Energy Technology

Transcription

Energy Technology

November 12, 2001
Technology Research
Energy Technology
Investing in the Power of the 21st Century
Source: Stone.
Hugh M. Anderson 646.366.4521
Table of Contents
Energy Technology—Investing in the Power of the 21st Century ...........................................................1
Energy Technology—Major Investment Themes.......................................................................................2
Robertson Stephens Energy Technology Stock Coverage ......................................................................5
Energy Technology—Fundamental Market Analysis ................................................................................7
The Structure of the Power Network in the United States .........................................................................7
The Advantages of the Centralized Power Network ................................................................................14
The Disadvantages of the Centralized Power Network ...........................................................................15
The Deregulation of the Power Industry ..................................................................................................18
Pricing, Tariffs and Rate Structures .........................................................................................................25
Merchant Power Operations ....................................................................................................................26
The Demand for Energy Technology ........................................................................................................28
Two Sources of Demand: Power Provider and Power Customer............................................................28
Power Provider Demand and Market Size...............................................................................................28
Power Customer Demand and Market Size.............................................................................................29
The Demand for Measurement and Intelligence......................................................................................31
Power Quality Costs and Their Relation to Market Size..........................................................................31
The Main Causes of Power Quality Problems .........................................................................................33
Energy Technology Solutions for Power Providers and Power Customers.........................................34
Incumbent Solutions.................................................................................................................................34
New Energy Technologies for Power Providers ......................................................................................38
New Energy Technologies for Power Customers ....................................................................................43
Distributed Generation Applications.........................................................................................................48
The Economics of Distributed Generation ...............................................................................................49
The Distribution of New Energy Technologies.........................................................................................51
The Basic Science of the New Energy Technologies..............................................................................51
Flywheels Compared with Batteries for Ride-Through Power Applications ............................................52
Types of Fuel Cells ..................................................................................................................................53
The Political and Regulatory Initiatives in Energy Technology .............................................................56
The Bush Energy Plan .............................................................................................................................57
The Key Federal Players and the Bills They Have Introduced ................................................................57
Energy Technology—Investment Analysis ..............................................................................................58
The Public Company Universe and the RSET Index...............................................................................58
Energy Technology Capital Markets in 2000–2001 .................................................................................60
How the Stocks Trade.................................................................................................................................61
The Energy Technology Software, Services and Information Stocks......................................................61
The Energy Technology Power Quality Stocks .......................................................................................62
The Energy Technology Distributed Generation Stocks..........................................................................63
Volume Analysis of the RSET Index ........................................................................................................65
Internal or Relative Strength Analysis of the RSET Index .......................................................................66
Institutional Ownership of RSET Components.........................................................................................67
Days Short Outstanding ...........................................................................................................................68
Sell-Side Coverage ..................................................................................................................................69
Valuation ......................................................................................................................................................70
Cash .........................................................................................................................................................72
Private Market Activity in Energy Technology.........................................................................................72
Energy Technology Companies Covered by Robertson Stephens .......................................................75
Public Energy Technology Companies not Covered by Robertson Stephens...................................171
Private Energy Technology Companies .................................................................................................197
Energy Technology—Investing in the Power of the 21st Century
We recently initiated coverage of the energy technology sector, which we believe represents
one of the most significant investment opportunities for the next ten years. Our investment thesis is
based on the following concepts:
•
The power industry is in a secular upward swing in IT investment, while the
majority of other economy sectors are in an IT investment downswing.
•
The proliferation of the semiconductor into networks and process control
manufacturing has dramatically increased the demand for high-quality and
reliability in power systems.
•
The strength of the current power network is that it provides relatively cheap power
to a high number of users; the weakness of the power network is that it has frequent
sags, surges and cuts that are detrimental to semiconductor-controlled systems.
We believe there are two basic demand trends in energy technology:
•
The rapid growth in competitive markets for power and natural gas is motivating a
fundamental restructuring in the $250 billion U.S. power industry.
•
Power customers are demanding technologies that lower their average energy
costs and improve power quality and reliability.
We have segmented the energy technology stocks into three groups:
Software, Services and Information: Companies that provide enterprise systems, services and IT
solutions to the power industry and power customers.
Power Quality: Companies that provide power quality hardware used to correct sags, surges and
cuts in the power supply.
Distributed Generation: Companies that develop small-scale power systems that can be sited
directly at the source of end-user load demand.
We believe that most significant current investment opportunities are driven by the considerable
demand from power providers for new energy enterprise software and middleware systems, network
platforms, and intelligent metering and measurement systems. We also believe that there will
continue to be substantial growth in the demand for new power quality technologies that enable
power customers to attain high levels of power reliability and quality. According to Electric Power
Research Institute (EPRI), U.S. businesses lost $0.33 for every $1.00 spent on power in 2000 as a
result of power quality problems.
We have initiated coverage of four stocks within these segments:
Software, Services and Information: Caminus Corporationa (CAMZ $15.85) with a Buy rating and a
$28 per share price target.
Power Quality: Active Power, Inc.a (ACPW $5.53) with a Market Perform rating.
Distributed Generation: Capstone Turbine Corporationa (CPST $4.80) with a Market Perform rating
and FuelCell Energy, Inc.a (FCEL $14.50) with a Market Perform rating.
Robertson Stephens, Inc.
1
Energy Technology—Major Investment Themes
We have established six major investment themes for the energy technology industry:
•
Investment dollars follow the lead of deregulation;
•
Better to work with the current power network than against it;
•
Information, intelligence and measurement are the backbone of the energy
technology revolution;
•
The storage of power has implicit value;
•
Power is a service business; and
•
Power does not care how it is made, it cares about its price and its quality.
Investment dollars follow the lead of deregulation. In our view, the most significant investment in
the power industry since the 1992 Energy Policy Act has been in the construction of independently
owned power plants and in the transfer of utility-owned plants to non-regulated power companies. In
1992, just 9.3% of total electricity generated was independently produced and, by year-end 2000, it
reached 20.6%. The 1992 Energy Policy Act gave regulators the authority to order open and
competitive access to utility transmission and distribution lines, so it is logical that that an increased
number of power generators have emerged to compete in wholesale power markets.
The introduction of competitive power markets has spawned the significant growth in the wholesale
power and natural gas markets, which are expected to generate $325 billion in transactions in 2001,
up from $236 billion in 2000 and $125 billion in 1999. This has in turn created strong demand for
systems used to trade and analyze the commodities that exist within the markets. Caminus is a
leading provider of energy trading and analysis software systems to both large and small participants
in the wholesale power and natural gas markets and, therefore, is one of the first energy technology
companies to truly benefit from the draft created by power deregulation. We believe that other
companies that provide network infrastructure, intelligent measurement systems and enterprise
management systems also have a significant opportunity to create value for power and energy
companies in the wake of growing competitive markets.
Better to work with the current power network than against it. A significant amount of recent
energy technology research has asserted that Clayton Christensen’s concept of “disruptive
technology” can be applied to power systems and that there is the potential that some of the
emerging applications of fuel cells will obsolete the current power network.
Our research concludes that it is unlikely that the current power network (large, centralized power
plants fueled by coal, uranium, natural gas and water, which feed into a networked transmission and
distribution system) will be displaced by a system dominated by smaller distributed power plants that
are sited close to end-user load. We believe it is more likely that distributed generation will be
incorporated into the current network in areas where it is uneconomic or technically unfeasible to
increase generation output at the central power plant and where the cost of running new wires is
economically constrained.
2
In cases where distributed generation is the most economically or environmentally viable solution,
we believe that many of the incumbent technologies, including natural gas-fired reciprocating
engines outfitted with emission-reduction technologies, will have cost preference over the newer
distributed generation technologies. The critical issue between the two will be duty cycle, or how
often the unit is run, and efficiency, or how much fuel is required to produce a given measure of
power. In low duty-cycle applications, we believe diesel generators will continue to carry the day. In
high duty-cycle applications, natural gas-fired reciprocating engines, microturbines and certain fuel
cells will share the market depending on variable costs and environmental factors. The greatest
promise of fuel-cell technologies is their high level of efficiency—in cogenerative configurations it is
expected that some fuel cells will achieve levels of 70% or greater efficiency. This is truly
revolutionary compared with existing technologies, in our view.
We believe information, intelligence and measurement are the backbone of the energy
technology revolution. The ultimate value of any system is dependent on the ability to measure
and assess the information generated through the use of the system. The current power network is
particularly bad at this. The majority of the meters used to measure power consumption are crude
devices that provide little more than the amount of power that flows through them. The utilities, for
their part, do not always even read the meters but instead estimate individual usage on the basis of
selected load profiles.
We believe that a key aspect of the energy technology revolution will be the adoption of advanced
measurement and intelligence at the end-user level. Information at the substation level is improving,
but we believe that in order to be effective much of the new energy technology depends on a
significantly improved flow of information to and from the end-user meter. Intelligent meters can not
only provide real-time usage information through a network connection, they can measure and
analyze power quality and reliability and serve as a two-way communication gateway between
power provider and power consumer. When connected to distributed generation control software,
they can serve as the nerve center for peak-shaving determinations. The information that is provided
by intelligent meters can be mined for more accurate load profiles, which can in turn be used to craft
power-usage contracts and ultimately reduce costs.
We are just scratching the surface of the value that can be created—for both power providers and
power customers—through the use of intelligent meters at the end-user level. Better information
leads to the potential for service and profit, two concepts key to our investment thesis.
The storage of power has implicit value. Of the major commodities, power is by far the most
unusual, because it cannot be stored in material quantities. In the regulated model, large-scale
storage was fashioned artificially through overbuilds on the basis of reserve margins—or the amount
of generation capacity in excess of the amount of power needed to service the highest load draw.
This is a fairly economically clumsy way of handling the issue, and most of the stored power in the
U.S. is in the form of ride-through battery systems and backup generators. The value of this enduser storage is the economic loss avoided (or, in some cases, the market share taken) in the event
of a power sag, surge or cut. Since stored power cannot be feasibly exported, the market value is
difficult to determine.
The fact that stored power cannot be bought on the open market, as natural gas can, means that
there is some degree of volatility inherent in power prices that is not apparent in other commodities.
This creates an arbitrage opportunity for those who can activate access to power during peak
periods of volatility—this is the premise behind the investment in mid-scale peaker plants over the
last five years. We believe this same concept can be applied to small-scale power plants and,
depending on the efficiency, start-up time and capital costs, there may be a significant opportunity
for certain distributed generation assets to act as micro-peakers that can be controlled remotely from
a trading desk.
3
Power is a service. We believe that the vast majority of power customers see power as a service,
and we do not expect this perception to change in the near future. We base this assertion on how
the deregulated market for services in the communications market has evolved. Companies have
moved from owning their own networks to subscribing to virtual private networks, where the network
carrier owns the fiber and optical assets. Even server and storage operations have been outsourced
to data center providers. As a result, we do not expect many power customers will be inclined to take
on power generation as an internal function.
However, we do believe there is strong demand for an improved offering of power services. The
current offering—grid-quality power at the spot or negotiated price—is a good starting point, but we
believe there is strong demand for various levels of power reliability and power quality. Importantly,
we believe that the margins for these services can be substantially higher than what can be
achieved selling grid power where everyone gets the same product. We believe that utilities have an
excellent opportunity to steal their own customers—take them away from a commodity-based model
and move them toward a commodity plus added service model.
We believe that many of the new energy technologies are integral to the development of incremental
power quality and reliability services. Intelligent meters, remote generation control systems,
middleware and network platform systems, facility software and control systems, and certain
distributed generation technologies all make the provision of new power services not only possible
but potentially profitable as well. In our opinion, the value of many of the new energy technologies
will be determined not by what the technology does, but whether a service intermediary can take
what the technology does, sell it as a service and make money in the process.
Power does not care how it is made—it cares about its price and its quality. Electrons come
from any number of sources, from large coal plants to the conversion of waste treatment gas to solar
panels. Neither the electron nor the equipment that consumes it distinguishes between the wide
variety of sources capable of providing for its supply. What does matter is the quality of the power—
the sags, surges and cuts in the power supply that are highly destructive to semiconductor-driven
equipment—and the price of power. As a result, we believe that power generation is ultimately a lowmargin and highly competitive business, and that the lowest marginal cost method will always
represent the majority of generation sales. We should also take into account the environmental costs
of power, although this is determined more through policy than through current market economics, in
our opinion.
We distinguish between price and quality because we believe the relationship between the two has a
great deal to do with how the market for energy technology will unfold. Cheap power is not so cheap
if the losses attributable to power quality problems are taken into account. If distributed generation
devices, or small-scale power plants that are placed close to the load, are able to provide power at
high levels of quality that is deliverable at a cost lower than the implied cost of current power
protection installations, then we believe that the investment opportunity is substantial.
4
Robertson Stephens Energy Technology Stock Coverage
We have initiated coverage of four stocks in the energy technology universe.
Caminus Corporation. Caminus is a leading provider of energy trading, transaction and risk
management software, and consulting services to energy companies. The company has more than
150 customers across North America and Europe, including utilities, electric power generating
companies, energy marketers, electric power pools, gas and oil producers, processors, and
pipelines. Some of the company’s current customers include BP Amoco, Enron, Williams, CMS
Energy, Consolidated Edison, Conoco and TXU Electric and Gas. Caminus is headquartered in New
York, New York; with additional offices in Houston and Dallas, Texas; London and Cambridge,
England; and Calgary, Alberta. The company has 365 employees, of which approximately 70% are
located in the United States. Further, approximately 25% of the company’s employees conduct
research and development. Caminus sells its products through a direct sales channel, with
approximately 40 sales and marketing professionals.
Active Power, Inc. Active Power designs and manufactures instant backup power systems for
industrial and commercial applications. These backup power systems are referred to as
uninterruptible power supplies (UPSs) or continuous power supplies (CPSs) because they provide a
seamless power bridge between a primary power source (usually the public power grid) and a
backup-power source (usually a diesel generator). To store backup power Active’s systems utilize a
patented flywheel technology as opposed to a lead acid battery, which is the chief component in the
majority of incumbent systems. In our opinion, Active Power’s flywheel-based UPS systems have
numerous sustainable competitive advantages over battery-based UPS systems, including higher
reliability, the ability to be operated and monitored remotely, a smaller footprint, and cleaner
operation. The company has also developed a CPS for the telecom industry that is expected to
provide up to eight hours of continuous backup power. The company’s main current distribution
channel is Caterpillar, a leading provider of backup power generators, which markets and sells the
company’s UPS products under the Caterpillar brand name.
Capstone Turbine Corporation. Capstone designs and manufactures microturbines, which are
used as small- and mid-size power generators in a low-emission and high-reliability environment.
Capstone also develops microturbines for use in automotive applications. The company is
headquartered in Chatsworth, California, and has additional facilities in Van Nuys, California.
Capstone currently has approximately 250 employees, and we estimate 2001 revenue of $30.5
million. The company sells its products in a variety of markets across North America, Western
Europe and Japan. Capstone expects that more than 60% of its eventual sales will be outside of
North America.
FuelCell Energy, Inc. FuelCell develops small-scale power plants that provide power at or near the
site where power is consumed. The company’s power plants, which are designed to provide
between 250 kilowatts and 3 megawatts, are powered by a molten carbonate fuel cell, which runs on
natural gas or alternate fuels and operates at relatively high temperatures for high fuel efficiency
(between 45–55% in testing), while producing water and heat as byproducts. Based in Danbury,
Connecticut, FuelCell tested its first fuel-cell stack in 1993 and has received research and
development contracts since 1994 from the Department of Energy that have totaled $187 million to
date. In addition, the company has participated in numerous federal and municipal projects and field
trials. The company has additional manufacturing facilities in Torrington, Connecticut, and is
constructing a new testing facility in Danbury. There are approximately 190 total employees, roughly
half of which are engineers.
5
Figure 1: ROBERTSON STEPHENS ENERGY TECHNOLOGY STOCK UNIVERSE ($ in millions, except per share data)
Ticker Company Name
Power Quality Group
APCC American Power Conversion
AMSC American Superconductor
ACPW Active Power
MXWL Maxwell Technologies
BCON Beacon Power
Price
11/9/01
Mkt
Cap.
LTM


Sales
Op. Inc.
Net Inc.
$14.40 $2,829.9 $1,528.6
$10.90
222.1
14.5
$5.53
222.0
15.9
$10.75
109.2
96.6
$0.85
36.3
0.1
$247.5
(33.0)
(31.4)
$145.4
(26.3)
(27.2)
4.2
Cash
Total Stockhldrs’
Assets
Equity
$327.5 $1,400.8
67.9
223.0
119.5
146.9
28.0
105.4
40.9
49.5
LTM


Capex
R&D Net Op. Csh Flw
$1,186.8
210.1
137.8
82.8
45.1
$62.5
53.8
14.6
11.1
$53.7
24.3
16.3
11.5
$6.5
(26.9)
(21.2)
(21.4)
SSI Goup
ITRI
CAMZ
Itron
Caminus
$26.84
$15.85
$555.4
252.0
$190.4
66.1
$16.1
12.0
$8.3
(4.3)
$28.7
33.1
$178.3
97.9
$63.8
83.8
$5.6
4.5
$23.2
9.7
$12.5
9.7
$28.19 $2,550.7
$34.05
530.1
$14.50
510.9
$8.32
407.0
$20.40
400.7
$4.80
369.5
$6.35
210.4
$4.50
160.0
$2.87
154.5
$8.00
136.7
$3.88
105.9
$5.40
85.6
$5.56
80.6
$0.36
38.8
$2.40
27.3
$35.9
57.8
27.5
5.3
71.4
35.8
1.3
7.9
2.8
0.0
0.0
6.7
41.9
0.3
2.1
$(88.4)
5.3
(15.1)
(84.0)
(7.8)
(37.8)
(10.8)
(3.6)
(29.8)
(8.8)
(24.9)
(11.1)
(7.7)
(6.8)
(10.1)
$(91.9)
1.5
(12.1)
(88.3)
(5.1)
(34.2)
(3.0)
(1.2)
(25.5)
(31.0)
(23.9)
$417.0
60.5
300.3
104.4
82.0
181.7
173.0
72.0
83.4
9.7
22.3
91.3
26.0
0.2
30.0
$635.3
165.8
334.3
164.8
166.1
271.5
180.5
81.3
97.6
84.0
24.0
101.0
69.4
3.6
48.5
$578.6
144.1
324.6
150.5
110.7
250.8
178.0
80.0
90.1
82.5
19.3
93.8
59.0
2.8
46.7
$19.8
6.1
15.1
6.9
2.2
17.6
1.3
2.7
6.0
0.6
0.4
$77.6
4.7
6.1
66.1
7.8
11.1
4.5
1.4
16.7
3.9
2.6
15.4
5.6
3.1
3.5
$(50.0)
3.1
(13.3)
(64.2)
(12.4)
(39.9)
(3.8)
(3.1)
(19.8)
(5.4)
(5.3)
Distributed Generation Group
BLDP
APWR
FCEL
PLUG
ENER
CPST
PRTN
HYGS
HPOW
MDTL
MCEL
CESI
SATC
MHTX
ESLR
Ballard Power Systems
AstroPower
FuelCell Energy
Plug Power
Energy Conversion Devices
Capstone Turbine
Proton Energy Systems
Hydrogenics
H Power
Medis Technologies
Millennium Cell
Catalytica Energy Systems
SatCon Technology
Manhattan Scientifics
Evergreen Solar
Source: Bridge, company reports, First Call and Robertson Stephens estimates.
(15.1)
(7.1)
(8.5)
2.8
0.0
12.8
(6.7)
(3.8)
(8.5)
Energy Technology—Fundamental Market Analysis
The Structure of the Power Network in the United States
The U.S. power industry recorded sales of approximately $250 billion in 2000, spread across three
distinct businesses: power generation, power transportation and customer service. In the historical
regulated monopoly system, the utilities and the regulators that controlled their spending projects
had jurisdiction over all three segments of the business. The various deregulation programs under
way in 42 states throughout the United States are primarily focused on power generation, leaving the
transmission and distribution system, “the grid,” under the control of regulators and utilities (in
California, the state government has moved to acquire a portion of the power transmission assets).
The bulk of new investment in the power network has also been for generation projects, primarily
natural gas-fired large-scale power plants, in part motivated by the competitive markets that now
exist in many states for wholesale power. The transmission system, on the other hand, has seen
little in the way of capital investment as it continues to be regulated and utility-owned.
Figure 2: POWER NETWORK REVENUE BREAKDOWN ($ in billions)
350
300
Market Size
250
200
150
100
50
Total Power
Market 2000
Generation
T&D
Consulting/
Services
1999
Wholesale
Gas and
Power
2000
Wholesale
Gas and
Power
2001E
Wholesale
Gas and
Power
Source: DOE, EIA and Robertson Stephens estimates.
7
It is often overlooked that electric power continues to be the fastest-growing source of energy in the
U.S. and that it has taken significant market share from other energy sources over the last 30 years.
Electricity accounted for approximately 15% of total energy consumed in the U.S. in 1960, according
to Power Systems Associates, and increased to 29% of total energy consumed in 1990. By 2020, it
is forecasted that 45% of total U.S. energy consumption will be electricity. The increase in demand
for electricity is in many ways attributable to Moore’s Law and the resulting proliferation of the
semiconductor throughout the U.S. communications and manufacturing infrastructure.
Moore’s Law estimates that the speed of a microprocessor will double every 18 months while its
price decreases by half. Microprocessors run on electricity, so as an increasing amount of the
machines that make up the world’s physical infrastructure incorporate relatively inexpensive
semiconductors into their control systems, an increasing amount of the world’s infrastructure
demands electricity. The most notable exceptions are automotive and railroad drivetrains, which are
powered by the direct conversion of gasoline, or diesel, to motive energy. This is likely to change as
well—already there are Caterpillar heavy machines that use the internal-combustion engine to create
electricity, which is then fed to the control and environment systems, as well as to electric motors that
operate the individual wheels. This system is often referred to as “drive-by-wire” and is expected to
overtake the automotive industry within the next decade. As a result, it is expected that electricity
consumption as a percentage of total energy consumption in the U.S. will reach 70% by 2070.
Figure 3: ELECTRICITY AS A PERCENTAGE OF TOTAL ENERGY CONSUMPTION
80%
Electricity/Total U.S. Energy Consumption (%)
70%
60%
50%
40%
30%
20%
10%
0%
1900
Source: Power Systems Associates.
8
1930
1960
1990
2020
2070
To keep things primarily on an apples-to-apples basis we have attempted to set most of our electric
energy consumption figures to kilowatt-hours (kWh), which is the measure used to price power at the
commercial, industrial and residential levels. A kilowatt-hour is the amount of electric energy
equivalent to one kilowatt of power provided or consumed for one hour, or the energy it takes to
keep ten 100-watt light bulbs lit for one hour. The installed capacity of a power plant is usually
referred to in megawatts (MW) or kilowatts (kW), which is simply the maximum amount of power the
plant can produce at any given time.
From a network architecture standpoint, the U.S. power system is essentially a collection of
interconnected hubs and spokes. The hubs of the power network are the large centralized powergeneration plants that generally produce power in bulk in a range between 50 MW and 400 MW (the
largest U.S. generating units are the Babcock & Wilcox coal-fired boilers, which are 1,300 MW) at a
capital cost of $450–650 per MW (an average of $0.055 per kW). The spokes are the powertransmission lines used to transport power across fairly long distances that then continue through
substations and distribution lines to the end-customer connection. Transmission and distribution
charges are fixed by regulators and depend on region. Historically, the allowable rates of return on
regulated generation, transmission and distribution assets have been based on the assessment of
the regulators as to what constitutes a “just and reasonable” return on the cost of a given capital
project. Known as the cost-plus model, this creates somewhat of a capital spending moral hazard,
insofar as the more absolute dollars spent the more absolute dollars allowed as a return without
regard to the economic efficiency of the project as determined by competitive market rates. The cost
to produce power added to the cost to transport it (effectively a pass-through cost to the customer) is
the basis for general cost comparisons for all types of power generation and transmission assets,
although the price paid by the customer can be significantly higher than this calculation indicates as
a result of supply and demand. Year-to-date 2001, average wholesale power prices (excluding
delivery charges) have ranged from $0.0403 per kWh in the Mid-west, to $0.1607 per kWh on the
West Coast.
The transmission lines in the U.S. are divided into three integrated regional grids: one in the East,
which connects the Eastern Seaboard and the Plains states; another in the West, which connects
the Pacific Coast and the mountain states; and another that operates in Texas. These networks
provide alternative paths in emergencies and allow network operators to buy and sell to each other.
The U.S. transmission grid, excluding the distribution lines, consists of nearly 160,000 miles of highvoltage (230 kilovolt and above) transmission lines, according to the Edison Electric Institute (EEI).
In total there are 680,000 miles of long-haul transmission lines and another 2.5 million miles of shorthaul distribution lines, according to the Digital Power Group. Accompanying these lines are 7,000
bulk-power substations and 100,000 lower-tier substations. Although net generation of electricity has
increased 26% over the last ten years, the number of transmission miles has stayed relatively
constant; a mile of new transmission costs more than $305,350 per mile.
9
Figure 4: HISTORICAL INCREASE IN TRANSMISSION LINES
1000
950
Thousands of Circuit Miles
900
850
800
750
700
650
600
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Source: Edison Electric Institute.
The U.S. relies fairly heavily on coal and uranium as sources of energy: 51% of the power generated
in the U.S. is from coal, while nuclear power represents 20% and natural gas 16%. The historical
dependence on coal as the base energy source for power generation is basically a factor of price
and availability. Coal is relatively cheap and is in generally stable supply, although recently prices
have shown an upward bias. Given its relatively attractive low emissions and because it is
domestically sourced, natural gas is currently favored as a fuel input for power production: more than
90% of announced electric-generating plants will be natural-gas based, according to EEI.
The ultimate determination of the economic value in converting an energy source into electricity is a
function of the cost of the energy source, the amount of the energy source needed to produce a
given amount of power (essentially, the efficiency of the fuel), and the cost of the capital equipment
needed to induce the conversion in one end and deliver power out the other. The cost of the energy
source is a function of commodity supply and demand and, in and of itself, is not indicative of the
ultimate cost to produce power. Instead, the biggest determinant of what power costs to produce for
a given energy source is the conversion ratio of the energy source to electricity. This is captured in a
measurement referred to as the “heat rate” of the generator.
An important technological development in large-scale turbines over the last 20 years has been the
combined-cycle turbine. Most combustion-based power plants generate power by burning the
energy source to create steam. The steam is then used to spin a turbine; a generator is attached to
the turbine to produce electricity. This single-cycle conversion process has been enhanced
10
significantly by using the excess heat produced in the initial combustion process to spin additional
turbines, resulting in a combined-cycle process. The process is often referred to as “cogeneration.”
The combined-cycle power plant can achieve much higher efficiency than a single-cycle power plant,
thereby reducing the amount of source fuel required to produce one kilowatt-hour of electric energy.
Through an amendment of the Clean Air Act, the Environmental Protection Agency recently
proposed new rules designed to encourage U.S. manufacturing and industrial plants to use
cogeneration. Specifically, the proposed amendment accelerates the permit process for new
cogeneration plants and provides “regulatory certainty” that is expected to spur new construction.
New cogeneration plants would be treated in a special portion of the Clean Air Act referred to as the
“new source review,” which is the segment that sets the requirements based on reduced air-based
pollutants that must be met when new generation capacity is added. The program has strong
endorsement from several major U.S. manufacturing firms including Archer Daniels Midland,
Caterpillar, Dow Chemical and Exxon Mobil.
The total amount of power consumed in the United States in 2000 was 3.6 trillion kWh, according to
the DOE. This represents a 28.6% increase in consumption since 1990; over the same period, real
gross domestic product (GDP) increased 37.5%. Using combined data from the Energy Information
Agency (EIA) and DRI, we estimate that the capacity of power plants in the United States at the end
of 2000 was 775,000–780,000 megawatts. According to McKinsey & Co. data, summer peak
consumption increased by 96,000 megawatts from 1994–1999, while new generating capacity
increased only 15,000 megawatts. As a result, the DOE has estimated that the U.S. will require a
cumulative additional 230,100 megawatts of generating capacity to meet expected power
requirements by 2010. The EIA estimates that, by 2020, 393,000 megawatts of generation
capacity—as many as 1,310 new power plants—will be needed to meet growing demand and to
offset retirements of existing plants. This translates to an increase of 50.5% in total generating
capacity over the next 20 years.
11
Figure 5: KWH CONSUMPTION IN THE 1990s
3,700,000
Million Kilowatt Hours (kWh)
3,500,000
3,300,000
3,100,000
2,900,000
2,700,000
2,500,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Source: EIA.
Current forecasts by DRI indicate planned additions of generating capacity in 2001 of 43,000
megawatts (Energy Argus reported that by the end of September 2001 more than 34,000 megawatts
of capacity had been added; 8,344 megawatts were added in Texas alone), 47,000 megawatts in
2002 and an average of 34,000 megawatts in 2003, 2004 and 2005—a total of 195,000 megawatts
over five years. Calpine, a California-based independent power plant (IPP) developer, plans to own
or control 70,000 megawatts by 2005, while Dynegy, a Houston-based energy merchant, plans to
own or control 75,000 megawatts over the same period. These two companies alone are expected
to control 15% of the megawatt capacity in the U.S. by 2005. However, the current rush to build
power plants has the potential to replicate numerous other recent cyclical overbuilds in commoditydominated industries, most notably long-haul communications networks and data centers.
Comparing the total kWh consumed in 2000—3.6 trillion—with the available generation capacity
expressed in terms of potential kilowatt-hours generated—6.8 trillion—indicates that power
customers used 53.1% of the available capacity in 2000. The blended forward Q4:02 regional (MidAtlantic, Mid-west, Texas and California) market price is $0.03029 per kWh, taken with the 34,000
megawatts expected in 2002, at 53.1% utilization we estimate that the market expects to sell an
additional $4.8 billion of wholesale power next year.
There are three basic segments of power customers in the U.S.: industrial, commercial and
residential. Industrial customers represented 31.4% of the total market in 2000, followed by
commercial customers, which represented 30.4% of the market. Residential customers accounted
for 35.0%, while other uses—street lamps and railroads, for instance—accounted for 3.2%. In
general, the commercial and industrial customers are considered together to represent business
12
customers, for which there is often considerable flexibility in pricing and delivery contracts. Business
customers accounted for $140 billion in power revenues in 2000, according to the DOE, paying an
average retail price of $0.066 per kilowatt-hour for power.
Figure 6: BREAKDOWN OF CUSTOMER BASE
Other
3%
Residential
36%
Industrial
31%
Commercial
30%
Source: DOE.
Beyond the significant increase in generating capacity that is forecasted to be necessary to maintain
current electricity reliability standards, we also expect there will be strong demand for increases in
fuel input transport capability and power output transmission mileage.
With the shift in fuel input preference to natural gas—90% of planned power plants will run on
natural gas—the DOE predicts that the U.S. will demand 62% more natural gas than current
consumption levels. As a result, the gas pipeline infrastructure in the U.S. is amidst the largest
expansion since the early 1960s, according to Industrial Information Resources. The Federal Energy
Regulatory Commission (FERC) has granted permits for 55 onshore and offshore large-scale natural
gas pipeline projects that total more than 7,800 pipeline miles and more than $10.0 billion in capital
investment, or an average of $1.3 million per mile. The 700-mile, $1.2 billion ($1.7 million per mile)
Gulf Stream project, between Mobile, Alabama and Palm Beach County, Florida, is the largest
project currently under way. It is expected that 25,000 miles of natural gas pipeline will be built by
2010 and that another 13,000 miles will be added by 2015. We estimate that this will require more
than $50.0 billion in capital investment or more than $3.0 billion per year.
While capital investment to increase North American natural gas transport infrastructure is under
way, the pace of investment to expand the electric transmission grid is proportionately lagging the
increase in generating capacity. According to a June 2001 “Transmission Planning for a Restructuring
U.S. Electricity Industry” survey, maintaining transmission adequacy at the level achieved in 2000 will
require quadrupling transmission investments by 2010, resulting in an additional 27,000 gigawatt miles.
Currently, there are 6,000 gigawatt miles planned; the North American Electric Reliability Council (NERC)
circuit miles of high-voltage transmission will increase only 4.2% over the next ten years. This
planned shortfall stems from numerous factors, chief among them is the difficulty in obtaining siting
permits (towns are not exactly volunteering to have power lines strung through their territory) and
regulated rates of return that are too low to encourage investment.
13
The Advantages of the Centralized Power Network
The centralized, hub-and-spoke power network model was developed to take advantage of the
economies of scale achieved by large-scale power plants both in terms of bulk purchases of fuel but
also in terms of overall efficiency. This has ultimately resulted in relatively low power prices for
customers, although the fact that the system has been regulated for so long makes it difficult to
assess what the actual costs to deliver are or have been.
The deregulation of the power markets has led formerly regulated utilities to declare many of their
power plants as “stranded assets,” meaning that the utilities built facilities that are uneconomic in a
competitive marketplace and their costs must be recovered through means other than revenue in the
marketplace. Nevertheless, this system has generally provided customers with rates that are low relative
to those found in other areas of the world, although cross-border comparisons are also difficult to
reconcile due to the various states of regulation and deregulation found across different regions.
To give a sense of the economics of the centralized generation model, we have constructed a model
based on a municipal power grid that contains a natural gas power plant, transmission and
distribution lines, and substations. For the purposes of simplifying the model, we have established
eminent domain rights and, therefore, exclude right-of-way costs. We also assume that we already
own the land and that we have available capital in cash. We assume the power plant is a GE Frame
7 combustion turbine with a steam turbine that generates total station power of 1,000 megawatts.
This would cost approximately $470.0 million, or $470 per kilowatt, and would provide enough power
for 135,000 homes with peak demand of 7.5 kilowatts. The grid area encompasses 155 square
miles, contains 66 miles of high-voltage transmission lines and 120 miles of medium-voltage
transmission. There are 3,420 miles of distribution lines and 19 substations. There is also one stepup transformer, one step-down transmission transformer and another 28 distribution transformers.
Based on current market prices, we estimate the high-voltage transmission lines would cost
approximately $305,350 per mile, or $20.2 million. The medium-voltage lines would cost
approximately $213,750 per mile, or $25.7 million. The distribution lines would cost approximately
$902.4 million and the substations would cost approximately $101.3 million. The transformers cost a
total of $19.7 million. We have also outfitted all of the houses with intelligent meters equipped with
external modem ports at a cost of approximately $63.6 million.
At 65% average utilization, the 1,000-MW power plant generates 5,694,000,000 kWh per year and
142,350,000,000 kWh over its lifetime.
The total capital outlay for this project is $1.6 billion. We expect the power plant will be retired in 25
years. The substations are expected to retire at the end of 25 years. The transmission and
distribution lines are expected to last 35 years, and we budget $0.00145 per kWh of maintenance
and operating expense, or $8.3 million per year. The GE Frame 7 turbine has an approximate heat
rate of 7,000, which results in natural gas costs of $0.028 per kWh at an average price of $4 for
natural gas.
The net cost to produce power in this centralized model is $0.038 per kWh, which is significantly less
expensive than most current forms of distributed generation, including those in which the fuel is from
resource-recovery processes and is therefore virtually free. Distributed generation refers to small to
mid-scale power plants located at or near the site of the user.
14
Figure 7: CENTRALIZED GENERATION PLANT ECONOMICS
Asset
Amount Unit
Service Area
Total Customers
155 Sq. Miles
136,000 —
GE Frame 7 Natural Gas Turbine
Transmission Mileage (345 kV)
Transmission Mileage (138/69 kV)
Distribution Mileage
Substations—Large
Substations—Small
Transformers—Step-Up
Transformers—Step-Down
Distribution Transformers
Intelligent Meters
1,000
66
120
3,418
14
5
1
1
28
136,000
1
Fuel—Natural Gas
T&D Maintenance and Operating Expense
Annual Payroll
Total
Megawatts
Miles
Miles
Miles
—
—
—
—
—
Customers
— mBtu
— —
220 —
— —
Capital Cost (MM)
Cost/Unit
Asset Life (kWh)
Util.
Cost/kWh
—
—
—
—
—
—
—
—
—
—
$470,000,000
20,199,559
25,687,106
902,412,348
87,789,416
13,506,064
2,940,096
2,940,096
13,781,698
63,580,000
$470,000
305,350
213,745
264,000
6,500,000
3,000,000
2,000,000
2,000,000
500,000
468
219,000,000,000
306,600,000,000
306,600,000,000
306,600,000,000
219,000,000,000
219,000,000,000
219,000,000,000
219,000,000,000
219,000,000,000
219,000,000,000
65.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
$0.003
0.000
0.000
0.002
0.000
0.000
0.000
0.000
0.000
0.000
—
—
14,300,000
$4
—
40,000
—
—
5,694,000,000
—
—
100.0%
$0.028
0.001
0.003
$1,602,836,382
—
—
—
$0.038
1
Assumes heat rate of 7,000.
Source: Austin Energy and Robertson Stephens estimates.
The main economic advantage of the centralized power network, assuming that prices are relatively
low as a result of bulk power production, is that it is connected to a high number of customers. This
spreads the cost of the assets, particularly the transmission and distribution lines, across a relatively
high number of customers. There is also the tremendous economic benefit in having power available
to as many customers as possible given that the equipment used to create the networked economy
runs on electricity. The public power grid should also be considered generally robust, maintaining an
average of 99.9% availability, according to the Digital Power Group. Although the quality of the
power produced fluctuates, in general, we believe that the relatively high availability of the power
grid has actually lowered relative costs of capital for U.S. businesses, since the discount rates used
in internal rate of return forecasts for investment projects assumes no major disruption in the power
system. If regular power interruptions had to be accounted for in investment project forecasts, as is
the case in many emerging markets, hurdle rates would increase thereby increasing the overall
required return and the related cost of capital.
The Achilles’ heel of the centralized power network is that it has no way to effectively store power in
any meaningful bulk. Electricity travels at nearly the speed of light, and arrives at a destination at
essentially the moment it is produced; instead of being directed along a specific path, it follows the
path of least resistance. The inability to store power leads not only to supply and demand
imbalances and pricing volatility, but also creates sags and surges in the grid as load demand
migrates from one node to the other. Until recently, virtual storage was created through the overbuild
of generation facilities, which was measured in terms of reserve margin. Reserve margin is defined
as the percentage by which electric supply exceeds peak summer demand assuming all plants and
transmission lines are operating. According to NERC, reserve margin in the U.S. decreased to
14.2% in 1999, from 18.9% in 1996, although the addition of new generating capacity is expected to
bring reserve margin up to 17.5% by year-end 2002.
The Disadvantages of the Centralized Power Network
The centralized power network architecture has numerous limitations that ultimately translate into
substantial economic loss for the customers that take power from the grid. The fundamental problem
with sending power over a network of long wires is that it is especially difficult to match load supply
with load demand. In the regulated environment where the utility had control of the generation,
power is essentially floated out onto the grid in a quantity that is expected to be sufficient to handle
15
the average aggregate demand loads throughout the day. This is an inexact science, since load
demand is somewhat dependent on weather (if it is hot, people all tend to turn on their air
conditioners at the same time). It is also subject to individualized production schedules (various
manufacturing equipment is going to pull power from the grid based on internal production
projections) and various other functions of demand that are difficult if not impossible to anticipate.
This problem culminates in sags and surges on the lines when a heavy load demand (such as an arc
welder or an air conditioner) is introduced to the network. When power rushes to meet a new
demand request, it is pulled from various sources, which in turn creates imbalanced pockets of load
along the network.
In the deregulated environment, price is the determinant of how much power is made available at
any given time. While price is an excellent medium of communicating supply and demand, the
supply response is now coming from far more providers than it did in the regulated environment.
This has in turn created increased congestion along the wires, exacerbating an already unstable
grid. Between August 1999 and 2000, transmission congestion grew by more than 200%. Further, in
the first quarter of 2001, congestion was three times the level experienced during the first quarter of
2000, according to NERC. Given that several additional large markets for wholesale power are
expected to open over the next three to five years (most notably in Texas), the congestion along
transmission lines can only be expected to increase.
The sags and surges that are constantly created along the lines of the power network are
exceedingly harmful to electronic and process control equipment. It is well-known that a surge of
power into an electronic device tends to fry the circuitry, but sags in the power supply are just as
harmful and degrade electronic components over time to the point that they simply stop working. The
centralized grid architecture came of age between 1940 and 1965, before the availability of
semiconductors approached anything close to current levels; thus, the sags and surges inherent in the
network were not as destructive to the machines drawing load from it then as they are today. The
presence of sags and surges in the power grid is referred to in terms of power quality. Perfect quality
power is free of sags and surges, and fits perfectly along the sine wave that represents alternating
current (AC). Deviations from the AC wave reflect the erosion of power quality, which in turn damages
the semiconductors and circuitry enclosed in much of the hardware connected to the power grid.
Figure 8: SINE WAVE WITH HARMONIC DISTORTIONS
Source: SINTEF Group.
16
Another fundamental shortcoming of the centralized power network is that it lacks internal
redundancy. In other words, when the line is cut the power goes out. Telecommunications networks
employ various schematics to ensure that if one part of the network is cut data traffic is routed along
an alternate path, which maintains the integrity of the network transmission. Power networks are not
as clever, although blackouts (which occur when no power is fed to the end user) can also result
from a lack of power generation at the source. The relative reliability of the network—its ability to
stay on—is generally referred to in terms of “9s.” The U.S. power network is generally considered to
be reliable to three “9s,” meaning that power is available for any given user 99.9% of the time. Over
the course of a year, this translates to an average of 8.8 hours, or a 65.0% chance of an outage. The
networked economy—made up of servers, wireless towers and semiconductor-driven manufacturing
equipment—requires power that is available 99.999% of the time. This translates to an average of
8.8 seconds of outage, or a 1.0% chance the power will go out.
The net effect of relatively poor quality and reliability power is economic loss. The Electric Power
Research Institute estimates that flaws in power quality and reliability on the power grid cost U.S.
businesses $46 billion in 2000, an increase of 43.8% relative to 1999 losses. Given that commercial
and industrial power customers spent $140 billion on power in 2000, according to the DOE, this
translates to $0.33 for every $1.00 spent on power. In terms of kilowatt-hours (the ultimate measure
of how power is priced), this means power actually costs $0.088 per kilowatt-hour, or 33% higher
than the $0.066 per kWh average retail price reported by the DOE. This also means that the cost of
power recorded on customers’ income statements is significantly understated.
The transportation of electricity over long distances also results in the physical loss of power volume
the farther it travels. If 100 megawatts are fed into one end of the transmission system, there are
only 91 megawatts left by the time it arrives at the other end. Although the ultimate price of power
generated by centralized makes the system tolerable to consumers, the whole process of producing
power through a centralized power grid is remarkably wasteful and inefficient. The DOE reports that
conversion losses (the amount of electricity produced per British thermal unit of source fuel energy)
are 67% of total energy conversion. Combined with the 9% line losses in transmission and
distribution, and the 5% that is lost in plant use, the centralized system essentially needs to make
power twice in order to get it delivered once.
Aside from the physical limitations of the centralized power network, there are also significant
political and regulatory shortcomings. The most obvious is that power lines are not the most popular
civic projects around, and siting and permitting restrictions make the process of constructing new
lines of transmission and distribution costly and time-consuming. This is in large part due to the fact
that the process is controlled by state and not federal regulators (although there are also great
stretches of terrain in the Western U.S. that are federally protected).
Given the difficulties of permitting and limited sites where construction is tolerable as well as its
regulated status, the power grid does not have a lot of capital flowing its way. In 1999, U.S. electric
utilities spent just $3.0 billion on maintenance capital expenditures. An additional $2.3 billion was
spent on construction, including replacements, additions and improvements. Considering that there
are more than 800,000 miles of long-haul wires and 2.5 million miles of short-haul wires, this
translates to approximately $135 per month per mile. Spread across the 3,540,237 gigawatt-hours
(GWh) of electricity that ran across the wires in 1999, this equates to $0.00145 per kilowatt-hour
(kWh), or about one-tenth of $0.01. According to EEI, annual investments in new transmission have
dwindled to $120 million per year; adjusted for inflation the amount of dollar investment in the electric
transmission network in 1999 was half of what it was in 1979.
The EIA projects that electricity consumption will increase by 45% by 2020, but that circuit miles of
high-voltage transmission will increase a total of only 4.2% over the same period. This translates to a
rate of less than 0.5% per year over the next 19 years. We believe this is a function of several
factors, among them siting and permitting, as well as absolute capital expenditure hurdles—a mile of
17
new high-voltage transmission costs $305,350 per mile (the cost varies from region to region and by
topography; this number is taken from the most recent construction announcements). The availability
of capital is not a barrier to investment—returns are. In our opinion, the lack of investment in the
transmission and distribution grid is more a function of regulators’ setting allowable rates of return
too low. In their efforts to protect consumers from the actual cost of maintaining and expanding the
functionality of the grid, regulators have in turn exposed them to the variable and often extremely
high cost of not doing so. The Electric Policy Research Institute (EPRI) estimates that the cost to
bring the regional transmission system to a stable condition is between $10–30 billion, with annual
expenditure of $1–3 billion in maintenance capital. We believe that much of this investment is
necessary in the western regions of the U.S., where more than $20 billion of capital is slated for
investment in 40,000 megawatts of capacity over the next six years.
The Deregulation of the Power Industry
The deregulation of the power industry in the U.S. is a combination of federal and statutory
initiatives, and focuses primarily on the power generation component of the power network, leaving
the transmission and distribution (T&D) wires regulated. Specifically, there have been two main
federal initiatives thus far: A 1978 law that allowed for the development of independent generation
plants, and the 1992 Energy Policy Act that gave state regulators the authority to order open and
competitive access to utility T&D lines.
The 1978 legislation planted the seeds of what is now the independent power (IPP) industry and
achieved its objectives by requiring many utilities to buy power from the new IPPs (also referred to
as qualifying facilities [QFs]), under long-term fixed-price contracts. The IPPs would then match the
long-term fixed-price contract against a long-term fuel-purchase contract, lever 90–95% of the
capital cost with project finance debt, and earn a return on equity by reducing operating costs and
improving efficiency. AES was a pioneer in this type of operation and, since then, several U.S.
companies have followed suit, including Enron, Dynegy and Calpine. The 1992 act made it
possible for state regulators to create independent system operators (ISOs), which control the flow
of power along intrastate T&D lines, as well as wholesale power exchanges (PXs), into which power
generators competitively bid their power output.
The effect of just these two federal deregulation initiatives is impressive, in our view. Notably,
independently owned power plants accounted for 20.6% of total U.S. kWh net generation in 2000,
according to the DOE, or approximately 150,000 MW. We estimate that the current total aggregate
value of these assets is between $67–96 billion (or $450–650 per kW). The majority of this shift in
ownership away from vertically owned utilities toward independent or non-regulated entities has
taken place in just the last three years: in 1997, only 10.6% of total net generation was
independently owned. This coincides with the efforts of many of the largest states, both in terms of
gross state product (GSP) and total megawatts of generation, to open their generation markets to
competition. Connecticut began its restructuring efforts in 1995; followed by California, New York,
Pennsylvania, Texas, Rhode Island and Vermont in 1996; Illinois, Massachusetts and Maine
followed in 1997; and Arizona got under way in 1998.
As of September 2001, 24 states have enacted legislation to establish competitive retail power
markets, representing approximately 438,500 MW of generation capacity, or 57.0% of total U.S.
capacity, and $6.1 trillion of GSP, or 66.0% of U.S. GDP. In addition, there are 18 states with
ongoing deregulation initiatives; combined with those states that have enacted deregulation, the total
number of states with progressive deregulation programs is 42, representing 88.0% of total
generation capacity and 91.0% of total U.S. GDP.
The gradual opening of major U.S. generation markets to competition over the last five years has
triggered dramatic growth in the trading of wholesale power. The aggregate notional value of
wholesale power and natural gas contracts traded in 2000 was $236 billion, an 89% increase from
18
1999. This is a function of both an increased number of market participants and an increase in
trading velocity, or the number of times an electron is traded before it is consumed. The average
wholesale U.S. electron is traded three times before it is consumed, but this is still the sign of a
relatively immature market. Notably, in the Nord pool in Scandinavia, which has been in place since
1993, the average electron is traded ten times before it is consumed, according to KWI.
However, the expected consumer benefits of increased choice and, ultimately, lower power prices
have not yet fully emerged. According to an October report, the Federal Trade Commission
determined that the lack of significant price declines was due to the fact that none of the states with
retail-choice programs has completed the transition from regulation to competition. The FTC noted
that, because most markets are currently a hybrid of regulation and competition, the ultimate effects
of deregulation have not yet been felt, although it did indicate its belief that lower average prices
would eventually materialize.
19
Figure 9: STATUS OF ELECTRICITY RESTRUCTURING BY STATE, AS OF SEPTEMBER 2001 ($ in millions)
State
Date
Description of Activity
Alabama
Oct-00
PSC closes formal inquiry into restructuring, determined it was not
demonstrated that all consumers would continue to receive safe, reliable
and efficient energy services at fair and reasonable prices; will continue
to monitor other states' activities.
Alaska
Apr-00
S.B. 303 introduced—if passed bill would implement retail choice in
the railbelt area by September 2001.
Jul-99
Legislature disbanded the Public Utility Commission and assigned
responsibilities to Regulatory Commission of Alaska.
Jan-00
Enron and Center for Law in Public Interest file suits challenging APS
(Arizona Public Service) restructuring settlement—claims sets electric
rates without examining company financial condition to establish
fairness. Enron claims shopping credit too low, will stifle competition;
potential for unfair marketing practices since APS not required to sell
generation assets but instead transfer them to utility affiliate.
Arizona
Deregulation
Legislation


