct payment to the firm that took it over, Oregon-based ClearEdge Power.

When United Technologies first put South Windsor-based UTC Power up for sale in the second quarter 2012, the conventional wisdom was the conglomerate was trying to raise money for its $16 billion acquisition of Charlotte aerospace manufacturer Goodrich Corp. Now, it appears UTC was trying to dump a subsidiary that had never turned a profit while restructuring the conglomerate to focus on aerospace and building manufacturing.

The new figures came to light in UTC's first quarter financing filing to the U.S. Securities and Exchange Commission in April. The filing said the disposition of UTC Power cost the conglomerate $48 million, including eliminating some of the subsidiary's debt and funding its operations until ClearEdge officially took over on Feb. 12.

The $48 million in payments came on top of the $179 million impairment charge UTC took on the subsidiary in the third quarter to adjust the true value of UTC Power to be more in line with the sales price.

Sources with knowledge of the fuel cell industry said discussion among investors always was UTC paid ClearEdge to take over UTC Power, including turning the subsidiary into a more viable business by eliminating debt and financing its future operations.

UTC would not have been able to unload the subsidiary otherwise, sources say.

"United Technologies hadn't done as well as FuelCell Energy has done," said Jeff Osborne, managing director in New York City for St. Louis investment firm Stifel Nicolaus & Co., Inc. FuelCell Energy is Connecticut's other major fuel cell manufacturer, headquartered in Danbury.

UTC officials declined to comment for this story.

The SEC filing was unclear on how much of the $48 million was a direct payment to ClearEdge and how much was buying down debt prior to the disposition and operating a loss-generating business for six weeks in the first quarter.

The sale itself resulted in 1 cent per share loss to UTC's stockholders, the company reported in the SEC filing.

Shutting down the UTC Power operations instead of paying ClearEdge to take over control would have been more complicated and probably more costly. In addition to the legacy operations in South Windsor, UTC Power has long-term contracts to service fuel cells already sold to customers, including at the World Trade Center, UConn, CBS Studios in California, and Samsung in South Korea.

ClearEdge officials declined to discuss the specifics of its UTC Power takeover but said the company got a good deal on the South Windsor business.

"Yes, it was a good deal for ClearEdge because it closely aligns with our long-term strategy of growth, innovation and customer service," said Neal Starling, executive vice president for ClearEdge.

ClearEdge considered taking over the South Windsor subsidiary when UTC first put it up for sale in the second quarter, Starling said. ClearEdge was in the running from the beginning because of the Oregon's firm prior relationship with UTC Power.

Still, those negotiations with ClearEdge and any other interested parties took months as UTC did not announce the intended sale until Dec. 22.

Although the sales terms were not announced in December nor at the Feb. 12 sale closure, investors speculated UTC must have nearly given the fuel cell subsidiary away, particularly because ClearEdge was less than 10 years old and made only small fuel cells for residential and small business customers. UTC Power, on the other hand, had 50 years of history including working on NASA projects and was one of the top two vendors of fuel cells in the world.

After ClearEdge took over UTC Power in February, the company laid off 39 percent of its worldwide workforce, the majority of which came out of the 300 employees in South Windsor. ClearEdge said the layoffs were to reduce redundancies in its East and West Coast operations.

After the layoff announcement, ClearEdge raised $36 million in financing to support the company's customers, including the legacy customers from UTC Power. The money also went to support manufacturing and expanding the company's sales force.

Since expanding its sales force, ClearEdge announced some significant sales, including part of a $100 million clean energy contract to install fuel cell at 19 Verizon facilities and another fuel cell at Western Connecticut State University.

With sales increasing, particularly Verizon, ClearEdge plans to add staff in South Windsor to increase production.

Originally, ClearEdge was attracted to taking over UTC Power because of its business heritage, and the Oregon company's ability to marry its smaller fuel cells with UTC Power's larger ones to create a diverse product offering for the market, Starling said.

Despite the difficulties UTC had unloading the fuel cell subsidiary, the sale should work out for ClearEdge since the company can serve the residential and small business market as well as the industrial and power generation market, Osborne said.

"It seems like a good marriage of two different companies," Osborne said.

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