Enacted Issued Ongoing None
Generation

MW
GWh
22,372 120,033
% of
Total
1999
GSP
3.3%
$115,071.00
2,093
5,861
0.2%
$26,353.00
15,254
82,080
2.3%
$143,683.00
10,013
45,662
1.3%
$64,773.00
52,349 188,758
May-98 HB 2663 enacted; law affirms ACC’s authority to require utes open turf
to retail competition. Bill extends restructuring to municipals and other
publicly owned utes.
Arkansas
Aug-01
Act 324 delays implementation of retail access until 10/03; public
hearing set for 10/18/01.
Mar-01
SB 236 signed into law, Act 324; delays start of deregulation from
1/02 to 10/03, authorizes PSC to initiate further delays based on
adequacy of transmission system and generating capacity to
support competitive market.
Aug-01
CA PUC publishes draft rate agreement between CPUC and DWR,
contains mechanism used to set electric rates to support DWR's powerpurchase program. Revenue requirements include costs requisite to
issue and pay off bonds issued for purchasing power under AB1 and
other costs. Comments filed by 8/01.
Jun-01
CA PUC set tiered rate structure for $0.03/kWh increase
adopted 3/27/01; commercial rates increase 34–45%, industrial
rates increase 50%, agricultural rates increase 15–20%, residential
rates increase up to 80%, no increase for low income or those using
below 130% of baseline.
Jun-01
SBX1 6 signed into law; main objective is to ensure adequate
supply of power at reasonable prices. Creates new agency with
authority to construct new power plants and transmission projects,
issue up to $5 billion in bonds, direct energy efficiency programs,
renewable programs.
Mar-01
Gov. Davis, through SB 33, can purchase utilities' transmissions
assets; agrees to purchase SCE transmission system for $2.67 billion.
Mar-01
FERC issues order to 13 power sellers in California to either make
refunds for power sales above proxy market clearing price during
Stage 3 emergencies or provide justification.
Mar-01
CA PUC approves rate increases of more than 40% for customers of two of
state’s major IOUs, most marked for reimbursement to the state for power it
purchases from the two IOUs.
Jan-01
FERC issues compliance order to Cal PX to enforce 12/00 order
ensuring that sellers into the PX market that bid in excess of
$150/MWh only receive actual bids rather than highest bid price;
Cal PX suspends day-ahead and day-of-market operations.
Sep-96
AB 1890 enacted to restructure California electric industry and
implement direct retail access; requires creation of ISO to operate
transmission system and a PX to operate a wholesale power market,
through which IOUs must sell to and buy all power; calls for divestiture
of power plants by IOUs; recovery of stranded costs through charge
on bills until 2002; a 10% rate reduction; and continued efficiency and
renewable programs.
Colorado
Jan-99
CO PUC adopts rules requiring IOUs to itemize fuel sources used for
generated and purchased electricity.
Connecticut
Sep-99
DPUC issues rule aimed at preventing customers from switching back
to standard offer service (SOS) after switching to an alternative
supplier if the SOS is the least expensive alternative for 12 months.
Apr-98
RB 5005 signed into law; allows access to competitive suppliers for
35% of consumers by 1/00 and all consumers by 7/00. Utilities
required to sell non-nuclear-generation assets by 1/00 and nuclear by
1/04. Bill also requires participation in ISO, public interest program
funding, functional unbundling, renewable energy funding, 5.5%
renewable portfolio standard, environmental protections and 10%
rate reduction beginning 1/00.
Jul-95
CT DPUC issues final report calling for restructuring the electric power
industry and gradually moving to retail competition.
California
Source: BEA and EIA.
20
5.2% $1,229,098.00
7,613
38,851
1.1%
$153,728.00
6,565
19,669
0.5%
$151,779.00
(Continued)
Figure 9: STATUS OF ELECTRICITY RESTRUCTURING BY STATE ($ in millions)
State
Delaware
Date
Sep-99
PUC issues final orders for restructuring electric utes in Delaware.
Mar-99
HB 10, Electric Utility Restructuring Act of 1999, enacted; provides for
phase in of retail competition beginning in 10/99 and completed by
4/01; residential rate cut of 7.5% and rate freeze for co-op customers;
funding for public benefits programs and no stranded cost recovery.
Washington, D.C. Jan-01
D.C. begins allowing customers direct access to competitive
electricity suppliers.
Deregulation
Legislation


(Continued)
Generation

MW
GWh
2,452
6,899
806
244
% of
Total
0.2%
1999
GSP
$34,669.00
0.0%
$55,832.00
Jan-00
DC PSC approves PEPCO restructuring settlement; government
and commercial customers have retail access.
Jan-00
D.C. City Council passes legislation to allow retail competition.
Apr-00
Supreme Court of Florida reverses the PSC order approving Duke’s
proposal for merchant power plant in New Smyrna; rules PSC does not
have authority per Florida Electric Power Plant Siting Act of 1973.
Apr-00
SB 2020 requires study of electric utility deregulation
and energy policy.
Feb-99
PSC rules IOUs must disclose sources of generation and purchased
power by fuel type.
Aug-98
PSC approves discount rates up to 20% for
new and expanding businesses.
Georgia
Jan-98
PSC issues staff report on electric restructuring, recommends marketbased rates, unbundled services, stranded cost recovery. Establishes
docket and recommends slow approach.
Hawaii
Apr-99
HI PUC has open docket (#96-0493) on electric power industry
restructuring; no recent action.
2,353
10,227
0.3%
$40,914.00
Idaho
Dec-98
Legislative committee concludes that deregulation would increase
electric prices and recommends against restructuring.
3,001
13,849
0.4%
$34,025.00
Illinois
Dec-00
ICC issues update on status of competition; as of 1/01 all commercial
and industrial customers are eligible for retail access to competitive
suppliers; residential eligible starting 5/01. Finds less than 10% of customers
have switched load to alternative suppliers, states lack of competition due to
need for more suppliers, electricity shortages, inefficient transmission
system, lack of uniform interconnection standards and lack of restructuring
in surrounding states.
Dec-97
HB 362 enacted; provides for rate cuts for ComEd and Illinois Power
effective 8/98, gives some C&I customers choice by 10/99, everyone
else by 5/02. Transition charges collectable through 2006, residential
customers get rate cut of 15% in 8/98, another 5% in 5/02.
Indiana
Mar-99
HB 648, a restructuring bill, is introduced but fails to move beyond
committee hearing.
Iowa
Apr-00
Proposed restructuring legislation dies without further action on
SF 2361 or HF 2530.
Mar-00
DNR proposes including Renewable Portfolio Standard in
restructuring legislation; would require renewable sources to be 4% in
2005 and 10% by 2015.
Florida
Kansas
Kentucky
Apr-00
General Assembly authorizes task force on restructuring.
PSC issues order to reduce rates under performance-based ratemaking approach; $52 million over five years.
Louisiana
Jan-01
PSC issues draft restructuring; allow large industrial customers retail
choice starting 1/03; utilities not required to divest generation assets.
Maine
Mar-01
PUC orders Central Maine Power to provide SOS from 3/01 to 3/02 for
medium and large non-residential customers, and set the SOS; PUC
approves CMP contracts with wholesale suppliers to supply the power
for the SOS, approves non-residential SOS rates ranging from
$0.056/kWh off-peak non-summer to $0.146 on-peak summer.
5.2% $442,895.00
25,082 115,327
3.2% $275,719.00
32,493 138,747
3.8% $445,666.00
21,808 117,521
3.2% $182,202.00
8,702
38,205
1.1%
$85,243.00
9,965
41,585
1.1%
$80,843.00
16,007
90,937
2.5% $113,539.00
20,372
89,622
2.5% $128,959.00
2,825
11,116
0.3%
11,582
50,650
1.4% $174,710.00
May-99 No electric measures acted on.
Apr-99
40,151 189,459
$34,064.00
May-97 LD 1804 enacted, allows retail competition by 3/00, features market
share cap of 33% for large IOS in former service territories, requires
divestiture of generation assets by 3/00, requires 30% of generation to
be from renewable energy sources including hydroelectric.
Maryland
Jan-00
PSC approves PEPCO’s restructuring plan; customers begin retail direct
access 7/00, PEPCO receives approval to sell generation assets.
Apr-99
HB 703 enacted; restructuring legislation includes 3% rate reduction
for residential consumers, stranded cost recovery TBD by PUC, fuel
source disclosure, non-bypassable wire charge, three-year phase in
begins 7/00 and concludes 7/02.
(Continued)
21
State
Massachusetts
Date
Aug-01
Dec-00
Nov-98
Nov-97
Michigan
Jan-01
Jun-00
Jun-00
Deregulation
Legislation


MA DTE approves fuel adjustment rate increases for standard offers by
$0.0123/kWh to reflect the rising cost of fuel to generate electricity.
(Continued)
Generation

MW
GWh
10,328 45,817
% of
Total
1.3%
1999
GSP
$262,564.00
24,634 100,566
2.8%
$308,310.00
10,118
47,418
1.3%
$172,982.00
MA DTE raises SOS for BECO to $0.05821/kWh from
$0.04500/kWh, other utility SOS rates also increased.
Ballot initiative to repeal electric restructuring unsuccessful; voters
defeat Question 4 by 71% of vote.
HB 5117 enacted; restructures electric power industry, retail access
required by 3/98, rate cuts of 10% by 3/98, another 5% 18 months
later, encourages divestiture of generation assets.
PSC issues final order authorizing DTE to securitize $1.77 billion in costs
through bond issuance for implementation of 5% rate reduction.
PSC issues orders to implement restructuring legislation; requires
revised tariff filings to implement retail access, IOUs and others with
more than 1 MW peak load must file restructuring plans, MPSC to
consult with generators on interconnection standards. Also issues
order establishing framework for alternative electric suppliers
to participate in retail markets.
Public Acts 141 and 142 signed into law; allows all consumers retail
choice by 1/02, DTE and CE customers get immediate 5% rate
reduction then frozen until 12/03, C&I rates capped to 12/03, smallbusiness capped until 12/04, authorizes stranded cost recovery and
licensing of new suppliers.
Minnesota
Jan-00
Mississippi
May-00 PSC concludes competitive power industry would not be beneficial.
7,538
34,434
1.0%
$64,286.00
Missouri
Sep-01
16,389
75,193
2.1%
$170,470.00
5,065
28,461
0.8%
$20,636.00
5,827
28,797
0.8%
$53,744.00
Feb-99
MN Legislative Electric Energy Task Force reports no consensus as
to whether state should restructure electric industry.
PSC approves reorg of KCPL into three subs: KCPL, which engages
in generation, T&D to 467,000 customers; Great Plains Power,
which develops competitive generation for the wholesale market;
and KLT, a non-reg with investments in energy-related businesses;
supply agreements require PSC approval and are cost-based.
Several bills introduced into legislature to restructure electric
industry to allow retail access by 01/00 or 01/02.
Montana
May-01 HB 474 signed into law, significantly alters existing restructuring and
extends transition period to 7/07; MT BOI authorized to invest in 450
MW of new generation and 120 MW in purchases from PURPA QFs,
creates MT Power Authority, financed by revenue bonds to
purchase, construct and operate generation, T&D systems,
Universal System Benefits Charge extended from 7/03 to 12/05, and
public utilities are to offer a product composed of electricity
from renewable resources.
Jan-01 MT PSC approves interim $14.5 million increase in delivery rates for
MTP customers.
Nov-00 MT PSC delays complete retail access for all consumers from 7/02
to 7/04 because of lack of competitive power supply market.
Nebraska
Feb-98
Initial studies completed; additional studies requested.
Nevada
Mar-01
Deregulation indefinitely delayed.
6,389
30,590
0.8%
$69,864.00
New Hampshire
Jan-01
NH Supreme Court upholds PSNH restructuring plan; PSNH plans
to implement retail choice 4/01, 10% rate reduction, SOS between
$0.044/kWh and $0.046/kWh, increasing gradually over three-year
transition period, divestiture of generation assets including PSNH
interest in Seabrook nuclear and 1,200 MW in fossil and hydro plants.
2,850
16,103
0.4%
$44,229.00
New Jersey
Dec-00
NJ Supreme Court upholds decision upholding NJBPU restructuring
and securitization orders for PSE&G; allows PSE&G to go forward
with implementing restructuring according to orders issued by BPU,
customers receive additional 2% rate reduction and securitization
bonds will be sold for $2.5 billion.
Legislation A 10/S 5 enacted; restructures electric industry, allows
customers to shop for electric supplier by 8/99, reduces current
rates 5% and 10% over next three years, allows for recovery of
stranded costs through wires charges.
16,625
53,666
1.5%
$331,544.00
5,531
32,342
0.9%
$51,026.00
Feb-99
New Mexico
May-01 SB 266 enacted to delay opening of retail markets to competition
until 2007.
Aug-00 NM Attorney General, NMIEC, NMRECA ask PRC to postpone
pending decision authorizing IOUs to unbundle operations;
concerned about price spikes in California.
22
(Continued)
State
New York
Date
Jun-01
Deregulation
Legislation


NY PSC approves standards governing the electronic exchange of
routine business information and data among electricity and natural
gas service providers in New York, issues order to establish uniform
retail access billing and payment processing practices that facilitate
single-bill option.
(Continued)
Generation

MW
GWh
34,963 144,553
% of
Total
4.0%
1999
GSP
$754,590.00
22,845 121,372
3.4%
$258,592.00
30,672
0.8%
$16,991.00
27,095 147,943
4.1%
$361,981.00
Mar-01
PSC approves rules for customers in NYSE&G territory to receive
credit for switching to competitive supplier; new "shopping credit"
tied to the going market price plus admin costs.
May-96 PSC orders decision to restructure New York electric power
industry; Competitive Opportunities Case adopts goal of having
competitive wholesale market by 1997, competitive retail market by
1998. Utilities should have reasonable opportunity to recover
stranded costs.
North Carolina
Jan-01
Legislation study panel concludes more study of restructuring issues
needed before recommending state opens to competition by 2005;
focus on consumer protection and encouragement of power plant
construction in the state.
North Dakota
--
No restructuring legislation introduced in 1999 or 2001.
Ohio
Oct-00
Allegheny Energy's restructuring plans approved by PUC;
competition and 5% residential rate reduction begins 1/01, rates
frozen through development period, which is 2003 for C&I
customers and 2005 for residential customers.
Jul-99
SB 3 signed into law; allows retail customers to choose energy
suppliers beginning 1/01, requires 5% rate reduction, five-year rate
freeze, consumer protections, environmental provisions, labor
protections, empowers PUC to determine stranded costs and
recovery period.
Oklahoma
Jun-01
Governor signs SB 440, establishes nine-member task force to
study effects of deregulation.
13,451
56,191
1.6%
$86,382.00
Oregon
Aug-01
HB 3633 enacted to revise Oregon electric restructuring law; delays
date for implementing retail access for large customers from 10/01
to 3/02, other provisions also delayed six months.
HB 3502 enacted to amend the power of PUC to both obtain fair and
reasonable rates, and balance interests of utility investor and consumer.
S.B. 1149 passed; residential consumers will not have retail access,
allows PUC to suspend restructuring if it jeopardizes low-cost power
from BPA, allows munis to choose whether or not to participate.
11,344
51,142
1.4%
$109,694.00
PUC approves settlement with GPU preserving customer rate caps,
encourages customer choice in alternative generation suppliers,
increases support for renewable energy and conservation,
enables GPU to defer wholesale power losses through 2005;
distribution rate caps extended through 2005, total generation rates
continue through 2010, shopping credits rise with corresponding
decrease in competitive transition charge, commits $15 million to
renewable and sustainable energy development.
HB 2286, bill to accelerate retail choice for all consumers by two
years to 1/99 is introduced.
HB 1509 is enacted; allows consumers to choose among
competitive generation suppliers beginning with one-third of
consumers by 1/99, two-thirds by 1/00 and all by 1/01.
36,563 191,134
5.3%
$382,980.00
Rhode Island
May-01 SB 881 passed; enables non-residential customers enrolled in lastresort service the option to return to SOS.
Aug-96 HB 8124 enacted; allows retail choice beginning 7/97, continues in
phases. First state to begin phase in of statewide retail wheeling for
industrial customers; residential customers guaranteed retail access
by 7/98.
South Carolina
Mar-00
SB 1168 introduced and referred to the Committee on Judiciary; allows
for retail direct access within three years but few expect it to pass.
South Dakota
Jun-99
Black Hills Power & Light freezes rates for five years until 1/05; rates
are among lowest in the United States.
Tennessee
Feb-99
Study Commission is continued; recommendations for restructuring
in Tennessee must be made by 2/01 when the commission ends.
Aug-01
Jul-99
Pennsylvania
Aug-01
Mar-98
Dec-96
4,691
957
7,659
0.2%
$32,546.00
18,116
87,244
2.4%
$106,917.00
2,923
9,089
0.3%
$21,631.00
18,180
97,731
2.7%
$170,085.00
(Continued)
23
State
Texas
Date
Sep-01
Aug-01
Jun-99
Aug-96
Deregulation
Legislation


Utilities begin auction process for generation assets; according to
SB 7 each generation company affiliated with a former utility must
sell entitlements to at least 15% of installed generation capacity at
least 60 days before competition begins. Action is designed to
increase pool of available power for new retail suppliers entering
market, prevent market power and promote competition.
(Continued)
Generation

% of
MW
GWh
Total
74,582 354,838
9.8%
1999
GSP
$687,272.00
Schedule for full implementation of retail open access
set to begin 1/02.
SB 7 enacted; requires retail competition begin by 1/02, rates frozen
for three years, then 6% reduction required for residential and smallcommercial customers, remains price to beat for five years or until
utilities lose 40% of customers to competition. All stranded costs
may be recovered, securitization allowed, utilities must unbundle
into three separate categories—the generation, the T&D and the
retail electric provider. Utilities cannot own more than 20% of
generation in their region, MUNIs and co-ops not affected unless
they choose in 1/02 to open territories to competition. Also requires
increase in renewable generation and 50% of new generation
capacity to be natural gas-fired.
PUC authorizes ERCOT ISO to be operational by 7/97.
Utah
Feb-99
Electric Deregulation and Customer Choice Task force continued
through 11/00.
5,206
35,910
1.0%
$62,641.00
Vermont
Dec-98
Working Group on Vermont's Electricity Future issues report with
restructuring plan; recommends restructuring within 18 months.
Governor creates task force to study restructuring activities.
VT PSB issues plan to restructure electric industry and calls for retail
competition by 1998; requires legislation.
961
4,909
0.1%
$17,164.00
18,750
72,198
2.0%
$242,221.00
26,167
102,074
2.8%
$209,258.00
15,065
92,822
2.6%
$40,685.00
Aug-98
Dec-96
Virginia
Jul-01
Mar-99
State Corporation Commission adopts rules to advance competitive
energy supply market and protect customers when the retail market
opens in 1/02; rules that utilities provide lists of all eligible customers
to competitive service providers, utilities would unbundle charges on
customer bills into distribution service, competitive transition charge,
electricity supply service and taxes.
SB 1269 passes General Assembly, signed into law by governor;
creates regional transmission entity by 1/01, deregulates generation
by 1/02, phases in consumer choice between 1/02 and 1/04, caps
rates until 7/07 for those that remain with incumbent utility, recovers
stranded costs through capped rates for customers staying with
utility and wires charges for those that switch, fuel and emission
disclosure requirements.
Washington
May-01 WUTC announces settlement between Puget Sound Energy and its
large industrial customers; the six largest customers will be allowed
to buy power from any source including other utilities, power
marketers and each other.
May-98 Bills passed to allow net metering for customer site generation
from solar, wind and small (25 kW) hydro, and an unbundling bill
to require generation, distribution, transmission, control area
services and programs to benefit the public to be shown as separate
charges for the purposes of preparing a report to the state
legislature. Bills do not require utilities to offer unbundled services.
West Virginia
Oct-00
Dec-99
Before provisions of restructuring law can take effect (approved in
3/00), a resolution must be passed by legislature in 2001;
lawmakers have concerns in small consumer price protection.
PSC submits restructuring plan to legislature; implements customer
choice by 1/01, provides rate freeze through 2004, stabilizes rates
through 2014. Divestiture is not required, but utilities must transfer
generation to a fully separate sub by 2005.
Wisconsin
Dec-00
WPS Resources files restructuring plan with PSC to transfer WPS
generating assets to a non-regulated sub and transform WIPSC into
regulated wires company. PPA between the two would be executed
and ratepayers would retain same rates. Plan is seen to remove
power plants and construction from rate base as step toward
competitive market in Wisconsin, which is seen as inevitable due to
surrounding states’ restructuring status.
12,759
56,356
1.6%
$166,481.00
Wyoming
Jun-98
PUC hearing on deregulation canceled in
response to legislators’ concerns.
6,112
45,348
1.3%
$17,448.00
775,882 3,617,873 100.0%
$9,308,979.00
Total
24
24
1
18
8
Pricing, Tariffs and Rate Structures
Total electricity costs to the consumer are dependent on several inputs: the cost of generation, the
cost of transportation, various other charges that depend on the territory and infrastructure projects
or financing schemes within the region. In the traditional regulated model, where a regulated utility
provides generation, transmission and distribution services, these costs are bundled into one bill.
Although it provides service to numerous end users, in reality the utility under the regulated model
has only one customer: the regulator. The regulator determines rates of return, not the customer; so,
the utility designs its investment plans in terms of the attractiveness to the regulator and not
necessarily in terms of the economic demand for the service. Rate structures are set by regulators in
a process called a rate case, in which the utility makes a case for what it believes represents a
necessary rate of return on assets and the regulators ultimately decide whether the dollar amount
requested is “just and reasonable” to the customers utilizing the asset.
In competitive and deregulated markets, the various cost inputs that make up the cost of a delivered
kilowatt-hour are unbundled. This means that the competitive generation prices are shown as
distinct from the regulated transmission and distribution charges, as well as the various other
charges that are the result of various decrees put in place by regulators. A common example of an
extraordinary charge is the cost of stranded assets, a term used to describe projects developed by
utilities that are approved or mandated by the regulators within the regulated model but are deemed
to be uneconomic or at a permanent cost disadvantage in an unregulated model. In most states
where there is a process to move from regulated markets to deregulated markets, the rate-payer
picks up the tab for the cost of the projects the regulators accepted as beneficial despite their
inability to earn an investment return. This can come in the form of a direct charge to each ratepayer
spread out over a number of years, or it might be in the form of the repayment of a bond issue used
to pay the utility the fair value necessary to reconcile its stranded assets in a lump sum at the outset
of deregulation.
Most references to power prices are made to the competitive markets that trade power in wholesale
blocks. Competitive market prices are categorized as firm peak and firm off-peak, and non-firm peak
and non-firm off-peak. Spot prices are quoted for day-ahead consumption, as well as in various
forward market time series.
25
Figure 10: U.S. REGIONAL WHOLESALE POWER PRICES
900.00
800.00
Megawatt-hour (MWh)
700.00
600.00
500.00
400.00
300.00
200.00
100.00
0.00
Oct00
Nov00
Dec00
Jan01
Feb01
West Coast Ave.
Mar01
Apr01
South Ave.
May01
Jun01
Jul01
Mid-west Ave.
Aug01
Sep01
Oct01
East Ave.
Source: Bloomberg.
It is important to recognize that although there are different prices for power depending on supply
and demand within given regions, all of the power that is consumed from the grid can be considered
the same. In effect, there is only one power product available on the grid—commodity-grade, lowquality 99.9% electrons. And as we mentioned previously, the hidden cost of this kind of low-quality
power indicates that delivered power prices understate the true cost of the power available from the
grid by approximately 25% for commercial and industrial customers.
Merchant Power Operations
The most significant area of investment in the power industry over the last ten years has been in
merchant, or non-utility, owned power plants. In tandem with the convergence of natural gas
gathering, marketing and transportation companies, with power generation and transmission
companies, merchant power operations have emerged as the dominant area of growth within the
energy industry. Led by companies such as Enron, Dynegy, AES, Calpine, El Paso, Williams,
Kinder Morgan, Duke, Southern (now Mirant) and numerous other unregulated power and gas
companies, more than $65 billion is expected to be invested in merchant power over the next ten
years. Independent power operators (companies other than the regulated utilities) now account for
20.6% of the total megawatt capacity.
The growth of the independent power industry has coincided with the significant pace of economic
growth throughout the 1990s, which has led to increased demand for power. While demand for
power tends to increase over time at a rate close to GDP, the continued proliferation of higher-
26
power, lower-cost semiconductors has also contributed to the increase in demand for electricity.
Data centers, in particular, are among the most power-intensive facilities in the economy with an
average load draw of 50–70 watts per square foot, according to EYP Mission Critical, a power
design and engineering firm. This is compared with the 3–7 watts per square foot of average
demand found in a traditional office building. Although the increase in data center operations is offset
in some part by decreased server use at end-user sites, the percent increase in power demand
related to the Internet is estimated between 3–15% (admittedly a wide range, and the source of
considerable debate among power engineers and physicists).
The IPP model generally hinges on the degree to which the project developer can lever nonrecourse debt. A typical IPP project will match a long-term fixed-price power output contract against
a long-term fixed-price fuel project, capitalized with non-recourse project debt and equity from the
parent company. A typical U.S. IPP project will carry between 85–95% non-recourse debt in a
structure similar to the one we have detailed. The return to the company is determined by its ability
to reduce operating costs and increase efficiency, as well as the base return implied through the
project structure itself. Several companies have advanced this model by owning pieces of the natural
gas infrastructure as well as rights to gas supply that can be arbitraged against the prices the
company can achieve for its power in the competitive marketplace. In addition, there are more
sophisticated instances where companies use their wholesale gas and power trading operations to
determine the return for the individual assets within the portfolio through the origination and remarketing of complex derivative contracts used by end customers to achieve relative price stability
for their energy consumption.
27
The Demand for Energy Technology
Two Sources of Demand: Power Provider and Power Customer
The demand for energy technology comes from two sources: the power providers and the power
customers. In addition, numerous power companies are taking advantage of strong balance sheets
and healthy cash flows to invest in energy technology companies. In our opinion, much of the nearterm growth in energy technology sales will be driven by demand from power providers, many of
which are recognizing the need for system upgrades in the wake of competitive markets for power.
In addition, innovations that improve the efficiency and reliability of the power grid as well as smaller
generation technologies are attractive to power providers as well. The power customer has two main
motivations—the reliability and quality of power, and the reduction of overall power costs through
increased efficiency and outsourced energy management services. Energy efficiency has already
had a substantial effect on total U.S. power consumption; EEI estimates that if energy efficiency had
stayed constant since 1972, power consumption would have been 72% higher to date than it has
actually been.
Power Provider Demand and Market Size
With the onset of deregulation, power providers have accelerated capital investment in a wide range
of areas. The most dramatic has been in the construction of new power plants, which we estimate
capital investment of $20 billion in the U.S. in 2001 alone. We believe that investment in new largescale power plants will continue to be a priority among energy companies and estimate that more
than $65 billion will be invested to build new power plants in the U.S. over the next five years.
The demand for energy technology from power providers spans nearly all aspects of the power
business. The substantial growth in the wholesale gas and power markets has increased the need
for trading and risk-analysis software that is specific to the complexity of energy trades. Online
energy trading is expected to exceed $3.6 trillion in notional transaction value by 2005, according to
Forrester Research, Inc. While many of the largest players in the wholesale markets have developed
proprietary trading systems, the total number of market participants and the velocity of trading have
increased significantly over the last several years. Even municipal consortia, long the most staid
energy companies in the business, are active in wholesale energy trading. For example, The
Energy Authority, which represents the Jacksonville Electric Authority, the Gainesville, Florida
regional utilities, and various other municipal and state power companies, booked $120 million in
wholesale trading profits in 2000. We estimate that the market for software-based trading systems
and risk-analysis models could reach $1 billion by 2005 and $4 billion by 2010.
The demand for new enterprise systems is not limited to energy trading and touches most aspects of
the day-to-day management of the energy business. Management of the T&D system requires
advanced wireless communications systems, and intelligent metering and measurement devices.
The T&D infrastructure itself is in need of the kind of technology that advanced the
telecommunications networks from general voice capability to high-throughput data transmission:
power chip switches to improve control and power throughput. One needs superconducting cable to
increase the capacity of the distribution network while decreasing the amount of cable required,
similar to the effect of shifting from copper to glass transmission wires in telecommunications
networks. The substations that control the flow of power along the grid are also in need of improved
power switching, conditioning and measurement systems. In addition, the load pockets that lead to
unreliable service along numerous nodes the grid can be addressed using small-scale or distributed
generation at the site of the grid supply imbalance. We estimate that the capital required to upgrade
and retrofit the transmission and distribution network, above and beyond that of the straightforward
addition of new lines, is in the tens of billions of dollars over the next decade.
28
Beyond investing in internal systems and infrastructure, power providers are also moving to provide
additional services to customers, which in turn is leading to increased demand for the technologies
that have the capability to create and deliver them. Several energy service providers are moving to
provide new classes of power products, including more reliable and higher-quality power, that
require the use of advanced, uninterruptible and continuous power supply systems, as well as
advanced switch gear and measurement systems.
Some of the more forward-thinking energy providers are recognizing that the ability to provide highquality and reliability power may be the best way to offset the potential of declining margins in
commodity power that may result from the addition of new capacity in the U.S. over the next five
years. RealEnergy, a start-up energy service provider in California, is ramping up on several
distributed generation projects that incorporate small-scale on-site generation devices with
generation-management software in a grid-connected configuration. These installments allow the
company to “peak shave” on behalf of commercial real estate companies, providing their own power
generation during peak hours when rates are highest for power from the grid. Austin Energy, a
municipal power provider in Austin, Texas, is considering constructing “premium power parks,” which
will integrate with the grid but provide dedicated high-quality and reliability power to data centers that
use the power park as a hub for their operations in one centralized location.
The Department of Energy estimates that 20% of new generation capacity will be in the form of
distributed generation by 2010, or approximately 2% of the total anticipated capacity of
approximately 1,000,000 megawatts by 2010. “Distributed” generation refers to small and midscale
power plants located at the site of the end user. We estimate the annual value of power output from
new distributed generation equipment could be in the $7–10 billion range based on 50% utilization
and power generation costs between $0.075 and $0.010 per kWh. We estimate that cumulative
sales of incremental distributed generation equipment over the same period will be approximately
$11 billion.
In addition to offering high-quality and high-reliability services, utilities are pursuing the use of
combined heat and power (CHP) technologies. The use of CHP increases the overall efficiency of a
generation unit, especially in on-site or distributed generation applications. Some CHP systems have
achieved efficiencies greater than 70%, which is significantly higher than the 35–50% efficiencies
claimed by distributed generation devices operating in a single-duty mode. The use of distributed
generation to create power also allows natural gas utilities, which have traditionally been kept out of
the power business, to deliver to the customer the capability to self-generate power and, in the
process, sell more natural gas.
Power Customer Demand and Market Size
The demand from power customers for energy technology ranges from straightforward bill analysis
and payment systems aimed at reducing basic energy spending to sophisticated high-reliability
continuous power configurations designed to avoid massive production and market share losses.
We believe the two main drivers of demand for energy technology from power customers are the
need for critical power quality and reliability, and the pursuit of lower total energy costs. The market
for power quality equipment, which includes uninterruptible power supply systems, backup
generators and DC power systems, was approximately $11 billion in 2000. Most of this was spent by
power customers that need to protect equipment for the frequent sags, surges and cuts in the power
stream fed from the regulated public transmission and distribution network. Thus far, the demand for
lower total energy costs has generally been met with energy management services, although some
customers have moved to integrate their own distributed generation with the grid in an effort to avoid
high grid power costs during peak consumption hours.
29
The demand for power quality and reliability equipment from power customers is directly tied to the
fact that sags, surges and cuts in the power grid are detrimental to the machines that draw power
from it. The Electric Power Research Institute estimates that U.S. businesses lost $46 billion in 2000
as a result of power quality events along the grid. Notably, total global sales of power quality and
reliability equipment in 2000 was approximately $11 billion. If half of the market is in the U.S., this
means American businesses lost seven times what they spent on power quality equipment in 2000.
This indicates the potential for significant growth in power quality equipment over the next several
years given the general consensus that the power grid is going to get worse before it gets better.
Given the 23% increase in diesel, dual fuel and gas-reciprocating engine units ordered in 2000,
reported by Diesel & Gas Turbine Worldwide (of which the majority was used for standby and
backup generation), we believe that power customers are already responding to the threat and
probability of power quality events.
In the high-tech industry, where power quality and reliability are critical, and sags and surges can not
only disrupt production but destroy equipment, many power customers take power quality matters
into their own hands. Over the past five years, the semiconductor manufacturing industry has
overtaken the auto industry and now represents the largest manufacturing industry in the United
States, according to the Digital Power Group. In 1999, STMicroelectronics paid more than $1 million
for a single superconducting magnetic energy storage (SMES) unit used to correct power sags and
surges. AOL has 55 megawatts (enough to power approximately 7,500 houses) of backup
generation capacity at its current facilities, and plans to install another 29 megawatts for its facilities
that are under construction. Oracle spent $6.6 million to build its own 13-megawatt substation at its
Redwood Shores, California, facility. While power is generally not a large component of variable
costs for most companies (although for heavy industries it can represent more than 50%), the cost of
not having it is substantial. We estimate that the cost to power an average cell tower for one hour is
approximately $0.66; the average revenue lost when the power is out for the same hour is $41,000.
The quest for lower energy costs has resulted in several customer-based strategies, mostly in the
form of energy services but also in the form of self-owned generation. An increasing number of
companies are either outsourcing all of their energy operations (procurement, bill-paying, efficiency
initiatives and other aspects of energy management) to companies including Enron Energy
Services, Sempra Energy Solutions, DukeSolutions, Pepco Services, Service Resources
International, TXU Energy Services and others, or simply assigning the function of energy billpaying and energy usage analysis to an outside vendor, such as Avista Advantage. Other power
customers are using intelligent measurement systems and software from Power Measurement,
Silicon Energy, Sixth Dimension, Powerweb and LODESTAR to establish their own records of
energy usage, quality and pricing. Chase Manhattan, Starwood Hotels, Boeing, Kraft, Simon
Property Group, DreamWorks, Federated Department Stores, Home Depot, Toys R Us and many of
the federal departments are all using some form of outsourced energy services at a national level.
Nike is currently using a service developed by Portland General and Silicon Energy that allows
facility managers to monitor energy usage at 15-minute intervals. According to Power Measurement,
a power customer can expect to pay 10% of its electric bill to implement an energy management
system, with payback in 6–12 months.
In a recent E-Source survey of energy customers that use energy services, 55% reported that tariff,
rate negotiation and bill payment were a useful service currently offered, followed by 50% that
reported that power quality monitoring was a useful service. In a correlative survey, it was reported
that among customers not currently using energy services that energy use profiles, analysis and
tariff or rate negotiation were perceived as useful by 35% of respondents, the highest attribution of
potential services offered.
Still other power customers are utilizing distributed generation to self-produce power during peak
usage hours, thereby avoiding the highest-price power and lowering total expenditures on power.
This approach is advantageous if the power customer can sell power generated during non-peak
hours back to the grid, in a process referred to as “net metering.” This concept was taken to the
30
extreme by several Northwest aluminum manufacturers in Q1:01, when power prices in the region
were so high that it was of higher economic value for the manufacturers to shut down smelting
operations altogether and resell the power the company had under contract. In some cases, the
prices realized were 18 times the contract price—Kaiser Aluminum booked $228 million in the first
quarter in power sales.
The Demand for Measurement and Intelligence
The base value of any system is dependent on its ability to measure and store the goods it
produces. In our opinion, the single greatest failing of U.S. regulators in their administration of the
power grid is that they have overlooked the fact that the metering systems are generally so crude
that the only information they provide is kilowatts consumed. The utilities themselves do not even
always bother to read them; bills are often estimated based on an average-usage profile. Because
information and intelligence are of value both to the supplier and the customer, we believe that the
demand for measurement and intelligence will come from both sides of the meter.
From the standpoint of the power provider, improved information technology at the customer site
provides numerous asset management benefits as well as the ability to tailor power products and
services to the customer’s usage. From the standpoint of the power customer, an intelligent meter
can provide highly refined power quality statistics, usage profiles and an overall framework to
determine the optimal energy strategy that insures high-reliability and quality while guaranteeing the
lowest available price. In addition, the customer-owned meter is the default in a dispute between the
utility and the customer, and in some cases, the cost of the meter can be recouped in the settlement
of an overcharge by the utility. This is information the customer simply would not have unless it had
its own intelligence from the meter.
A further benefit to the power provider is that intelligent meters can be read remotely, which can
ultimately save time and money in the meter-reading process (which is mostly done by hand) as well
as speed the billing process and reduce the sales cycle. For example, Wisconsin ElectricWisconsin Gas recently signed a 15-year deal with SchlumbergerSema that will provide real-time
energy consumption data as well as information analysis services through the connection of 650,000
customers to SchlumbergerSema’s wireless fixed network.
Power Quality Costs and Their Relation to Market Size
The demand for power quality is essentially a function of the economic impact a power quality event (a
sag, surge, or cut in power) has on a given customer’s bottom line. We have calculated that the
highest levels of power reliability—99.999% and above—cost approximately $0.148 per kilowatt-hour
at a minimum, or approximately 125% more than the average cost of retail power. Whether or not
this cost is justified depends on the ratio of economic loss to power cost, which varies from customer
to customer. A cellular tower, for instance, consumes between 3–5 kilowatts of power per hour and
costs approximately $0.66 to run over that period. When the tower ceases to function because of a
power outage, the losses run an average of $41,000 per hour, according to EPRI. Not surprisingly,
communications companies are currently among the biggest users of power quality equipment.
31
Figure 11: THE PRICE OF POWER QUALITY, CONVERTED TO KWH ($ in millions, except per unit data)
Asset
Primary Grid Power at 99.9% Reliability
Backup Generators
Uninterruptible Power Supplies
Static Switches
Switch Gear
Cooling Systems
Misc. (TVSS, Monitoring, Rack Dist., Utility Transfer)
Amount
1,000
4,000
2,500
10
—
10
—
—
Total
Units
Kilowatts
Kilowatts
Kilowatts
PDUs
—
Crack Units
—
—
Capital Cost Cost/Unit Asset Life (kWh) Cost/kWh
—
—
—
$0.066
$3,000,000
2,000,000
500,000
3,000,000
1,500,000
750,000
$750
800
50,000
—
150,000
—
131,400,000
131,400,000
131,400,000
131,400,000
131,400,000
131,400,000
$0.023
0.015
0.004
0.023
0.011
0.006
$10,750,000
—
—
$0.148
Source: EYP Mission Critical and Robertson Stephens estimates.
A recent study by EPRI, determined that the aggregate cost of power quality events in 2000 was
$45.7 billion across the digital economy (telecommunications, data storage and retrieval services,
biotech, electronics manufacturing, and financial), continuous process manufacturing (paper,
chemicals, petroleum, rubber and plastic, stone, clay, glass, and primary metals), and fabrication
and essential services (manufacturing, utilities, railroad, mass transit, water and wastewater, gas
utility, and pipelines) industries. The bulk of the loss is concentrated in the fabrication and essential
services businesses, which represented $29.2 billion or 64% of the total, largely a result of
equipment damage. The digital economy businesses lost $13.5 billion, or 30% of the total.
The average cost of a one-second outage at industrial and digital economy companies was $1,477,
a three-minute outage cost $2,107 and a one-hour outage cost $7,795. Brief outages are more
common than outages of one hour or more—approximately half of the outages experienced last less
than three minutes. California had the highest costs related to power quality in 2000, with an
average $16.8 billion, or 37% of the total; followed by Texas with an average of $10.8 billion; and
New York with $10.3 billion. This translates to $0.134 per kWh in California for commercial and
industrial customers, $0.076 per kWh in Texas and $0.134 in New York. In our view, the best place
to be in the power quality business is in these three states, which also represent GSP of $2.7 trillion
or approximately 30% of the U.S. economy.
The EPRI study extrapolates that across the entire economy, the U.S. is losing $104–164 billion per
year as a result of outages, and another $15–24 billion due to power quality phenomena. The range
sums to $119–188 billion or 85–135% of the total amount spent on power by the commercial and
industrial sector in 2000. In short, the U.S. economy potentially loses as much or more in power
quality than it spends on power in the first place—or put simply the real cost of power is between
$0.122 and $0.155 per kilowatt-hour. This means that high-quality power is basically priced
correctly—we calculate that a 99.999% installation currently costs approximately $0.148 per kWh.
A recent E-Source study addressed the behavior of power customers and their reaction to power
quality events and subsequent lost productivity, damaged machinery and stalled production. More
than 50% of the large users of power claimed that power quality significantly affects their company’s
overall performance and that end-user facilities experience hundreds of voltage anomalies each
year. The study noted that key characteristics differentiated larger customers from smaller
commercial and industrial power customers. According to Pacific Gas & Electric (PG&E), which
has the largest service territory in the U.S., commercial and industrial customers that experience
three or more power outages per year are more likely to consider switching energy providers than
those that experience no outages. General Motors (GM) has negotiated a long-term contract with
Detroit Edison (DTE) and Consumers Power that includes insurance against unplanned power
outages beyond a predetermined number. Depending on the site, GM receives between $10,000 and
$240,000 per outage. Hewlett-Packard’s Greeley, Colorado facility, which was experiencing daily
power interruptions, installed a flywheel energy storage system and has not had a power outage since
and has gone in excess of 17,000 hours (more than two years) without a power-related process
32
interruption. Baltimore Gas & Electric (BG&E) has invented its own high-speed power transfer switch,
which it sells to its customers as well as to other energy service providers. PG&E Energy Services
developed a technology and insurance package for KLA-Tencora, a semiconductor manufacturer, that
protects its facility from power outages—the deal was prompted by a single outage that cost KLA
more than $8 million in lost production, labor and equipment.
The question is: If the U.S. commercial and industrial segments of the economy lose as much as
they spend on power, why do they only spend between $5–7 billion per year on power quality
equipment? We have illustrated that the ultimate cost of power when power quality losses are
factored in is between $0.122 and $0.155 per kWh, and the cost to establish 99.999% power is
$0.148 per kWh, so why do companies choose to pay less now and more later rather than pay the
same amount all the time and protect their equipment in the meantime?
We believe that the answer lies in part with the fact that power is a service, and customers are used
to treating it as such. To achieve 99.999% reliability, the customer must take it upon itself to install a
UPS, backup generator, transfer switches and power distribution unit. Furthermore, there is
maintenance and management of the system that must be considered. Many customers probably
have not even calculated the potential cost of power quality to their bottom lines because it is not an
ongoing consideration—it gets figured out after the fact and not before the fact. These are probably
only partial answers to a more complex set of circumstances that are unique to each power
customer. In addition, in many cases, the fault for power quality disturbances lies within the facility
itself and is a function of a poorly designed floor layout. Many customers would probably prefer to
blame the utility for their problems and negotiate a lower average commodity power price than
revamp their own facilities.
The Main Causes of Power Quality Problems
Power quality events have numerous causes. The more mundane are environmental: lightning
strikes the grid, a tree falls on a wire, a squirrel chews through the casing of the wire and shorts the
circuit (and itself). According to the Digital Power Group, 90% of the faults in the power grid are
created by first re-closure events. A re-closure is the grid’s own reaction to a disturbance along its
lines. In the case of the suicide squirrel, a giant switch at the nearest substation will open and shut
and, in the process, vaporize what remains. This process lasts approximately 12 cycles, or one-fifth
of a second. If that does not work, it will try again. If that does not work, it tries a third time. If that
does not work, the line goes down. The fault occurs because during the time that the re-closure is
happening a voltage sag is created.
Power is equal to voltage times current and, in alternating current (AC) delivery, the ideal voltage
and current is represented by a single-frequency sine wave with constant frequency and magnitude.
Voltage magnitude variations are mainly the result of the daily load patterns of load variations.
Voltage frequency variations are often the result of an imbalance between load and generation; the
same is true of current variations.
Ultimately, unbalanced load is the main source of voltage and current imbalance. Unbalanced load is
most commonly the result of a large single-phase load, although it can also occur as a result of an
uneven spread of single-phase low-voltage customers. In turn, harmonic voltage distortions are
mostly caused by non-linear load. Large harmonic voltage distortion can occur as an increasing part
of the load is fed through power-electronics converters, which leads to equipment malfunction. This
leads to the tripping of electronic equipment as well as the interruption of power plant operation.
Most power quality events are termed as the following: interruptions, which means the voltage at the
supply terminal is close to zero; under-voltage, which is a sag in the supply voltage followed by a
recovery within a short period of time; over-voltage, the opposite of under-voltage; voltage
magnitude step, which is a rapid voltage change; fast voltage events, which are voltage events of
short duration; and phase angle jumps, which are mostly voltage sags.
33
Electronic equipment itself can also be the cause of voltage disturbances as a result of the nonsinusoidal current draw of inverters and rectifiers. This leads to harmonic distortion of the current
that in turn leads to harmonic components in the supply voltage. In general, a single electronic
device does not create significant distortions to be problematic, but when multiple devices draw from
the same source, a distortion of supply voltage can result.
The main issue regarding the safety of equipment in the face of power quality events is how much
punishment the electronics can take. Some computers can detect under-voltage at the controller
input that leads to a signal for a controlled shutdown of the hard drive, or essentially an internal UPS.
The critical question is how much of a sag duration electronic equipment can handle before tripping
the circuit. If a trip is activated when the voltage is at 50% of the bus voltage level and the voltage
ripple is 5%, then any sag for more than four cycles (one-fifteenth of one second) will shut down the
computer. Semiconductor-based process control machines are at risk when there is even an 80%
voltage drop for a few cycles. Most voltage sags are between four and ten cycles in duration. Given
that programmable logic controllers can trip in sags between 35–85% thresholds, this indicates that
there is significant risk that power quality events will damage many of the machines that make up the
semiconductor-driven economy.
Energy Technology Solutions for Power Providers and Power Customers
We have classified the energy technology solutions into three categories: software, services and
information (SSI); power quality (PQ); and distributed generation (DG). The order of these categories is
intentional and is based on the pace of adoption we believe each will achieve. The SSI segment is the
area of technologies that we believe can most quickly respond to the demand that is created as a
result of the deregulation of the wholesale power markets as well as the infrastructure issues
associated with the grid. Software, in particular, is attractive because it can address a specific demand
pocket quickly and without the significant capital expenditures common with developing equipment
technologies. Although the barriers to entry are lower, we believe the same rules apply to the software
sold to the energy industry as apply to software companies selling applications to other segments of the
economy: be among the first, get big quickly and hold on to the customer through value-added services.
We have gone to great lengths to detail the demand for power quality services and equipment. This
segment is the most developed among the different energy technology categories, representing
more than $11 billion in annual sales. Given the ongoing and substantial losses attributable to power
quality issues, we believe this industry is poised to grow significantly over the next five years.
Distributed generation is perhaps the most celebrated of the energy technology industries and has
numerous participants from fledgling start-ups to General Motors. Distributed generation can take
many forms and addresses a number of potential market demands, although it is on a slower
technology track than some of the software and power quality companies, and requires substantial
capital and some regulatory help to get where it wants to go, in our opinion.
Incumbent Solutions
Software, Services and Information: Many power providers have approached deregulation and
competitive power markets with trepidation, preferring to hold off on capital investment until the
market begins to resemble a form against which general strategic decisions can be made. As a
result, many participants in the power markets have developed enterprise systems internally or
adapted existing systems on an ad hoc basis to fill basic needs. Utilities in particular have been
hesitant to invest capital in information and software systems for the T&D network, the administration
of which is often turned over to the independent system operator (ISO).
34
The most prevalent software systems in the trading and marketing arena until the past few years
were internally developed, often in Microsoft Excel. Information systems and network platforms,
specifically the metering and telemetry tied to base assets, have been primitive and are only now
being assessed in network terms. This is another reason why we believe that the software, services
and information segment will be among the first to see significant market growth as power providers
and customers make the decision to invest in information and measurement systems through third
parties. The leaders in the software, services and information markets are only now beginning to
emerge, and the innovative frontier is perhaps the widest in this market segment.
Power Quality: The traditional power quality equipment consists of a lead-acid battery-based UPS,
diesel-fired backup generators, power conditioners and analog switch gear. In effect the great
technological marvel that is the Internet is kept alive by car batteries and diesel engines. Battery-based
UPS systems have numerous limitations due to the characteristics of the batteries themselves, which are
unreliable and contain hazardous materials. They are also heavy, meaning that in many cases data
centers need to install structural support to accommodate the large banks of batteries necessary to
protect the power systems. Batteries are also difficult to monitor remotely and require on-site testing.
This brings down the inherent reliability of the backup power system because failure is difficult to
anticipate without the ability to ascertain at any time how each component is functioning. Batteries also
generate exceptional heat and require specialized air-conditioning to keep them cool, which raises the
overall energy cost required to keep the system running.
According to the Darnell Group, the total worldwide battery-based UPS market is forecasted to reach
$5.4 billion in 2001. It is expected to grow at a compound annual growth rate (CAGR) of 6.1% to
reach $7.2 billion by 2006, with relatively flat growth in the near term reflecting difficult comparisons
and a weakening picture for capital equipment investment. The trend in UPS systems has been
moving up in the power ratings as more rack-mounted servers and medium-duty servers are added
as opposed to increases in desktop workstations. As a result, there has been a dramatic increase in
11–50 kilovolt-amp (kVa) UPS systems and an equally rapid drop in systems under 2 kVa. The
Darnell Group expects the dominant segment by 2006 will be the 11–50 kVa power range as the PC
market matures and UPS systems are not replaced on the same cycle as desktop workstations. The
growth in the mid-range and high-end UPS market is expected to be driven by the preference for
higher-power servers and outsourced computing housed in data and storage centers. American
Power Conversion, Emerson Electric’s Liebert division, Invensys and MGE UPS are the current
market leaders in battery-based UPS systems.
35
Figure 12: BATTERY-BASED UNINTERRUPTIBLE POWER SUPPLY SYSTEMS
Source: American Power Conversion and Liebert.
In the telecommunications industry, power quality is handled somewhat differently than in the
computing and process-controlled industries. Recognizing that the grid is inherently unstable,
telecom operators opted to configure switches and other telecom equipment to run on a direct
current (DC), which eliminates sags and surges. In essence, power is taken from the grid in through
AC delivery and is then converted into DC through a DC power plant. The power is then run through
a bank of batteries that send power through a copper bus around the telecom facility. The telecom
equipment then plugs into the DC bus. In essence, a second power grid is created that is used to
convert AC power into DC power, which creates a straight line of power that by definition is without
the sags and surges inherent in AC power. The leading manufacturers of DC power plants for the
telecommunications industry are Liebert, Marconi, Tyco and Power-Onea,b.
The use of diesel-based reciprocating engines as a secondary source of power generation has been
in place for several decades. Diesel generators have numerous advantages: they are reliable,
relatively easy to maintain and generally do what they are supposed to do. In fact, often times the
reason they fail in an emergency power event is because the starter battery is dead.
The main drawback to diesel generators is that they are dirty and emit generally unacceptable levels
of pollutants. However, because they run so infrequently and usually for a relatively short period of
time, they are typically exempt from clean air laws. As a result, they are still the workhorses of the
backup power system and, along with their natural gas-fired cousins, can be expected to remain an
integral part of backup power systems well into the future. This is evidenced by a recent survey by
Venture Data Corp. that reported that 81% of end users were interested in diesel-reciprocating
engines to solve grid-reliability problems, followed by 60% that favored non-diesel-reciprocating
generator sets. This was by far the highest preference for any distributed generation technology. The
leading manufacturers of reciprocating engines are Caterpillar, Solar Turbines (a division of
Caterpillar), Detroit Diesel, Cummins and Wartsila. Generac, Coleman Powermate (a division of
Sunbeam), Kawasaki and Honda are leaders in the small backup-generator market.
36
Another commonly used critical backup system combines the diesel generator with a flywheel-based
energy storage system that creates a continuous power supply (CPS). This configuration is favored
by data centers that require high-reliability power in large blocks. Flywheels are favored over leadacid batteries because they take up less space, can be monitored remotely, are inherently more
reliable and do not generate excess heat that requires additional air-conditioning. The current
leaders in the CPS segment are Piller and HiTec.
Distributed Generation: The traditional use of on-site, or distributed, generation has been in a
backup-power or remote-power setting. In a backup-power mode, diesel and natural gas generators
are considered low duty, meaning they are not expected to run often or for very long. These engines
have a fairly good record of reliability. According to the Gas Research Institute (GRI) and NERC,
internal-combustion engines are 95.8% reliable at 60 kilowatts and 91.2% reliable at 800 kilowatts.
Combustion turbines are 92.7% reliable at 1–5 megawatts and 93.3% reliable at 25 megawatts. By
contrast, central plants are considered 85.9% reliable at greater than 100 megawatts.
The demand for diesel and gas-powered engines continues to be strong, particularly in the standby
generation market. In its power generation survey, Diesel & Gas Turbine Worldwide reported the
diesel- and natural gas-reciprocating engine market increased substantially in 2000, with total units
ordered up 23% and total output up 21% in 1999. Total output of these engines stood at 11,712
megawatts at the end of 2000, with the strongest increase in the 1- to 3-megawatt segments. The total
output of diesel- and gas-powered turbines and reciprocating engines stood at 87,563 megawatts.
Figure 13: UNIT SHIPMENTS OF NATURAL GAS TURBINES AND DIESEL ENGINES
7,000
6,000
Units Ordered
5,000
4,000
3,000
2,000
1,000
0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Units Ordered (1.0 to 7.5 MW)
Source: Diesel & Gas Turbine Worldwide.
37
New Energy Technologies for Power Providers
Software, Services and Information: The new energy technologies emerging in the software,
services and information segment span a wide range of applications within the power industry and
offer significant upside, in our opinion. Although many power providers recognize the need for
upgrades or initial installations of both internal and external systems, they have been cautious in
investing in capital projects during the early years of deregulation. This is also the legacy of
regulation, in which regulators determined which capital projects would be approved. However,
power providers now find themselves in a position where they have significant amounts of cash on
the balance sheet—the current aggregate cash balance of U.S.-based utilities, independent power
producers, local gas-distribution companies, E&P companies, oil refiners and marketers, and major
oil companies is $58.4 billion.
The fastest growth in the software segment has come in the competitive energy commodity markets,
dominated by natural gas and power but also incorporating NGLs, weather derivatives, coal,
emissions credits and numerous other exotic securities based on various energy inputs. The
phenomenal growth in the wholesale markets over the past three years has spawned demand for
sophisticated software-based trade capture and risk-analytics systems that can be adapted off the
shelf and incorporated as an enterprise risk-management system. The increase in the dollars traded
and the velocity of trading has resulted in a larger number of overall market participants, all of which
must make the decision to buy or build their trading and risk-management systems (the third option
is to exit the business). Several companies now offer new local- and Web-based software systems
that include trade capture, physical scheduling, risk analytics, asset modeling and weather risk
analysis. The current leaders in this space are Caminus, Allegro, KWI, OpenLink Financial (OLF),
FEA, TriplePoint, Excelergy, Sungard, Powertrade, eAcumen, Risk Advisory’s Energy
BookRunner, Sakonnet Technology, trueQuote.com and Vedaris (Altra, a leader in the gas
segment, was recently acquired by Caminus). ISpheres has introduced a new desktop application
that detects and alerts energy traders to new trading opportunities in real time, according to the
opportunity scenarios specified by the traders.
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Figure 14: EXAMPLE POWER TRADING SCREEN
Source: Caminus Corporation.
Beyond the wholesale power and gas function, there are several companies that provide software
and enterprise platforms for additional aspects of the energy business. Excelergy has also
developed a fully integrated business software platform that can manage billing and customer
service, while LODESTAR provides software that enables energy companies to automate pricing,
billing, load profiling and settlement, financial management, and transaction management.
Enermetrix operates an electronic marketplace for processing and execution of natural gas and
electricity contracts. @TheMoment has developed real-time auctions for forward auctions, reverse
auctions, built-to-forward contract systems and real-time risk management systems for a broad array of
energy applications. Peace Software provides a Web-based customer and commodity management
dynamic platform that includes customer service, billing, enrollment and electric supply functionality.
Still other companies provide transaction platforms in which the company acts as a trade or auction
facilitator or as a principal. E-lecTrade manages an electronic transaction platform for structured
energy products, standard energy products and spot market products, as well as transmission,
ancillary services and generator tolling. HoustonStreet.com manages a trading platform in crude
oil. On the principal side, wholesale trading giants have developed their own online trading portals
headlined by EnronOnline, the largest eCommerce site in the world. DynegyDirect has also
emerged as a leading principal-based trading site.
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In the information segment, there are several companies that offer advanced measurement systems
and data analysis led by Power Measurement, Itron, ABB, General Electric, Siemens and
SchlumbergerSema. We believe that the demand for smart meters that provide load-usage profiles,
power quality readings and other load-demand data are a key to power providers that offer highvalue services to energy customers. With intelligent metering systems, power providers can
ultimately obtain highly detailed information streams that can be used to balance load across a
system segment, anticipate load usage, determine power quality and reliability, understand what
affects the load profile and tailor specific solutions to end customers. Encorp provides remote
power-control modules for generators and interconnects that provide power sensors, remote power
quality monitoring, remote energy and electrical metering, and remote data logging. Encorp also
offers energy automation software that enables the power provider to remotely dispatch, aggregate
and control multiple distributed generation assets.
There are also several companies emerging to provide the key link between the measurement and
intelligence at the asset and customer level and the enterprise platform of the power provider.
SmartSynch provides utilities with a wireless network platform that connects the utilities’ embedded
assets (meters, substations) with its mobile assets (lineworkers) and its computing assets and
manages the data exchanged between them to create a transaction management, billing and CRM
system. Sixth Dimension has developed a LAN-based network operating system that connects
intelligence at both the meter and energy-asset level, and then aggregates and manages the
information so that it can be read in a common format across the energy enterprise. Sixth
Dimension’s hardware and network platform can also be adapted to run with Silicon Energy’s
enterprise energy management software, which manages facility loads and provides diagnostics on
overall energy usage across an entire organization.
Power Quality: Without high-reliability standards, there is little incentive for power providers in
general, and T&D operators specifically, to provide power quality as part of the basic service to
customers. Power quality has traditionally been the responsibility of the end user and not the power
providers. However, there is a tremendous need for improved efficiency and reliability in equipment
at substations and along the T&D grid. American Superconductor has developed a version of its
supermagnetic energy storage system (D-SMES), which provides large-scale on-site power
correction of sags and surges that is used along the T&D network. This technology is now in use at
four utilities, including Wisconsin Public Service, Entergy, Alliant Energy and TVA. The D-SMES
unit is jointly marketed with General Electric. Incidentally, the largest electric battery in the world is
the 10-megawatt lead-acid storage battery at Chino, California, which is used at an electrical
substation for leveling peak power demands.
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Figure 15: SUPERMAGNETIC ENERGY STORAGE SYSTEM
Source: American Superconductor Corporation.
American Superconductor is also developing several new energy technologies that can be used by
utilities to improve overall system efficiencies and, ultimately, lower overall system and operating
costs. The company’s high-temperature superconducting (HTS) can carry 14 times the power of
standard copper cable and allows for an increased amount of power to be transported within a
smaller footprint. Detroit Edison has deployed a 400-foot run of American Superconductor’s HTS
wire capable of transporting 100 megawatts in its Frisbee substation. This installation will replace
nine copper cables with three HTS cables and bring the overall weight of the cable to 900 pounds
from 18,000 pounds. American Superconductor has also developed superconducting transformers
and HTS generators that are designed to smooth the flow of power along the T&D grid.
Intermagnetics, a leader in superconductor technology used in magnetic resonance imaging (MRI)
technology, is also developing superconducting cable, as well as fault-current controllers and
transformers. The DOE recently announced that it had funded its next round of superconductivity
partnership initiative (SPI) projects, naming seven winners including Pirelli, General Electric (both
partners with American Superconductor) and DuPont. The DOE and industry will invest $117 million
over the next three to four years to develop seven projects, five of which involve HTS cable. Pirelli’s
project will connect two Long Island Power Authority (LIPA) substations with a half-mile stretch of
HTS underground power cable that will operate in series with an existing medium-voltage
transmission line.
In addition, ABB has developed several megawatt-level high-power switches that are specifically
used for the distribution levels within the T&D grid. The company also is the largest transformer
manufacturer in the world with more than $2 billion in annual sales, as well as providing turnkey
substation design and construction.
Distributed Generation: The demand for new distributed generation technologies from power
providers could be strong given the right set of regulatory, economic and environmental conditions,
in our opinion. The most immediate demand is in areas along the T&D grid where load demand is
higher than the available generation capacity at the node, which creates what are called load
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pockets. Rather than build more capacity at the centralized plant, T&D operators are looking to
install distributed generation at the point where the load pocket exists. This application requires fairly
high loads in distributed generation terms. Many of the newly developed distributed generation
technologies—microturbines, fuel cells, advanced photovoltaic systems—are rated between 5
kilowatts and 150 kilowatts, generally too little to handle the demands placed on the T&D grid.
Additional wires need to be strung to the site of the under-served customers as well, which affects
the economics of the distributed generation configuration.
In our opinion, there are three big regulatory hurdles that need to be overcome in order for
distributed generation to be widely adapted by the T&D companies. The first is the fact that many
T&D companies, as part of the deregulation of the power industry, are not allowed to own
generation. In order for distributed generation to be adopted on a wide scale, the language
addressing the ownership of generation in the laws regarding deregulation needs to be altered to
exclude small on-site generation. The second is the jurisdictional control of regulators over
interconnection standards, which are what determine how a piece of distributed generation
equipment physically hooks into the grid (this also affects the pace of adoption at the powercustomer level). Lastly, there must be some determination as to who pays for the distributed
generation—the T&D company or the customer. Since the T&D company is not currently in the
generation business, it would have to have a system by which it could collect on the generation
used. This would also require some upgrades and needs to be authorized by the regulators.
In the higher-power segments, there are several new energy technologies that could be adapted to
serve in load-pocket applications. FuelCell Energy is developing 1- to 3-megawatt base-load power
plants that run on a variety of fuels from biowaste gas to natural gas and have essentially no
emissions. These small-scale power plants can also follow load well, which means they can adjust to
load requirements. Several other fuel-cell developers, including Ballard Power Systems and
International Fuel Cells (a division of United Technologies), are developing stationary power
systems in the 250-kilowatt area. Capstone Turbine, a leading developer of microturbines, is
planning to introduce a 150- to 250-kilowatt microturbine in 2003 that runs on a range of fuels from
biowaste gas to natural gas that can be combined in packs up to six to provide between 900
kilowatts and 1.5 megawatts of power.
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Figure 16: FUELCELL ENERGY’S DIRECT FUELCELL WITH CAPSTONE MICROTURBINE
Source: FuelCell Energy, Inc.
Although not technically an element of distributed generation, there are several technologies that
address the emissions of large-scale and mid-scale power turbines. One of the competitive
advantages of a number of the emerging distributed generation technologies is the low emissions
profile of NOx relative to gas-fired turbines. Catalytica Energy Systems is developing a product
called XONON, which can be integrated into gas turbines, that reduces overall emissions levels
significantly. The product is currently under development for large GE turbines as well as mid-scale
solar natural gas turbines.
New Energy Technologies for Power Customers
At the end of the day, most power customers consider power a service. Flip the switch up, lights go
on and machines start running. When the bill comes, pay it. When there is a problem, call the power
company and see what happens. We also view power as a service, and we believe that the pace of
the adoption of energy technology will be a function of how well power providers can incorporate
new energy technologies into their service and make a profit doing so. A technology has a much
better chance of adoption if someone makes money with it than if someone saves money with it, in
our opinion. For all of the energy technologies that can and should be adopted by power customers,
we believe the output of what the technologies do should ultimately be available as a service.
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However, the service is slow in coming, and an E-Source survey indicated that a large percentage of
energy customers do not think their current power provider is capable of providing some of the highvalue services they would want. In the meantime, there are several emerging technologies that
enable power customers to take matters into their own hands.
Software, Services and Information: One of the main drivers of demand for energy customers is
the reduction of overall energy costs. For many commercial and industrial customers there are
enough mistakes on the power bill itself that material savings can be achieved in a proper bill
reading. AvistaAdvantage provides both bill and usage analysis in a Web-based service that is
based on the amount of power used per month by the customer. Silicon Energy’s software
provides facilities managers with an integrated Web-based cost analysis and energy management
platform that includes day-ahead forecasting and integrated bill analysis functions. For larger
customers, Enron Energy Services, Sempra Energy Solutions, DukeSolutions, Pepco Services,
Service Resources International, TXU Energy Services and others provide total energy outsource
management, often at a fixed cost that is some percentage less than the average monthly energy
payment made by the customer.
RealEnergy, a California-based company, is incorporating on-site distributed generation
configurations that are used to peak shave, or provide power when demand and prices are at their
highest. Although the customer remains connected to the grid, the distributed generation equipment
is interconnected with the customer’s power feed. By generating its own power at a fixed rate while
the variable rate of power increases past the fixed rate, companies can save on their overall energy
costs even with the capital cost of the equipment factored in. In addition, with its own generation
capability on-site, overall reliability and quality can be improved.
One of the most important services to emerge over the last decade for high-quality and reliability
customers is the engineering, design and construction of mission-critical power systems for data
centers and high-reliability facilities. EYP Mission Critical is a leading designer of power systems
that have 99.999% and above capability for corporate and communications data centers and hightech manufacturers. GE Digital Energy also specializes in critical power system design and
development for facilities that require “high 9s” reliability. Cupertino Electric is a leading developer
and construction manager of data centers and also designs and engineers power systems for the
highest level of power reliability and quality.
Advanced meter systems play as large a role on the customer side of the meter as on the power
provider side. In order for many of the energy analysis systems to optimize their output, the data
must be read through an intelligent meter. In addition, many intelligent meters enable remote
monitoring and operation. Power Measurement is a leading intelligent meter developer and has
incorporated data analysis into its overall service offering. ABB, GE and Siemens also make power
measurement systems with various levels of intelligence, including the ability to determine the power
quality in real time as well as the nature of any harmonic distortions and power quality events. Many
high-tech manufacturers, including Sun Microsystems, have intelligent meters installed within their
facilities that are connected to the UPS systems and the switch gear. This capability enables the
customer to settle disputes with the utility regarding actual power service delivered versus total
power charges, number of outages and the overall number of power quality events.
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Figure 17: INTELLIGENT METERS
Source: Power Measurement.
Power Quality: We believe that several new energy technologies in the power quality segment can
add significant value to power customers without a significant impact on total capital costs. Several
companies are developing flywheel-based energy storage systems, which replace batteries in UPS
systems as well as in small backup power installations. Flywheels are essentially motor generators:
they draw a small amount of electric power when the grid is operating to spin a high-density wheel at
high speeds in a vacuum and then convert that kinetic energy into ride-through electricity when the
primary power source is cut. Depending on the size of the wheel and the rate of spin, flywheels can
supply a large amount of power for a short period of time (250 kilowatts for 30 seconds, for example)
or a small amount of power for a long period of time (1–2 kilowatts for 4–6 hours).
Active Power has developed a flywheel that replaces the lead-acid battery in UPS systems, in both
a packaged power module as well as a complete branded Caterpillar UPS cabinet. The systems are
available in power ranges of 300-, 600- and 900 kVa, and 1.8 megavolt-amps. The packaged power
modules can be used to replace the batteries within an existing UPS cabinet and are compatible with
Liebert, MGE and Invensys UPS products. This product is currently marketed for batteryreplacement applications by Invensys’s Powerware UPS division. Beacon Power has developed a
composite ultra-high-speed flywheel that is used in remote telecommunications applications.
AFS Trinity has also developed a composite flywheel that will be used in high-power applications.
Acumentrics has developed a flywheel-based CPS used as well as a solid-oxide distributed
generation system.
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Figure 18: ACTIVE POWER, INC.—UNINTERRUPTIBLE POWER SUPPLY
Source: Active Power, Inc.
For large power-correction applications, American Superconductor’s SMES units provide shortduration power correction against sags and surges for more than 3 mVa. WPT provides power
quality analysis and software systems in either portable or permanent installations. Maxwell
Technologies has developed ultra-capacitors that store energy at a density up to ten times that of a
conventional battery and are designed to provide repeated bursts of energy for periods from
fractions of a second to several minutes. SoftSwitching Technologies has developed a dynamic
surge corrector that corrects the most common voltage sags—50% voltage drop lasting up to 15
cycles, or one-quarter of a second. SST’s surge correctors are rated at 1.5 kVa to 2,000 kVa and
can provide 100% power correction for three cycles.
Distributed Generation: Many of the new energy technologies in development today address the
distributed generation market from the power customer side. One of the principal benefits of the new
distributed generation technologies is that they have the potential to generate power at a high rate of
efficiency, which reduces the variable fuel-cost component of the total per kWh to produce power.
Another benefit is that they generally have low or near-zero emissions, which is beneficial for several
reasons. First, this can make the process of obtaining a permit to site the generation take less time
and cost less money. Second, it gives flexibility in terms of where the generation can be housed—it
would not make sense to put a diesel generator inside a facility, for instance. Finally, the new
distributed generation technologies under development will be available in a wide range of power
outputs, from sub-kilowatt to several megawatts, which enables end users to tailor their own
generation solutions to their loads. This enhances efficiency and optimizes power generation systems.
In the 1- to 3-megawatt class, FuelCell Energy has developed molten carbonate technology that is
designed to operate as a high-efficiency, low-emissions stationary base-load power plant.
Commercial production of these fuel-cell power plants is expected in 2002. International Fuel Cells
(IFC), a division of United Technologies, has been the pioneer in the commercial production of fuelcell power plants and has been selling 250-kilowatt phosphoric acid ONSI fuel cells as backup power
systems for more than 15 years. In addition, IFC is developing a proton-exchange membrane (PEM)
250-kilowatt power plant expected to be in commercial production in the next several years. Ballard
Power Systems, which is developing fuel-cell engines for automotive applications, is also
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developing a 250-kilowatt PEM fuel-cell power plant, several of which are currently in field trials.
There are several additional developers of mid- to high-power molten carbonate fuel cells, including
Toshiba, Hitachi, IHI, Mitsubishi Heavy, Insalda and Westinghouse.
In the mid- to higher-power segment, Capstone Turbine has developed a microturbine, which runs
on fuels ranging from biowaste gas to natural gas, that is designed for use in commercial and
industrial applications. The microturbines are currently available in 30- and 60-kilowatt configurations
and can be combined in series to provide up to 600 kilowatts of power. The company also expects to
introduce a 150- to 250-kilowatt configuration in 2003 that can be combined in series to produce
more than 1 megawatt of power. Capstone’s turbines can be operated in stand-alone, or grid
bypass, mode as well as dual-mode applications, where the turbine and the power grid are
interconnected. Honeywell, which is selling its microturbine technology to General Electric, has
also developed a microturbine in a 75-kilowatt configuration, and ALM Turbine is in the
development stage for a high-efficiency 50- to 500-kilowatt gas turbine technology. Solo Energy is
developing a mid-power gas turbine, although it plans to sell the output rather than the equipment.
STM Power is developing a 25-kilowatt natural gas-fired Stirling engine scheduled for production in
the next two years.
In the low- to mid-power segment, there are numerous companies developing fuel-cell-based
distributed generation equipment, much of which is aimed at residential applications. Although some
manufacturers have previously promoted the idea that residential customers can disconnect from the
grid and power their homes on solely the fuel cell (perhaps with the power grid serving as standby or
backup), most equipment makers are now encouraging the use of the fuel cell in conjunction with the
main power grid. This is due to a number of thorny logistical issues, including charges incurred when
a customer leaves the grid, charges incurred to keep the grid as a standby, various municipal
regulations regarding fire safety and wiring schematics, resistance to net metering (selling the power
back onto the grid) from the utilities, and a host of other circumstances. Avista Labs, Plug Power,
H Power and Hydrogenics/General Motors are currently developing PEM fuel-cell units for home
use in the 5- to 10-kilowatt range. Global Thermoelectric is developing a solid-oxide fuel cell
(SOFC) for residential use in the 5- to 10-kilowatt range. Other fuel-cell developers include Annuvu
(PEM), BCS Technology (PEM), Celsius (PEM), Ceramatec (SOFC), Cummins, Dais Analytic
(PEM), DCH Technology (PEM), De Nora (PEM), dmc-2 (PEM), ElectroChem (PEM), Elf
Atochem (PEM), Energy Partners (PEM), ETH Materials (SOFC), Fuel Cell Resources (PEM),
Gaz de France (PEM and SOFC), H-Tec (PEM), Hydrocell (PEM), Hydrovolt Energy Systems
(SOFC), ICTP (PEM), IdaTech (PEM), Ion Power (PEM), JLG Industries (PEM), Lynntech (PEM),
McDermott (SOFC), Metallic Power (zinc/air), Millennium Cell, NexTech Materials (PEM),
Procyon Power Systems (PEM), Schafer Corp. (PEM), Sulzer (SOFC), Toyota (PEM), VTT
Chemical (PEM), Warsitz (PEM) and ZeTek (alkaline fuel cells). This list is by no means
exhaustive; in total it is estimated that there are more than 250 companies worldwide currently
developing fuel cell or related component technologies.
In the micro-power segment (below 1 kilowatt), there are several companies that are developing
fuel-cell technologies. Medis Technologies is developing a direct liquid methanol fuel cell for use in
laptops and cell phones, among other applications. Manhattan Scientifics is developing a
methanol-based micro-fuel cell designed to power a cell phone on standby for six months and
provide one week of talk time. Motorola has also recently announced the development of a direct
methanol fuel cell intended for use in cell phones and other portable communications devices.
In the photovoltaic (PV), or solar, industry there are several companies that are working to reduce
the overall cost of a solar cell and thereby enlarge the potential market for solar in both stationary
and portable applications. Evergreen Solar has adapted a patented string method to reduce the
amount of silicon used in the manufacture of solar cells by drawing molten silicon out of a vat
stretched across two strings. This process also reduces the amount of silicon wasted through the
traditional sawing process. AstroPower has developed a model of a solar cell that is manufactured
from recycled semiconductors, which lowers overall costs. As opposed to the emerging market for
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microturbine or fuel-cell-based distributed generation, the market for photovoltaic distributed
generation is large and growing: industry estimates set the market at approximately $2 billion, and
the market has traditionally grown between 15–20% a year.
Distributed Generation Applications
In general, the potential benefits of a distributed generation application are that load can be more
closely matched to supply and that as market power rates rise above what it costs to produce power
with the distributed generation, higher-cost market rates can be avoided and overall energy costs
reduced. This also reduces the customer’s exposure to volatility in power prices that are not based
on seasonal or weather-based demand. From the standpoint of an overburdened power provider,
distributed generation applications at the customer level enable a quick and well proportioned match
to a given customer’s increased power needs, while mitigating or deferring the need for increases in
the T&D system.
There are numerous distributed generation applications for both power providers and power
customers, including load-pocket T&D enhancement, base-load generation for commercial facilities,
standby and backup to dual-mode peak shaving, and power quality. Because distributed generation
matches supply closely to load, the potential for more specialized applications—individual power
supplies for mission-critical manufacturing equipment within a semiconductor manufacturing plant,
for instance—is also being explored, although technical hurdles still remain for many of the new
distributed generation technologies under development.
One high-value application of distributed generation is in delivering power quality to the power
customer. The concept of power quality being equated to the proximity of the power source to the
consuming device is well illustrated by the power systems on a server’s motherboard. As more and
more gates have been packed onto chips the voltage tolerances have decreased as the gates get
smaller: the physical dimension of the transistor is directly related to the voltage it can withstand. In
1995, the standard was 5 volts, by 2002 it is expected to be 1 volt. At the same time that voltage
tolerances are dropping, overall chip power demand is increasing. In 1997, the average chip
required 70 watts of peak power; by 2002, the Semiconductor Industry Association expects chips will
require 120 watts of peak power. Because power is equal to voltage times current a decrease in
voltage with an increase in power means that current must increase at a proportionately greater rate
than the power does. To get high-current, low-voltage power to a chip the best solution is to put a
DC/DC converter as close to the chip as possible. This configuration, known as the distributed power
architecture (DPA), is gaining widespread adoption in the high-power computing industry. The same
concept can be used to explain why the highest-value operation for distributed generation is in
power quality and reliability.
We believe that the current market for distributed generation from the power customer side is largely
motivated by the need for reliable backup generation. This is suggested by the substantial increases
in orders for low-duty diesel and gas turbines over the past several years. Diesel & Gas Turbine
Worldwide reported that in 2000, unit orders of diesel, dual fuel- and gas-reciprocating engines
increased 23% versus 1999, with a surge in orders in the 1- to 3.5-megawatt range dominated by
diesels used for standby. This is the most common distributed generation application, where lowduty reciprocating engines are often combined with UPS and switch gear to provide a power
customer’s facility with seamless power in the event of an outage or extended sag.
The current market for power provider applications in distributed generation appears to be in its use
to fill load pockets with on-site generation. NiSource, an Indiana-based natural gas company with
E&P, natural gas transmission and storage as well as power generation, transmission and
distribution assets, has recommended that there is a significant need for base-load generation just
behind transmission bottlenecks, particularly in the areas near the Eastern Interconnect. The
decision is generally determined by a cost analysis of adding generation and wires at the base-load
facility that can be marketed anywhere along the grid compared with the cost of specific base-load
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distributed generation that is marketed to a specific set of customers. The customers must usually
be prepared to take the distributed power in a take or pay situation for the economics of the
distributed generation to be secured. Additional wires often must be strung in the area near the
distributed generation as well.
Many fuel-cell developers have geared their market strategy to serving the residential customer. In
this application the generation equipment acts either as a stand-alone power plant or works in
combination with the grid. The basic principle in stand-alone usage is that for power regions with
remote power or reliability that is so bad (certain sections of Long Island, for instance) a relatively
higher cost to produce power is justified. When used in concert with the grid, distributed generation
can be theoretically used for backup or standby power or for peak shaving and net metering, in
which the customer activates the unit during peak power period, selling power back to the grid when
power prices are lower. This concept of net metering has been well established by solar panel
manufacturers, which have successfully lobbied for the ability to establish net metering programs in
33 states. Notably, in these states the utility has to pay what it charges for power and not the
wholesale price. The utilities also charge the interconnected customer annual backup charges if the
unit is used as a primary power source, which are in the range of $5–225 and average $100,
according to Batelle Labs.
The National Energy Marketers Association has released a set of guidelines that it believes will
increase the relative attractiveness of distributed generation in economic terms. It recommends that
regulators unbundle distribution rates, eliminate penalties, redundant charges and barriers to entry,
and implement tariffs that encourage investments in distributed generation. The association also
suggests that utilities must provide equal, non-discriminatory access to markets for power and
auxiliary services and that federal and state governments must adopt uniform technical requirements
and procedures for interconnection of distributed generation technology. In our opinion, the issue of
interconnection standards has major implications for the viability of distributed generation and
general as well as the profit margins of the distributed generator equipment manufacturers.
The Economics of Distributed Generation
While there are numerous potential applications for distributed generation, without reasonable
economics we believe distributed generation will be relegated to specialized niches. One of the
potential ironies of the effort to move to increased distributed generation is that while it has reflexive
benefits for both the power provider and the power customer neither is in a position to commit to
paying for their half. Or whatever their fraction is. Much of the development in distributed generation
energy technology has been based on the idea that since distributed generation conceivably makes
so much sense there will eventually be a market for it. Markets are borne of several functions, some
governmental, some regulatory, but mostly they arise because the new thing delivers something
better than the old thing at the same or a lower price. While we believe there are still significant
regulatory hurdles that need to be cleared to enable the market for new distributed generation
technology to flourish, in our opinion the real trick is getting the costs down. This makes the analysis
of the economics of distributed generation, and all high value power services, particularly important
in assessing the viability of energy technology investments.
Luckily, there is a lot of distributed generation already in place that can be used as a benchmark
against which new technologies can be measured. Power does not care how it is made—it cares
about its cost and its quality. Other factors do come into play including environmental benefits and
policy initiatives but in general price and quality determines which electrons get sold and which do
not. The most common piece of distributed generation is the diesel-fired reciprocating engine
installed in a backup or standby configuration. Actually, that is not quite true—the most common
piece of distributed generation is the gasoline-fired internal combustion engine. In total megawatt
terms, the amount of power generated by automobile engines at any given time dwarfs what the
stationary power system produces—there are approximately 13,245,000 (compared with 775,000
megawatts of stationary power) megawatts available in the automobile fleet alone.
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Both the car engine and the diesel generator are low duty-cycle engines, meaning they are not
designed to run all the time (just as car engines eventually consume themselves if they are run
continuously). Diesel generators are engineered to run a total of approximately 15,000 hours (one
year, eight months) before requiring an overhaul. Natural gas engines are engineered to run
approximately 50,000 hours (five years, eight months) before requiring an overhaul. Diesel
generators are generally used in situations where portability and low run time are factors; natural gas
engines are used in stationary situations and are expected to run more frequently. Diesel generators
are also noisier and dirtier than natural gas engines. On a straight capital cost, diesel generators are
priced at approximately $175 per kilowatt or $0.012 per kWh for a 250-kilowatt unit. Natural gas
engines have a capital cost of $300–350 per kilowatt or $0.007 per kWh for a 250-kilowatt unit.
For diesel generators and natural gas engines, fuel costs represent the majority of the delivered
power cost. Diesel currently ranges between $0.80 and $1.10 per gallon, which translates to
approximately $0.075 per kWh. This brings the total cost per kWh for a diesel generator to
approximately $0.087 per kWh. Delivered natural gas to commercial customer prices have ranged
between $4.82 and $9.80 per million Btus (mBtu) since 1989, according to the DOE. This translates to
$0.049–0.101 per kWh. At a 1990s average of $5.69 per mBtu, the total cost per kWh for a natural gas
engine is $0.073 per kWh. At an average between May 1999 and May 2001 of $7.09 per mBtu, this
translates to $0.085 per kWh. Delivered gas to commercial customer prices averaged $6.09 per mBtu
in 2000, $5.38 in 1999 and $5.49 in 1998, according to the DOE; prices have ranged between $8.52
and $9.65 in the first five months 2001. This analysis excludes maintenance and installation costs.
For general purposes, we can establish a benchmark range of current distributed generation costs
between $0.073 and $0.111 per kWh. According to the DOE, the average price of power in 1999
was $0.067 per kWh, with Idaho at the low end of the range at $0.039 per kWh and Hawaii at the
high end at $0.119 per kWh. California power prices averaged $0.093 per kWh, while New York
averaged $0.104 per kWh, Massachusetts averaged $0.092 per kWh, Pennsylvania averaged
$0.076 per kWh and Texas averaged $0.060 per kWh.
The economics of the new energy technology distributed generation equipment are more difficult to
define because many developers have not yet gotten on their projected cost curve and those that
have are seeing a slower sales rollout than originally expected. Capstone’s 30- and 60-kilowatt
microturbines are currently commercially available, and we have calculated an installed power cost
of between $0.101 and $0.127 per kWh at a gas price of $5 per mBtu and $0.125 per kWh and
$0.154 per kWh at $7 gas. Although IFC has produced the ONSI fuel cell for the past 15–20 years,
the new fuel-cell technologies are still not estimated to reach commercial production for several
years. As a result, using projected cost curves supplied by fuel-cell company managements that are
based on cost estimates and production schedules several years in the future is not particularly
helpful in our current analysis of distributed generation economics.
In a 1999 analysis of distributed generation economics, Arthur D. Little determined that where there
were constraints in the T&D system the cost for central plant model additions was between $0.070
and $0.180 per kWh, which reflected the cost of new T&D capacity. If both generation and T&D were
constrained, the cost increased to between $0.090 and $0.220 per kWh. Given an average price for
distributed generation between $0.073 and $0.111, which we calculated, it would appear that in this
environment, distributed generation is an economically viable alternative to additional central
generation and wires. The marginal cost of additional T&D wires is less than $0.010 per kWh if the
T&D grid is unconstrained; Arthur D. Little estimates that if it is constrained, costs range between
$0.050 and $0.160 per kWh. Based on certain payback assumptions, the study concludes that
distributed generation will be economic where electric rates are high and natural gas rates are low, and
recommended California, Illinois and New York as markets where this phenomenon is most prevalent.
50
The Distribution of New Energy Technologies
As we have intimated earlier, we believe that in some cases the best distribution of many of the new
energy technologies is in the form of a usable service. The distribution of energy technology
equipment has typically been handled by regional dealers of generator sets or through specialized
sales channels within larger organizations. The largest distributor of distributed generation is
Caterpillar, while the largest distributor of power quality equipment is Emerson Electric, with high
market share in both the UPS and DC power segments. The strategies for the distribution of new
energy technologies that have been developed by start-up companies involve navigating several
new channels, including local gas utilities, power utilities, organic sales efforts, engine manufacturers
and discount retailers.
Almost all of the developmental energy technology companies have staked a significant portion of
the potential success of their business plans on mastering the most efficient and broad-based
sales channel for their products. There is still substantial divergence of opinion on what that
constitutes. Some technology equipment companies are using power and gas utilities as a
channel, although neither has significant experience in or systems in place for product sales.
Others have signed deals with incumbent distributed generation equipment companies, either in
their primary business lines or in tangential businesses. Active Power, for instance, has an
exclusive distribution agreement for its UPS product with Caterpillar. The company also has a
distribution agreement with Invensys’s Powerware, one of the largest UPS manufacturers, to
incorporate Active Power’s battery-free power storage units into Powerware’s new and existing
UPS installations. Capstone has several channels of distribution, including power utilities, gas
merchants, an organic sales operation and an incumbent engine maker. In July 2000, Target
stores began selling 1.1-kilowatt wind turbine systems from Bergey Wind Power through its
online store target.com. Home Depots, the largest home improvement retailer, is now selling
residential solar electric power systems from AstroPowera.
The Basic Science of the New Energy Technologies
The promotion of many of the technologies that are emerging to penetrate the power market as new is
somewhat misleading; in truth most of the energy technologies we refer to as new are quite old. The
fuel cell was invented in 1839 by William Grove, and the concept behind the flywheel has been around
since the advent of the potter’s wheel. The new part is mostly in the application of the technology to
areas that were previously uneconomic. The significant reduction in the cost of semiconductors and
bi-polar transistors has in some cases had more to do with the improvement in the performance and
economics of energy technologies than any radical redesign of the basic technology. We include a
brief description of the science behind four of the most prominent technologies in the energy
technology investment universe: flywheels, fuel cells, microturbines and superconductors.
Flywheels. A flywheel is essentially a large, cylindrical disk set on bearings that spins at a relatively
high rate of speed and acts as both an electric motor and an electric generator, depending on its
mode. It is used as a power storage device because the act of spinning creates kinetic energy,
which can then be released over time as the flywheel gradually spins down to stasis. The flywheel
spins in the first place by drawing power from a primary source, usually the power grid. In this mode,
it is essentially an electric motor. When the primary source of power is cut, the kinetic energy—the
mechanical energy of an object by virtue of being in motion—is released, converting the flywheel into
an electric generator. By using electronic stabilizers, the decreasing power output of a flywheel that
is released as it slows down can be trued up, so that the output is actually constant over the short
period electric power is required.
How well a flywheel operates is a function of several factors. Ideally, the flywheel would spin in a
perfect vacuum, with no friction and no gravity. This would result in the highest efficiency transfer of
drawn energy to stored energy. But traditionally, only about 5% of the kinetic energy stored could
51
actually be converted into electric energy. Active Power has increased that percentage to above
80% with several innovative techniques. First, it uses ceramic bearings to keep the flywheel spinning
extremely close to true. Second, it jacks up the flywheel using magnetic levitation, which reduces the
effective load on the bearings from 600 pounds (the weight of the steel flywheel itself) to 50 pounds.
Third, through the use of an array of specialized power transistors the Active Power system
transforms the variable frequency and voltage power output of the flywheel into a stable 480-volt
direct current. This is achieved by using power chips to increase the flow of electricity through the
magnetic field inducing coils as the rotational speed of the flywheel decreases.
Flywheels Compared with Batteries for Ride-Through Power Applications
Flywheels have numerous advantages over batteries in ride-through applications, in our opinion, that
result in lower overall system cost and higher overall system reliability. Batteries have long been used as
ride-through power for UPSs, DC telecommunications power systems, remote terminals, cable vaults,
central offices and cellular towers. However, batteries are hobbled by several characteristics that make
them less than the optimal solution for true high quality and reliability power:
•
First, the life of a battery is extremely sensitive to temperature. In persistently warm climates,
such as the American southeast, Texas and the southwest, battery life is significantly
foreshortened as a result of high temperatures. This results in a higher replacement cycle
than is normally implied in the economics of a backup power system. In general, batteries
must be replaced fairly frequently, from two to six years depending on the environment.
•
Batteries are difficult to monitor and are often tested by hand at the site. This is costly from
a maintenance and labor standpoint and leaves the system vulnerable to unknown failures
between inspections.
•
Third, batteries lose power density over time after multiple recharges. As a result, they may
not be able to deliver the required full power in a ride-through or backup situation.
•
Fourth, batteries take up a lot of space, and are heavy. In data centers, for instance, entire
rooms must be reserved to house the massive banks of batteries required for the powerintense servers hosted at the center. In many cases, structural reinforcement must be
added to the building to accommodate the weight of the battery stack. Data center
economics are based on revenue per square foot; the more space a battery stack takes
up, the less revenue that can be generated from that space.
•
Fifth, largely because of their temperature sensitivity, batteries in large installations require
dedicated air conditioning, which can add significant variable costs to a facility’s backup
system economics.
•
Finally, lead-acid batteries are often classified as hazardous materials, creating an
environmental liability and potentially costly disposal requirements. They can also restrict
siting potential in remote applications.
Given all of this, what do batteries have going for them? They are cheap in terms of up-front cost,
they are readily available (unless there is a run on large UPS systems, as there was during the rush
to build data centers over the last several years) and they are the devil you know.
In contrast, flywheels are not temperature sensitive. No additional air-conditioning is required; the
units have self-cooling fans. Flywheels are also easily monitored remotely. In our opinion this is the
biggest determinant of system reliability—it is essential to know if the backup system is available at
any second of the day from a central location, regardless of the reliability of the energy storage
device. Monitoring a flywheel is a simple proposition—it is either spinning or it is not. Flywheels are
also extremely compact relative to batteries, and much lighter per given power density, and so are
ideal in data center applications. Active Power’s flywheels also have no native environmental
liabilities, eliminating the need for hazardous materials disposal costs or potential siting issues.
52
Fuel Cells. Fuel cells produce electricity through an electrochemical reaction, as opposed to
combustion. In a steam combustion process, for example, the burning of fuel creates heat, which
can then vaporize water and create steam under pressure. This steam can then be channeled to
spin a turbine, the mechanical energy from which can be transformed into electricity by a generator.
In a fuel cell, electricity is generated directly from the fuel and at a much higher efficiency. There is
no combustion—instead electrons are forced to break off of the input fuel and are routed to an
external conductor. As a result, the emissions from fuel cells are significantly lower than from
combustion-based generators and are usually in the form of water.
A fuel cell consists of an electrolyte sandwiched between two electrodes termed an anode and a
cathode. Pure hydrogen or a fuel containing hydrogen enters through the anode while oxygen (air) is
fed to the cathode. A catalyst is typically part of the design and is used to accelerate the separation
of hydrogen atoms into their components, electrons and protons. Electrons are then channeled out
of the unit to provide power to the load demand.
The basic unit of a fuel-cell system is a fuel plate. To increase the power of the system, several fuel
cell plates—which each generate a voltage between 0.5V and 1.0V—are combined into a stack. The
stack is then integrated with a fuel reformer and power electronics module. This is a generic model
of how the process of a fuel cell takes place:
1. Fuel containing hydrogen flows to the anode where the electrons are stripped from
hydrogen atoms. The hydrogen atom is formed of only one electron and one proton;
the remaining positive hydrogen ions are protons. This reaction is accelerated by the
presence of a catalyst, usually platinum or other metals. In general, the lower the
temperature of a fuel cell, the greater its dependency on a catalyst. This is because the
process of exciting atoms gets easier with heat.
2. Since the electrolyte allows only the passage of protons or other ions, electrons at the
anode are forced to flow toward the cathode through an external circuit—this is the
power output.
3. The ions (protons) remaining from the separation process diffuse through the
electrolyte (an internal circuit). At the cathode, oxygen from the air combines with the
protons coming through the electrolyte to form water. This process, which is called a
proton exchange, also creates controllable heat.
The process that occurs in a fuel cell is essentially the reverse of water electrolysis. In a fuel cell, the
electrochemical union of oxygen and hydrogen creates electricity and water is a byproduct. By contrast,
an electrolysis cell uses electricity to separate water into its constituents, hydrogen and oxygen.
A generic fuel-cell plant includes a fuel-cell stack, some type of fuel reformer and a power control
system. The fuel reformer is needed for low-temperature systems that are fed with fuel other than
pure hydrogen. The reformer, essentially a miniaturized refinery, separates hydrogen from fuel
through a variety of processes including steam reforming, partial oxidation and gasification. The
power control system inverts the direct current power output of the fuel cell into AC, and controls the
overall operation of the unit.
Types of Fuel Cells
Fuel cells can use either pure hydrogen or various fuels containing hydrogen as input; hydrogen can
be produced separately or extracted from the fuel in the reforming section of the power plant. Fuel
cells are classified by their electrolyte (the middle part of the sandwich).
A comparison of different types of fuel cells is summarized in Figure 19.
53
Figure 19: COMPARISON OF MAJOR FUEL-CELL TECHNOLOGIES BY ELECTROLYTE
Polymer Electrolyte
Membrane
PEMFC
Ion-exchange
membrane
Phosphoric
Acid Electrolyte
PAFC
Phosphoric acid
Molten Carbonate
Electrolyte
MCFC
Molten alkali
(lithium, potassium)
carbonate mixture
Electrolyte State
Charge Carrier
Solid
H+ (protons)
Liquid
Cell Structure
Silicon carbide
matrix
Catalyst
Platinum only
Silicon carbide
matrix, Teflon
bonded
Platinum family
80–200°C
Porous carbon
paper substrates
200°C
Liquid
CO3 (carbonate
ion, neg.)
Liquid suspended
inside porous
ceramic
Nickel (no need for
noble metal
catalysts)
Nickel-based
materials
600–650°C
Electrolyte
Electrode Material
Operating
Temperature °C
Cogen Potential
Efficiency
None
Less than 40%
Fuel
Pure hydrogen
Reforming
Reformed
externally
0.0001–0.210 MW
$0.5–1.0
Portable, vehicle,
small, high density
Output Power
Target Cost $/W
Applications
H+
Moderate
37–42% (up to
85% w/ cogen)
Gas, methane,
ethanol
Reformed
externally
0.2–5 MW
$3.5–4.5
Stationary
High
50–60% (75–80%
w/ microturbine)
Most hydrocarbonbased fuels
No need for
external reformer
0.1–3 MW
$1.4–3
Large applications at
constant loads
Solid Oxide
Electrolyte
SOFC
Yttria-stabilized
zirconia (YSZ) and
other electroceramics
Solid (ceramic)
O (oxygen ion,
negative)
High temp. alloys
Alkaline
Electrolyte
AFC
Potassium
hydroxide
Perovskites (e.g.,
lanthanum
manganate)
(Ni/YSZ) anode.
LaMnO3
600–1,000°C
Broad range of
non-noble metals
and oxides
Potassium
hydroxide
50–250°C
High
50–60%
(85% cogen)
Wide range of
hydrocarbons
No need for
external reformer
0.1–10 MW
$1–1.5
Stationary, high
power, possibly
motor vehicles
Multiple fuels,
internal reforming;
few problems with
solid electrolytes;
high-grade waste
heat
Exotic high-temp
materials needed
Low
Up to 70%
Pros
Low operating
temperature, fast
start-up, high
energy density
Commercially
available
No external
reformer, no noble
metal catalyst
Cons
Platinum required,
CO contamination
Electrolyte is highly
corrosive
Developers
Avista Labs
Ballard Power Sys.
Electrochem
H Power
Int’l Fuel Cells
Plug Power
Proton Energy Sys.
Nuvera Fuel Cells
All carmakers
Others
2002
Anode
contamination
with CO, higher
cost
United
Technologies
(ONSI)
FuelCell Energy
Mitsubishi Electric
Siemens/
Westinghouse
Ceramatec
Ceramic Fuel Cells
Global
Thermoelectric
Acumentrix
Fuji
Ztek
1992
2002
2003
Comm.
Availability
Source: Company reports, Fuel Cell Commercialization Group and Robertson Stephens estimates.
54
Liquid
CO3 (carbonate
ion, neg.)
Regular plastics
Hydrogen (no CO2
contaminant)
External
electrolysis
0.05–0.1 MW
$2–3
Aerospace,
vehicles,
stationary
Components
other than
electrodes, cheap,
fast start-up
CO2 contaminates
electrodes
1999
Microturbines. The microturbine is based on the same general technology as a jet engine, although
it is much smaller and can run on a variety of fuels (jet engines actually run on a fairly dirty fuel
called naptha that drops out of the refinery process before gasoline). There are six basic elements:
the compressor, the recuperator, the combustion chamber, the turbine and generator, the heat
exhaust, and the power electronics.
First, the compressor impeller draws air into the unit through the air inlet. The compressor impeller
then increases the air pressure and feeds the compressed air to the recuperator. During its time in
the recuperator, the air is heated to approximately 1,000 degrees Fahrenheit. This is done to reduce
the amount of fuel required in the air-fuel mix. After passing through the recuperator, the air is fed
into the combustion chamber, where it is combined with fuel and burned. The resulting hot gas is
allowed to expand through the turbine spinning its blades at 96,000 revolutions per minute. The
turbine, which is attached to a shaft supported by innovative air bearings, produces mechanical
energy that is then converted to electricity by the generator, which is essentially an electric rotor that
sits on the same shaft as the turbine. The air inlet is also used to cool the generator. The use of air
bearings enables the bearings to operate free of contact with the shaft and achieve lift by trapping
and controlling airflow around the shaft. Because they require no lubrication, these bearings enable
low-maintenance operation at very high speeds.
Simultaneous with the mechanical operation of the unit, the power electronics manage critical
functions and monitor more than 200 features of the unit, including control of the microturbine’s
speed, temperature and fuel flow. In addition, the power controller communicates through network
connections, enabling remote operation. Furthermore, the digital controller integrates the electron
flow of the microturbine with the flow of electrons from the public power grid or other generation
devices when it is operating in the dual mode of standby and base-load generation. The AC power
output from multiple sources must be synchronized, or it will compete with itself and create harmonic
distortions that are extremely hazardous to the equipment running off it. Capstone’s electronics
feature built-in auto-synchronization controls that smoothly transition the output load from the grid to
the microturbine and back.
Superconductors. Superconductors are compounds, alloys or simple elements that conduct
electricity without resistance below a certain temperature. The temperature at which a material turns
superconductor is called the transition or critical temperature (TC). The losses in electric energy
flowing through a conductor are proportional to the resistance of that conductor—the higher the
resistance the higher the amount of electric energy lost as heat. Since the resistance is zero, an
electric current will flow theoretically for ever in a closed circuit made of superconducting material.
Superconducting materials also have an unusual property: they have the ability to repel magnetic
fields and repulse magnets, a phenomenon called diamagnetism. For instance, if a magnet is
moving close to the surface of a superconductor the motion of the magnet close to a conductor
induces electric currents that in turn generate an opposing magnetic field. In the case of a
superconductor, the newly generated field mirrors exactly the original field canceling its effect. As a
result, the net magnetic field inside the superconductor is zero. This phenomenon named the
“Meissner effect” was discovered in 1933. The Meissner effect is strong enough to actually make the
magnet levitate over the superconductive material, hence potential applications in transportation.
Superconductivity was first discovered in 1911 by Dutch physicist Kamerlingh Onnes. When mercury
was cooled at the temperature of liquid helium (four degrees Kelvin, or four degrees above zero on the
absolute scale of temperature) its resistance suddenly dropped to zero. Throughout the 20th century
new superconducting materials, with higher critical temperatures were discovered and theories were
formulated regarding this physical phenomenon. One of the main goals of the research efforts was to
increase the critical temperature to levels easier to create and maintain in the lab or in the field. The
higher the critical temperature the wider the spectrum of potential applications.
55
A major theoretical breakthrough came in 1962 when Brian Josephson predicted the behavior of a
junction consisting of a thin layer of insulating material sandwiched between two superconducting
layers. In such a junction, electrons tunnel through the isolator creating a current flow even in the
absence of an external voltage. His prediction, later confirmed, won him a share of the 1973 Noble
prize in physics. The Josephson junction found application in the creation of one of the most
sensitive instruments used to measure weak magnetic fields called superconductor quantum
interference device (SQUID).
In 1987, a new material based on yttrium, barium, copper and oxygen (referred to as YBCO) was
shown to superconduct at temperatures of 92 K. YBCO was the first superconductor found to
operate at temperatures warmer than liquid nitrogen. This was a major step forward from a practical
standpoint since liquid nitrogen is a fairly inexpensive and commonly available coolant. The current
record for the critical temperature is 138 K.
The Political and Regulatory Initiatives in Energy Technology
We believe that the market for distributed generation, and energy technology in general, is in further
need of legislative and regulatory support in order to realize its full potential. FERC Order 888 in
1996 required that electric utilities open their transmission and distribution lines to competitive
access to wholesale competitive market participants. The legislation in several states over the same
period to deregulate the wholesale and retail generation markets has resulted in a significant shift in
the ownership of generation in the U.S. and has generally increased plant efficiency and stimulated
significant private capital investment in new generation facilities.
However, there has been very little done from a legislative or regulatory standpoint in the last five
years that directly addresses the market barriers in place for alternative forms of generation or
forced minimum reliability standards. There are several initiatives under way for this phase of the
energy technology revolution is now waiting in the wings and has the potential to achieve legislative
passage within the next several Congressional sessions. The initiatives that we believe currently
have the most direct relevance to the pace of the distributed generation market, and energy
technology in general, are interconnection agreements and standards and the length of the
allowable depreciation cycle for on-site power equipment.
The absence of uniform interconnection standards and lack of the right to interconnect have
presented significant barriers to the deployment of distributed generation, in our opinion. The term
Interconnection refers to the ability to connect a piece of distributed generation equipment into the T&D
grid, a key capability necessary to enable net metering and other dual-mode distributed generation
configurations. A recent National Renewable Energy Laboratory (NREL) report sought to determine
the extent to which barriers to interconnection were affecting distributed generation projects under way
in the United States. The NREL developed case studies for 65 separate projects representing
installations between 1 kilowatt and 26 megawatts and determined that most of the distributed power
case studies experienced significant market entry barriers. In total, 58 of the 65 cases, or
approximately 90%, expressed difficulty in dealing with the utility. The barriers include: technical
barriers, which often include requirements for protective equipment and safety measures to avoid
potential hazards facing utility personnel; business practice barriers, which include a lengthy approval
process, application and interconnection fees, insurance requirements, and operational requirements;
and regulatory barriers, which include charges and payments as well as the outright prohibition of
parallel operations, as well as substantial discounts that are offered to induce potential distributed
generation developers to take power from the grid rather than continue with their planned project.
The purpose of Federally mandated interconnection standards is to significantly shorten the period
of time it takes to connect distributed generation to the grid, set the fees and charges in a
reasonable fashion and allow distributed generation manufacturers to configure their equipment to a
56
single standard. The purpose of new standards regarding the length of the depreciation cycle
allowable for on-site power generation is to more closely match the life cycle of distributed
generation to the allowable depreciation period. Currently, on-site power systems are required to be
written down over 15–29 years, which better resembles the write-down period on a large power
plant. A more accurate depreciation period would be five to seven years for distributed generation,
which significantly shifts the accounting impact of the equipment and improves the economics of a
distributed generation project from a tax point of view.
The Bush Energy Plan
The Bush Energy Plan seeks to provide a comprehensive approach to all facets of energy use in the
United States, and focuses heavily on the procurement of natural resources used in energy
production and the diversification of input sources for power generation. It is not particularly long on
technological recommendations, which is understandable given the breadth of the proposal. From
the standpoint of energy technology investment, the most important references are found in Chapter
6, which states that the use of distributed energy can ”reduce peak demand loads [and bypass]
congested areas of transmission by placing new generating capacity closer to the consumer … thus
achieving overall system efficiencies.” The plan also recognizes the need for increasing the ease of
integration of on-site power with the overall grid. This language echoes our assessment that from the
standpoint of power provider demand, one of the biggest near-term opportunities is in providing
distributed generation to areas where load pockets occur: placing micro-generation close to the point
of distribution is in many cases more economical than stringing additional wires along the grid.
The Key Federal Players and the Bills They Have Introduced
The key players in the debate are Representative Joe Barton (R-Texas), chairman of the House
Subcommittee on Energy and Air Quality of the House Committee on Energy and Commerce;
Representative Billy Tauzin (R-Louisiana), the chairman of the Committee on Energy and
Commerce; Senator Jeff Bingaman (D-New Mexico), the democratic chairman of the Senate
Energy Committee; Senator Jim Jeffords (Ind.-Vermont), chairman of the Environment and Public
Works Committee; Representative Jack Quinn (D-New York); Representative Heather Wilson
(D-New Mexico), who serves on the Energy and Commerce Committee; Senator Frank Murkowski
(R-Alaska); and Representative Robert Matsui (D-California).
Representative Barton has included language regarding interconnection standards as part of a
comprehensive response bill to the Bush energy plan. Representative Quinn has introduced H.R.
1945, which has interconnection language as well as tax and depreciation language through an
amendment to the Federal Power Act and the IRS Code of 1986. Quinn’s bill is intended to
encourage the development and deployment of “innovative and efficient energy technologies.”
Representative Wilson has introduced H.R. 1045, which seeks to “increase electric system reliability
and provide environmental improvements through the rapid deployment of distributed energy
resources.” Senator Bingaman has introduced S.597 titled “Comprehensive and Balanced Energy
Policy Act of 2001,” which contains language to eliminate barriers to emerging energy technology
and prescribes guidelines governing distributed generation facilities. Senator Jeffords has introduced
S.933 titled “Combined Heat and Power Act,” which provides comprehensive interconnection
language. Senator Murkowski introduced in S.388 and S.389, a 10% investment tax credit for new
distributed generation and combined heat and power systems as well as language that directs FERC
to develop interconnection standards. Representative Matsui introduced H.R. 2108, which includes a
10% investment tax credit for combined heat and power systems and sets a seven-year depreciation
schedule for distributed generation assets.
In the September 2001 discussion draft highlights of Republican Representative Barton’s “Electric
Supply and Transmission Act,” it is recommended that FERC be directed to “establish uniform
interconnection standards for both distribution and transmission facilities,” and that “states and non-
57
regulated utilities must implement net metering programs meeting minimum Federal standards for
residential renewable and fuel cell generation.” Democratic Chairman of the Senate Energy
Committee Senator Bingaman’s proposal also recommends that FERC be given control over
interconnection standards, noting that there is a need for a “series of provisions to ensure that we
have a greater role in our electricity generating system of the future for renewables and distributed
generation,” and that there is a need for “uniform interconnection standards to the electric grid.” On
October 10, 2001, Senator Bingaman announced that his committee is suspending further marking
up of the comprehensive energy bill and that the legislation will be brought directly to the Senate
floor for a vote before Congress goes into its autumn recess.
The California Public Utilities Commission has recently launched an incentive program aimed at
stimulating sales of distributed generation equipment as a response to Governor Gray Davis’s
Assembly Bill 970, which called for the creation of more energy supply and demand programs. The
program provides aggregated incentive funding of $125 million per year and applies to those that
install self-generation units between 2001 and 2004. Notably, in order to qualify for funding, the
systems must be interconnected for parallel operation with the utility grid.
Energy Technology—Investment Analysis
The Public Company Universe and the RSET Index
With the publication of this report, we are introducing the Robertson Stephens Energy Technology
(RSET) index. The RSET index is currently composed of 22 companies that participate in the software,
services and information (SSI), power quality (PQ), and distributed generation (DG) segments of the
energy technology industry. Many of the companies included in the index are developing specific
technologies that are designed to operate in general marketplace segments. Although we have pegged
the index to 100 as of January 1, 1999, things do not get really interesting until early 2000, and because
the industry is still relatively immature, the index does not show signs of cyclicality. The RSET index is
highly correlated to the NASDAQ, with a correlation of 0.8, and moderately correlated to the S&P 500. It
is highly volatile relative to both the NASDAQ and the S&P 500—the RSET index has a volatility of 0.51,
while NASDAQ has a volatility of 0.29 and the S&P 500 has a volatility of 0.08.
Year-to-date 2001, the RSET index has declined 48.2% after an increase of 32.4% in 2000, with the
biggest hit coming in the third quarter. We attribute the overall decline in the index to several factors:
1. The majority of companies that have had IPOs in the last 24 months have either reset
their expectations of the near-term potential market size for their products or pushed out
the projected schedule of volume production. Others have successively missed production
targets or changed strategy. Either way, the effect has been a general ratcheting down of
revenue projections and a lengthening of the expected term to profitability.
2. Many large holders of stock pre-IPO—including company managements—have sold
large blocks of stock in the past 18 months that, in some cases, has led to a material
increase in supply.
3. The market in general has shunned companies with no current earnings or internal
generation of cash, two characteristics common to many energy technology
companies. Many of the companies in the energy technology segment do not expect to
be profitable for more than eight quarters.
4. The overall slowdown in spending on telecom and network infrastructure including data
centers and storage facilities has lowered the profile of the demand for high-quality power
systems, although we believe other segments of the economy have mitigated somewhat
the lower-than-expected revenue flowing into the power quality market.
58
Figure 20: RSET INDEX WITH MOVING AVERAGES
200-Day Moving Average
450
400
350
300
250
200
150
100
50
Dec-98
Apr-99
Aug-99
Dec-99
NASDAQ
Apr-00
Aug-00
ET Index
Dec-00
Apr-01
Aug-01
Apr-01
Aug-01
200-Day MA
50-Day and 150-Day Moving Averages
450
400
350
300
250
200
150
100
50
Dec-98
Apr-99
Aug-99
Dec-99
NASDAQ
Apr-00
ET Index
Aug-00
50-Day MA
Dec-00
150-Day MA
Source: FactSet and Robertson Stephens.
59
The RSET index is composed of the following companies: Active Power, American Power
Conversion, American Superconductor, AstroPower, Ballard Power Systems, Beacon Power,
Caminus, Catalytica Energy, Capstone Turbine, Energy Conversion Devices, Evergreen Solar,
FuelCell Energy, Itron, H Power, Hydrogenics, Manhattan Scientifics, Millennium Cell, Medis
Technologies, Maxwell Technologies, Plug Power, Proton Energy Systems and SatCon. Figure 21
ranks the index components by current market capitalization.
Figure 21: ENERGY TECHNOLOGY UNIVERSE RANKED BY
CURRENT CAPITALIZATION ($ in millions, except per share data)
Ticker
Company
Price
11/9/01
Market
Cap.
LTM
Sales
APCC
BLDP
ITRI
APWR
FCEL
PLUG
ENER
CAMZ
CPST
AMSC
ACPW
PRTN
HPOW
HYGS
MDTL
MXWL
MCEL
CESI
SATC
BCON
MHTX
ESLR
American Power Conversion
Itron
AstroPower
FuelCell Energy
Plug Power
Energy Conversion Devices
Caminus
Capstone Turbine
American Superconductor
Active Power
Proton Energy Systems
H Power
Hydrogenics
Medis Technologies
Maxwell Technologies
Millennium Cell
Catalytica Energy Systems
SatCon Technology
Beacon Power
Manhattan Scientifics
Evergreen Solar
$14.40
28.19
26.84
34.05
14.50
8.32
20.40
15.85
4.80
10.90
5.53
6.35
2.87
4.50
8.00
10.75
3.88
5.40
5.56
0.85
0.36
2.40
$2,829.9
2,550.7
555.4
530.1
510.9
407.0
400.7
252.0
369.5
222.1
222.0
210.4
154.5
160.0
136.7
109.2
105.9
85.6
80.6
36.3
38.8
27.3
$1,528.6
35.9
190.4
57.8
27.5
5.3
71.4
66.1
35.8
14.5
15.9
1.3
2.8
7.9
—
96.6
—
—
41.9
0.1
0.3
2.1
$9,995.9
$2,202.1
Total
Source: FactSet and Robertson Stephens estimates.
Energy Technology Capital Markets in 2000–2001
In our opinion, the overall decline in the RSET index since the beginning of 2001 is a predictable
response to a market segment that was oversupplied with merchandise. Although hardly a scientific
analysis on our part, we believe that the initial catalyst for the capital markets activity in 2000 was an
article that appeared on the MSN-FN Web site in the first weeks of January 2000. The free article
selected Plug Power, a developer of fuel cells for residential installations with General Electric as a
distribution middleman, as a stock that could increase 10,000% over the next ten years. The response
in the stock to that article was overwhelming—Plug Power’s stock climbed 95% in the first half of
January, then added another 71% in the second half of the month. Ballard Power and FuelCell
Energy traded in sympathy and increased 132% and 50%, respectively, in January of 2000.
The increase in total market capitalization of the RSET index in the first quarter of 2000—to $22.5
billion as of March 31, 2000 from $10.6 billion on January 1, 2000—sparked a frenzy of capital
markets activity. Investment banks rushed to fill the demand for fuel-cell stocks and energy
60
technology companies in general, which culminated in 18 IPOs or secondary offerings of energy
technology companies over the first three quarters of 2000. Two of the more high-profile names—
Capstone Turbine, which boasted both Bill Gates and Paul Allen as early investors, and Active
Power—posted first-day performances of 200% and 218%, respectively. The blackouts in California
combined with exceptionally high wholesale power prices in several U.S. regions provided the
second wave of catalysts necessary to focus investor attention on the need for generation that can
be deployed rapidly and the high value of power quality and reliability. At its peak on September 15,
2000, the RSET index boasted $33.5 billion in aggregate market capitalization. By the time of the
last energy technology IPO of 2000 in late October (Beacon Power), the index had fallen to $25.9
billion, and finished the year at $17.0 billion. Although highly touted as a technology and market
leader, Plug Power had its share of difficulty in 2000. By the end of the year, Plug Power had
changed the design of its fuel cell so that it no longer met GE’s specifications, dramatically reduced
(and then abandoned) its near-term production forecasts, altered its strategy from a stand-alone
model to a grid-connected model, extended its projections for profitability and lost its CEO.
The year 2001 has seen some capital markets activity in the energy technology industry. FuelCell
Energy raised $240 million in June 2001 and several private deals got priced in the first half of the
year, but we believe that in general the market is still digesting the supply introduced into the market
in the first three quarters of 2000. Although the equity capital markets activity in general has been
slow compared with a year ago, the relative soggy performance of many energy technology stocks
has made raising capital in the public markets difficult. We believe this will sharpen investors’ focus
on cash—how much is on hand and how quickly it is being spent.
How the Stocks Trade
Many of the energy technology stocks are story stocks—they respond to the announcement of
investment stakes taken by large multinationals as validation of concept or technology, or spike up at
the announcement of a contract signed to provide a relatively small amount of trial units to a single
customer. Because of the perceived size of an extraordinary potential market—the $250 billion U.S.
power market, for instance—companies that are still in the development phase of technology are
often afforded a more forgiving treatment by investors than those that are selling products into the
marketplace. We believe this phenomenon is a function of the limitations to valuing companies with
no products and no cash flow. For companies that have not yet commercialized a product, the bulk
of the valuation is in the terminal valuation cloud of a discounted cash flow analysis and is dictated
by general supply and demand. As a company moves into the commercialization mode, near-term
results affect the market’s assessment of the odds that the terminal valuation reflects what reality
seems to imply. The discount rate increases as the required return increases and overall valuations
contract in response—particularly when the company misses its own internal near-term forecasts.
The Energy Technology Software, Services and Information Stocks
The stocks in the SSI segment have outperformed the RSET index, increasing 30.2% year to date
compared with a 48.2% decline in the index. The SSI index has a volatility of 0.48 (defined as the
ratio between the standard deviation and the average index value) and is negatively correlated with
the S&P 500 and weakly correlated with the NASDAQ. The SSI companies (Caminus and Itron)
have the lowest cash-burn rates among the RSET index components.
61
Figure 22: SSI INDEX VERSUS RSET INDEX
600
500
400
300
200
100
0
Dec-98
Apr-99
Aug-99
Dec-99
Apr-00
ET Index
Aug-00
Dec-00
Apr-01
Aug-01
SSI Index
The Energy Technology Power Quality Stocks
The stocks in the power quality (PQ) segment have declined 7.6% year to date, compared with a
48.2% decline in the RSET index. The PQ index has the lowest volatility of the RSET components,
with a volatility of 0.4. The PQ index is highly correlated with the NASDAQ—the correlation index is
0.8—and is moderately correlated with the S&P 500. There is a relatively good correlation between
American Superconductor, American Power Conversion, Active Power and Beacon Power, with
mutual correlation coefficients that range between 0.5 and 0.9.
62
Figure 23: PQ INDEX VERSUS RSET INDEX
600
500
400
300
200
100
0
Dec-98
Apr-99
Aug-99
Dec-99
Apr-00
ET Index
Aug-00
Dec-00
Apr-01
Aug-01
PQ Index
The Energy Technology Distributed Generation Stocks
The stocks in the distributed generation (DG) segment have underperformed the RSET index,
decreasing 45.8% year to date, compared with a 48.2% decline in the RSET index. The DG stocks
have the highest volatility among the RSET index components, with a volatility of 0.54. The DG
index is highly correlated with the NASDAQ—the correlation index is 0.8—and is moderately
correlated with the S&P 500. There is high correlation among the fuel-cell stocks that are
components of the DG index (Ballard Power Systems, FuelCell Energy, H Power, Hydrogenics,
Millennium Cell, Medis Technologies and Plug Power), with mutual correlation coefficients that range
between 0.5 and 0.9. In general terms, the fuel-cell stocks tend to move together.
63
Figure 24: DG INDEX VERSUS RSET INDEX
600
500
400
300
200
100
0
Dec-98
Apr-99
Aug-99
Dec-99
Apr-00
ET Index
Aug-00
Dec-00
Apr-01
Aug-01
DG Index
Notably, there is an interesting phenomenon in DG stocks—that is the market apparently does not
see these new energy technology companies as competing against one another but instead
competing against whatever the incumbent technology may be. For instance, the two major
developers of microturbine technology in 2000 were Capstone and Honeywell. When it was
announced that General Electric would acquire Honeywell on October 23, 2000, Capstone’s stock
increased by 10% on the day of the announcement and 9% on the day following the announcement
(although the GE/Honeywell merger eventually fell apart, GE is purchasing Honeywell’s microturbine
technology anyway). This was somewhat counterintuitive—General Electric has significant
experience in aeroderivative engines and has greater R&D resources than Honeywell and
presumably represents a greater threat to Capstone than Honeywell did alone. More recently, when
it was announced that General Motors would use Hydrogenics’s proton-exchange membrane fuelcell technology to develop a residential fuel-cell system both Plug Power and H Power—which are
pursuing a similar model—experienced stock price increases.
64
Volume Analysis of the RSET Index
The aggregate average trading volume in the RSET index since January 1, 1999 has been 6.5
million shares per day. The peak average daily volume occurred in Q2:01, a 22% sequential
increase. On a 90-day rolling average basis, overall daily trading volume has been steadily
increasing, to 11.0 million shares in September 2000 from approximately 3.4 million shares in May
1999. In our opinion, this is a function of several factors including the introduction of several new
issues in the second and third quarters and the gradual disposition of shares that had been under
lock-up for 90- and 180-day periods after the introduction of these new issues went public. With the
absorption of these new shares into the market, overall volume has increased. We expect the
volume trend to moderate somewhat over the next several quarters in the absence of any new
capital markets activity.
Figure 25: QUARTERLY VOLUME OF THE RSET INDEX (in thousands)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Q1:99
Q2:99
Q3:99
Q4:99
Q1:00
Q2:00
Q3:00
Q4:00
Q1:01
Q2:01
Q3:01
Average Daily Trading Volume
After mirroring upward trends in both volume and the value of the RSET index in 2000, the
correlation between volume and the RSET index value has inverted in 2001. We believe this is the
legacy of the excessive supply response in the capital markets in 2000, which resulted in the
introduction of 12 new public companies in the first three quarters of 2000. With the disposition of
even more shares into the market as lock-up periods expire, the overall demand for the companies
in the RSET index has failed to keep up with the supply of available stock.
65
Figure 26: VOLUME VERSUS RSET INDEX VALUE (in thousands)
300.0
14,000.0
12,000.0
90-Day Average Volume
10,000.0
200.0
8,000.0
150.0
6,000.0
100.0
4,000.0
90-Day Average RSET Index Value
250.0
50.0
90-Day Average Volume
90-Day Average RSET Index Value
Oct-01
Oct-01
Jul-01
Aug-01
Jun-01
Jun-01
Apr-01
May-01
Mar-01
Jan-01
Feb-01
Dec-00
Oct-00
Nov-00
Sep-00
Jul-00
Aug-00
Jun-00
Apr-00
May-00
Mar-00
Jan-00
Feb-00
Dec-99
Oct-99
Nov-99
Oct-99
Sep-99
Jul-99
Aug-99
May-99
0.0
Jun-99
2,000.0
0.0
Linear (90-Day Average Volume)
Internal or Relative Strength Analysis of the RSET Index
We have measured the internal strength of the RSET index using the standard relative analysis
formula (100-[100/(1+[average of upward price change]/[average of downward price change])]) using
a 50-day average for each series of upward and downward price changes. The 50-day analysis is
more predictive than the traditional 9- or 20-day analysis and produces a longer-term indicator of the
overbought or oversold condition of the RSET index. In general terms, the index is oversold when
the RSI indicator drops below 35 and overbought when the RSI indicator exceeds 60. The value
changes in the RSET index that have occurred in the short to intermediate term after overbought
and oversold indications in the RSI value have become progressively more truncated in 2001 than
they were in 2000. However, the RSI has been generally predictive over the past nine months, as it
was for the majority of intermediate trends in 2000.
The current RSI value of 30, which is below the oversold indication level of 35, suggests that the
RSET index is currently in an oversold condition, and that current energy technology stock prices are
at levels that merit strong consideration of long positions in the energy technology RSET companies.
66
Figure 27: RELATIVE STRENGTH ANALYSIS OF THE RSET INDEX
80
450
400
70
350
Index Value
250
50
200
RSI Value
60
300
40
150
100
30
50
Index
Sep-01
Jul-01
Jun-01
Apr-01
May-01
Mar-01
Jan-01
Dec-00
Oct-00
Nov-00
Jul-00
Aug-00
Jun-00
Mar-00
May-00
Jan-00
Feb-00
Dec-99
Oct-99
Sep-99
Jul-99
Aug-99
Jun-99
Apr-99
Mar-99
Feb-99
20
Dec-98
0
Relative Strength
Institutional Ownership of RSET Components
We have analyzed institutional activity in the components of the RSET index by focusing on the top
20 holders ranked by the size of their positions on a quarterly basis. On average, the top 20
institutional holders of a stock control approximately 25.7% of the shares outstanding. This
percentage has been trending slightly up over the last ten quarters to reach 27.2% as of June 2001.
We have analyzed the top 20 holders because we are interested in the intensity of the positions
held, which is represented by the portion of the shares outstanding institutions are willing to
control—particularly in the top five positions. The top five institutional holders control an average of
16.0% of the RSET index and represent nearly 60% of the institutional positions in the top 20.
The highest concentration of control among institutional ownership among the top 20 holders is
found in the software, services and information stocks—with an average of 53.0%. The power quality
components of the RSET index have averaged 32.8% institutional control among the top 20 holders.
The distributed generation stocks are by far the most popular among retail investors, with the top 20
holders representing an average of only 16.2% of the total shares outstanding.
The most dramatic institutional activity has occurred in the distributed generation components. The
control among the top 20 institutions in distributed generation stocks has fluctuated between 12.9%
and 19.4%, and currently stands at 18.9%. The largest downward sequential changes in institutional
ownership seem to correlate with the strongest performance in the stocks, which indicates to us that
institutional investors have been selling into strength when the distributed generation stocks rally.
67
Figure 28: PERCENTAGE OF RSET INDEX HELD BY TOP 20 INSTITUTIONAL HOLDERS
350
35%
300
30%
250
25%
200
20%
150
15%
Distributed Generation Index
Percentage of Total DG Shares Out Controlled by Top 20 Institutions
40%
100
10%
50
5%
0%
0
Mar-99
Jun-99
Sep-99
Dec-99
Mar-00
Jun-00
Sep-00
Dec-00
Percentage of DG Total Shares Controlled By Top 20 Institutions
Mar-01
Jun-01
Index
Source: Bloomberg, FactSet and Robertson Stephens.
Days Short Outstanding
We have calculated the days short outstanding for the component stocks in the RSET index based
on the reported short interest divided by a 20-day average volume. The range of average days short
has been between 2 and 12 days, although the top of the range for individual stocks has reached as
high as 20 to 105 days. The highest concentration of short interest has been in the software,
services and information segment, which has been routinely shorted but has had the strongest
relative performance of all three of the RSET component subgroups. The lowest level of short
interest has been in the power quality stocks.
In general terms, the lowest levels of days short outstanding have coincided with the peaks of
intermediate term up moves in the RSET index. In other words, the shorts generally get it right. For
instance, short interest in 2000 peaked in the last week of August at 11 days and bottomed at 3 days
by the first week of 2001, correctly anticipating a 54.7% decline in the RSET index. The current level
of days short outstanding is approximately six days, which is in line with the historical average of six
days. As a result, we do not see any trend indication at this point related to the correlation between
the RSET index and days short outstanding.
68
Figure 29: DAYS SHORT OUTSTANDING OF THE RSET INDEX
14
450
400
12
350
RSET Index Value
250
8
200
6
150
10
300
4
100
2
ET Index
8/30/2001
8/01/2001
7/02/2001
6/01/2001
5/02/2001
4/02/2001
3/02/2001
1/31/2001
12/29/2000
11/29/2000
9/29/2000
10/30/2000
8/30/2000
8/01/2000
6/30/2000
6/01/2000
5/02/2000
3/31/2000
3/02/2000
2/01/2000
12/31/1999
12/01/1999
11/01/1999
9/01/1999
10/01/1999
8/03/1999
7/02/1999
6/03/1999
5/04/1999
4/05/1999
3/04/1999
2/02/1999
0
12/31/1998
50
0
Sell-Side Coverage
The legacy of last year’s capital markets activity is the number of sell-side analysts currently
covering the stocks in the energy technology universe. According to Nelson’s database, Capstone
Turbine is currently covered by 20 analysts, or one analyst for every $13 million of market
capitalization. Plug Power is also covered by 20 analysts, or 1 analyst for every $17 million of market
cap. The analyst-to-market cap ratio is significantly better for Ballard Power Systems, which is
covered by 32 analysts ($111 million in market cap per analyst).
We believe the relatively high number of analysts covering the energy technology sector at this
stage of the market indicates that there is still a significant expectation that investment capital in the
public markets will be directed into the energy technology sector. Given the magnitude of the
potential demand in the software, services and information segment, we expect that the focus will
shift from distributed generation and power customer-related companies to software and information
companies. The power companies are in the early stages of reconfiguration and system and
platform implementation. As a result, we believe that the next wave of capital markets activity will be
more heavily weighted in the software, services and information segment, and will be represented by
companies that have a significant portion of their sales to energy companies.
69
Valuation
The energy technology stocks are typically valued using some form of discounted cash flow
analysis, with discount rates generally between 20–40% depending on the pace of development and
the schedule for commercial production. Comparable analysis is generally difficult except in the fuelcell and distributed generation stocks, as few of the publicly available energy technology companies
are competing in the same marketplace. In comparing fuel-cell and distributed generation stocks,
however, the only line on the income statement that is generally positive is the revenue line. As a
result, the comparable analysis of fuel-cell and distributed generation stocks is typically based on
price to sales. This is fraught with its own problems as many of the fuel-cell companies are selling
development and not commercial units, and revenues are therefore not representative of the actual
trend in production sales.
The total market capitalization of the RSET index peaked in mid-September 2000 at $33.5 billion.
Given that we now have the results of the 12 months of sales since that peak ($2.2 billion), we can
make the assessment that the component stocks were trading at a multiple of 15x sales at the peak
of the RSET index. If we assume approximately 10% growth in sales over the next 12 months, or
$2.4 billion, the RSET index is currently trading at 4x forward 12-month sales.
The current market value of the component stocks is $10.3 billion. Rather than impose our own
valuation criteria on the market, we have built a model to assess what the market is implying in this
current value. One way to look at this number is to compare it with the required sales and EBITDA
necessary at the end of the next five years to justify present market values. This requires three
assumptions—sales growth, EBITDA margin and discount rate. We have made several simplifying
assumptions. The first assumption is that the discounted free cash flow between now and year five
sums to zero. This is not a great stretch—many of the energy technology companies do not expect
to generate free cash flow in the next four years. As such, we have also ignored changes in working
capital, cash taxes (not likely) and depreciation. In this model, we are only concerned with the
terminal value of EBITDA, and what the implied multiple is as indicated by the current market value
of the RSET index. We have formulated the multiple to be the reciprocal of the discount rate, which
we define as the required return necessary to convince an investor to take a long position (we have
ignored the theoretical CAPM formulation of the discount rate—which would be approximately
16%—for the sake of reality).
The notation for the model is as follows:
Current revenue ($2.2 billion)
R0 =
Revenue in year five
R5 =
EBITDA in year five
E5 =
e=
EBITDA margin
g=
Annual growth rate in revenue
r=
Discount rate
M=
Terminal EBITDA multiple, which is equal to (1/r)
PV = Current market value of the RSET index ($10.3 billion)
The formulas for the model are:
R0(1+g)5
R5 =
E5 =
eR0(1+g)5
M=
(1/r)
The equation for the model is:
PV = ME5/(1+r)5
70
This equation gives the implied relationship between sales growth “g,” discount rate “r,” and the
EBITDA margin “e.” We have made a generalized assumption and assigned a 25% EBITDA margin
to revenue in year five. This leaves only “g” and “r” to solve. The question is: At what rate would
sales have to grow in order to satisfy the present market value of the RSET index at a discount rate
that takes into account the relatively high required return we assume is necessary to take a long
position in these stocks? This leads to two additional questions. The first is whether it is reasonable
to assume the growth rate implied in the current market value will actually transpire. The second is
whether the total sales in year five seems to be an accurate reflection of the total market opportunity
for these companies, given that they will not be alone and that their sales will represent some
percentage of the overall market.
Figure 30 gives the range of values that satisfies the current market capitalization of the RSET index
for a range of EBITDA margins.
Figure 30: SENSITIVITY ANALYSIS OF MARKET-BASED DCF ASSUMPTIONS
180%
160%
Implied Growth Rate in Sales
140%
120%
100%
80%
60%
40%
20%
0%
10%
13% 15%
18%
20%
23% 25%
28%
30%
33%
35% 38%
40%
43%
45% 48%
50%
Implied Discount Rate
E1 (25% EBITDA)
E2 (35% EBITDA)
E3 (15% EBITDA)
Source: FactSet and Robertson Stephens estimates.
This analysis suggests that if the required return implied in the discount rate is 25%, then sales
would need to grow at a CAGR of 70% over the next five years, assuming a 25% EBITDA margin. If
the discount rate is assumed to be 35%, then aggregate sales would need to grow at a CAGR of 97%
over the next five years. If we change the EBITDA margin assumption to 35% at a 25% discount rate,
the required CAGR in sales for the next five years drops to 59%. This implies that for every 1,000 basis
points in EBITDA margin, the required CAGR of sales likewise drops 1,100 basis points.
71
These results provide a valuable starting point in determining the upside and downside potential of
the components that make up the RSET index. In other words, if one assumes a 25% discount rate,
but also assumes that the CAGR of sales over the next five years is only 50%, then the value of the
RSET index would decrease to $5.5 billion, or a decrease of 47%. If, on the other hand, one assumes
that the CAGR of sales over the next five years is 100% at a 25% discount rate, then the present value
of the RSET index would increase to $23.1 billion, or a 124% increase from its current level.
Given the relatively small base of aggregate revenues in the RSET index, it does not seem
unreasonable to assume a CAGR of 70% or higher, which would indicate that total sales in 2006
would be in the $30–50 billion range. This is within forecasted ranges when taking into consideration
the total of the SSI, PQ and DG markets. However, it does expose the fact that the longer it takes for
companies to reach commercial production the less these companies are worth. It also
demonstrates that companies with sustainable high EBITDA margins—companies that are generally
in the SSI segment—have the greatest leverage in terms of potential upside from current market
values, in our opinion.
Cash
As of the end of second calendar quarter 2001, the component companies had approximately $2.3
billion in cash on the balance sheet, although the total of the average cash burn over the last four
quarters for the component companies was approximately $450 million per quarter. However, we
believe that many of the companies have completed the bulk of their manufacturing transition
spending, which has been the major consumer of cash in the industry over the past 12 months. In
addition, some of the component companies are expected to turn cash positive in the next three to
five quarters. At the same time, with the capital markets unreceptive to companies with rapid cash
burn rates some company managements have scaled back near term investing plans. As a result, we
expect the aggregate burn rate of the energy technology companies will decline to approximately $200–
250 million over the next several quarters. This indicates an average of ten quarters of available cash,
which we believe will be adequate to determine which technologies will stay and which will leave.
Private Market Activity in Energy Technology
There has been a dramatic increase in the amount of invested and available venture capital related
to the energy technology area over the past three years. Data compiled by Nth Power, a leading
energy technology venture capital firm, and Stanford Business School indicate that invested private
capital in 2000 was $1.2 billion, a 165% increase over the 1999 total of $442.0 million. This marks
the second straight year in which venture capital investments in energy technology companies have
increased more than 100% compared with the previous year.
72
Figure 31: PRIVATE EQUITY INVESTMENT IN ENERGY TECHNOLOGY ($ in millions)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Avail.*
*Year to date.
Source: Nth Power, Venture Source and Robertson Stephens estimates.
Between 1990 and 1995, venture capital investment in the energy technology area averaged
approximately $15.2 million, barely material considering the size of the power industry. Given the
power industry’s regulated status during that time, it makes sense that there was no significant
venture capital investment in energy technology. Predictably, venture investment perked up
significantly following the Energy Policy Act of 1996—venture capital investments jumped to almost
$100 million in 1996, or more than 250% compared with the previous year. Since the end of 1995,
venture investment in the energy technology area has increased at a CAGR of 113%.
Although public capital markets dictate to some extent the pace of future private investment in the
area, we calculate that there is approximately $4 billion in available capital at venture capital and
private equity funds that actively invest in the energy technology area. Still, we believe that venture
capital investing in energy technology is in the early stages—the Energy Policy Act was only passed
five years ago and the pace of structural change is only now beginning to accelerate. Total venture
capital investment in 2000 was $68.8 billion according to Venture One, giving energy technology a
approximately 2% share of total venture capital investment; we would expect that as the power
industry continues to reconfigure itself energy technology investment will likewise continue to increase.
73
ENERGY TECHNOLOGY COMPANIES
COVERED BY
ROBERTSON STEPHENS
75
November 12, 2001
Active Power, Inc.
(ACPW $5.53)
Rating: Market Perform
Change in . . .
Rating:
Operating EPS 2001E:
Operating EPS 2002E:
Rev 2001E (MM):
Rev 2002E (MM):
12-Month Price Target:
Yes/No
No
No
No
No
No
No
52-Week Range (NASDAQ):
FD Shares Outstanding (MM):
Market Cap (MM):
Average Daily Volume (000):
Book Value/Share 9/01:
5-Year Projected EPS Growth Rate:
Price/Book Value 9/01:
Was
Is
MP
$(0.72)
$(0.63)
$22.9
$33.8
NA
FY December
Operating EPS:
1Q
2Q
3Q
4Q
Year
P/E
$39–3
40.2
$222
604
$3.43
NM
1.6x
Revenue (MM):
1Q
2Q
3Q
4Q
Year
Eqty Mkt Val/Rev
2000
2001 E
$(1.15)
$(1.26)
$(0.35)
$(0.16)
$(1.92)
—
$(0.17) A
$(0.17) A
$(0.18) A
$(0.19)
$(0.72)
NM
2000
$0.2
$0.7
$1.3
$2.7
$4.9
—
2001 E
$5.1 A
$6.7 A
$6.2 A
$4.8
$22.9
9.7x
2002 E
$(0.16)
$(0.16)
$(0.16)
$(0.14)
$(0.63)
NM
2002 E
$3.7
$5.0
$9.9
$12.2
$33.8
6.7x
Recently Initiated Coverage with a Market Perform Rating
Investment Conclusion: We believe Active Power’s backup power systems will gain significant
market share over the next five years through superior economics, performance, and the rapid path
to market through Caterpillar’s distribution channel. Based on the revenue minimums set by
Caterpillar and using a conservative revenue ramp for the company’s other backup power products,
we believe the company will reach profitability in late 2003. However, we believe near-term
weakness in the next several quarters will limit potential upside in the stock price.
•
There is widespread demand for backup power systems in the U.S. and abroad. The
EPRI estimates that U.S. businesses lose $46 billion per year due to power quality
problems, approximately $0.33 for every dollar spent on electricity.
•
We believe the performance and economics of Active Power’s UPSs give the
company a sustainable competitive advantage over incumbent players for the next
several years.
•
Distribution agreement with Caterpillar achieves broad potential customer
penetration, high product credibility and an attractive minimum revenue base. We
believe minimum revenue requirements of $100 million in 2003 for Caterpillar are
achievable. An attachment rate of only 10% of Caterpillar’s installed base of 300,000
backup generators would yield $1.7 billion in cumulative sales at current ASPs.
•
Operating margin, receivables and pricing are advantaged by Active Power’s
strategy. We believe Active Power can achieve our target of 11% operating margin at a
faster rate by transferring seed market and sales costs to its distributors, while keeping
working capital requirements relatively low. In addition, product pricing has remained firm.
•
Near-term weakness in sales over the next several quarters should limit potential
upside in the stock price. The general market slowdown in backup power systems
combined with the seasonal revenue dip that historically occurs in the first half of the year
limits the upside in the stock, in our opinion. We have valued Active Power using both
relative multiple and DCF analysis and believe the shares are currently fairly valued.
77
Company Summary
Active Power designs and manufactures instant backup power systems for industrial and
commercial applications. These backup power systems are referred to as UPSs or CPSs because
they provide a seamless power bridge between a primary power source (usually the public power
grid) and a backup power source (usually a diesel generator). To store backup power Active’s
systems utilize a patented flywheel technology as opposed to a lead acid battery, which is the chief
component in the majority of incumbent systems. In our opinion, Active Power’s flywheel-based UPS
systems have numerous sustainable competitive advantages over battery-based UPS systems,
including higher reliability, the ability to be operated and monitored remotely, a smaller footprint, and
cleaner operation. The company has also developed a CPS for the telecom industry that is expected to
provide up to eight hours of continuous backup power. The company’s current main distribution
channel is Caterpillar, a leading provider of backup power generators, which markets and sells the
company’s UPS products under the Caterpillar brand name.
Active Power has two main products: the CleanSource2 DC, which can be used as a battery
replacement in an existing UPS, and the Cat UPS, which is sold as a complete flywheel-based UPS
system. A third product line, aimed at the 30- to 150-kVa market is currently in development. The
CleanSource2 DC product is rated at 200-, 300-, 400- and 600-kVa, while the UPS systems are
available in 300-, 600- and 900-kVa installations and can be integrated into a continuous power
system with a Caterpillar generator set. We believe that the total value of the markets in which Active
Power competes is between $3–5 billion.
Active Power is headquartered in Austin, Texas. The company is currently in transition from a
15,000-square-foot facility to a new 127,000-square-foot facility in Austin. We expect the company to
generate sales of $23 million in 2001, followed by $34 million in 2002. We estimate the company will
have its first profitable year in 2004, generating $8 million in net income. From a product standpoint,
the current sales mix is largely dominated by the Cat UPS product; as a result, the majority of sales
are to Caterpillar. Over the long term, we expect the sales mix is likely 60% Cat UPS, 5%
CleanSource DC and 35% from other products. From a geographic standpoint, revenues as of the
second quarter 2001 were generated 85% in the United States and 15% from the rest of the world.
The Market Opportunity
The proliferation of the semiconductor in the global economic infrastructure over the last 20 years is
credited with dramatically improving overall productivity and, in turn, spurring significant economic
growth. The semiconductor has had another effect on the economic infrastructure, however. It has
changed the nature of the demand for electricity from standard grade grid-delivered power to high
reliability power, free of the commonplace power cuts, sags, and surges native to long-haul electric
distribution and transmission systems. As a result, the power network that was set up as the engine
of the industrial age is antiquated in the face of the information age. To illustrate this point, American
businesses spent approximately $122 billion for grid-sourced power in 1999; according to the EPRI,
American businesses also lost $46 billion due to power quality and reliability problems. On average,
American businesses experience power quality events 20 times per year.
The demand for high-quality power has been historically met with systems that combine ride-through
power sources and backup generators. The ride-through power sources, referred to as UPSs,
provide a bridge between the grid and backup generators. They also correct the incoming power
supply for sags and protect equipment against surges. For telecommunications systems, direct
current (DC) power supplies have historically been used, which essentially run grid power through
batteries and result in a clean, reliable power supply. The market for UPS systems is estimated at
approximately $3 billion, DC power supplies another $3 billion and backup generators another $4
billion; all told, the global market for power quality equipment worldwide was estimated at
approximately $11 billion in 2000 and is expected to grow 7% per year, according to Darnell Group.
78
With the recent boom in data center and network infrastructure construction over the last three
years, demand for UPS equipment and backup generators has surged. The construction of new data
centers alone was expected to require 2,000 megawatts of power over the next several years. Not to
mention the power quality requirements of all of the other support stuff—central switching offices,
remote terminals, cell towers—necessary to create a functional network. Today, it is clear that a lot
of those data centers are not going to get built. However, what is often overlooked is the fact that
there are already hundreds of thousands of data centers in place. It is just that they are embedded
inside the rollers in a steel mill or the ovens in a bakery. In our opinion, the demand for high-quality
power will come as much from traditional companies with semiconductor-driven process control
equipment as it will from the server and storage markets. According to an EPRI study, 64% of the
total losses from power quality and reliability problems occurred in the fabrication and essential
services segments of the economy.
Active Power’s Business Model
Active Power’s business model is to develop and manufacture a full line of backup power products,
based on a proprietary flywheel design, that are specifically produced for applications in the billiondollar commercial and industrial power quality market. As a new entrant into an already heavily
competitive market, Active Power is relying on two main tenets of its model. First, that the performance
of its products is superior to existing backup power systems at better economics, and second, that it
can achieve rapid market penetration by pushing its products through distribution agreements with
entrenched, well-regarded sales partners. With this model, we believe the company has the potential
to become a dominant power quality equipment provider across all spectrums of power.
The first key to Active Power’s business model is that its products are all based on the same general
flywheel design. The CleanSource DC product, which replaces the battery component of an existing
UPS system, is essentially the basis for the company’s UPS products. A UPS has basic
components: front-end electronics that monitor the incoming signal to determine if there is a cut, sag
or surge in the power supply; an energy storage device, which supplies power until the backup
generator starts up; and an inverter, which converts the direct current signal from the energy storage
device to an alternating signal, which is what comes out of the wall socket. By introducing both a
battery replacement for existing systems, and an entire UPS system based on the same technology,
the company has essentially made two products out of one design. The HIT6 product, which is
directed at the telecommunications market, is essentially a scaled-down version of the CleanSource
DC integrated with a small turbine of Active Power’s design.
The second key to the company’s business model is that the flywheel is designed to utilize
commodity materials in order to bring costs down quickly through scale. For instance, the flywheel
and the outer casing are made of steel. With the exception of a processor and an insulated gate bipolar transistor (IGBT), all materials can be procured from multiple suppliers. As a result, Active
Power has placed heavy emphasis on its patent portfolio, covering everything from combining motor
generator functions to the flywheel and the UPS electronics. We believe this aspect of the model will
enable the company to price its products competitively against both existing flywheel-based CPS
systems and battery-based UPS systems as well.
Finally, Active Power’s business model is predicated on its agreements with entrenched distribution
channels. For instance, the agreement with Caterpillar, a leading manufacturer and distributor of
backup generation, gives the company immediate access to all end users that currently employ
backup generation of any kind. In addition, the Cat-branded UPS gives the customer the Caterpillar
stamp of approval and does not require new brand awareness. The UPS can also be integrated into
an entire system sale that includes UPS and backup generation, which results in a higher up-front
sale for Caterpillar as well as a higher average gross margin.
79
Active Power’s Strategy
Active Power’s broad strategy is to develop better, cheaper products for existing markets, package them
with the brands of market leaders and leverage their distribution channels to the end customer. The
market leaders then increase their own share within a marketplace, or enter a new marketplace and take
share from the incumbents. While this strategy sacrifices the margin in the distribution channel, it
spreads start-up costs across a broad potential customer base and speeds product to market.
Active Power’s strategy for its business plan has followed its product development and introduction
cycle. The company’s first product, the CleanSource DC, saw significant demand pull from the data
center market, which until last year provided the greatest pull for high-end UPS equipment seen in
decades. Since data centers place such a high premium on space available for rent, the
CleanSource product is highly attractive: one CleanSource flywheel takes up 25–30% of the space
that is usually occupied by a stack of batteries. In addition, the flywheel is lighter than the same
stack of batteries, so the building does not need structural reinforcement at the site of the UPS.
Because the potential revenue derived from space savings and the cost savings resulting from the
flywheel’s relatively light weight, the higher capital cost for the unit is more than offset. This enabled
Active Power to ramp up production manufacturing in anticipation of higher volumes for the UPS
product, as well as make design changes to the product.
By the summer of 2000, the Cat UPS product was launched, which significantly broadened the
company’s potential customer base to include hospitals, utilities, steel processing facilities,
telecommunications providers, banks, bakeries, TV stations, and an assortment of other companies
and numerous government and military sites. Active Power now focuses its sales efforts on training
the Caterpillar distributors and reaching agreements with other original equipment manufacturers
(OEMs). This strategy leaves the resource-heavy responsibility for the end customer sale to
Caterpillar. While this limits the leverage to Active Power because there is a margin sacrifice in
transferring the sales function to Caterpillar, it also decreases the burn rate of capital and spreads
the adoption risk of the technology across a wide potential base of customers. At the same time, the
upside potential for Active Power is embedded in the sales minimums that were set at the onset of
the agreement; specifically, Caterpillar has an annual sales minimum of $100 million in 2003.
Given the dramatic slowdown in the demand for UPS systems in the data center market, the Active
Power strategy is showing some resilience. Unit sales in Q4:00 and Q1:01 were supported by high unit
shipments to a small group of customers, while Q2:01 and Q3:01 unit shipments were almost entirely
through the Caterpillar channel and represented smaller unit totals to a broader base of customers.
Active Power is also continuing to pursue strategic agreements with distribution partners that include
development funding for new product development. The agreement with Caterpillar, for instance,
included a $5 million development funding contribution from Caterpillar that was dedicated to the
development of the Cat UPS product. Management has indicated that it will continue to sign deals
with partners that include development funding for products that can be branded by the partner and
pushed through the partner’s distribution channel.
80
The Distribution Channel
Active Power’s distribution channel currently includes Caterpillar, GE Digital Power and the
Powerware division of Invensys. Caterpillar is the sole distributor of the company’s Cat-branded
CleanSource UPS product, and represents the company’s most significant distribution partner.
Caterpillar has a dealer network of more than 200 distributors and an additional 1,500 branch outlets
in 65 countries around the world. In total, Caterpillar has more than 9,000 sales professionals and is
the leading provider of backup generation in the world, with an installed base of more than 300,000
generator sets worldwide.
We believe that Caterpillar is the most logical distributor for Active Power’s UPS products, given the
fact that a customer with a backup generator has already made a commitment to power reliability. As
a result, there is a significant opportunity in retrofitting Caterpillar’s existing installed base of
generator sets to include an Active Power UPS. This results in an integrated continuous power
system (CPS), all installed and serviced by Caterpillar. At the same time, Caterpillar can broaden the
depth of its product offering as more customers who are purchasing backup generators begin to
recognize the value of continuous power. Prior to its agreement with Active Power, Caterpillar could
only provide the backup generator unit, which would then be coupled with a traditional battery-based
UPS unit from Liebert, Powerware, or MGE UPS. Now Caterpillar can offer an integrated Catbranded system, while also getting an enhanced revenue stream on the total system.
The Caterpillar distribution agreement gives Caterpillar semi-exclusive worldwide rights to distribute
Cat UPS under the Caterpillar brand. Provided that Caterpillar meets minimum yearly revenue
requirements, Active Power will not sell the Cat spec UPS to any of Caterpillar’s specifically
identified competitors until January 1, 2005. Active Power provides a one-year warranty to the
customer from the date of delivery, after which Caterpillar offers an extended warranty to the
customer. To date, Caterpillar has fulfilled its minimum sales requirements, which increase to $100
million in annual sales in 2003. In 2004, there is a milestone checkpoint that can lead to a two-year
extension. In addition, if Caterpillar does not fulfill a particular minimum, it has a six-month grace
period to true up the cumulative numbers in order to maintain exclusivity.
We believe that Caterpillar has a strong commitment to meet and exceed the sales expectations for
the Active Power UPS units. Dealers are required to include in their business plans for the year their
anticipated sales of UPS units, and many dealers have hired or are in the process of hiring a
specialist salesman for the UPS product. Previous strategic Caterpillar initiatives have followed this
same path and have resulted in dramatic growth for Caterpillar in new businesses. For instance, Cat
Rental, which provides rented on-site generators for short-term use, was started in 1998 and has
since grown 2,500% sequentially in terms of store locations, vaulting Caterpillar to a leading position
in the marketplace from a standing start in 1998. We expect the same momentum to drive Cat’s
sales efforts for the Active Power UPS units.
Customer Base and Product Economics
Active Power’s current customer base includes hospitals, utilities, steel processing facilities,
telecommunications providers, banks, bakeries, TV stations and an assortment of other companies
across a broad spectrum of industries. Specifically, current end customers include ABC, Comcast,
Verizon Wireless, Cable & Wireless, OneCall, Nippon Steel, Michelin, Goodyear,
STMicroelectronics, ABB, Siemens, Reliant Energy, Enron, Southern Company, American Electric
Power, HP, Sun Microsystemsa, Micron Technologyb, MBNA, Xilinxa, Hess Cable, Newform Cable,
Jacksonville Electric Authority, Fairview Hospital and Kern Medical Center. We expect the company
to add considerably to this list as the Caterpillar distribution widens in 2002. Most of the company’s
customers are first time customers, but we also expect to see repeat customers increase as a
portion of the sales mix over the next several years.
81
The customer economics for any UPS system are ultimately a function of how much it is willing to
lose in the event of a power quality event. If a quarter-cycle surge in the incoming power source trips
the process control electronics in a paper mill and freezes production, then management is likely to
conclude that a UPS system is a necessary cost of production. EPRI estimates that the average cost
of a one-second outage is $1,477. By comparison, we estimate that battery-based UPS protection
costs average approximately $1,200 per kilowatt for a 250-kilowatt load over ten years.
The product economics are a function of up-front capital costs, variable costs of maintenance and
electric power consumption. In the case of data centers, where space is at a premium, the footprint
of the unit also becomes a significant consideration. In addition, the weight of the unit is taken into
account, since structural reinforcement is often needed to support the weight of a stack of batteries.
From the standpoint of physical comparison, a traditional 240-kilowatt battery-based UPS has a
footprint of 37.5 square feet, weighs 13,000 pounds and has an electrical efficiency of 92%. A 250kilowatt Active Power UPS has a footprint of 10.0 feet, weighs 3,250 pounds and has an electrical
efficiency of 98%. Based on a ten-year unit life, we estimate the Active Power UPS costs
approximately 60% of a battery-based system when replacement batteries and maintenance are
taken into account. This results from the higher efficiency of the Active Power unit and the long
service life of the flywheel itself. Specifically, a higher efficiency results in lower annual utility costs,
and the longer service life of the flywheel results in lower overall maintenance costs and avoids the
replacement of the battery string (approximately 20% of the up-front cost of a battery-based UPS)
after six years.
Product and Technology Analysis
Active Power currently offers two products, the CleanSource UPS, which is branded Caterpillar, and
the CleanSource2 DC, an Active Power product. The CleanSource UPS is available in a 300-, 600and 900-kVa configuration, while CleanSource DC is rated at 160-, 240-, 320- and 480-kVa. The
higher the output, the more flywheels in the box; the electronics are essentially the same for each of
the UPS products. The base CleanSource UPS retails for $90,000–115,000 for a 300-kVa unit and
$350,000 for higher power configurations. The CleanSource2 features a recharge time of two
minutes and can also be attached to the Caterpillar UPS system to provide higher power protection,
while giving the customer flexibility with a base system purchase. CleanSource2 will be available in
250- and 500-kilowatt sizes.
The company is also planning to provide a UPS unit scaled to 1.8 mVa in the next several quarters.
Active Power’s installed CleanSource DC units have accumulated more than 400,000 hours of field
operation to date.
When the Cat UPS is coupled with a Caterpillar generator and installed with synchronous
electronics, a CPS is created. This combined product is currently being marketed by Caterpillar and,
while not technically an Active Power product, this system is enabled by the UPS supplied to Cat by
Active Power. CPS systems are often found in data centers, bank transaction facilities, and hospitals.
UPS systems provide bridge power between the primary power source (the grid) and a secondary
power source (usually a backup generator). In the event of a power failure at the primary level, the
UPS will provide ride-through power at exactly the same load as the primary power source for
approximately ten seconds, during which time it will signal the startup of the backup generator.
When the backup generator takes over from the UPS, the UPS starts the recharge of its energy
storage system. In the case of traditional UPS systems, this involves recharging the batteries. Both a
traditional battery-based UPS and the Cat UPS draw power from the primary power source, so the
recharge is dependent on restoration of the primary source. In the Cat UPS, the flywheel spins back
up to full speed, which takes two to three minutes. The backup generator then runs for at least 15
82
minutes, regardless of restoration of power at the primary source. Importantly, the start-up of the
generator set is also powered by battery; a frequent cause of backup power failure is that the starter
battery on the generator fails. To address this additional power reliability problem, Active Power has
developed an important feature for its UPS systems that draws 24 volts from the flywheel after the
cut in the primary source, which is then delivered to the generator set to augment or replace the
starter battery.
Figure 32: ACTIVE POWER, INC.—THE CLEANSOURCE AND CAT UPS PRODUCTS
CleanSource DC
CAT UPS 600 kVa
Source: Company reports.
Active Power’s Flywheel Technology
A flywheel is essentially a large, cylindrical disk set on bearings that spins at a relatively high rate of
speed and acts as both an electric motor and an electric generator, depending on its mode. It is
used as a power storage device because the act of spinning creates kinetic energy, which can then
be released over time as the flywheel gradually spins down to stasis. The flywheel spins in the first
place by drawing power from a primary source, usually the power grid. In this mode, it is essentially
an electric motor. When the primary source of power is cut, the kinetic energy—the mechanical
energy of an object by virtue of being in motion—is released, converting the flywheel into an electric
generator. By using electronic stabilizers, the decreasing power output of a flywheel that is released
as it slows down can be trued-up, so that the output is actually constant over the short period electric
power is required.
How well a flywheel operates is a function of several factors. Ideally, the flywheel would spin in a
perfect vacuum, with no friction and no gravity. This would result in the highest efficiency transfer of
drawn energy to stored energy. But traditionally, only approximately 5% of the kinetic energy stored
could actually be converted into electric energy. Active Power has increased that percentage to
more than 80% with several innovative techniques. First, Active Power uses ceramic bearings to
83
keep the flywheel spinning extremely close to true. Second, it jacks up the flywheel using magnetic
levitation, which reduces the effective load on the bearings from 600 pounds (the weight of the steel
flywheel itself) to 50 pounds. Third, through the use of an array of specialized power transistors, the
Active Power system transforms the variable frequency and voltage power output of the flywheel into a
stable 480-volt direct current. This is achieved by using power chips to increase the flow of electricity
through the magnetic field inducing coils as the rotational speed of the flywheel decreases. Active
Power currently holds 29 patents, the majority of which are related to these aspects of the flywheel.
The company’s flywheel technical innovations have been converted into commercial products,
however, because they are done at low cost. The complete flywheel assembly—the device that
replaces the battery in backup power systems—consists of 11 parts, including the wheel, armature,
bearings and rotor. The major component cost in the flywheel assembly is steel, which is readily
available and can be hedged in volume. As a result, we believe that the true competitive advantage
Active Power has in terms of flywheel-based backup power solutions is in its low-cost design, not
necessarily in the design itself.
Flywheels Compared with Batteries for Ride-Through Power Applications
In our opinion, flywheels have numerous advantages over batteries in ride-through applications that
result in lower overall system cost and higher overall system reliability. Batteries have long been
used as ride-through power for uninterruptible power supplies, DC telecommunications power
systems, remote terminals, cable vaults, central offices, and cellular towers. However, batteries are
hobbled by several characteristics that make them less than the optimal solution for true high-quality
and reliability power:
•
First, the life of a battery is extremely sensitive to temperature. In persistently warm
climates, such as the American Southeast, Texas and the Southwest, battery life is
significantly foreshortened as a result of high temperatures. This leads to a higher
replacement cycle than is normally implied in the economics of a backup power system. In
general, batteries must be replaced fairly frequently, from two to six years depending on
the environment.
•
Batteries are difficult to monitor and are often tested by hand at the site. This is costly from
a maintenance and labor standpoint, and leaves the system vulnerable to unknown failures
between inspections.
•
Third, batteries lose power density over time after multiple recharges. As a result, they may
not be able to deliver the required full power in a ride-through or backup situation.
•
Fourth, batteries take up a lot of space and are heavy. In data centers, for instance, entire
rooms must be reserved to house the massive banks of batteries required for the powerintense servers hosted at the center. In many cases, structural reinforcement must be
added to the building to accommodate the weight of the battery stack. Data center
economics are based on revenue per square foot; the more space a battery stack takes
up, the less revenue that can be generated from that space.
•
Fifth, largely because of their temperature sensitivity, batteries in large installations require
dedicated air-conditioning, which can add significant variable costs to a facility’s backup
system economics.
•
Finally, lead-acid batteries are often classified as hazardous materials, creating an
environmental liability and potentially costly disposal requirements. They can also restrict
siting potential in remote applications.
84
Given all of this, what do batteries have going for them? They are cheap in terms of up-front cost, they
are readily available (unless there is a run on large UPS systems, as there was during the rush to build
data centers over the last several years) and, despite their drawbacks, they are the devil you know.
In contrast, Active Power’s flywheels are not temperature sensitive. No additional air-conditioning is
required; the units have self-cooling fans. Flywheels are also easily monitored remotely. In our
opinion, this is the biggest determinant of system reliability—it is essential to know if the backup
system is available at any second of the day from a central location, regardless of the reliability of
the energy storage device. Monitoring a flywheel is a simple proposition—it is either spinning or it is
not, and Active Power’s flywheels are also self-monitoring and can alert facility or network personnel
well in advance of any required maintenance. Flywheels are also extremely compact relative to
batteries, and much lighter per given power density, and so are ideal in data center applications.
Active Power’s flywheels also have no native environmental liabilities, eliminating the need for hazardous
materials disposal costs or potential siting issues.
Competitors
Active Power competes in both the UPS market, through its distribution agreement with Caterpillar,
and the battery market, through its CleanSource DC product. As a battery-replacement product,
CleanSource DC has no substantial direct competitors, but the dominant suppliers of batteries in the
$400 million lead-acid battery market are Exide (EX $0.78), C&D Technologies (CHP $21.50), and
Yuasa (Korea).
Active Power’s main competitors in the $1.5 billion high-power UPS market (250 kVa and up) are
Liebert, a division of Emerson; Powerware, a division of Invensys; MGE UPS, a private company
headquartered in France; Toshiba; and American Power Conversion (APCC $14.40). Although direct
market share data is difficult to pinpoint because many of the industry leaders are divisions of larger
companies, Emerson has between 25–30% market share, with both MGE and Powerware between
20–25% each, with Toshiba, American Power Conversion and others making up the difference.
Interestingly, Powerware is also a distributor of Active Power’s CleanSource2 product, which
replaces the batteries in the traditional UPS system. This arrangement was largely developed to
serve the data center market, which takes advantage of the flywheel’s smaller footprint and lighter
weight relative to traditional battery-based energy storage systems.
Piller and International Computer Power both offer flywheel-based energy storage systems, with
Piller by far the dominant player currently in the market. Piller combines its flywheel with its own UPS
system, which is offered in high power ranges. Piller, HiTec and EuroDiesel all offer CPS systems,
which are sold through their own distribution channel. The HIT6 telecommunications product will
compete against battery- and flywheel-based backup power systems that are made by C&D
Technologies, Beacon Power (BCON $0.85), Yuasa, Panasonic, Generac and the Hawker division
of Invensys.
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Competitive Analysis
Threat of entry. We believe that the barriers to entry with a flywheel-based backup power system
are reasonably high. Active Power’s design, which is based on readily available low-cost materials
protected by numerous manufacturing and design patents, is, to the best of our knowledge, not being
imitated by any competitors. However, there are several developmental flywheel companies that have
targeted certain segments of the power spectrum in which Active Power competes, including Beacon
Power in the low-power telecommunications sector and AFS Trinity in the higher-power area.
Threat of substitution. In our opinion, the biggest competitive threat to Active Power’s products is
substitution. Developmental battery technologies used in a traditional UPS that overcome the traditional
limitations of lead-acid batteries at lower costs, or cheaper distributed generation devices that can
provide clean and reliable power close to the load, could be substituted for flywheel-based UPS systems.
We do not see many likely candidates on the horizon at this point, however.
Bargaining power of buyers. In essence, the majority buyer of Active Power’s products is Caterpillar.
The requirements of the arrangement with Caterpillar are based on sales minimums; it is conceivable
that once these minimums are met, Caterpillar could negotiate for lower prices on Active Power units.
Bargaining power of suppliers. We believe that the bargaining power of suppliers in currently
reasonably high because of single source requirements for two components, IGBT from Semikron
and a processor from Motorola. We do not see much current evidence that either Semikron or
Motorola have exercised significant bargaining power to date, largely because of the relatively low
number of components supplied. In addition, Active Power is instituting design plans that will enable
it to procure from multiple sources.
Rivalry among current competitors. Until the steep increase in demand for large UPS units that
resulted from the boom in data center construction, the competitive environment among competitors
in the industrial and commercial UPS market was relatively static, with the bulk of market share
spread between Emerson Electric’s Liebert division, Invensys and MGE UPS. Gross margins were
not particularly compelling relative to the smaller power segments of the UPS industry, because the
large-scale providers were making much higher margins on service and maintenance contracts, in
our opinion. In the CPS market, Piller and HiTec are among the only manufacturers and distributors
offering a flywheel-based product, and we believe their margins may be threatened by the Cat CPS
product that incorporates the Active Power developed UPS system.
Financial Analysis and Forecasts
We have projected Active Power’s financial potential through 2005 and have generated estimates for
the income statement, balance sheet and statement of cash flows. Our projections are based on the
following assumptions.
Revenues
Active Power has two main revenue streams: sales of UPS systems to the Caterpillar distribution
channel and sales of the CleanSource2 battery replacement through a direct sales channel and
through OEM partners including PowerWare and GE Digital Power. We estimate the company will
generate revenue of approximately $23 million in 2001, and forecast revenue of approximately $34
million in 2002 followed by $113 million in 2003. Our revenue estimate for 2005 is $241 million. This
translates to flywheel unit shipments of 381 in 2001, 548 in 2002 and 1,908 in 2003. The company
also generates revenue from maintenance and parts sales, which represented 13% of total revenue
in Q3:01 and should trend between 5–10% of overall revenue in future quarters. Sales of UPS units are
typically seasonal, with the fourth quarter the strongest and the first quarter the weakest.
86
Figure 33: ACTIVE POWER, INC.—REVENUE, MARKET PROJECTIONS AND
OTHER OPERATING DATA ($ in millions, except per share and per unit data)
FY December
CleanSource DC
Total Pucks
Average Selling Price (ASP)
Revenues
Sequential Growth Rate
Annual Growth Rate
Percentage of Total
Gross Profit
Est. Gross Margin
CleanSource UPS, 300 kVa
Total Pucks
ASP
Revenues
Annual Growth Rate
Percentage of Total
Gross Profit
Est. Gross Margin
CleanSource UPS, 900 kVa
Total Pucks
ASP
Revenues
Annual Growth Rate
Percentage of Total
Gross Profit
Est. Gross Margin
CleanSource UPS, 1.8 mVa
Total Pucks
ASP
Revenues
Annual Growth Rate
Percentage of Total
Gross Profit
Est. Gross Margin
HIT6
ASP
Revenues
Annual Growth Rate
Percentage of Total
Gross Profit
Est. Gross Margin
CAT Projects
ASP
Revenues
Annual Growth Rate
Percentage of Total
Gross Profit
Est. Gross Margin
UPS 30–150 kVa
ASP
Revenues
Annual Growth Rate
Percentage of Total
Gross Profit
Est. Gross Margin
Incremental/Acquisitions
Acquisition Revenues
Annual Growth Rate
Percentage of Total
Gross Profit
Est. Gross Margin
Flywheel Revenues
Service and Parts Revenues
Percentage of Revenue
Total Revenues
Total Pucks
Annual Growth Rate
Est. Gross Profit
Est. Gross Margin
Manufacturing Capacity
Total Wheels/Quarter
Capacity Utilization
1999
—
—
—
—
—
—
—
—
—
—
—
2000
—
—
26,000
—
0.0%
0.0%
0.0%
—
0.0%
—
—
55,000
—
0.0%
0.0%
0.0%
—
0.0%
—
—
165,000
—
0.0%
0.0%
0.0%
—
0.0%
—
—
495,000
—
0.0%
0.0%
0.0%
—
0.0%
—
15,000
—
0.0%
0.0%
0.0%
—
0.0%
—
—
—
—
—
0.0%
—
0.0%
—
—
—
—
—
0.0%
—
0.0%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.0%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2001E
39
39
26,000
$1.0
—
—
5.1%
(0.2)
(19.2)%
288
288
55,000
15.8
—
—
79.9%
(2.9)
(18.1)%
18
54
165,000
3.0
—
—
15.0%
(0.5)
(18.4)%
—
—
495,000
—
—
—
0.0%
—
0.0%
—
15,000
—
—
—
0.0%
—
0.0%
—
—
—
—
—
0.0%
—
0.0%
—
—
—
—
—
0.0%
—
0.0%
—
—
—
—
—
—
—
19.8
1.9
9.8%
$21.9
381
—
(3.6)
(18.2)%
2002E
93
93
26,000
$2.4
138.5%
138.5%
8.3%
0.1
4.2%
305
305
55,000
16.8
5.9%
5.9%
57.7%
0.8
4.7%
30
90
165,000
5.0
66.7%
66.7%
17.0%
0.2
4.9%
10
60
495,000
5.0
33.3%
—
17.0%
0.2
4.6%
—
15,000
—
—
—
0.0%
—
0.0%
—
—
—
—
—
0.0%
—
0.0%
—
—
—
—
—
0.0%
—
0.0%
—
—
—
—
—
—
—
29.1
1.7
6.3%
$30.8
548
46.8%
1.4
4.7%
2003E
225
225
26,000
$5.9
141.9%
141.9%
5.4%
1.0
17.2%
765
765
55,000
42.1
150.8%
150.8%
38.5%
7.0
16.7%
210
630
165,000
34.7
600.0%
600.0%
31.7%
5.9
17.1%
48
288
495,000
23.8
380.0%
380.0%
21.7%
4.2
17.7%
—
15,000
—
—
—
0.0%
—
0.0%
—
—
—
—
—
0.0%
—
0.0%
805
3,640
2.9
—
—
2.7%
0.0
1.5%
—
—
—
—
—
—
—
109.3
2.7
2.5%
$112.0
1,908
275.6%
18.1
16.6%
2004E
290
290
26,000
$7.5
28.9%
28.9%
4.4%
1.8
23.9%
900
900
55,000
49.5
17.6%
17.6%
29.1%
11.2
22.6%
250
750
165,000
41.3
19.0%
19.0%
24.2%
9.3
22.6%
122
732
495,000
60.4
154.2%
154.2%
35.5%
13.7
22.8%
65
15,000
1.0
233.3%
—
0.6%
0.1
10.4%
—
—
—
—
—
0.0%
—
0.0%
2,900
3,640
10.6
—
—
6.2%
1.1
10.2%
—
—
—
—
—
—
—
170.2
3.4
2.0%
$173.6
2,672
55.8%
36.2
21.3%
2005E
525
525
26,000
$13.7
81.0%
81.0%
5.8%
3.4
25.0%
1,010
1,010
55,000
55.6
12.2%
12.2%
23.5%
14.8
26.6%
300
900
165,000
49.5
20.0%
20.0%
21.0%
13.2
26.7%
180
1,080
495,000
89.1
47.5%
47.5%
37.7%
23.8
26.8%
830
15,000
12.5
1,176.9%
1,176.9%
5.3%
2.3
18.2%
—
—
—
—
—
0.0%
—
0.0%
4,400
3,640
16.0
—
—
6.8%
2.5
15.5%
—
—
—
—
—
—
—
236.3
4.7
2.0%
$241.0
3,515
38.8%
57.5
24.3%
450
65.3%
875
18.9%
1,000
47.7%
1,000
66.8%
1,000
87.9%
Source: Company reports and Robertson Stephens estimates.
87
Customer Mix. The majority of Active Power’s sales have been through the Caterpillar distribution
channel, accounting for 96% of total revenue in 2000 and 85% in Q3:01. As such, the mix of sales of
the company’s products has been heavily skewed toward the UPS product, which is manufactured
by Active Power but outfitted with a Caterpillar nameplate. Although we expect that Caterpillar will
continue to represent the greatest portion of Active Power’s revenue mix, the skew toward Cat has
been exacerbated by a steep drop off in the demand for battery replacements from data centers.
Data centers had represented the most immediate demand pull for CleanSource through the OEM
relationships with Powerware; with the recent revocation of much of the planned capital for new data
center construction, it is unlikely this market will amount to much in the next several quarters. We
expect Active Power to increase its efforts to sell the CleanSource2 product through a direct sales
channel. Sales results from the CleanSource DC product are also expected to be affected by large
orders from single customers, as opposed to the trend of small orders from multiple customers for
the UPS products, which results in lumpy sales results.
Geographic Sales Mix. From a geographic standpoint, Active Power’s sales are largely domestic;
70% of 2000 revenue was in the United States, with the rest of the world making up the balance. In
Q3:01, this ratio was 80% domestic, 15% rest of the world. In our opinion, this geographic mix is
more the result of Active’s rollout program with Caterpillar, which focused on training domestic
distributors first, than any particular demand characteristics in international markets. In fact, the
demand for power quality in developed countries outside the United States is also being driven by
the commercial shift to networked markets and semiconductor-driven process control equipment. In
many developing markets, there is an outright need for power itself. We expect that the geographic
mix of the company’s products will trend to 50% United States/50% rest of world by late 2003–2004.
The company is currently rolling out its training for Cat distributors in Europe, with Asia to follow in
the next several quarters.
Caterpillar Revenue Minimums. The arrangement with Caterpillar is underpinned by annual
revenue minimums, which if not met by Caterpillar negate the exclusivity of the distribution
agreement. The annual minimum in 2003 is $100 million; our current revenue estimate for 2003 is
$112 million. To date, Caterpillar has met its revenue minimums, and the agreement has a six-month
grace period as an opportunity to true up any missed minimums. We believe that Caterpillar will
continue to meet or exceed its sales minimums, based on both the early adoption rate and the
continued integration of the UPS with the backup generator set.
Revenue Recognition and the Sales Cycle. The company usually recognizes revenue when a
unit is shipped; revenue for units that are shipped for evaluation by a customer are recorded when
the customer accepts the unit. The length of the sales cycle is somewhat dependent on the
potential customer’s knowledge of the product. Similar to many new energy technology
companies, Active Power does a fair amount of missionary selling, introducing customers to the
product, giving them tours of the manufacturing facilities and providing on-site demonstrations,
much of which is currently coordinated through Caterpillar corporate. As a result, a full new
customer sales cycle can take up to six months, although this period has been contracted to two
months in some cases. If the order is in conjunction with a new facility build-out, the sales process
may be fairly rapid while the delivery date is set months into the future. Repeat customers order
additional systems through the Caterpillar dealer, while Caterpillar corporate sets delivery priorities
and manufacturing plan forecasts. Revenue is recognized when a unit is shipped to Caterpillar; the
unit has no return rights. Once it has been shipped, the unit is paid for within 45 days. For units
sold by Caterpillar dealers, Active Power bills Caterpillar corporate, which in turn invoices the
dealer. In the event that a unit sold to a dealer is not placed to a customer, the dealer holds the
unit in inventory and the product is not returned to Active Power.
88
Pricing Trends. The ASP for Active Power’s units has trended at approximately $55,000 per
quarter. We expect ASPs to increase sequentially over the next several quarters as the company
continues to roll out its higher-kVa UPS units as well as the CleanSource2 product. ASPs also
continue to be positively affected by strong customer demand for additional option packages. The
company has not yet experienced any meaningful ASP discounting in bulk orders domestically,
although the sales prices in Europe have been subject to some haircutting for bulk orders. European
UPS units are also rated at 400 kVa, which puts the company at a cost-analysis disadvantage to the
incumbent UPS systems. Active Power plans to offset this effect by manufacturing product in a
European facility, which will generate significant cost savings in shipping and distribution.
Backlog
Although the company does not currently provide book-to-bill ratios or current backlog, management
has a reasonable estimate of forward quarter’s sales. We believe that as the Caterpillar distribution
channel widens its potential customer base for the UPS product, which could include staggered
multisite deployments for large commercial and industrial enterprises, management’s ability to
quantify backlog will improve significantly.
Gross Margin
Active Power has achieved general improvement in sequential gross margin, and we expect the
company to turn gross margin positive in Q3:02. Q3:01 gross margin decreased sequentially to
(11)%, down from (8)% in the second quarter. We estimate Q4:01 gross margin will be (11)%,
bringing full year 2001 to (14)%. Our current estimate for 2002 gross margin is 4%, with 16% in 2003
and 25% in 2005. Management has indicated it expects long-term gross margin of 30–35% on its
UPS products, which is in line with historical gross margin on legacy UPS units in the commercial
and industrial markets. Cost of goods sold includes the cost of component parts sourced from
suppliers, personnel cost, equipment and costs associated with assembly and test operations, as well
as costs related to logistics and quality assurance. Note also that the company includes shipping and
handling costs as part of cost of goods sold, indicating that gross margin may be compromised by a
higher percentage of international sales until production for these markets is moved to more
centralized European or Asian locations.
There are three main components that drive gross margin: scale, long-term contracts for materials,
and the more effective use of the supply chain as determined by the engineering team. The
percentage of each component area to total cost of goods sold is approximately one-third for each.
Scale. From the standpoint of the pace of gross margin improvement, we believe that scale will be
the first area to contribute meaningful gross margin gains. The company is expected to complete its
transition into a 127,000-square-foot facility in Austin by Q4:01 from its existing 42,300-square-foot
location also in Austin. This will alleviate the capacity constraints in place in the second and third
quarters of 2001, which limited the company’s ability to realize gross margin improvement through
scale. We estimate that annual real estate lease costs will be approximately $1.2 million when the
transition to the new facility is complete.
Long-Term Supply Contracts. The next sequential factor in gross margin improvement should be
the arrangement of longer-term contracts with suppliers, in our opinion. The company also currently
single sources power electronics from Semikron, which need to by carried in inventory, as well as a
processor from Motorola, which is an automotive design for Ford and is readily available. As Active
Power has focused its flywheel design on commodity-grade materials, we also believe there is
opportunity for the company to hedge its commodity costs through forward contracts.
89
Supply Chain Improvement. We believe the third sequential factor in terms of gross margin
improvement is the optimization of the supply chain. This effort is, to some extent, made in tandem
with the effort to secure long-term supply contracts, and is dependent on certain design changes that
will enable the company to incorporate multiple suppliers. Management currently estimates that the
time to complete the cycle of a design change is approximately three to four months. As a result, we
expect that the shift from single-source suppliers to multiple-source suppliers will likely be ongoing
several quarters into 2002.
Sales, General and Administrative Costs
We estimate that sales, general and administrative costs (SG&A) will run approximately 54% of
sales in 2001 and 46% in 2002, and decrease significantly thereafter to 13% in 2003 and 7% in
2005. The company’s strategy focuses on selling to distributors as opposed to end customers, and
so does not require a large direct sales force. The current sales headcount is about 12. We expect
the main components of SG&A will be cost related to training the Caterpillar dealers and costs for
securing additional distributors. Marketing dollars are directed to the end-user sales market through
trade press articles, industry conferences and highly targeted direct mail campaigns.
We estimate fourth quarter SG&A of $3.3 million, which totals $11.8 million in 2001, or 54% of sales.
We estimate SG&A of $11 million in 2002, followed by $14 million in 2003 and $16 million in 2005.
Note that warranty costs are included in SG&A and are currently set at 3% of revenue. Active Power
offers a one-year warranty that is passed through to the end customer; Caterpillar does not make a
margin on the one-year warranty. After the one-year warranty expires, Caterpillar offers the
customer an extended warranty, which generates a margin for Caterpillar and ends Active Power’s
warranty obligation on the unit.
Research and Development
We estimate Active Power will spend $15.8 million, or 72% of sales, on research and development
(R&D) in 2001, followed by $13.8 million in 2002. We expect R&D to decline significantly thereafter
as a percentage of sales to 7% by 2005. At year-end 2000, Active Power had spent $18.3 million on
R&D since 1998; the company has spent a cumulative $30 million to date on R&D. At year-end
2000, the company had an R&D team consisting of 54 engineers and technicians.
We expect that approximately 50% of 2001 expected R&D spending, or $7.9 million, will go to the
further development of the Cat UPS product. As a result, we estimate that cumulative R&D spending
for the Cat UPS product will reach approximately $20 million since 1998. We estimate that the
remaining R&D of $7.9 million in 2001 will be dedicated to the further development of the smaller
UPS products, as well as other product initiatives.
Development Funding. Because of the slowdown in product sales to data centers, as well as the
overall contraction in business spending in the U.S. and global economies, management is pursuing
additional development funding to offset its R&D capital outlays. We estimate the company will
receive between $3–4 million over the next 12 months.
Operating Income
We estimate that Active Power will turn operating income positive in 2004. Long term, we estimate
operating margin should reach 11%, beginning with the 2005 period, based on the reduction of
SG&A and R&D as a percentage of sales in 2004 and an expansion in gross margin in 2004 and
2005. We currently estimate operating loss of $(35) million in 2001, followed by $(29) million in 2002
and $(12) million in 2003. Our estimate for operating income in 2005 is $26 million.
90
Cash and Cash-Burn Rate
Active Power had a current cash and short-term investments balance of $90 million at the end of the
second quarter, down $45 million in the nine months since year-end 2000. Cash now represents
61% of total assets; cash was 87% of total assets at year-end 2000. We estimate that Active
Power’s cash and short-term investments balance at year-end 2001 will be approximately $60 million, or
$1.54 of cash per share. This is based on a forecasted $3 million per month cash burn in 2001, which is
calculated as operating cash flow plus capital expenditures.
We expect $3 million per month cash burn in 2002. We currently estimate the company will turn
operating cash positive in Q2:04. Active Power currently has no short- or long-term debt, so
coverage ratios are irrelevant.
The Current Account
We estimate that Active Power will have working capital of $64 million at year-end 2001. This is
largely a function of the company’s large cash and short-term investment equivalents, which
represented 61% of current assets at the end of the third quarter.
Accounts Receivable. Active Power’s receivables were 55% of sales in the third quarter, a
decrease from the 78% realized in the second quarter. This translates to average days receivable of
77 days in Q3:01. We believe that, ultimately, DSO should trend toward approximately 50 days. We
have determined our estimated DSO range based on the 45-day receivable period agreement the
company has with Caterpillar corporate, in which Cat pays Active within 45 days of unit shipment to
the dealer, offset by an increase in international shipments, which carry receivable terms up to 90
days. This level of receivables translates to a rough average of $12–20 million in quarterly
receivables in 2003, or 55–65% of sales per quarter. Given the degree to which the company can
stretch its own payables schedule, we expect that Active Power will require $34 million in quarterly
working capital in 2003 based on this receivables analysis, all other things held constant.
Inventory. Inventory as a percentage of sales was 99% at the end of the third quarter, a sharp
increase over the second quarter, as sales fell short of production expectations. Inventory balances
before reserves were 90% raw materials for the year-end 2000 balance of $3.2 million. The raw
materials portion of the inventory balance includes three- to four-month stockpiles of Semikron IGBTs
and Motorola processors, both of which are sole-sourced. With subsequent design changes, which
incorporate standardized IGBTs and processors that can be filled through competing suppliers or
negotiated through long-term contracts, the percentage of inventory consumed by raw materials
should begin to ease (we do not have an estimate as to how far it can come down, just that it should).
With regards to Active Power units as inventory in the distribution channel, we believe that most
Caterpillar distributors are unlikely to carry UPS inventory due to its relatively high up-front cost and
the diverse characteristics of the potential customer base. Some of the early units may be at
Caterpillar for use as demos, but we believe that the majority of units shipped to Caterpillar are
passed through directly to end-use customers.
Prepaid Expenses. Prepaid expenses represent a relatively small percentage of current assets net
of cash, and are related to D&O insurance that is paid up front and not to materials.
Fixed Assets
At year-end 2000, net property, plant and equipment (PP&E) was $4.5 million, with $3.4 million
recorded as cost for equipment; as of the end of the third quarter, the carried balance of net PP&E
was $16.5 million. This $12 million increase is primarily due to capital expenditures related to the
shift into a new manufacturing facility in the first nine months of 2001. Given forecasted capital
expenditures of $18 million in 2001, we expect that the net PP&E will be approximately $20 million
by year-end, or 17% of total assets. Future capital expenditures are expected to run at
approximately 4–5% of revenue per year, with an average amortization period of seven years.
91
Manufacturing Capacity and Utilization
The company is expected to complete its transition into a 127,000-square-foot manufacturing facility
in Austin by the fourth quarter of 2001 from its existing 42,300-square-foot location in Austin. This
should alleviate the capacity constraints in place in the second and third quarters of 2001, which
have limited the company’s ability to ship orders for UPS units. We estimate that annual real estate
lease costs will be approximately $1.2 million when the transition to the new facility is complete. With
the additional capacity, we expect to begin to see finished goods built into inventory, although this
function will not likely get under way until the first quarter of 2002.
We estimate that the company will scale up its capacity to 450 flywheels per quarter by year-end
2001, adding capacity for another 425 flywheels per quarter in 2002 and the number of flywheels
equivalent to 225 megawatts in 2003. Our estimate for total quarterly flywheel capacity in 2005 is
1,000 megawatts.
Capital Structure
Active Power’s capital structure is straightforward and fairly typical of energy technology capital
structures: all equity, no debt. In Active’s case, all of its previously issued preferred stock was
converted to common stock coincident with the initial public offering. The shares outstanding is
expected to increase by 500,000 in the third quarter due to the process of exercising all remaining
warrants. We expect an additional increase of 200,000 shares in the fourth quarter as a result of the
same process.
Earnings Review and EPS Outlook
We expect Active Power will lose $24 million in 2001, followed by $26 million in 2002 and $11
million in 2003. We currently estimate that the company will earn $8 million in 2004 and $27 million
in 2005. On a per-share basis, this translates to an operating loss of $(0.72) per share in 2001, a
$(0.63) loss per share in 2002, a $(0.26) loss per share in 2003. We estimate operating EPS of
$0.17 and $0.61 in 2004 and 2005, respectively.
Our quarterly net operating loss estimate for Q4:01 is $(7.7) million, or an operating loss per share of
$(0.19). We are currently forecasting the company will achieve profitability in Q4:03 and full-year
profitability in 2004.
Valuation
We have valued Active Power using relative multiple analysis and discounted cash flow. Active
Power, like many new energy technology companies, has no current earnings, has negative cash
flow per share, and its book value is also in deficit. Also similar to many new energy technology
companies, it could either hit huge (we estimate the potential market is in excess of $11 billion), be
eclipsed by another technology, or fail to live up to expectations. Based on our valuation, we believe
Active Power shares are currently fairly valued.
Discount Rate Calculation. We have calculated a base discount rate of 25% using the capital asset
pricing model (CAPM), the formula for which is the sum of the risk-free rate and a risk-adjusted
equity market premium, and an additional return requirement of 10%. The current risk-free rate
based on the ten-year government bond is 5.23% (closing bid October 30, 2001, Bloomberg). The
historical geometric risk premium for the U.S. market between 1928–1999 is calculated at 6.05% by the
Federal Reserve. There is not enough data to calculate a beta for Active Power itself. To be
conservative, we have used an Internet stock average beta of 1.7, as calculated by Value Line. This
results in a discount rate of 15.5%, to which we have added an additional 10% required return.
92
Discounted Relative Multiple Valuation
Our relative multiple valuation focuses on the relation between the historical growth rate and P/E of
American Power Conversion, which, in our opinion, is the only appropriate comparable publicly
traded company to Active Power. Specifically, we examine how the market could value Active Power
if its growth rate is similar to the historical growth rate experienced by American Power Conversion.
American Power Conversion is the world leader in unit sales of UPS systems, although its focus has
historically been in the PC and enterprise server backup market. The company has recently added
industrial and commercial UPS products to its revenue base. We have specifically chosen American
Power Conversion because we believe that, being a leader in the UPS business, it demonstrates
what the market is willing to pay for a backup power company according to various growth rates.
American Power Conversion had a compound annual earnings growth rate of 26% in the time frame
from year-end 1992 to year-end 2000. Its revenue in 1993 was $250 million, approximately in line
with our estimate of revenue for Active Power in 2005, the second year in which the company is
expected to turn profitable. The 12-month forward earnings multiple paid for American Power
Conversion’s stock over a rolling series of the sum of four quarters has been 12x and 31x earnings;
the high end of the multiple range correlates with earnings growth above 50%, while the low end of
the multiple range correlates with growth in the 5–20% range.
We estimate that Active Power will grow its earnings by 262% between 2004 and 2005 (with
estimated operating EPS of $0.17 in 2004 and $0.61 in 2005). Based on the historical market
multiples paid for American Power Conversion’s stream of earnings, we believe Active Power should
trade in the $15–17 per share range based on 26x our 2005 operating EPS estimate; discounted
four and one-quarter years to present value at 25%, this represents $6 per share.
Discounted Cash Flow Valuation
We recognize the shortcomings of discounted cash flow analysis, and have attempted to correct for
them as well as possible. First, there is the fact that for a company that has negative cash flows for
the first several years of the analysis, the bulk of the present value of the company comes from the
discounted terminal value. Since the terminal value is the least accurate of the estimated cash flows,
and because the effect of an increased terminal multiple can be to significantly magnify the terminal
value, the present value calculation can show significant differences even if the adjustments made
are relatively small. If, as is the case with many energy technology companies, there is a small
number of shares outstanding, the effect of valuation adjustment can result in substantial changes in
per share valuations.
Our terminal multiple is again based on historical multiples assigned to American Power Conversion
(APC), this time in terms of multiples of EBITDA. APC’s EBITDA multiples have averaged 16x when
the rate of EBITDA growth is above 60%, 14x when growth is 30–50% and 12x when growth is
between 5–30%. To be conservative, we have used 15x as a terminal multiple of EBITDA for Active
Power. Based on these parameters, our DCF value for Active Power is approximately $5 per share.
Valuation Summary
Based on the combination of our valuation parameters, we believe that shares of Active Power are
currently fairly valued and rate the shares as Market Perform.
93
Investment Risks
Among the risks are:
Levered to One Distributor. The bulk of the company’s sales over the next 12 months are
expected to come from a single distributor, Caterpillar.
Technological Risk. The central differentiating factor in any backup power system is the energy
storage device. Although we believe Active Power’s UPS and CPS units have leading-edge
electronics and software configurations, the central feature of the system is the flywheel energy
storage system. While we believe that this flywheel system provides compelling advantages in terms
of reliability and quality relative to traditional battery-based UPS systems, there are currently
numerous efforts under way to improve battery-based storage systems. There are also several
competing flywheel technologies, some of which compete directly in Active Power’s markets and
some of which have existing products against which Active Power plans to compete.
Public Relations Risk. Although spinning no faster than 8,000 revolutions per minute, flywheels pose
significant risk to personnel standing in their path if they somehow break loose from their casings. A
high-profile accident involving any flywheel company’s products could dampen enthusiasm for
flywheel-based products in general, as well as introduce the possibility of costly legal action.
Financing Risk. We believe Active Power has adequate capital resources to see it through to cash
generated from operations and ultimately self-funding operations. However, with an estimated cashburn rate of $3 million per month over the next 12 months, and the projection that cash flow will not
turn positive until late 2004, the company could find itself in a position in which it needs to scale back
development, which, in turn, could result in higher-cost financing in the future.
94
Figure 34: ACTIVE POWER, INC.—INCOME STATEMENT ($ in millions, except per share data)
FY December
Flywheel Sales
Development Funding
Net Sales
Cost of Goods Sold-Sales
Cost of Goods Sold-Development
Gross Profit
Gross Margin
1999
$1.0
—
1.0
(3.0)
—
(2.0)
(187.1)%
2000
$4.9
—
4.9
(8.0)
—
(3.1)
(63.5)%
2001E
$21.9
1.0
22.9
(24.9)
—
(3.0)
(13.8)%
2002E
$30.8
3.0
33.8
(29.4)
—
1.4
4.4%
2003E
$112.0
1.0
113.0
(93.8)
—
18.2
16.2%
2004E
$173.6
—
173.6
(136.4)
—
37.3
21.5%
2005E
$241.0
—
241.0
(181.0)
—
60.0
24.9%
SG&A
R&D3
Amort. of Deferred Stock Comp.1
Total Operating Expenses
(4.0)
0.6
(1.6)
(5.0)
(6.2)
(9.9)
(6.7)
(22.8)
(11.8)
(15.8)
(4.1)
(31.7)
(13.7)
(13.8)
(2.7)
(30.2)
(14.4)
(14.5)
(1.0)
(29.9)
(15.2)
(15.5)
—
(30.7)
(16.4)
(17.5)
—
(33.9)
(7.0)
(668.9)%
0.4
—
—
(3.6)
0.0
(10.2)
—
0.0%
—
(29.7)
—
(25.9)
(530.7)%
4.4
—
—
(1.6)
(0.1)
(23.1)
—
0.0%
—
(19.1)
—
(34.7)
(158.7)%
6.3
—
—
—
(0.1)
(28.6)
—
0.0%
—
(28.8)
(93.5)%
3.0
—
—
—
0.1
(25.7)
—
0.0%
—
(11.7)
(10.5)%
0.8
—
—
—
0.1
(10.8)
—
0.0%
—
6.6
3.8%
0.8
—
—
—
0.1
7.5
—
0.0%
—
26.1
10.8%
0.8
—
—
—
0.1
27.0
—
0.0%
—
—
—
—
—
—
(39.8)
(42.2)
(28.6)
(25.7)
(10.8)
7.5
27.0
$(3.98)
—
—
10.0
—
$(1.92)
—
—
21.9
—
$(0.72)
—
—
39.7
—
$(0.63)
—
—
41.0
—
$(0.26)
—
—
42.0
—
$0.17
—
—
43.0
—
$0.61
—
—
44.0
—
Sales
14.4%
365.3%
349.4%
Cost of Goods Sold
142.8%
165.0%
212.7%
EBIT
11.3%
269.2%
34.4%
Net Income
354.5%
5.9%
(32.2)%
Diluted EPS
344.5%
(51.7)%
(62.6)%
Cash EPS
0.0%
0.0%
0.0%
Ratio Analysis
Gross Margin
(187.1)%
(63.5)%
(13.8)%
SG&A/Sales
379.4%
127.4%
54.0%
R&D/Sales
(53.4)%
202.5%
72.1%
Operating Expenses/Sales
481.8%
467.2%
144.9%
Operating Margin
(668.9)%
(530.7)%
(158.7)%
EBT Margin
(973.1)%
(474.2)%
(130.7)%
Tax Rate
0.0%
0.0%
7.2%
Net Margin
(3,805.9)%
(865.8)%
(130.7)%
Last 12 Months (LTM) Return on Equity Analysis/DuPont Sales Basis
LTM Operating Margin
(668.9)%
(530.7)%
(158.7)%
LTM Sales/Assets
3.7%
3.1%
18.6%
Assets/Equity
(93.5)%
102.5%
91.6%
LTM Interest Burden
145.5%
89.4%
82.3%
LTM Tax Burden
100.0%
100.0%
100.0%
LTM Return on Equity
33.6%
(15.2)%
(22.3)%
LTM Return on Capital
(166.7)%
(27.7)%
(22.3)%
LTM Return on Assets
(140.5)%
(27.0)%
(24.4)%
40.7%
18.2%
(17.1)%
(10.1)%
(12.9)%
0.0%
263.6%
218.6%
(59.3)%
(58.0)%
(59.0)%
0.0%
55.0%
45.4%
(156.0)%
(168.9)%
(167.3)%
0.0%
38.8%
32.7%
297.8%
261.9%
253.7%
0.0%
4.4%
44.5%
44.8%
97.9%
(93.5)%
(83.5)%
3.0%
(83.5)%
16.2%
12.9%
12.9%
26.7%
(10.5)%
(9.7)%
0.1%
(9.7)%
21.5%
8.8%
8.9%
17.7%
3.8%
4.3%
0.0%
4.3%
24.9%
6.8%
7.3%
14.1%
10.8%
11.2%
0.0%
11.2%
(93.5)%
35.6%
84.6%
89.4%
100.0%
(25.1)%
(25.1)%
(29.7)%
(10.5)%
110.8%
110.4%
92.3%
100.0%
(11.8)%
(11.8)%
(10.7)%
3.8%
139.5%
125.7%
113.7%
100.0%
7.5%
7.5%
6.0%
10.8%
144.0%
132.8%
103.5%
100.0%
21.4%
21.4%
16.1%
EBIT (loss)
Operating Margin
Interest Income
Interest Expense
Equity in Earnings
Change in Fair Value of Warrants2
Other Income
EBT
Income Taxes
Tax Rate
Minority Interest
Dividends on Preferred Stock4,5
Extra. Items
Net Income
Earnings Per Share:
Operating EPS
Amortization of Goodwill
Cash EPS, Excl. Non-Recurring
Fully Diluted Shares Outstanding
EBITDA
Growth Rates
1
Non-cash expense reflects the difference between exercise price of option grants to employees and management’s estimated
fair value of the common stock on the date the grants were given, amortized over the vesting period of applicable options.
2
Reflects the change in the fair value of the liability associated with warrants outstanding prior to the IPO (August 8, 2000)
recorded as a non-cash expense.
3
Composed of general R&D expense of $4,441,000, offset by $5,000,000 development funding from Caterpillar used to develop
the CAT UPS product in 1999.
4
In 1999, composed of $1,820,000 cumulative undeclared dividends on preferred stock, $5,886,000 accretion on redeemable
convertible preferred stock to redemption amounts, and $21,953,000 beneficial conversion feature on preferred stock issuance.
5
In 2000, composed of $2,053 cumulative undeclared dividends on preferred stock, and $17,026,000 accretion on redeemable
convertible preferred stock to redemption amounts.
95
Figure 35: ACTIVE POWER, INC.—BALANCE SHEET ($ in millions)
FY December
Working Capital
Cash and Short-Term Investments
Accounts Receivable (A/R)
Inventories
Prepaid Expenses and Other
Deferred Taxes
Current Assets
1999
$26.4
26.3
0.0
0.9
0.0
—
27.2
2000
$137.0
135.3
1.9
2.3
1.2
—
140.7
2001E
$64.2
62.1
2.3
2.5
0.8
—
67.7
2002E
$37.1
20.9
6.7
5.5
2.0
—
35.1
2003E
$33.6
12.9
20.6
17.4
6.0
—
56.9
2004E
$40.1
13.9
25.5
23.4
7.8
—
70.6
2005E
$65.9
36.1
29.5
27.8
9.6
—
103.0
0.1
0.2
0.6
—
—
0.8
—
2.1
1.6
—
—
3.7
—
2.5
1.0
—
—
3.6
—
5.4
2.6
—
—
8.0
—
15.8
7.5
—
—
23.3
—
20.5
9.9
—
—
30.4
—
25.0
12.2
—
—
37.1
A/R Turnover
DSO
Inventory Turnover
Days Inventory
A/R as % of Sales
A/P as % of COGS
Inventory as % of Sales
—
—
—
—
—
—
—
2.3
43
1.1
86
69.1%
85.0%
296.1%
1.5
61
1.5
61
66.1%
67.4%
77.7%
1.9
49
2.1
42
59.5%
49.3%
51.3%
2.0
45
2.2
42
56.5%
41.6%
44.6%
2.0
45
1.9
49
50.8%
40.1%
43.7%
2.2
41
1.9
47
45.8%
39.7%
40.0%
A/R Gap
A/P Gap
Inventory Gap
—
—
—
0.3
(2.6)
1.5
(1.3)
6.1
1.3
1.0
(2.0)
1.2
4.3
(12.3)
5.0
4.0
(13.3)
4.3
2.1
(10.6)
2.2
Long-Term Assets
Net PP&E
Goodwill & Intangible Assets
Other Assets
1.1
—
—
4.5
—
10.9
20.2
—
29.5
23.1
—
28.4
20.9
—
23.4
21.8
—
32.1
23.0
—
41.3
Long-Term Assets
1.1
15.4
49.7
51.5
44.3
53.9
64.3
28.4
4.0%
92.6%
156.1
9.9%
86.6%
117.4
42.3%
52.9%
86.6
59.5%
24.1%
101.1
43.8%
12.8%
124.5
43.3%
11.2%
167.3
38.4%
21.6%
—
54.2
—
—
—
—
—
—
—
—
—
—
—
—
0.0
0.8
(25.7)
(5.4)
(30.3)
0.0
212.6
(52.7)
(7.5)
152.4
0.0
215.0
(81.3)
(5.6)
128.1
0.0
215.0
(107.1)
(5.6)
102.4
0.0
215.0
(117.9)
(5.6)
91.6
0.0
215.0
(110.4)
(5.6)
99.0
0.0
215.0
(83.4)
(5.6)
126.0
23.9
0.0%
(93.5)%
(127.0)%
152.4
0.0%
102.5%
100.0%
128.1
0.0%
91.6%
100.0%
102.4
0.0%
84.6%
100.0%
91.6
0.0%
110.4%
100.0%
99.0
0.0%
125.7%
100.0%
126.0
0.0%
132.8%
100.0%
3.6
0.0
3.6
—
—
—
—
(14.3)
(14.3)
—
(23.8)
(23.8)
—
(13.8)
(13.8)
—
(5.0)
(5.0)
—
4.2
4.2
28.4
(0.0)
156.1
—
117.4
—
86.6
—
101.1
—
124.5
—
167.3
—
0.2%
19.9%
0.0%
0.0%
14.8%
20.2%
0.0%
0.0%
18.7%
23.6%
0.0%
0.0%
18.7%
23.6%
0.0%
0.0%
18.7%
23.6%
0.0%
0.0%
18.7%
23.6%
0.0%
0.0%
18.7%
23.6%
0.0%
0.0%
Short-Term Debt
Accounts Payable
Accrued Expenses
Other Accrued Expenses
Current Portion of LTD
Current Liabilities
Total Assets
Long-Term Assets/Total Assets
Cash/Total Assets
Capital Structure
Long-Term Debt
Preferreds
Common Stock
Additional Paid-In Capital
Retained Earnings
Treasury and Deferred Stock Comp.
Total Equity
Total Capital
Total Debt/Equity
Assets/Equity
Equity/Total Capital
Other Liabilities
Warrants with Redemption Rights
Minority Interest & Other
Total Other Liabilities
Total Liabilities and Equity
Balance
Prepaid Expenses and Other/COGS
Accrued Expenses/COGS
Other Accrued Expenses/COGS
Deferred Taxes/Taxes
96
Figure 36: ACTIVE POWER, INC.—STATEMENT OF CASH FLOWS ($ in millions)
FY December
Operating Sources:
Net Income
Depreciation
Other
1999
2000E
2001E
2002E
2003E
2004E
2005E
$(10.2)
0.6
—
$(23.1)
1.1
—
$(28.6)
2.0
—
$(25.7)
2.2
—
$(10.8)
6.7
—
$7.5
8.7
—
$27.0
12.0
—
Total Operating Sources
(9.6)
(22.0)
(26.6)
(23.6)
(4.1)
16.1
39.0
Operating Uses:
Inventories
Receivables
Other Current Assets
Non-Debt Current Liabilities
Capital Expenditures
Exchange Loss
Other
(0.1)
0.2
0.0
0.3
(0.6)
—
3.3
(1.4)
(1.9)
(1.2)
2.9
(4.4)
—
(52.1)
(0.2)
(0.4)
(0.2)
(0.2)
(17.7)
—
(3.0)
(3.0)
(4.4)
(1.2)
4.4
(5.1)
—
—
(11.9)
(13.9)
(3.9)
15.4
(4.5)
—
15.0
(6.0)
(4.9)
(1.9)
7.1
(9.5)
—
—
(4.5)
(4.0)
(1.8)
6.7
(13.3)
—
—
3.1
(58.0)
(21.7)
(9.3)
(3.8)
(15.2)
(16.8)
Operating Cash Flow
(6.5)
(80.1)
(48.3)
(32.9)
(7.9)
0.9
22.2
Non-Operating Sources:
Short-Term Debt
Long-Term Debt
Sale of Stock
Repurchase of Stock
Other
Dividends
(0.1)
—
0.1
—
28.5
—
(0.1)
—
139.7
—
8.3
—
—
—
0.9
—
4.5
—
—
—
—
—
1.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total Non-Operating Sources
28.5
147.9
5.4
1.6
—
—
—
Beginning Cash & Equivalents
Free Cash Flow
Ending Cash & Equivalents
2.8
22.1
24.9
24.9
67.9
92.7
92.7
(42.9)
49.8
49.8
(31.3)
18.6
18.6
(7.9)
10.7
10.7
0.9
11.6
11.6
22.2
33.8
Total Operating Uses
97
November 12, 2001
Caminus Corporation
(CAMZ $15.85)
Rating: Buy
Change in . . .
Rating:
Cash EPS 2001E:
Cash EPS 2002E:
Rev 2001E (MM):
Rev 2002E (MM):
Yes/No
No
No
No
No
No
No
Market Cap (MM):
Note: 44% of equity owned by insiders.
Was
Is
Buy
$0.53
$0.77
$71.3
$93.9
$28
$38–11
15.9
$253.8
153
$5.23
35%
FY December
Cash EPS:
1Q
2Q
3Q
4Q
Year
P/E
2000
2001 E
2002 E
$0.05
$0.11
$0.14
$0.18
$0.49
—
$0.08 A
$0.14 A
$0.04 A
$0.27
$0.53
29.7x
$0.13
$0.17
$0.22
$0.24
$0.77
20.6x
Revenue (MM):
1Q
2Q
3Q
4Q
Year
Mkt Val/Rev
2000
$8.5
$11.2
$14.7
$17.3
$51.7
—
2001
$16.4
$17.7
$15.2
$22.0
$71.3
3.6x
2002 E
$20.1
$21.8
$24.6
$27.3
$93.9
2.7x
E
A
A
A
Recently Initiated Coverage with a Buy Rating and a $28 per Share Price Target
Investment Conclusion: We believe Caminus can grow earnings 35% annually for the next three
years as it expands its leadership position providing integrated risk analytics and trading software to
the energy industry. The company is continuing to experience repeat sales trending above 30% of
initial license sales, which we expect will help to drive improved gross margin and total return. Based
on comparable industry multiples and DCF analysis, our valuation indicates the potential for 75%
upside over the next 12 months, from current price levels.
•
The markets for wholesale power and natural gas are growing rapidly. The
deregulation of power and natural gas markets has created commodity markets with
estimated transaction totals of more than $1.4 trillion in North America by 2005, up from
$125 billion in 1999. Increased numbers of participants, rapidly increasing velocity of trades
and significant volatility in the wholesale power markets have created strong demand for
structured trading platforms and portfolio risk-analysis capabilities, in our opinion.
•
Caminus is a leading provider of software-based trading platforms and risk-analysis
software to the energy industry. The company has taken an early lead in the growing
market for these software systems; of the energy companies that utilize software-trading
platforms from outside vendors, 50% are running Caminus software.
•
We expect Caminus’s operating margin to continue to improve over the next several
years, leading to sustained EPS growth of 35% annually. We estimate operating margin
will increase to 19% in 2003 and 24% by 2005, given the high gross margins for software
licenses. We estimate this will drive ROE in the 15–20% range over the next several years.
•
We expect the pending acquisition of Altra Energy’s gas trading software business
will add significantly to the company’s customer base and overall product offering.
We have excluded the potential effects of the acquisition from our current forecast.
•
The stock is trading at a significant discount to our valuation. We have valued
Caminus using both relative multiple and DCF analysis and believe the stock is currently
worth $28 per share. We believe the stock has potential upside of more than 75% from
current price levels.
98
Company Summary
Caminus is a leading provider of energy trading, transaction and risk-management software, and
consulting services to energy companies. The company has more than 150 customers across North
America and Europe, including utilities, electric power generating companies, energy marketers,
electric power pools, gas and oil producers, processors, and pipelines. Some current customers
include BP Amoco, Enron, Williams, CMS Energy, Consolidated Edison, Conoco, and TXU Electric
and Gas. The company is headquartered in New York, New York, and has additional offices in
Houston, and Dallas, Texas; London, and Cambridge, U.K.; and Calgary, Alberta. Caminus has
approximately 365 employees, of which approximately 70% are located in the United States.
Approximately 25% of the company’s employees conduct research and development. Caminus sells
its products through a direct sales channel, with approximately 40 sales and marketing professionals.
Caminus is a leader in the market for energy trading, transaction and risk-management software,
which has the ability to support multiple commodities and types of risks across varied geographies.
In addition, the company provides strategic consulting services to many of the leading players in the
energy market. We expect Caminus will generate $71.3 million in revenue in 2001 and $8.4 million in
pro forma net income, or $0.53 cash EPS, followed by $93.9 million in revenue in 2002 and $12.2
million in net income, or $0.77 cash EPS.
The deregulation of the wholesale power and natural gas industries in North America, and indeed
around the world, has created two of the largest and fastest-growing commodity markets in history.
In 1999, the wholesale market for power and gas in North America was $125 billion; by year-end
2000, it had grown to $236 billion, or 89%. Current forecasts indicate that by year-end 2001 the
wholesale gas and power market will grow another 38% to $325 billion and by 2005, it will reach
$1.4 trillion. Apart from the notional dollar amounts involved, the sheer volume of trading in the
wholesale power market has skyrocketed, increasing tenfold from 1996 to 1998.
There are three elements of this spectacular market growth in wholesale power and natural gas
trading that provide a significant market opportunity for Caminus, in our opinion. The first is that
along with the growth in notional dollars traded has come a significant increase in market
participants. In 1998, more than 70% of wholesale power trading was conducted purely by
intermediaries that do not produce, transport, or consume power in any meaningful quantities. Since
that time, the percentage of power plants that are owned by companies independent of the utilities
has increased to 20.3% from 10.6%. This has significantly increased trading velocity, which is
defined as the number of times an electron is traded before it is actually consumed. We expect that
as the U.S. power market matures velocity will increase further. This is illustrated by a comparison
with the Scandinavian wholesale power market, which has been deregulated since 1993. In this
market, an electron is traded an average of ten times before it is consumed; in the U.S., it is
currently traded only three times.
Accompanying the increase in overall traded volumes of power is significant volatility in pricing; in
fact, power is one of the most volatile commodities in the world. This is fundamentally a function of
the fact that power cannot be stored in large volumes (historically, virtual storage was created in
regulated markets by overbuilding the amount of necessary generation, an extremely uneconomic
way of handling the problem). This issue is compounded by the condition that power consumption is
largely determined by the weather, and it is difficult to match load assumptions with weather
forecasts with much accuracy.
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The third driver of the market opportunity for Caminus is the assumption that unlike most commodity
trades, power and natural gas trades are exceedingly complex in structure, composed of 30–40
elements per trade. A financial transaction requires creditworthiness, capital availability, an ABA
routing number and various other standardized parameters. An energy trade requires all of those
parameters as well as real-time scheduling, transmission and pipeline path creation, transmissionand pipeline-loss calculations (physical volume is lost in transportation), power flow schedules,
regulatory tags, gas nomination and control, pipeline-to-pipeline interconnects, pipeline rate
schedules, and so on. The management of these operations is critical to the companies making the
trades, who also must assess the level of risk of their individual trades and their overall portfolios. As a
result, many of the country’s normally staid utilities have been rudely awakened by the realization that
their balance sheets are now fully exposed to some of the most volatile commodities in the world.
The combination of these factors has created a large market demand in the energy industry for
software specifically designed for energy commodity trading systems and risk-analysis programs.
We believe Caminus is in a leadership position to fill this need. Many of the early market
participants, including Enron (ENE $8.63), Dynegy (DYN $38.76), Williams (WEG $41.38), AEP
(AEP $44.54), Duke Energy (DUK $39.66) and Reliant Energy (REI $27.74), created their own
proprietary internal systems. Other participants have tried to adopt internal systems or patch
financial trading software into an energy format. In our opinion, Caminus provides the customer with a
fully integrated trading system software and risk-analysis capability that rivals, or in some cases
exceeds, the capability of the proprietary systems used by the large traders, several of which are now
adding Caminus software modules to their own systems.
Although it is difficult to properly assess potential market size, we believe there are in excess of 250
large energy companies that could readily utilize a complete Caminus trading system and another
2,500 that could use various elements of the Caminus software suite. ABB, a large European
industrial conglomerate, has estimated that spending on global energy information will grow to $24
billion in 2005 from $14 billion in 1999—we believe software for trading systems could represent
approximately 10% of this estimate.
In addition to the day-to-day trading of the commodity, energy companies increasingly find
themselves in need of specialized strategic consulting in issues regarding the deregulation of energy
markets and the potential impact it will have on individual companies. Caminus’ strategic consulting
practice consists of 30 consultants in the United Kingdom and 5 consultants in the United States that
provide strategic consulting related to all aspects of deregulated energy markets.
The company’s consultants have also taken an important role in overall energy policy formulation,
having worked extensively with the British gas and electricity regulators to develop fully
competitive gas and electricity markets. In 1998, Caminus was named the lead economic advisor
on the New Electricity Trading Arrangements (NETA), which resulted in a major overhaul of the
market structure for power trading in the United Kingdom. As other states and countries grapple
with the best method for deregulating power, we believe Caminus is in an excellent position to
influence market development.
Caminus’s Business Model
Caminus’s business model is based on the premise that, given the market opportunity we have
described, energy market participants have three choices: establish a robust trading and riskanalysis platform, hold onto energy assets but outsource the trading of the output, or exit the market.
We believe, as Caminus does, that most market participants will choose the first option. This
requires the company to decide whether to source a solution from a vendor or attempt to develop
trading systems in-house. However, only the largest market participants have the resources and the
intellectual capital to develop systems in-house—notably, many of these are buying Caminus’
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software. We believe that as the market evolves a large number of participants will establish their
trading systems with vendor software and focus their own efforts on the actual trading and marketing
functions. Caminus has already demonstrated its ability to penetrate the market for customers that
use software: 50% of the companies that use vendor software use Caminus. As the percentage of
participants that choose to source their trading platforms to outside vendors increases, we expect
Caminus will be in a leadership position to provide proven solutions.
Caminus’s business model is to provide a software-based platform that serves as host for an energy
company’s entire operations, connecting to and integrating with all of its existing enterprise systems.
From the standpoint of readily addressing a market opportunity, software is one of the most
desirable: it requires a relatively small amount of capital expenditure and enables the developer to
tailor the product to the specific market need. Caminus’s model is particularly attractive because
there are largely no legacy software systems for energy trading. As a result, the main focus of
Caminus’s business model is to become the base platform for the energy company, creating a
system where all of the company trade information, receivables, payables, auditing, risk analysis and
position assessment is connected. This creates an environment for additional software module sales
and new product development, so that the relationship with the customer becomes viral. Already, the
company is seeing a trend rate in add-on software sales at existing customers in excess of 30% of
the initial software license sale.
Similar to many software companies, Caminus charges an initial license fee and an installation fee of
50% of the license fee. This is typically accompanied by a maintenance contract of 30% of the initial
license fee, as well as software add-ons that represent 20% of the initial license fee. The average
up-front license fee is $650,000 and, with installation, maintenance and add-ons, total revenue per
license averages approximately $1.3 million. The license is billed 50% up-front, with 25% due in 60–
90 days and the final 25% due in 120–150 days. As a result, DSO averages 90–100 days.
Installation and maintenance are billed on a time-and-materials basis with receipt due in 30 days.
An important element of the company’s overall business model is the leverage gained from the
strategic consulting practice. Although contracted to provide independent assessments of a given
energy client’s strategy within deregulated markets, it is inevitable that part of the solution for many
clients is the adoption of Caminus’ software. (Notably, the Zai*Net Models product suite, which values
energy assets, was developed by Caminus’ strategic consultants.) The company began a focused
effort at the beginning of 2001 to bring together leads generated by consultants and the necessary
follow-up and close from the software sales team. As such, the overall gross margin of the company
is enhanced by this synergy, as it allows the sales team to increase its own productivity.
Finally, the strategic consulting practice has another synergistic benefit: It helps to set the rules of
the market. Caminus’s consultants were the chief architects of the revised wholesale power trading
system in the United Kingdom. As such, it would logically follow that the company’s software is the
best adapted to that new trading system. With the expansion of the strategic consulting practice into
the North American markets, we see continued possibilities for the consulting practice to pave the
way to better-functioning markets that are served by highly integrated software trading platforms.
The Strategy
Caminus’ strategy for its business plan is predicated on a first-mover advantage. Software has
inherently low barriers to entry when there is no established platform provider and famously high
barriers when there is. Recognizing this, Caminus moved quickly in 1998 as wholesale markets
began to experience rapid volume growth to provide a software offering to its beachhead base of
consulting clients and to the market as a whole. This translated to an acquisition strategy, with
Caminus purchasing Zai*Net in 1998, as a trading platform; Positron, in 1999, for risk analytics; and
Nucleus, a competing product of Zai*Net, in 2000. The company would have bought a sales and
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distribution channel as well, but finding there were no viable opportunities Caminus built one
organically. We believe this strategy has already shown strong results: Of the energy companies
using vendor software for trading systems, 50% are running Caminus.
Caminus has capitalized on this early mover strategy in numerous ways, several of which are tied to
the company’s strategic consulting practice. With its stable of large clients, both in terms of
governments and energy companies, Caminus was able to position its software solutions through its
consultants’ leads, which were often at the highest levels of the boardroom. With consulting as a
market scout, both in terms of customers and products, Caminus has pursued numerous big fish first
and set a level of market acceptance for its products. For example, Caminus’ strategic consulting
practice was the lead adviser in the U.K.’s NETA, which enabled the software effort to market directly
to the energy participants in the U.K., ultimately securing British Energy, PowerGen, London Electricity
and Yorkshire Electricity as software customers. With its latest mandate to advise Endesa, Spain’s
largest power utility, on its wholesale market operations, there is a significant opportunity to place
software not only to Endesa but other Spanish market players as well. We expect that Caminus will
replicate this relationship between strategic consulting and software sales in numerous other markets
around the globe.
The early mover strategy has also led to the ability to cast a wide net in market terms. Caminus has
sold its software to utilities, natural gas and power marketers, pipeline operators, energy retailers,
financial institutions, regulatory agencies, oil and gas producers, local distribution companies,
independent power producers, and transmission companies. The wider the net, the more feeder fish
the company encounters: A sale to a large pipeline, for instance, opens up a customer set that
includes all of the gas producers that feed to that pipeline. In addition, Caminus can sell its products
to customers on the other side of the meter from the utilities and energy merchants. Many large
industrial and commercial users of energy have their own trading and procurement operations,
representing a substantial potential market for Caminus products.
The company is also aggressively pursuing the introduction of new high-value software modules,
which is intended to have two strategic effects. Specifically, it increases the amount of software sold
into existing customers and creates an opportunity to sell to customers with proprietary legacy
systems. For example, WeatherDelta, which was introduced in the fall of 2000 to model expected
weather patterns and their effects on the risk profile of a portfolio of energy assets, is now being
used by Williams Energy, the tenth largest power marketer in the United States in 2000. Williams,
which has largely developed its own proprietary trading system, joins a list that includes Enron, El
Paso, Dynegy and TXU that are large-scale energy merchants that have their own systems but
incorporate Caminus solutions as part of those systems.
Caminus’ strategy is to become the global backbone platform for the entire energy enterprise, seamlessly
integrating all of a company’s systems through Caminus software. Although it is a hackneyed analogy,
we believe Caminus could become the Windows of the energy enterprise, and it has already proven its
ability to provide global integration for Conoco, Tractabel, NRG and TXU, all large energy players. The
company is also accelerating its plans to configure its software to be Web enabled, allowing Caminus
to host the platform on its own servers and provide even tighter maintenance and service capabilities
for the customer, while capturing margin from the efficiencies of having localized service personnel.
Finally, we expect that Caminus will pursue strategic partnerships, potentially with the Big 5 accounting
firms, to execute even more quickly on the company’s ability to build dominant market share and
establish a base of repeat buyers.
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Caminus’ software distribution channel has been built organically and is predominantly made up of
direct salespeople complemented by the strategic consulting professionals. The sales channel
currently totals 40 professionals, with 20 in pre-sales and 20 in quota sales. The average annual
sales per representative was $1.5 million over the last 12 months; management believes it has
capacity within its existing sales head count to bring that number up to $3.0–4.0 million per
salesman given a close rate above 50% of the sales pipeline. In our opinion, the biggest drag on
closing this capacity utilization gap within the sales force is not necessarily getting representatives to
sell more, but training installation and maintenance personnel. Training a software services
professional takes approximately six months; given the company’s relatively matched ramp between
sales growth and growth in SG&A costs, we expect that increases in revenue per sales professional
will largely be a function of the company’s ability to continue adding installation personnel.
Customer Base
Caminus’s current customer base includes approximately 150 energy enterprise customers, 115 of
which are software customers and 35 are consulting clients. The software customers are comprised
of energy participants from all sectors of the power industry, including utilities, natural gas and
electric power marketers, energy retailers, financial institutions, regulatory agencies, oil and gas
producers, local distribution companies, pipelines, independent power producers, and transmission
companies. From a geographic standpoint, the customer base is located in the United States,
Canada, the United Kingdom, Germany, Austria, Belgium, the Netherlands, Spain and Venezuela.
Caminus currently boasts 8 of the top 20 North American gas marketers and 7 of the top 20 North
American power marketers in the year 2000, including Enron, Dynegy, El Paso, PG&E, Coastal,
TXU, Conoco, Williams, CMS and BP Amoco. Furthermore, the company added several significant
players in the United Kingdom as an extension of its development of NETA, including British Energy,
PowerGen, London Electricity and Yorkshire Electricity. AES Electric, a large producer of power into
the U.K. pool, is already a Caminus customer.
The product mix in North America is approximately 50% Zai*Net, 20% GasMaster and 30% Nucleus.
The typical customer preference is to buy trade-capture platforms first (Zai*Net Manager and
Nucleus Manager) and later fill in with analytics modules and additional seats. However, with the
introduction of the WeatherDelta product, which has a broad range of potential customers, we
expect to see the product flow go both ways, from trade capture to analytics and from analytics to
trade capture.
We believe the potential customer base for Caminus’s products is approximately 250 large
customers, which average $1–3 million and up on average, and approximately 2,500 mid-size
customers, which will likely average between $250,000 and $500,000 in an initial sale. The large
customer base is well-known, but the mid-size marketplace could include municipal power and gas
authorities, which would likely use the Zai*Net physicals scheduling software, the mid-sized German
utilities, and the mid-sized gas local distribution companies, which may require a more tailored
product than the company currently offers.
Caminus’s additional customers in the utility sector include Austin Energy, Bayernwerk, BC
Hydro/Powerex, Carolina Power & Light, Consolidated Edison, Electrabel, Elsam, Florida Power &
Light, GPU Energy, Ontario Power Generation, Pennsylvania Power & Light, Preussen Elektra,
Public Service Electric & Gas, TXU Electric and Gas, SEP, Rochester Gas & Electric, Endesa,
Toronto Hydro, Pacificorp and the Lower Colorado River Authority. Natural gas and electric power
marketers include Bord Gais, Eastern Electricity, Merchant Energy Group of the Americas and
Valero. New Energy, an energy retailer, and Credit Suisse First Boston and GE Capital, both
financial institutions, are also customers. Additional oil and gas customers include Amerada Hess,
Anadarko, Ocean Energy, Petroleos de Venezuela, Phillips, Ultramar Diamond Shamrock and
Unocal. Southwestern Energy and TXU Lone Star Gas, both local distribution companies, are also
customers. Pipeline customers include Colorado Interstate Gas and Transok. Calpine, an
independent power producer, and Tennet and National Grid Company, both transmission
companies, are customers of Caminus as well.
The company currently offers two general trading platforms that are the foundation of Caminus’
software product suite: Zai*Net and Nucleus. The base modules provide trading and transaction
management, which integrate trading systems and increase the efficiency of daily trading operations
while providing full front-, middle- and back-office functionality across a wide variety of energy
commodities and traded instruments, including physicals, swaps, OTC options, listed options and
futures. Additional modules, which plug in to the base modules but can also operate independently,
encompass risk management, physical operations and analytical models. Written mostly in C/C++
with standard graphical user interfaces, all of Caminus’ software is seamlessly integrated with itself
and features an open, three-tier client/server architecture. The company’s software connects directly
to the customer’s existing Unix (HP, Sun and IBM) and NT server platforms, and Oracle, Siebel,
Sybase, SAP and Microsoft databases. Caminus also develops custom software applications, which
vary in scope and complexity.
Energy risk-management modules provide an advanced set of risk-assessment and management
tools that are specifically designed for the energy markets. These are typically required by energy
traders and marketers, risk managers, and credit officers in order to manage individual and overall
portfolio exposure. Module functions include value-at-risk simulations, credit risk analysis, and
weather and volumetric risk analysis across multiple commodities and markets. Physical operations
modules enable power and gas traders to manage the physical scheduling, operations and invoicing
in real time for pipelines, transmission systems and power markets. Analytical models are used to
analyze the value of adding or subtracting physical assets, such as power plants and pipelines, as
well as the effect on the overall energy markets. These modules perform market simulations, assess
energy asset valuations and suggest risk-management strategies that are used to support strategic
asset decisions, enabling a company to model physical assets to be effectively integrated with its
trading and marketing operations.
Caminus recently introduced a front-office application that is designed to test how a potential trade
will affect an energy portfolio before the transaction is executed. In addition, the company recently
announced a strategic alliance with LODESTAR, which produces billing, pricing, load profiling and
transaction management software for the energy industry. Caminus will integrate its software
platform with LODESTAR’s wholesale and retail energy billing and trading system, which will provide
straight-through process environment for vertically integrated energy customers.
Software Products
Zai*Net
Zai*Net Manager. Zai*Net Manager is the core component of the Zai*Net suite. It supports energy
trading operations, recording and managing transactions in electric power (traded on an hourly
basis), natural gas (traded on a daily basis), crude oil, refined products, natural gas liquids (NGLs),
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coal, emission allowances, weather derivatives and foreign exchange transactions. The software
incorporates pricing and back-office support for all traded instruments, including physicals, swaps,
OTC options, listed options and futures. Risk management is performed in real time, providing
aggregated portfolio numbers that mark position and price changes instantaneously. The software is
designed to provide detailed position tracking, risk analysis and accounting at the enterprise level
and operate as the backbone of an entire trading operation.
Zai*Net Manager is typically purchased by utilities, independent power producers (IPPs), energy
commodity marketers, refineries, wholesalers, retailers and financial institutions. Specifically, the
software enables deal capture, value-at-risk (VaR) analysis, ad-hoc report writing, settlement
processing, portfolio stress testing, credit limits, hourly pricing, exotic options, user-defined formula
pricing and enterprisewide risk management. The integrated report writer function provides real-time
profit and loss, mark-to-market position, risk and credit assessment, enabling the calculation of
mark-to-market positions across the enterprise, cross-commodity risk management across disparate
geographic areas and credit risk management.
Figure 37: CAMINUS CORPORATION—ZAI*NET MANAGER TRADE CAPTURE SCREEN
Zai*Net Physicals. Zai*Net Physicals manages physical energy scheduling and invoicing
operations. This enables traders, schedulers and back-office support staff to match the executed
trades with various logistical operations associated with the actual physical transfer of the
commodity on hourly, day-ahead and long-term schedules. Specifically, Zai*Net Physicals
automates real-time scheduling, physical curtailments tracking, transmission and pipeline path
creation, transmission- and pipeline-loss calculations, schedule creation for power flows and bookouts, NERC and E-Tag generation, gas nomination and control, pipeline-to-pipeline interconnects,
pipeline rate scheduling, physical loss tracking, and trade-to-nomination and return.
The Zai*Net Physicals product group is composed of GasMaster, PowerMaster and PlantMaster.
GasMaster II was recently introduced in Europe and incorporates multicurrency functionality.
GasMaster is used for gas scheduling related to pipelines, storage facilities, gas pipeline
interconnects, gas storage points, bids and confirmations of complex physical gas transactions, and
wellhead accounting, including the management and division of interest and royalty payments.
PowerMaster is used to schedule electric power across various global transmission systems, track
power curtailments, electric power flow, line losses by transaction, flow paths and planned power flows
in daily and monthly schedule formats, and capture and schedule power and transmission capacity in
hourly and real-time formats. PlantMaster is used by natural gas processing plant operators to track
physical flows of gas throughout a facility to manage title and allocation.
Zai*Net Risk Analytics. Zai*Net Risk Analytics is a high-value module that provides sophisticated
trade and portfolio risk assessment for energy traders. The module uses Monte Carlo models to
calculate value-at-risk (VaR) in a given portfolio and provides real-time credit risk analysis as well as
portfolio stress analysis that monitors the impact of price, volatility movements and time, on positions
and profit and loss. The module also creates a full system-audit trail that is integrated throughout the
system. Specifically, the Risk Analytics module includes HJM Monte Carlo VaR analysis, current and
potential credit risk exposure analysis, stress testing, exotic option pricing and analysis tools, basis
breakdown reporting, profit and loss (P&L) attribution reporting, and financial position reporting.
Zai*Net Models. The Zai*Net Models module is designed to model competitive power and natural
gas markets from the standpoint of adding or subtracting physical assets to the market. These
models formulate the embedded risk prevalent in energy assets and perform sensitivity analysis
relative to fuel cost assumptions, price volatility, operating costs and discount rates. As a result,
Zai*Net Models gives the user the ability to value investments in generation and storage assets,
while capturing the embedded optionality, anticipate price formation in newly deregulated markets
and price swing contracts. Specifically, functions include competitive market simulation, forwardprice generation, Monte Carlo spot price, simulations, power plant valuation, swing and storage
valuation, hydro-generation modeling, and financial models.
Zai*Net Models is comprised of PowerMarkets, PowerOptions, GasOptions and ProjectFinance.
PowerMarkets simulates the dynamics of the competitive electricity markets and includes forward
prices, trading flows between markets and regions, and the operating performance of power
generators. PowerOptions values energy assets and optimizes generation strategies within
emissions constraints, while GasOptions values storage assets and optimizes injection and
withdrawal decisions. ProjectFinance is used to conduct sensitivity analysis on project economics.
WeatherDelta. The WeatherDelta module, which, along with GasMaster II, is the newest software
product from Caminus, assesses the impact of weather on the profit and loss within an energy asset
portfolio. WeatherDelta assesses the impact of weather on load demand, available generation,
pricing, retail contracts and traded positions, taking into account volumetric risk in the context of a
complete portfolio.
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WeatherDelta consists of four modules: Weather Engine, Load Profile Builder, Price Calibration and
Risk Manager. Weather Engine is the statistical database from which the analytical framework of the
module is based, simulating thousands of hourly multiregional weather paths based on more than 64
million hourly historical observations that are updated on a monthly or quarterly basis. Based on
weather simulations from the Weather Engine, the Load Profile Builder captures the sensitivity of
individual loads to weather factors such as temperature, humidity, time of year, day of week and time
of day. The Price Calibration module combines the observed forward-market price curve and the
simulated hourly load distributions to calibrate the hourly load-spot price relationship to current
market prices. This is done to create hourly price distributions based on several observed or
simulated load levels. The Risk Manager encompasses a standard transaction capture function and
combines it with the hourly volumetric risks and portfolio VaRs determined by the analysis within the
Price Calibration module. Given this analysis, Risk Manager then assesses the impact of adding
cooling degree day or heating degree day futures or options to monthly portfolios, enabling the
display of shifts in the monthly profit and loss of the portfolio in real time.
Nucleus
Nucleus Manager. Nucleus Manager is the core component of the Nucleus suite. Similar to Zai*Net,
it supports energy trading operations, recording and managing transactions in electric power (traded
on an hourly basis), natural gas (traded on a daily basis), oil and coal. Users set up defaults for
standard trades to streamline data entry. The software is also designed to manage customer data
aggregation of the commercial, industrial and residential segments of a company’s retail operations.
Nucleus Manager also handles the quote entry, approval and maintenance of retail transactions for
power and gas, and records information from facility meters.
The software integrates real-time pricing and credit limits with built-in derivatives and risk
management capabilities. All processes are tied to a single database, enabling a trader or risk
manager to define and track all contracts and monitor physical and futures contracts. This single
database also collates data from both the regulated and the non-regulated sides of the house, as
well as creating a link to a general ledger while pulling both accounts receivable and accounts
payable accounts.
Nucleus Risk Analytics. Nucleus Risk Analytics is designed to develop a central location for
position control data and to create hedge strategies around that data. Specifically, the software
provides online option valuation, including Asian, Spark Spread and Swing, Monte Carlo simulation
of VaR, position control reports, fair market value for contracts, degree day options and futures, and
a historical weather database with multiregional hourly weather simulation. The software can also
integrate optional modules for custom contracts and modeling.
Nucleus Physicals. Nucleus Physicals is used to automate hourly, day-ahead and long-term
physical scheduling and management of energy trades. In addition, the software can perform gas
nomination and control, gas pipelines and storage management, meter volume allocations,
scheduling for power flows, book-outs and roll-forwards, NERC and E-Tag generation, transmission
and pipeline path creation, and transportation, inventory and storage accounting. This enables
trading organizations to minimize reconciliation and data entry, monitor pipeline balances, track flow
requirements against capacity rights and quickly generate accurate schedules.
Software Consulting Services. Caminus also provides software services that include the
implementation and initial installation of software and newly licensed modules, as well as conversion
of the customer’s historical data, and ongoing training and support. In addition, the company
provides best-practices consulting for traders, and remote diagnosis and telephone support.
Strategic Consulting
The strategic consulting practice consists of 30 consultants in the United Kingdom and 5 consultants
in the United States that provide strategic consulting related to all aspects of deregulated energy
markets. The strategic consulting practice has particular expertise in determining the most effective
operating strategies and the most appropriate use of assets in deregulating energy markets.
Specifically, Caminus’s consultants specialize in the economic valuation of new and existing power
projects, and have advised on more than 20 power projects across Europe. In addition, the
company’s consultants provide quantitative analyses of evolving market structures with a
determination of key price drivers. In fact, the quantitative work done by Caminus’s consultants
culminated in the development of the Zai*Net Models component of the Zai*Net software suite.
Caminus’s consultants also provide risk management assessments and have developed risk
management training courses for both European and North American power companies.
Caminus’s consultants have also taken an important role in overall energy policy formulation, having
worked extensively with the British gas and electricity regulators to develop fully competitive gas and
electricity markets. In 1998, Caminus was named the lead economic advisor on NETA, which resulted in
a major overhaul of the market structure for power trading in the United Kingdom. NETA was officially
launched in the first quarter of 2001, and Caminus is now providing NETA-compliant Zai*Net
software to several of the U.K.’s major energy producers, including British Energy, PowerGen,
London Electricity and Yorkshire Electricity.
Acquisitions
Caminus has made several acquisitions since the company was founded in 1998. These include
Zai*Net, an integrated trading platform, in 1998; Positron, a power risk analytics system, and DC
Systems, a gas analytics system, in 1999; and Nucleus, another integrated trading platform, in 2000.
In total, the company has spent $56 million of capital on acquisitions, and we expect that Caminus
will continue to take advantage of the relatively fractured competitive landscape to consolidate
market share and fill out the product line. All of the company’s acquisitions have been accounted for
as purchases.
On October 15, 2001, Caminus announced the acquisition of Altra Energy’s gas trading software
platform for $30 million in cash and 1.975 million shares, or approximately $64 million in current
price terms. Altra Energy is the largest provider of natural gas trading software and has a current
base of approximately 100 customers. As a combined company, Caminus and Altra will have more
than 300 customers. Based on our preliminary analysis, Caminus paid approximately 1.5x Altra’s
2002 estimated revenue, which compares favorably with the current market valuation of Caminus of
approximately 3.0x estimated 2002 sales.
The rationale for this acquisition is based on several factors. The first is a macro trend that has been
ongoing in the energy business over the last several years. This is based on what Dynegy refers to
as the “merchant leverage effect,” which essentially captures incremental margin when gas
producers and power producers are put together. As a result, there has been a significant
convergence among natural gas companies and power companies that has resulted in several
significant mergers and acquisitions over the last two to three years. With more companies moving
toward a combined gas and power model, it makes strategic sense for energy software developers
to develop comprehensive and integrated suites that can address both gas and power needs across
the energy enterprise. With the addition of Altra’s natural gas platform, we believe Caminus can
improve its competitive position on the gas side of the house as well as increase overall penetration
within the customer enterprise.
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Another factor in the acquisition of Altra is the investment Altra has made in the migration of its
systems to a Web-based platform. Caminus has also been moving toward the Web-based delivery of
its products and services, and can avoid duplicating costs that have already been incurred by Altra in
its development process. Furthermore, Altra has also been a leader in developing systems for gas
pipeline operators, which is an area that Caminus has identified as having high-growth potential.
Caminus’s management has given preliminary financial estimates on the effect the acquisition will
have on financial forecasts. Management has indicated that Altra’s 2001 revenue will be
approximately $30 million. Depending on when the deal closes, we estimate the contribution to 2001
revenue could be $3–5 million in Q4:01. We estimate that the deal is dilutive to Q4:01 earnings by
$(0.03). Total shares outstanding will increase to 18.4 million shares in 2002, although the fourth
quarter will likely be a blend of the third quarter shares and the new shares. In 2002, management
expects that Altra will add 40% to current revenue estimates. Based on our current estimate of $93.9
million, this represents approximately $38.0 million, or a revenue growth rate of 25%.
Competitors
Given the high-margin large market opportunity in the wholesale gas and power trading arena, there
are surprisingly few serious competitors currently in the market. Over the last few years, Caminus’s
chief competitor has not been another software company, but the in-house development of
proprietary systems. Several companies compete in various areas of Caminus’s product offering, but
only SunGard Data Systems (SDS $26.14) competes on the enterprise level, with its Epsilon and
Panorama for Energy products. Epsilon is comprised of gas scheduling, power scheduling and risk
management modules (competing against Zai*Net Physicals, Nucleus Physicals, Zai*Net
RiskAnalytics and Nucleus Risk Analytics), while the Panorama for Energy product provides trade
capture and processing (competing against Zai*Net Manager and Nucleus Manager). SunGard has
typically taken an aggressive approach in pricing and uses its overall size as a competitive tactic.
Other competitors include KWI, which claims Bonneville Power, Cinergy, Ontario Power and TVA as
customers in North America and has a good presence in Europe; OpenLink Financial, a large
supplier of enterprise resource software; Allegro Development, which markets natural gas and power
trading software, in addition to applications developed for trading crude oil, refined products, NGL
and coal, as well as some risk management software; and Algorythmics. KWI is noted for its
hydroelectric physicals and analytics programs. Caminus does not currently offer a hydroelectric
systems product.
One aspect of the competitive landscape that is still undetermined is the level to which accounting
firms and their respective consulting arms will approach this industry. Accenture, for instance, has
been recommending OpenLink Financial to its consulting customers, while PricewaterhouseCoopers
has been advocating for KWI. Deloitte & Touche has been recommending Caminus’s products, but
nothing formal has been put in place in terms of a direct marketing agreement. In addition, the
consulting firms could buy one or two of Caminus’s competitors (or buy Caminus for that matter) and
change the competitive landscape significantly from a distribution standpoint.
Finally, there could be some market share lost to companies that decide not to trade the output of
their own energy assets and outsource this function to an existing energy marketer, although this
outcome affects all software competitors and not Caminus exclusively. Although Dynegy
(DYN $38.76) has made a significant effort to pursue this business, we do not see it as an
immediate threat to the growth in the market for software trading platforms.
Threat of entry. Although the barriers to entry in the software business are fairly low from a capital
standpoint, we believe that participation in the energy software market requires a significant amount
of domain expertise. There simply are not that many people who are energy specialists, and
Caminus is fortunate in that it has so many energy consultants in-house that can participate in the
development of software products. Nevertheless, there is always a threat that employees could be
hired away or a larger tangential software competitor could buy its way into the market.
Threat of substitution. The main threat of substitution comes from in-house proprietary
programmers, in our opinion. Many of the large energy trading houses still develop their systems on
their own, although recently there has been some adoption of Caminus and other vendors’ software
by the large players.
Bargaining power of buyers. Absent their own systems or the means with which to develop them,
the buyers of trading platform software are at the mercy of the vendors. If they do not pay for the
trading and risk-analysis platform, they stand to lose much more than the software would cost, in our
opinion. Trading losses are marked to market and expensed in the period occurred, as opposed to
systems installations, which occur over a period of several quarters.
Bargaining power of suppliers. This is not a material issue for software companies in this market,
in our opinion.
Rivalry among current competitors. There is growing competition in the energy trading software
area, which is manifesting itself in some indications of reduced pricing by smaller competitors.
However, we believe the market is big enough to support healthy revenue growth for the handful of
companies that have robust and integrated systems. Furthermore, given the strong demand
forecasted for third-party vendor software sales, we believe there should not need to be significant
undercutting in price at this stage in the market development. Many of the customers we spoke with
have also indicated that price is not the main consideration in the decision regarding a system.
We have projected Caminus’s financial potential through 2005 including estimates for the
income statement, balance sheet and statement of cash flows. Our projections are based on the
Revenues
Caminus has two main revenue streams: revenue from software licenses and related services and
revenue from strategic consulting. The software revenue stream has four components: the initial sale
of the software license; the installation of the software; the maintenance of the overall system; and
add-on software sales. In most cases, the software revenue stream is expected to unfold over a fiveyear period, led by the initial sale of the software license. This initial software license sale has
averaged approximately $650,000 per customer over the last 12 months, and is accompanied by
installation and training services that generally average 50% of the initial license fee spread over two
quarters. The vast majority of customers also retain Caminus for maintenance of the overall system,
which represents additional revenue of approximately 30% of the initial license fee and any
additional software added, generally over a five-year period. Finally, most the company’s customers
add incremental software modules to their original systems, whether it is additional seat licenses,
risk analytics modules, or some combination of the two, which represents a revenue stream of
approximately 30% of the initial license sale, spread out over four to five years (there is also an
installation revenue stream of 50% of the add-on module sale).
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To project Caminus’s total software and services revenue, we have constructed a model based on
the following assumptions. We attribute the average license sale of $650,000, which represents four
to six modules, in the quarter it is delivered. We then assume an additional 50% implementation fee
of $325,000 and spread it over the current quarter and the subsequent quarter. We then assume a
maintenance agreement that represents 20% of the initial license sale, or $130,000, which is spread over
the next four years on a quarterly basis and begins concurrently with the initial sale. Further, we assume
the customer takes add-on software representing 30% of the initial license sale, or $195,000, which
is implemented over four years (there is a pyramiding function that occurs with the add-on software
sales, because installation and maintenance revenue increases in the same percentage proportion
as that of the initial license sale).
We estimate that Caminus will generate revenue of $64 million in software sales and services in
2001, followed by $84 million in 2002, and $118 million in 2003. Our software sales and services
estimate for 2005 is $196 million. This translates to compound annual growth of 32%. We estimate
that Caminus’ strategic consulting revenue will reach $8 million in 2001, followed by revenue of $10
million in 2002, and $11 million in 2003; our 2005 revenue estimate is $12 million.
Figure 38: CAMINUS CORPORATION—REVENUE, MARKET PROJECTIONS
AND OTHER OPERATING DATA ($ in millions)
FY December
1999
2000
2001E
2002E
2003E
2004E
2005E
Software Licenses
Annual Growth Rate
Percentage of Total
Cost of Revenues
$12.5
0.1%
46.6%
(0.8)
$24.6
96.0%
47.5%
(1.0)
$31.4
27.9%
44.1%
(1.2)
$44.2
40.6%
47.1%
(1.8)
$60.4
36.6%
47.0%
(2.4)
$79.6
31.9%
47.8%
(3.2)
$98.2
23.4%
47.0%
(3.9)
Gross Profit
Gross Margin
11.8
93.9%
23.6
96.0%
30.2
96.1%
42.4
96.0%
57.9
96.0%
76.4
96.0%
94.3
96.0%
7.8
152.9%
29.0%
(4.7)
18.6
137.7%
35.9%
(10.7)
32.2
73.2%
45.1%
(16.5)
40.0
24.3%
42.6%
(20.4)
57.4
43.5%
44.7%
(29.3)
75.5
31.6%
45.3%
(39.3)
98.2
30.0%
47.0%
(51.1)
Gross Profit
Gross Margin
3.1
39.9%
7.9
42.4%
15.7
48.7%
19.6
49.0%
28.1
49.0%
36.3
48.0%
47.1
48.0%
Strategic Consulting
Annual Growth Rate
Percentage of Total
Cost of Revenues
6.6
0.0%
24.4%
(2.9)
8.6
30.6%
16.6%
(3.6)
7.7
(10.4)%
10.8%
(4.4)
9.7
26.0%
10.3%
(6.3)
10.6
9.9%
8.3%
(6.9)
11.5
8.6%
6.9%
(7.2)
12.4
7.7%
6.0%
(7.6)
Gross Profit
Gross Margin
3.6
55.4%
4.9
57.5%
3.3
42.6%
3.4
35.0%
3.7
35.0%
4.4
38.0%
4.8
38.5%
—
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—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26.9
179.6%
51.7
92.2%
71.3
37.8%
93.9
31.7%
128.4
36.8%
166.7
29.8%
208.9
25.3%
18.5
68.8%
36.4
70.4%
49.1
68.9%
65.4
69.7%
89.8
69.9%
117.0
70.2%
146.2
70.0%
Software Services
Annual Growth Rate
Percentage of Total
Cost of Revenues
Annual Growth Rate
Percentage of Total
Cost of Revenues
Gross Profit
Gross Margin
Total Revenues
Annual Growth Rate
Gross Profit
Gross Margin
The Software Sales Pipeline. Caminus’ software pipeline is a function of four main components:
the absolute number of graded leads and the average expected sale per customer; the ratio of the
aggregate expected revenue from those leads to the 12-month sales target; the close rate on those
leads; and the trend rate of software add-ons revenue as a percentage of initial license value. Leads
are classified using fairly conservative assignations relating to both seriousness and expected close
date, and no leads are considered as guaranteed to convert to actual sales, and individual sale
estimates are capped at $1 million (given the $650,000 average sale per customer, we believe this is
a sound policy). The ratio of total potential aggregate expected revenue relative to 12-month targeted
revenue is expected to be between 2.25 and 2.50, where it currently stands. The hurdle rate on closing
the sale is 50%; management has indicated that it expects to maintain a rate better than this over the
next six months. Finally, the value of add-on software sales has been running at more than 30% of the
initial license sale, which is a positive trend not built into our current estimates. Combined, the trend
direction and overall robust profile of the current sales pipeline gives us confidence that the company
can meet or exceed our current revenue targets over the next 12 months. In addition, we believe that
as the customer base continues to expand the potential for recurring revenue in the form of additional
software sales, additional installation fees and additional overall maintenance fees, increases at a rate
faster than that of actual incremental customers added.
Seasonality in Software Sales. Like many technology companies, Caminus experiences significant
seasonality in its sales, both within the quarter and over the course of the fiscal year (ending
December). Within the quarter specifically, we estimate the trend has been 25% of sales in the first
month of the quarter, 25% of sales in the second month and 50% in the third month, with up to 50%
of that month’s sales in the last two weeks of the quarter. In practice, this means that the quarter is
generally made or lost during the last month of the quarter. From an annual standpoint, the
seasonality trends to see the highest amount of revenue in the fourth quarter, which is usually
followed by the lowest amount of revenue in the first quarter. As a result, the fourth quarter sales
targets have been reached by the second month of the quarter, while the first quarter can come
down to the wire in the last week of the third month. To mitigate this effect, the company is taking
steps to encourage its sales force to close sales in the front two months of the quarter by offering
higher commissions in the first and second months of the quarter, although we are skeptical that this
will affect customer-buying habits significantly. As such, we expect that the inherent seasonality of
the business will continue to be a factor in estimating the target level of sales within a given quarter.
The Sales Cycle. Caminus has a fairly long sales cycle, which can stretch to six months depending
on the size of the customer. In general, smaller customers make faster decisions for a lower average
sales price, with a typical cycle of 8–12 weeks and an average license sale of $250,000–300,000.
Larger customers, frequently utilities, pass the purchase decision through a more protracted chain of
approvals but spend upwards of $1 million on the initial license. In addition, the company has
improved its ability to prepackage the implementation and installation of the software for mid-sized
and smaller customers, shortening the overall length of the sales cycle.
Product Sales Mix. We estimate that license revenue and related services will represent 90% of
total 2001 revenue. Within the software segment, services represents an increasing percentage of
the total. This is partially due to the lag of the services relative to up-front license revenue; the base
of service revenue is growing as the overall customer base grows. At year-end 2000, software
services represented 39% of total revenues, up from 34% in 1999, which translated to an annual
growth rate of 113%. Conversely, revenue from strategic consulting decreased to 20% of total
revenue in 2000 from 24% in 1999.
Geographic Sales Mix. Caminus generates approximately 60% of its revenue in North America
(largely from software sales and services). As its product mix currently stands, revenue generated by
software and related services typically originate in North America, while revenue from strategic
consulting originates in Europe. This is largely due to the historical nature of the individual
businesses: Caminus Consulting was a U.K. company and Zai*Net was a U.S. company. Although
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Caminus has introduced a consulting practice in North America, with expected revenue backlog of
$1 million over the next 12 months, and software in Europe, with significant deals announced with
Endesa in the second quarter and Elsam in the fourth quarter, we expect that these product introductions
will likely offset each other in the near future as a percentage of revenue. As software sales increase to
European customers over the course of 2002, we believe the overall geographic mix will shift to a 50/50
balance between North America and the rest of the world. The geographic mix of software sales in Q2:01
was approximately 65% North America and 35% Europe.
Consulting Revenue. We expect Caminus will generate $8 million in consulting revenue in 2001,
followed by $10 million in 2002 and $11 million in 2003. Consulting revenue is largely a function of
head count: In 2000, the company generated $8.9 million in consulting revenue over a base of 40
people, or $215,000 per head. Our estimates are likewise a direct function of additional head count.
We expect the company will add four consultants in 2002, which translates into $2 million in
additional revenue. In addition, the company has added five consultants in North America, which can
be expected to generate $1 million over the next 12 months (on a per-head basis, approximately in
line with their European counterparts). Revenue in 2000 increased 30%, which was partly the result
of an ongoing project with the British government to restructure the wholesale power markets. This
project has wound down significantly since the introduction of the New Energy Trading Arrangement
(NETA) in March 2001. As a result, we expect 2001 consulting revenue will decline a modest 3%,
although we do expect that the consultants freed up from the NETA project should be redeployed by
Q4:01 and Q1:02.
Revenue Recognition. Caminus recognizes revenue for the initial software license upon delivery to
the customer. The cash payments that match this up-front revenue recognition are generally
received 50% upon receipt of software, with 25% due in 60–90 days and 25% due within 120–150
days. If there is customization involved with the initial software license, which generally requires
tying the acceptance of the product by the customer to specific delivery milestones, then the
percentage-of-completion method is used to record revenue. Milestone examples include tying the
system in with a specific Oracle configuration or adding functionality to the Zai*Net modules. On
percentage-of-completion deals, cash receipts typically match the recording of revenue. If all of the
work is new, or is not an adaptation or customization of an existing product, revenue is recorded
using the completed-contract method.
Installation, implementation and consulting revenue is recorded on a time-and-materials basis and is
recognized monthly as time is accrued, with a billed collection period due in 30 days and collection
typically received within 60 days. Maintenance revenue is billed annually in advance, is booked as
deferred revenue and then amortized over 12 months (the deferred revenue account on the balance
sheet, which stood at $5 million as of June 30, 2001, is largely maintenance revenue). Consulting
revenue is billed and recognized monthly on a time-and-materials basis.
Pricing Trends. The ASP for initial license fees was approximately $650,000 in Q3:01, up from
$630,000 at year-end 2000. The ASP has increased significantly over the past two years—
progressing from $225,000 in 1998, to $425,000 at year-end 1999 and to $630,000 at year-end
2000. For the purposes of our revenue estimates, we have held current ASP constant as we are
unsure which way the expansion in the customer base will trend. The company could continue to
sign large customers, which would likely increase the ASP but extend the sales cycle, or it could
begin to penetrate the mid- to small-level customer base, which would likely bring a lower average
ASP but a shorter sales cycle and a much wider potential customer base.
Gross Margin
Caminus has shown continued improvement in blended gross margin in the first three years of
operation, increasing to 70% in 2000, from 69% in 1999 and 51% in 1998. This is due to the
emergence of software license sales as an increasing percentage of overall revenue. In the software
and services segment, gross margin has trended toward 73%, with software license in the 95–97%
range and maintenance and installation in the 45–50% range. Gross margin in strategic consulting
has typically averaged 50%, although we expect margin to trend closer to 35% as business has
slowed. Margin in the strategic consulting business comes under pressure when capacity utilization
slips from 100%; it is unlikely that a quarterly slowdown in consulting revenue would be matched by a
reduction in head count. Given this fixed-cost base for consulting, margin is more susceptible to
temporary slowdowns than Caminus’ software business, although the installation and maintenance lines
are also affected the same math.
We believe that gross margin for the strategic consulting business should not be looked at in isolation. As
consultants increasingly become generators of sales leads for the software product, their effective
gross margins increase, although the effect will be accounted for as an offset of expense in the
SG&A line and not in the strategic consulting gross margin line.
We estimate that blended gross margin will be 69% in 2001, with a slight improvement in 2002 to 70%, a
level maintained in 2003. Broken down by segment, we expect software licenses gross margin to
reach 96% in 2001, 2002 and 2003, while software consulting and maintenance gross margin
should average 45–50% in 2001, 2002 and 2003. Strategic consulting margin should average
approximately 35% for the foreseeable future, as there will likely be a negative effect on gross
margin over the next several quarters as the company expands its consulting presence in the
United States ahead of billable revenues.
We estimate that sales, general and administrative costs (SG&A) will run approximately 38% of
revenue in 2001 and 31% in 2002, maintained thereafter at 33–35% in 2003 through 2005 as
additional software consulting staff is added. The current software quota sales head count is
approximately 21, or $1.5 million in revenue per sales professional (commissions are 8% on a new
software sale and 3% for an add-on). Management has indicated that the capacity utilization per sales
professional could increase to $3.0–4.0 million; this would indicate that all other things held constant,
SG&A could decrease to 22% of revenue on an annualized basis. If Caminus does increase its sales
utilization to the $3.0–4.0 million per quota salesman, we estimate the leverage is significant in terms
of EPS; all other things held constant, our 2002 EPS estimate would increase to $1.17 from $0.77 per
share, while our 2003 EPS estimate would increase to $2.17 from $1.05 per share.
We estimate Q4:01 SG&A of $7.3 million, which totals $27.4 million in 2001. We estimate SG&A of
$29.5 million in 2002, followed by $43.1 million in 2003 and $69.6 million in 2005. We expect the
main component of SG&A costs in the future will be compensation of additional software sales
professionals and commission expenses for existing salesmen.
Research and Development Expenses
We estimate Caminus will spend $12 million, or 17% of sales, on research and development (R&D)
in 2001, followed by $15 million in 2002 and $19 million in 2003, or 15% of sales. We expect R&D to
decline thereafter as a percentage of sales to 13% by 2005, or $27 million. At year-end 2000,
Caminus had spent $12 million on R&D since 1998; to date, the company has spent a cumulative
$21 million on R&D. At the end of Q3:01, Caminus had an R&D team consisting of approximately 95
engineers and technicians.
To some extent, the level of R&D is dependent on additions in head count (salaries for software
developers are included in R&D), although the majority of R&D spending is related to the development
of new software modules. The initial phase of R&D design, during which the majority of development
work is done, is expensed until functional feasibility is achieved. The second phase, which is less
material to commercial production, could be capitalized up until the product is ready for introduction
and then amortized after product introduction over a period of three to five years, although the
company expenses all R&D as incurred.
114
Depreciation and the Amortization of Goodwill
Caminus’s depreciation is mostly tied to its capital expenditures on servers and internal operating
systems, as well as leasehold improvements. Depreciation of fixed assets is on a straight-line basis
over the life of the asset or, in the case of leasehold improvements, over the life of the lease.
Amortization is largely composed of goodwill from acquisitions. Acquired technology is amortized on
a straight-line basis over the estimated product life, which is generally three years, or as a function of
the ratio of current revenue to total projected product revenue, whichever is greater.
Amortization in Q1:01 was $3.7 million and decreased to $3.2 million in Q2:01 and to $3.0 million in
Q3:01, as the amortization schedule on an acquisition was completed at the end of the first quarter.
We estimate fourth quarter amortization of $2.6 million. With the implementation of new accounting
standard FASB 142 regarding the amortization of goodwill attributable to acquisitions, the bulk of
amortization will mostly disappear from the income statement in 2002 and be recorded solely on the
balance sheet. In addition, management reviews goodwill and other intangible assets on a quarterly
basis to determine if the carrying amount of an asset is recoverable.
We estimate that total goodwill to date is $42.2 million, composed of $6.2 million from Caminus, $8.6
million from DC Systems, $12.0 million from Nucleus and $15.4 million from Zai*Net (Caminus was
valued at $6.6 million, DC Systems for $13.5 million, Nucleus for $17.6 million and Zai*Net for $25
million). If the accounting rules regarding expensing amortization through the income statement were
to remain intact, we estimate that amortization of goodwill in 2002 would be $11.0 million, followed
by $7.0 million in 2003, $4.0 million in 2004 and $1.0 million in 2005. In addition, the company will
record slightly more than $500,000 a year in non-cash expense over four years, which represents
the amortized portion of deferred compensation that is the result of additional shares added to the
stock incentive plan in the second quarter. We await guidance on the amount of goodwill that will be
assigned to the acquisition of Altra’s software business.
Operating Income
We estimate that Caminus will turn operating income positive in 2002. Longer term, we estimate
operating margin should reach 21% or higher, beginning with the 2004 period, based on the reduction
of R&D as a percentage of sales in 2003 and some expansion in gross margin in 2004 and 2005. We
currently estimate operating loss of $3 million in 2001, followed by operating income of $18 million in
2002 and $21 million in 2003. Our estimate for operating income in 2005 is $49 million. Combined with
our $20 million estimate of depreciation in 2005, our 2005 EBITDA estimate is $70 million.
Cash and Free Cash Flow
Caminus had a current cash and short-term investments balance of $33 million at the end of Q3:01,
an increase of $4 million in the nine months since year-end 2000. This translates to $2.06 per share.
We estimate that the company generated $3 million of free cash in the third quarter. We estimate a
cash burn of $12 million in the fourth quarter. We expect that Caminus will generate free cash flow of
$6 million in 2002, followed by $5 million in 2003 and $23 million in 2005.
The Current Account
We estimate that Caminus will have working capital of $62 million at year-end 2001, the majority of
which is a function of the length of its receivables cycle, which hovers in the 85- to 95-day range.
The company carries no inventory, as all software that has been built has been expensed; the
product is then burned onto a CD or delivered electronically. In the case of acquired technologies, it
shows up on the balance sheet as acquired R&D, which is then written off over three to five years.
Accrued liabilities generally represent accrued bonuses, which are paid in the first and third quarters.
As a result, accrued liabilities (bonuses not yet paid) accounts are higher in the second and fourth
quarters than in the first and third quarters. Unrealized gains and losses on securities classified as
available-for-sale are carried as a separate component of shareholders’ equity.
Accounts Receivable. Caminus generally records revenue for software licenses, although cash is
received according to the following schedule: 50% due upon installation, 25% due within 60–90 days
and 25% due in 120–150 days. The company has never had a customer fail to complete its cash
payments. In addition, the seasonality of sales has a likewise effect on receivables. With a greater
proportion of revenue reported in the fourth quarter than in the first quarter, the level of DSO can be
expected to be higher in the first quarter than it is in the fourth, especially if fourth-quarter sales are
to large customers.
We forecast DSO of 88 in Q4:01 and a long-term average in the 85- to 90-day range. The company
added a professional in the first quarter to focus solely on the collection of receivables, which we
expect will have a meaningful impact on the cash conversion cycle by 2002. Unbilled receivables arise
when revenues are recognized using the percentage-of-completion method. These receivables are not
contractually billable until specified dates or milestones are achieved, usually within one year. We
estimate that unbilled receivables represented $2.0 million of the $14.7 million at year-end 2000, or
13.6%. We expect this percentage will trend closer to less than 10% over the next several years as
more of the company’s revenue is generated by standardized software products.
Fixed Assets and Capital Expenditures
At year-end 2000, net property, plant and equipment (PP&E) was $5 million; at the end of Q3:01, the
carried balance of net PP&E was $6 million. The majority of fixed assets are composed of computer
hardware, software and office equipment. Capital expenditures in 2000 were higher than normal
because of the company’s relocation to new office space; we expect a normal level of annual capital
expenditures is approximately $1.5 million.
Capital Structure
Caminus’s capital structure is straightforward and fairly typical of energy technology capital
structures: all equity, no debt. The equity is currently 44% owned by insiders, with Oaktree, the
largest shareholder, standing at 25%.
Earnings Review and EPS Outlook
We expect Caminus will earn pro forma net loss of $4.5 million in 2001, followed by $11.7 million in
2002, $16.6 million in 2003 and $31.3 million in 2005. On a per-share basis, this translates to cash
EPS of $0.53 in 2001, $0.77 in 2002, $1.05 in 2003 and $1.89 in 2005. The company reports net
income on a pro forma basis, which adds back the amortization of goodwill attributable to
acquisitions to pretax income and non-cash compensation and then taxes that number at 37.5%.
Our quarterly pro forma net income estimate for Q4:01 is $4.4 million, or $0.27 per share.
Valuation
We have valued Caminus on the basis of several ratios compared with software companies with
similar attributes to Caminus. We have also utilized a discounted cash flow analysis. Our current
valuation of Caminus translates to an expected 12-month share price of $28 per share, or the
potential for an almost 75% increase from the current price levels. Therefore, we rate shares of
Caminus as a Buy.
Software Valuation
There are currently no other publicly traded companies that develop trading and risk-analytics
software for the energy industry. As a result, we have broadened our comparable universe to include
two segments of the software industry: analytics and business intelligence software, and financial
116
analytics software. We believe this is appropriate for several reasons. First, Caminus is in both of
these businesses, providing analytics and intelligence through its trading analytics platform;
database management through its basic trading platform; and advanced analytics through its plug-in
modules. Second, we believe a broader universe illustrates a more accurate picture of what
investors are paying for software companies across the industry and not just within a particular
segment. We have summarized several financial ratios and estimates in Figure 39.
Figure 39: CAMINUS CORPORATION—VALUATION ($ in millions, except per share data)
Company
Ticker
Analytics/Business Intelligence
Business Objects
BOBJ
Cognos
COGN
Informatica
INFA
Cash
 P/E
 Earnings Growth
EPS


2001E
2002E
2001E
2002E
2001E
2002E
Price
11/9/01
Shares
Out
Mkt Cap
$30.94
17.05
11.18
60.8
88.2
77.3
$1,881.7
1,503.9
864.2
$0.66
0.42
(0.07)
$0.77
0.68
0.08
46.9x
40.6
NM
40.2x
25.1
139.8
10%
(40)%
NM
17%
62%
NM
4.7
NM
NM
2.4
0.4
NM
—
—
1,416.6
—
—
43.5
68.3
NM
39%
4.7
1.4
47.47
20.43
42.33
26.61
22.9
35.0
33.6
34.2
1,086.8
715.5
1,423.1
910.2
1.76
0.48
0.88
1.00
2.12
0.70
1.31
1.18
27.0
42.6
48.1
26.6
22.4
29.2
32.3
22.6
16%
NM
19%
11%
20%
46%
49%
18%
1.6
NM
2.5
2.4
1.1
0.6
0.7
1.3
PEG


2001E 2002E
Average
—
Analytics Software
Barra
HNC Software
Advent Software
FactSet Research
BARZ
HNCS
ADVS
FDS
Average
—
—
—
1,033.9
—
—
36.1
26.6
NM
33%
2.2
0.9
Software Average
—
—
—
1,225.2
—
—
39.8
47.5
NM
36%
3.4
1.2
Caminus Current
CAMZ at Comps.
CAMZ
CAMZ
15.85
36.46
15.9
15.9
252.2
580.1
0.53
0.53
0.77
0.77
29.9
39.8
20.6
47.5
NM
NM
44%
44%
NM
3.4
0.5
0.9
Source: Bridge, company reports, First Call and Robertson Stephens estimates.
Taking the ratios implied by the market for these three segments combined, the market is currently
paying approximately 41x estimated 2002 EPS, based on an average 2002 EPS growth rate of 36%.
We believe that Caminus can grow its earnings at an annual rate of approximately 35% per year for
the next several years. Based on our 2002 EPS estimate of $0.77, the comparable universe multiple
translates to $32 per Caminus share.
We have also valued Caminus on a discounted cash flow basis and have assumed a 9x terminal
EBITDA multiple and a 15% discount rate. We have based our terminal multiple on the low range of
historical EBITDA multiples paid for the software companies in our comparable universe. Our
discounted cash flow model returns a value of $28 per Caminus share.
pricing model (CAPM), the formula for which is the sum of the risk-free rate and a risk-adjusted equity
market premium. The current risk-free rate based on ten-year government bond is 5.23% (closing bid
October 30, 2001, Bloomberg). The historical geometric risk premium for the U.S. market between
1928–1999 is calculated at 6.05% by the Federal Reserve. There is not enough data to calculate a
beta for Caminus itself. To be conservative, we have used an Internet stock average beta of 1.7, as
calculated by Value Line. This results in a discount rate of approximately 15%.
Figure 40: CAMINUS CORPORATION—VALUATION ($ in millions, except per share data)
FY December
Discounted Cash Flow Method
2001E
2002E
2003E
2004E
2005E
EBIT
Depreciation & Amortization
(3.2)
13.6
17.7
9.4
25.6
12.8
35.2
16.7
49.0
20.9
Total EBITDA
10.4
27.1
38.4
51.9
69.9
—
(3.5)
(12.7)
—
(11.0)
(2.4)
—
(16.0)
(6.2)
—
(16.0)
(7.9)
—
(20.0)
(7.0)
Free Cash Flow
(5.8)
13.7
16.2
28.1
42.9
Cash
Short-Term Debt, Current LTD
Long-Term Debt
44.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total Other Assets & Liabilities
44.8
—
—
—
—
14.0%
55.3
14.5%
54.3
15.0%
53.4
15.5%
52.4
16.0%
51.5
NPV of EBITDA
8.0x EBITDA
8.5x EBITDA
9.0x EBITDA
9.5x EBITDA
10.0x EBITDA
320.4
340.5
360.5
380.5
400.6
314.5
334.2
353.9
373.5
393.2
308.8
328.1
347.4
366.7
386.0
303.1
322.1
341.0
360.0
378.9
297.6
316.2
334.8
353.4
372.0
Discounted Equity Value
8.0x EBITDA
8.5x EBITDA
9.0x EBITDA
9.5x EBITDA
10.0x EBITDA
420.6
440.6
460.6
480.7
500.7
413.7
433.4
453.0
472.7
492.3
407.0
426.3
445.6
464.9
484.2
400.4
419.3
438.3
457.2
476.2
394.0
412.6
431.2
449.8
468.4
Discounted EV/Share
8.0x EBITDA
8.5x EBITDA
9.0x EBITDA
9.5x EBITDA
10.0x EBITDA
26.43
27.69
28.95
30.21
31.47
26.00
27.24
28.47
29.71
30.94
25.58
26.79
28.00
29.21
30.43
25.16
26.35
27.54
28.73
29.93
24.76
25.93
27.10
28.27
29.43
Cash Taxes
∆ Working Capital, Excluding Cash
Discount Rate
NPV of Unlevered Free Cash
Shares Outstanding
15.9
Source: Robertson Stephens estimates.
Valuation Summary
Based on the combination of our valuation parameters, we believe that shares of Caminus are currently
undervalued and would recommend investors buy shares at current prices. Our current price target is
$28 per share, which represents potential upside of almost 75% from the current price levels.
118
Investment Risks
The projected market does not materialize. Although we believe that the potential number of
customers that can add value to their operations through the use of Caminus’ software is substantial,
the overall market for the company’s products may be limited to large energy concerns that have
sophisticated trading requirements. However, we believe that the company’s efforts to expand its
product line to incorporate the physical asset component of the energy chain as well as to reach the
mid-size and smaller customer market give it a wider potential customer base.
The overall economic slowdown curtails energy company spending. The energy industry year
to date has continued to spend on both infrastructure and systems, and is in effect on a different IT
cycle than the majority of the remainder of the economy. However, there is the potential that the
overall slowdown in the economy reaches the energy industry and affects spending on all systems.
A larger firm could enter the business or acquire a competitor. Although Caminus is currently
the big fish in the emerging area of energy trading software, there is the potential that a larger
software or consulting company could enter the business. In particular, the large consulting firms
may attempt to create their own software systems or acquire one of Caminus’s competitors and
push it through their distribution channel. While we believe there are a limited number of potential
acquisition candidates, they do exist and they could be used as loss leaders to take market share
from Caminus. This would ultimately reduce the company’s gross margin potential and could have a
damaging effect on long-term earnings growth.
Governments or regulators could move to arrest the development of wholesale power and
gas trading. Despite numerous successful deregulated energy frameworks around the world, the
general incompetence of regulators and politicians in California with regard to the state’s attempt at
deregulating its power industry could retard the development of deregulated markets in other states
and countries. Clearly, the demand for Caminus’ software is dependent on the continued
deregulation of energy commodity markets worldwide. If public or political perception turned against
this trend, Caminus’s long-term growth prospects could be compromised.
Figure 41: CAMINUS CORPORATION—INCOME STATEMENT EXCLUDING ALTRA
($ in millions, except per share data)
FY December
1999
2000
2001E
Net Sales
$26.9
$51.7
$71.3
Cost of Goods Sold
(8.4)
(15.3)
(22.2)
Gross Profit
18.5
36.4
49.1
Gross Margin
68.8%
70.4%
68.9%
SG&A
(12.8)
(20.7)
(27.4)
R&D
(3.9)
(6.6)
(12.0)
Amort. of Intangible Assets
(8.6)
(11.7)
(13.0)
Other Operating Expenses
(1.0)
(12.8)
—
(26.3)
(51.9)
(52.3)
EBIT
(7.7)
(15.5)
(3.2)
Operating Margin
(28.7)%
(29.9)%
(4.5)%
Interest Income
0.1
2.3
2.1
Interest Expense
(0.3)
(0.1)
—
Equity in Earnings
—
—
—
Other Income
0.0
0.0
0.0
EBT
(8.0)
(13.2)
(1.1)
Income Taxes
(0.6)
(2.3)
(3.4)
Tax Rate
Minority Interest
—
—
—
Dividends on Preferred Stock
—
—
Extra. Items
—
—
—
Net Income
(8.6)
(15.5)
(4.5)
Earnings Per Share:
Operating EPS
$(1.01)
$(1.04)
$(0.28)
—
1.63
0.83
—
0.49
0.53
8.5
14.9
15.9
EBITDA
1.3
(2.7)
10.4
Growth Rates
Sales
179.6%
92.2%
37.8%
Cost of Goods Sold
79.0%
82.7%
44.7%
(23.7)%
99.8%
(79.0)%
EBIT
Net Income
Diluted EPS
Cash EPS
—
—
9.9%
Ratio Analysis
Gross Margin
68.8%
70.4%
68.9%
SG&A/Sales
47.5%
40.0%
38.4%
Engineering/Sales
14.6%
12.8%
16.8%
97.6%
100.3%
73.5%
(28.7)%
(29.9)%
(4.5)%
Operating Margin
EBT Margin
(29.6)%
(25.5)%
(1.6)%
Tax Rate
(32.0)%
(30.0)%
(6.3)%
Net Margin
Last 12 Months (LTM) Reported Return on Equity Analysis/Sales Basis
(28.7)%
(29.9)%
(4.5)%
LTM Sales/Assets
0.65
0.50
0.58
Assets/Equity
1.61
1.19
1.44
LTM Interest Burden
102.9%
85.4%
35.2%
LTM Tax Burden
108.1%
117.5%
394.0%
(33.5)%
(17.7)%
(5.3)%
(33.5)%
(17.7)%
(5.3)%
(20.8)%
(14.9)%
(3.6)%
Last 12 Months (LTM) Operating Return on Equity Analysis/Sales Basis
—
—
13.4%
—
—
0.58
LTM Sales/Assets
—
—
1.44
Assets/Equity
LTM Interest Burden
—
—
121.5%
—
—
394.0%
LTM Tax Burden
—
—
369.6%
—
—
6.7%
—
—
6.7%
120
2002E
$93.9
(28.5)
65.4
69.7%
(29.5)
(15.4)
(2.8)
—
(47.7)
17.7
18.9%
1.0
—
—
—
18.7
(7.0)
37.5%
—
2003E
$128.4
(38.6)
89.8
69.9%
(43.1)
(18.9)
(2.2)
—
(64.2)
25.6
19.9%
1.0
—
—
—
26.6
(10.0)
37.5%
—
2004E
$166.7
(49.6)
117.0
70.2%
(58.6)
(22.3)
(0.9)
—
(81.8)
35.2
21.1%
1.0
—
—
—
36.2
(13.6)
37.5%
—
2005E
$208.9
(62.6)
146.2
70.0%
(69.6)
(27.2)
(0.4)
—
(97.2)
49.0
23.5%
1.0
—
—
—
50.0
(18.8)
37.5%
—
—
11.7
—
16.6
—
22.7
—
31.3
$0.72
0.04
0.77
16.2
27.1
$1.02
0.03
1.05
16.3
38.4
$1.38
0.03
1.41
16.5
51.9
$1.88
0.01
1.89
16.6
69.9
31.7%
28.4%
(647.5)%
43.8%
36.8%
35.6%
44.4%
42.0%
40.9%
37.4%
29.8%
28.6%
37.6%
36.2%
34.7%
33.5%
25.3%
26.2%
39.1%
38.0%
36.7%
34.5%
69.7%
31.4%
16.4%
50.8%
18.9%
20.0%
37.5%
12.5%
69.9%
33.6%
14.7%
50.0%
19.9%
20.7%
37.5%
13.0%
70.2%
35.2%
13.4%
49.1%
21.1%
21.7%
37.5%
13.6%
70.0%
33.3%
13.0%
46.5%
23.5%
24.0%
37.5%
15.0%
18.9%
0.68
1.42
105.6%
62.5%
12.0%
12.0%
8.5%
19.9%
0.85
1.32
103.9%
62.5%
14.6%
14.6%
11.1%
21.1%
0.91
1.34
102.8%
62.5%
16.6%
16.6%
12.4%
23.5%
0.93
1.34
102.0%
62.5%
18.6%
18.6%
13.9%
21.9%
0.68
1.42
104.9%
62.5%
13.8%
9.1%
9.1%
21.7%
0.85
1.32
103.6%
62.5%
15.8%
10.9%
10.9%
21.7%
0.91
1.34
102.8%
62.5%
17.0%
11.5%
11.5%
23.7%
0.93
1.34
102.0%
62.5%
18.8%
12.9%
12.9%
Figure 42: CAMINUS CORPORATION—INCOME STATEMENT INCLUDING ALTRA
($ in millions, except per share data)
FY December
1999
2000
2001E
2002E
2003E
2004E
2005E
Net Sales
$26.9
$51.7
$75.7
$129.1
$173.9
$225.8
$285.7
Cost of Goods Sold
Gross Profit
Gross Margin
(8.4)
18.5
68.8%
(15.3)
36.4
70.4%
(25.1)
50.6
66.8%
(39.0)
90.1
69.8%
(52.5)
121.4
69.8%
(68.0)
157.9
69.9%
(86.9)
198.8
69.6%
SG&A
R&D
(12.8)
(3.9)
(8.6)
(1.0)
(26.3)
(20.7)
(6.6)
(11.7)
(12.8)
(51.9)
(28.8)
(12.9)
(13.0)
—
(54.7)
(41.0)
(20.6)
(4.8)
—
(66.5)
(60.9)
(26.1)
(4.2)
—
(91.1)
(79.0)
(33.9)
(2.9)
—
(115.8)
(97.2)
(40.6)
(2.4)
—
(140.1)
(7.7)
(28.7)%
(15.5)
(29.9)%
(4.1)
(5.5)%
23.6
18.3%
30.2
17.4%
42.1
18.6%
58.7
20.5%
Interest Income
Interest Expense
Equity in Earnings
Other Income
0.1
(0.3)
—
0.0
2.3
(0.1)
—
0.0
2.1
—
—
0.0
1.0
(2.1)
—
—
1.0
—
—
—
1.0
—
—
—
1.0
—
—
—
EBT
Income Taxes
Tax Rate
(8.0)
(0.6)
(13.2)
(2.3)
(2.0)
(3.0)
22.5
(8.5)
37.5%
31.2
(11.7)
37.5%
43.1
(16.1)
37.5%
59.7
(22.4)
37.5%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8.6)
(15.5)
(5.1)
14.1
19.5
26.9
37.3
Operating EPS
$(1.01)
—
—
$(1.04)
1.63
0.49
$(0.31)
0.83
0.50
$0.77
0.07
0.83
$1.05
0.06
1.11
$1.44
0.11
1.54
$1.97
0.09
2.06
8.5
14.9
16.2
18.4
18.6
18.8
18.9
EBITDA
1.3
(2.7)
10.1
36.6
47.6
64.6
87.3
Sales
Cost of Goods Sold
EBIT
Net Income
179.6%
79.0%
(23.7)%
(17.0)%
92.2%
82.7%
99.8%
80.2%
46.3%
63.8%
(73.2)%
(67.4)%
70.7%
55.6%
(671.1)%
(378.3)%
34.6%
34.4%
27.9%
38.6%
29.9%
29.5%
39.0%
37.8%
26.5%
27.9%
39.6%
38.7%
Diluted EPS
Cash EPS
(28.2)%
—
2.8%
—
(70.0)%
2.9%
(345.1)%
66.2%
37.1%
33.1%
36.7%
39.5%
37.4%
33.5%
68.8%
47.5%
14.6%
97.6%
(28.7)%
(29.6)%
(8.1)%
(32.0)%
70.4%
40.0%
12.8%
100.3%
(29.9)%
(25.5)%
(17.5)%
(30.0)%
66.8%
38.1%
17.1%
72.3%
(5.5)%
(2.7)%
(147.9)%
(6.7)%
69.8%
31.8%
16.0%
51.5%
18.3%
17.5%
37.5%
10.9%
69.8%
35.0%
15.0%
52.4%
17.4%
18.0%
37.5%
11.2%
69.9%
35.0%
15.0%
51.3%
18.6%
19.1%
37.5%
11.9%
69.6%
34.0%
14.2%
49.0%
20.5%
20.9%
37.5%
13.1%
EBIT
Operating Margin
Minority Interest
Extra. Items
Net Income
Earnings Per Share:
Growth Rates
Ratio Analysis
Gross Margin
SG&A/Sales
Engineering/Sales
Operating Margin
EBT Margin
Tax Rate
Net Margin
Last 12 Months (LTM) Reported Return on Equity Analysis/Sales Basis
LTM Sales/Assets
Assets/Equity
LTM Interest Burden
LTM Tax Burden
(28.7)%
0.65
1.61
102.9%
108.1%
(29.9)%
0.50
1.19
85.4%
117.5%
(5.5)%
0.58
1.53
49.3%
247.9%
18.3%
0.88
1.49
95.3%
62.5%
17.4%
1.04
1.41
103.3%
62.5%
18.6%
1.08
1.43
102.4%
62.5%
20.5%
1.09
1.43
101.7%
62.5%
(33.5)%
(33.5)%
(20.8)%
(17.7)%
(17.7)%
(14.9)%
(6.0)%
(6.0)%
(3.9)%
14.2%
14.2%
9.6%
16.5%
16.5%
11.6%
18.5%
18.5%
12.9%
20.4%
20.4%
14.3%
Last 12 Months (LTM) Operating Return on Equity Analysis/Sales Basis
LTM Sales/Assets
Assets/Equity
LTM Interest Burden
LTM Tax Burden
—
—
—
—
—
—
—
—
—
—
11.5%
0.58
1.53
123.7%
247.9%
22.0%
0.88
1.49
96.1%
62.5%
19.8%
1.04
1.41
102.9%
62.5%
19.9%
1.08
1.43
102.2%
62.5%
21.4%
1.09
1.43
101.6%
62.5%
—
—
—
—
—
—
343.3%
6.0%
6.0%
17.2%
11.1%
11.1%
18.7%
12.5%
12.5%
19.7%
12.9%
12.9%
21.2%
14.0%
14.0%
Figure 43: CAMINUS CORPORATION—BALANCE SHEET ($ in millions)
FY December
1999
2000
2001E
2002E
2003E
2004E
2005E
$(4.8)
0.7
7.4
—
2.5
0.4
$33.6
29.3
16.3
—
3.0
1.3
$61.9
44.8
28.6
—
2.3
2.1
$70.7
51.2
32.8
—
3.1
4.3
$82.1
56.4
42.9
—
4.1
6.1
$102.8
69.3
55.4
—
5.3
8.3
$132.5
91.9
67.2
—
6.6
10.5
11.0
49.9
77.9
91.4
109.4
138.3
176.2
3.1
1.4
5.0
4.2
2.1
—
—
1.7
8.1
2.4
4.1
—
—
2.7
5.0
3.1
5.2
—
—
3.6
6.6
4.0
6.4
—
—
4.7
8.8
5.3
8.5
—
—
6.1
11.3
6.9
11.1
—
—
7.5
14.1
8.5
13.6
—
15.7
16.3
16.0
20.7
27.3
35.4
43.7
—
—
0.0%
0.0%
0.0%
1.2
79
95.7%
70.9%
0.0%
1.0
91
105.7%
41.7%
0.0%
1.0
90
98.8%
45.0%
0.0%
1.1
87
97.8%
44.6%
0.0%
1.1
86
96.8%
44.1%
0.0%
1.1
86
95.8%
43.7%
0.0%
—
—
—
1.5
2.5
—
(8.3)
5.6
—
(10.4)
2.4
—
(13.6)
2.7
—
(17.5)
4.0
—
(21.3)
4.2
—
Long-Term Assets
Net PP&E
Investments in Long-Term Securities
Acquired Technology
Other Assets
1.6
21.8
—
3.1
4.0
4.9
25.2
12.4
4.4
7.3
3.9
15.1
15.0
2.8
8.9
5.5
12.3
15.0
2.8
11.0
8.7
—
15.0
2.8
14.5
8.0
—
15.0
2.8
19.0
7.1
—
15.0
2.8
23.3
Long-Term Assets
30.5
54.2
45.6
46.6
41.0
44.8
48.2
41.5
73.5%
1.6%
104.0
52.1%
28.1%
123.5
36.9%
36.3%
138.0
33.8%
37.1%
150.4
27.2%
37.5%
183.0
24.5%
37.8%
224.3
21.5%
41.0%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
52.7
(19.0)
(2.9)
(5.1)
0.2
127.1
(34.4)
—
(5.0)
0.2
130.2
(39.2)
—
(5.6)
0.2
130.2
(27.4)
—
(5.6)
0.2
130.2
(10.8)
—
(5.6)
0.2
130.2
11.8
—
(5.6)
0.2
130.2
43.1
—
(5.6)
25.7
87.8
85.6
97.3
114.0
136.6
167.9
25.7
0.0%
161.1%
100.0%
87.8
0.0%
118.5%
100.0%
85.6
0.0%
144.3%
100.0%
97.3
0.0%
141.8%
100.0%
114.0
0.0%
132.0%
100.0%
136.6
0.0%
134.0%
100.0%
167.9
0.0%
133.6%
100.0%
Other Liabilities
—
—
—
—
—
21.9
20.0
—
9.1
—
11.0
—
12.8
—
—
—
21.9
20.0
9.1
11.0
12.8
41.5
—
104.0
—
123.5
—
138.0
—
150.4
—
183.0
—
224.3
—
30.2%
59.2%
50.2%
64.7%
59.7%
161.1%
47.1%
155.4%
38.5%
82.4%
50.1%
193.5%
38.5%
82.4%
50.1%
193.5%
38.5%
82.4%
50.1%
193.5%
38.5%
82.4%
50.1%
193.5%
38.5%
82.4%
50.1%
193.5%
Working Capital
Inventories
Deferred Taxes
Current Assets
Short-Term Debt
Accounts Payable
Accrued Expenses
Deferred Revenue
Current Liabilities
A/R Turnover
DSO
A/R as % of Sales
A/P as % of COGS
A/R Gap
A/P Gap
Inventory Gap
Total Assets
Cash/Total Assets
Capital Structure
Long-Term Debt
Preferreds
Common Stock
Retained Earnings
Subsription Receivable
Total Equity
Total Capital
Total Debt/Equity
Assets/Equity
Balance
122
Figure 44: CAMINUS CORPORATION—NON-CUMULATIVE
STATEMENT OF CASH FLOWS ($ in millions)
FY December
Operating Sources:
Net Income
Depreciation
Other
1999
2000
2001E
2002E
2003E
2004E
2005E
$(8.6)
9.0
—
$(15.5)
12.7
—
$(4.7)
13.6
—
$11.7
9.4
—
$16.6
12.8
—
$22.7
16.7
—
$31.3
20.9
—
0.4
(2.8)
9.0
21.1
29.5
39.3
52.1
—
(4.0)
(0.9)
0.7
(1.2)
(0.0)
(9.9)
—
(8.2)
0.2
4.6
(4.3)
(0.2)
(40.4)
—
(12.4)
(1.5)
(0.5)
(3.5)
(0.0)
13.6
—
(4.2)
(2.9)
3.4
(11.0)
—
—
—
(10.1)
(2.8)
4.5
(16.0)
—
—
—
(12.6)
(3.4)
5.5
(16.0)
—
—
—
(11.8)
(3.5)
5.8
(20.0)
—
—
(15.3)
(48.4)
(4.2)
(14.7)
(24.3)
(26.5)
(29.5)
Operating Cash Flow
(14.9)
(51.1)
4.8
6.4
5.2
12.9
22.7
Short-Term Debt
Long-Term Debt
Sale of Stock
Repurchase of Stock
Other
Dividends
3.1
—
12.3
(2.3)
(0.3)
—
(3.1)
—
59.0
(2.2)
13.6
—
—
—
0.5
—
2.7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12.8
67.4
3.1
—
—
—
—
Free Cash Flow
2.8
(2.1)
0.7
0.7
16.2
16.9
16.9
7.9
24.8
24.8
6.4
31.2
31.2
5.2
36.4
36.4
12.9
49.3
49.3
22.7
71.9
Operating Uses:
Inventories
Receivables
Exchange Loss
Other
November 12, 2001
Capstone Turbine Corporation
(CPST $4.80)
Change in . . .
Rating:
EPS 2001E:
EPS 2002E:
Rev 2001E (MM):
Rev 2002E (MM):
Yes/No
No
No
No
No
No
No
Market Cap (MM):
Was
Is
MP
$(0.56)
$(0.51)
$30.5
$47.6
NA
$57–3
77.0
$368.3
2,420
$3.27
NM
FY December
Operating EPS:
1Q
2Q
3Q
4Q
Year
P/E
Revenue (MM):
1Q
2Q
3Q
4Q
Year
Eqty Mkt Val/ Rev
2000
2001 E
$(36.49)
$(14.32)
$(0.11)
$(0.08)
$(12.82)
—
$(0.12) A
$(0.13) A
$(0.16) A
$(0.14)
$(0.56)
NM
2000
$3.7
$6.1
$6.2
$7.1
$23.2
—
2001
$8.9
$13.6
$3.3
$4.7
$30.5
12.1x
E
A
A
A
2002 E
$(0.13)
$(0.13)
$(0.13)
$(0.12)
$(0.51)
NM
2002 E
$5.8
$8.5
$14.1
$19.2
$47.6
9.2x
Investment Conclusion: We believe the company is well positioned to capitalize on future demand
for low-emission distributed generation, particularly with its future higher-powered units. However,
given Capstone’s recent weak sales trend and management’s lack of visibility in 2002, we expect the
stock will tread water in the absence of any large order announcements or further clarification from
management regarding its projected sales.
•
There is increasing demand for generation placed close to the load. The strain on
electric power grid systems stemming from increased demand and complex load profiles
has created a need for high-efficiency base-load and backup generation that is distributed
close to the use site.
•
Capstone’s products are in the market, and we believe its future higher-powered
units will address a broad market segment. Capstone has been producing commercial
units for the past 18–24 months. We believe the company’s future 125- to 250-kilowatt
model, expected in 2003, will address a broader market segment than its existing 30- and
60-kW units while increasing overall ASPs and gross margins.
•
Capstone’s capability to run on a variety of fuels increases its potential market
reach, in our view.
•
Capstone’s units can be operated and monitored via network connections. This
increases overall reliability and improves the customer’s ability to arbitrage power produced
with the units against power produced from the power grid, potentially lowering overall
power costs to the user.
•
Expect the stock to tread water until better visibility for near-term and 2002 sales.
Recent weak relative sales in the third quarter, combined with full-year sales well below
previous expectations, limits near-term upside in the stock, in our opinion. Although the
market opportunity may unfold slower than thought for Capstone, we believe the company
is in an excellent position to capitalize on the demand for low-emissions distributed
generation, particularly with its future higher-powered units.
124
Company Summary
Capstone designs and manufactures microturbines, which are used as small- and mid-size power
generators in a low-emission and high-reliability environment. Capstone also develops microturbines
for use in automotive applications. The company is headquartered in Chatsworth, California, and has
additional facilities in Van Nuys, California. Capstone currently has approximately 250 employees,
and we estimate 2001 revenues of $30.5 million. The company sells its products in a variety of
markets across North America, Western Europe and Japan. Capstone expects that more than 60%
of its eventual sales will be outside North America.
The company currently offers two main products: a 30-kW turbine and a 60-kW turbine, for which
prices average $28,000 and $49,000, respectively. The units can also be combined to create
packages of more than 1.5 megawatts. In addition, Capstone expects to introduce a 125–250-kW
unit in 2003. The company’s initial public offering was in June 2000, from which Capstone raised
$135 million, net. At year-end 2000, the company had 35 U.S. patents and 2 international patents.
The majority of delivered power worldwide is produced with a centralized production and distribution
system. This system produces power in bulk at large power plants and then distributes the electrons
across long transmission and distribution wires to be consumed as needed by businesses and
individuals. The main advantage to this system is that since power is produced in bulk, provided
there is a plentiful feedstock such as coal, it is cheap. The disadvantages to this system are that the
distribution process is expensive and regulated, and relatively unreliable. Worse yet, everyone feeds
at the same trough; mismatches between load demand and load supply create sags and surges in
the power network that disrupt the operation of microprocessor-controlled equipment.
The disadvantages to the centralized power system are the market opportunities for Capstone,
which sells microturbines that are used to provide distributed power. The initial driver of Capstone’s
market opportunity is the turbine’s low emissions and a relatively attractive price. But more important
still is the fact that power generated close to the load is inherently more reliable than power taken
from the grid. In our opinion, this factor gives Capstone its broadest market opportunity. This
requires a close matching of supply with the load requirements of the potential customer, and how
much it will pay for power reliability. We believe that amount is high relative to the price paid for the
unreliable power from the grid. EPRI estimates that in 2000 U.S. businesses lost $46 billion due to
power quality problems. Yet spending on backup power systems in the same year was
approximately $11 billion. The gap between these two figures is the margin that can be made up in
sales of high-quality power, in our opinion.
years, demand for UPS equipment and backup generators surged. The construction of new data
centers alone was expected to require 2,000 MW of power over the next several years. Not to
mention the power quality requirements of all of the other support staff—central switching offices,
remote terminals, cell towers—necessary to create a functional network. Today, it is clear that a lot
of those data centers are not going to get built. However, what is often overlooked is the fact that there
are hundreds of thousands of data centers already in place. It is just that they are embedded inside the
rollers in a steel mill or the ovens in a bakery. In our opinion, the demand for high-quality power
comes as much from traditional companies with semiconductor-driven process control equipment as
it will from the server and storage markets. According to an EPRI study, 64% of the total losses from
power quality and reliability problems occurred in the fabrication and essential services segments of
the economy.
We believe that the market opportunity for Capstone begins with the resource recovery market,
which is global, and the micro-cogeneration market, which is focused in Japan and Western Europe.
Resource recovery applications include powering oil and gas exploration operations, which can use
natural gas that would otherwise be flared to fuel the microturbine, and using methane gas from
landfills and waste treatment facilities to fuel the microturbine and export power back to the grid.
Micro-cogeneration is achieved by using the heat exhaust from the microturbine for space heating,
hot water heating and air-conditioning (a big consumer of electricity).
If Capstone is successful in pushing through high manufacturing volumes and further reducing costs
to the point that the total cost to produce power is comparable with the grid, then we believe
Capstone can aggressively pursue the $11 billion power quality market. Microturbines are well suited
for power quality applications because the load can be closely matched by adding incremental
turbines and because of their ability to load follow, which enables the turbine to respond
proportionately to the amount of power required by the devices connected to it.
Capstone’s Business Model
Capstone’s business model is to manufacture microturbines in several power output ranges that
feature high-reliability, high-efficiency and ultra-low emissions, and are sold by a variety of
distributors, depending on the target market segment. Because of the turbine’s flexibility in both fuel
input (Capstone’s turbines can run on low- and high-pressure natural gas, low-BTU gas, sour gas,
gaseous propane, compressed natural gas, diesel and kerosene) and power output (turbines are
available with power outputs of 30- and 60 kW, which can be combined to produce more than 1.5
MW), Capstone can address multiple markets without significant design or manufacturing changes.
Capstone’s model also aims to reduce maintenance costs through continuous remote monitoring of
the turbines. In addition, few components of the turbine need maintenance or replacement. The
initial target markets are resource recovery and micro-cogeneration, followed by power quality and
peak shaving.
Capstone’s model is particularly well suited to take advantage of the resource recovery market, in
our opinion. Resource recovery refers to the process of taking hydrocarbon gases, which exist as a
byproduct of a given process that would otherwise be released to the atmosphere, and using them
as fuel for power generation equipment. In oil and gas exploration operations, for instance, it is
common when exploring for and producing oil to dispose of the associated natural gas in the
reservoir by burning it at the wellhead. This process is referred to as flaring (this is the fire stream
that is often seen jutting out from the side of an oil production platform or drilling rig) and results in
approximately 4 trillion cubic feet of disposed natural gas worldwide on an annual basis. At the same
time, drilling and production operations require electric power for pumps and top drives, which is
typically supplied by diesel-powered generators. Capstone’s turbines can eliminate both steps—gas
that would otherwise be flared can be used as a source fuel for the turbine, which can produce
electricity to run the drilling and production machinery.
We believe the resource recovery model is particularly attractive; the source fuel is virtually free,
while the need to transport diesel fuel to run the generators is eliminated. There are currently
approximately 2,300 drilling rigs running in the world; if every one of them used a Capstone 60-kW
unit, we estimate the cumulative market is approximately $115 million. Added to the approximately
110 production platforms currently in place, which we estimate require between 250 and 500 kW
each, we expect the total potential cumulative oil and gas market opportunity for Capstone is
approximately $150 million.
Another example of resource recovery is the use of methane gas produced by waste treatment and
landfill facilities. In July 2001, the Los Angeles Department of Water and Power (LADWP) began
producing 300 kW of electricity using 10 Capstone microturbines at a landfill in Burbank. In August,
126
LADWP installed 50 microturbines at the Lopez Canyon landfill, with expectations to produce up to
1.5 MW of power from the methane gas produced by the landfill. We expect that LADWP will look to
extend its microturbine program to a potential of 11 additional landfills across the Los Angeles region
over the next several years. Again, the model is the same—the source gas is virtually free and the
electricity in this case can be consumed by the facility, or, if regulation permits, exported back onto
the power grid. In Allentown, Pennsylvania, there is an installation of 12 30-kW Capstone units at a
wastewater treatment plant that has been in place since early 2001.
Capstone is concurrently pursuing potential applications in the automotive industry, with an initial
focus on the municipal bus market. The company currently has bus projects under way in
Chattanooga, Tennessee; Atlanta, Georgia; Los Angeles, California; Tempe, Arizona; and
Christchurch, New Zealand. Capstone’s model for automotive applications is also based on the lowemissions characteristic of the turbine combined with lower overall maintenance costs. The company
is partnering with several bus manufacturers in an effort to develop a commercial product that can
be adopted over the next five to ten years in municipal bus fleets around the world. Capstone also
has a joint development agreement with Hyundai Motor Company to experiment with putting
microturbines into sport utility vehicles.
In our opinion, the most critical factor to Capstone’s business model is the company’s ability to cut
costs. In order to achieve the kind of market penetration beyond the resource recovery and microcogeneration markets that is implied in our model, we believe Capstone’s delivered power costs
should be comparable to the grid. If this can be achieved, then we believe the company’s model has
significant potential to deliver strong profit growth.
Capstone’s Strategy
A key component of Capstone’s strategy for its business model is to strengthen its sales channel
through distributors that are already active in or tangentially related to targeted markets. In Japan,
for example, Capstone’s subassemblies and components are being incorporated into devices that
utilize the hot-air exhaust from the turbine to heat water.
Given its flexibility in input fuels, Capstone is working in partnership with several Japanese
companies, including Mitsubishi, Sumitomo/Meidensha and Takuma, to engineer micro-generation
products that can be adapted to numerous regions throughout Japan. The company recently
announced that Sumitomo has ordered 50 of the 60-kW units for distribution in the Japanese market.
In Europe, Capstone’s distribution partners include Advantica (BG Technology); MWH (the merger of
Harza and Montgomery Watson), a wastewater infrastructure development firm; GAS
Energietechnik, one of Europe’s leading producers of landfill gas utilization packages; and Soffimat,
which specializes in decentralized energy conversion and production using natural and biomass gas.
By partnering with local gas companies, Capstone has access to a large portion of the customers in
a given area. From the gas company’s point of view, selling more natural gas-powered turbines
means selling more natural gas. In the U.S., Capstone has established its own direct distribution arm
in California, where much of the company’s current demand is originating. California, in particular,
has strict emissions laws, giving the Capstone turbine a natural advantage over traditional dieselfired generators, in our opinion.
The company is also distributing its turbines through Alliant Energy, a Great Lakes-based gas and
electric utility; PP&L, a Pennsylvania-based wholesaler and retailer of natural gas and power; and
PanCanadian Petroleum. Capstone also recently announced a worldwide distribution venture with
Cummins, a leading manufacturer of engines and backup generators, to market Capstone turbines
with a focus in the Latin American, Asian and Middle East markets. We believe Cummins will give
Capstone access to a number of its target markets in Latin America specifically, including
Venezuelan oil fields and manufacturers in Brazil and Colombia.
A second component of Capstone’s strategy is its decision to bring almost all of its specialized
manufacturing in-house. The company now manufactures its own air-bearings and combustion
system components as well as recuperators. Capstone purchased the technology and
manufacturing rights for the recuperator component from Solar Turbines in the fall of 2000 for $9
million. This investment is expected to reduce total costs, enable more efficient manufacturing cycles
and inventory levels. The company began producing commercial quantities of recuperator cores at a
new facility in Van Nuys in June of 2001. At the same time, Capstone continues to focus on products
in which the OEM provides the final package configuration.
A third component of Capstone’s strategy is a focus on the type of power required at the customer
load. The ability to string multiple turbines together to create higher power blocks gives the customer
a more precise supply option for a given load range. This feature and the ability to monitor the units
through a network connection give the power consumer authority over its management rather than
the local regulated utility. For businesses that require increasingly high-quality power without sags,
surges and blackouts, this authority is of high value in terms of overall production cycles and just-intime inventory.
Finally, Capstone—and all distributed generation manufacturers—needs to continue to invoke the
support of both political parties and to demonstrate to the utilities the potential revenue benefit
distributed generation presents and not as a competitor. Ake Almgren, Capstone’s CEO, met with
President Bush and Spencer Abraham, head of the Department of Energy, earlier this summer in
Washington, D.C. Several other politicians have advocated further spending and regulatory change
to remove some of the misplaced barriers that slow the potential of distributed generation. At the
same time, the company must ensure that the regulatory environment outside of the United States is
also structured in a way that is advantageous from the standpoint of the customer economics. In
Japan, the Ministry of Economy, Trade and Industry has stated that its mission is in part to provide
for “an efficient energy supply and promote energy policies in harmony with the environment.” On
July 12, 2001, DOE Secretary Abraham announced a $3 million award to Capstone for research and
development of packaged cooling, heating and power systems for buildings.
Capstone currently offers two commercial products, a 30-kW microturbine and a 60-kW
microturbine. A 125–250-kW microturbine is expected to be introduced in 2003. Capstone’s
microturbines can run on a variety of fuels, including low- and high-pressure natural gas, low-BTU
gas, sour gas, gaseous propane, compressed natural gas, diesel and kerosene. The units can be
configured to run in parallel with the grid, in a dual-mode, or stand-alone, in a base-load mode. In
addition, the units can be monitored remotely through a network connection. The only scheduled
maintenance is fuel and air filter changes at 8,000 hours and 12,000 hours, respectively. The unit is
expected to last 40,000 hours and is air cooled.
Capstone’s Microturbine Technology
The technology behind the Capstone microturbine is notable not just for its mechanical innovation,
including air bearings and cooling systems, but also the extensive integration and development of
the power electronics systems that control the unit. The 30-kW unit produces 30 kWs of power and
approximately 300,000 kilo-joules of heat, which is enough energy to heat 20 gallons of water per
minute with a 20-degree Fahrenheit heat rise. The unit is designed at a target availability of 98%, a
specification that has been confirmed through independent testing by Southern California Edison.
The unit itself is housed in a stainless-steel frame about the size of a large refrigerator. The
microturbine is based on the same general technology as a jet engine, although it is much smaller
and can run on a variety of fuels (jet engines actually run on a fairly dirty fuel called naptha, which
128
drops out of the refinery process before gasoline). There are six basic elements of the microturbine:
the compressor, the recuperator, the combustion chamber, the turbine and generator, the heat
exhaust, and the power electronics.
Figure 45: CAPSTONE TURBINE CORPORATION—30-KW TURBINES
First, the compressor impeller draws air into the unit through the air inlet. The compressor impeller
then increases the air pressure and feeds the compressed air to the recuperator. During its time in
the recuperator, the air is heated to approximately 1,000 degrees Fahrenheit. This is done to reduce
the amount of fuel required in the air-fuel mix. After passing through the recuperator, the air is fed
into the combustion chamber, where it is combined with fuel and burned. The resulting hot gas is
allowed to expand through the turbine spinning its blades at 96,000 revolutions per minute. The
turbine, which is attached to a shaft supported by innovative air bearings, produces mechanical
energy that is then converted to electricity by the generator, which is essentially an electric rotor that
sits on the same shaft as the turbine. The air inlet is also used to cool the generator. The use of air
bearings enables the bearings to operate free of contact with the shaft and achieve lift by trapping
and controlling airflow around the shaft. Because they require no lubrication, these bearings enable
low-maintenance operation at very high speeds.
Simultaneous with the mechanical operation of the unit, the power electronics manage critical
functions and monitor more than 200 features of the unit, including control of the microturbine’s
speed, temperature and fuel flow. In addition, the power controller communicates through network
connections, enabling remote operation. Furthermore, the digital controller integrates the electron
flow of the microturbine with the flow of electrons from the public power grid or other generation
devices when it is operating in the dual mode of standby and base-load generation. The alternating
current (AC) power output from multiple sources must be synchronized, or it will compete with itself
and create harmonic distortions that are extremely hazardous to the equipment running off it.
Capstone’s electronics feature built-in auto-synchronization controls that smoothly transition the
output load from the grid to the microturbine and back.
Distribution
Capstone has agreements with numerous third-party distributors around the world. In general, the
distribution model is based on the concept that distributors will make a margin on the unit but get the
most benefit from increased fuel sales as a result of switching customer funds that would be spent
on electricity to increased natural gas sales. In other cases, governmental subsidies provide an
incentive to increase the amount of low-emission equipment in the marketplace.
130
Figure 46: OIL AND GAS RESOURCE RECOVERY DISTRIBUTORS
Distributor
Location
Area of Service
Description
California Power
Partners
Cinergy
San Diego, CA
California
•
Plainfield, IN
Indiana, Ohio
and Kentucky
•
•
•
Conuar
Buenos Aires,
Argentina
Argentina
•
Enertec LLC
Southport, CT
•
The Hanover
Company
Houston, TX
New York,
Connecticut
and western
Massachusetts
U.S. oil and gas
resource recovery
G.A.S. Energie
Technik
Krefeld, Germany
Germany
•
•
•
•
Geveke Power
Systems
Papendrecht, the
Netherlands
Northwest Europe
•
•
Gridlink Power
Systems
Calgary, Canada
Canada
•
•
GSD General
Systems Design
Istanbul, Turkey
Turkey
•
Interstate Power
Systems
Minneapolis, MN
Central U.S.
•
•
MCX Environmental
Energy Corp.
SOFFIMAT
Atlanta, GA
Paris, France
Southeastern
U.S.
France and
northern Africa
•
•
•
Williams Distributed
Power Services
Tulsa, OK
U.S. and Mexico
•
•
Specializes in the emerging opportunities from energy
deregulation in the United States.
More than 1.4 million electric customers and 478,000
gas customers.
Active in U.S. power and natural gas markets.
Owns or operates more than 16,500 MW of electrical and
combined heat plant generation.
Will sell, install and service Capstone’s microturbine power
systems throughout designated markets, focused on providing
turnkey energy solutions for combined heat-and-power, chilling
and distributed generation applications where the electric grid
is inadequate or nonexistent.
Provides custom-engineered combined heat-and-electric power
systems, related products and services.
International leader in natural gas compression services,
compression fabrication and processing, and oil and gas
production equipment.
World’s largest operator of rental compression horsepower.
A leading European energy and environmental
technology company.
In addition to natural gas energy and patented special
applications, G.A.S. is focused on alternative energy fuel
projects utilizing landfill gas, sewage gas, biogas, weak gas
and liquid gas.
Part of the Geveke NV group, Geveke Power Systems is the
official Capstone distributor for northwest Europe and exclusive
Caterpillar gas and diesel engine dealer.
Geveke Power Systems delivers complete energy solutions
in the range from 30 kW to 20 MW, from a standard engine
to a fully customized power plant with all-inclusive
maintenance contract.
Gridlink Power Systems is a wholly owned subsidiary of
EnSource Energy Services, a provider of integrated services to
the oil and gas industry.
Gridlink Power Systems’ sells microturbines, reciprocating
gensets up to 1 MW and turbine gensets up to 5 MW.
GSD is an engineering and contracting company offering
extensive experience in power technology, including cogen
and boiler automation.
Parent company of five operations. Among them, they
distribute Detroit Diesel engines and Allison transmissions;
handle bearing, power transmission and conveyor services;
provide parts, sales and service for the mobile refrigeration
industry; and supply parts, kits and assemblies for bus and
coach OEMs in North America.
It handles sales and rentals of generators from 5 kW to 2,000
kW. Interstate offers the Capstone microturbine in diesel,
natural gas and propane fuel configurations for prime power
and standby use.
Project development, consulting and sales related to biomass
fuel and power facilities.
Paris-based international energy group and leader in the
field of decentralized energy conversion and production,
utilizing natural gas, biogas, biomass, process gas, LPG
and diesel fuels.
Currently manages several-hundred installations exceeding
1.2-GW installed base.
Subsidiary of the internationally renowned Williams energy and
communications corporation.
Provides a broad range of services in the areas of natural
gas, petroleum, energy marketing, retail energy, and
trading and finance.
Figure 47: TURBO-ELECTRIC DISTRIBUTORS (hybrid-electric vehicles)
Distributor
Location
Area of Service
Description
AVS–Advanced
Vehicle Systems
Chattanooga, TN
U.S.
•
Founded in 1992 to make a dozen electric buses for
Chattanooga, Tennessee. Since then, the company has
sold more than 100 buses.
Chargeking
Energy
Technology
Beijing, China
China
•
Specializes in electric vehicles and electric vehicle
charging systems.
•
Energized by Capstone microturbines, ChargeKing HEV
buses are the first such vehicles to enter the Chinese market.
Designline, Ltd.
Ashbourton,
New Zealand
New Zealand
•
Leading New Zealand car manufacturer. Its diesel buses
meet stringent Euro II environmental standards, while its
hybrid-electric city bus, powered by Capstone microturbine
technology, meets Euro III standards.
E-Bus
Downey, CA
North America
•
Founded in 1998 to design and build electric and hybridelectric transit buses and shuttle vehicles.
•
Current product line includes 22-foot electric and Capstone
microturbine-energized trolley replicas and shuttle buses.
Enova Systems
Torrance, CA
North America,
Hawaii and
South Korea
•
Designer, developer and manufacturer of electric, hybridelectric, and fuel-cell propulsion systems and components for
the global vehicle market.
Solectria
Wilmington, MA
U.S. and
worldwide
•
Founded in 1989, it develops and manufactures a wide range
of components for electric, hybrid and fuel-cell vehicles, and
for the distributed power generation industry.
•
More than 2,000 vehicles worldwide, including cars, trucks,
buses and industrial machines, rely on Solectria’s proprietary
drive system technology.
132
Figure 48: POWER APPLICATIONS DISTRIBUTORS (micro-cogen, peak, low-Btu gas and standby)
Distributor
Active Power
Corporation
Advantica
Technologies
Location
Tokyo, Japan
Area of Service
Japan
Description
•
Value-added distributor of turbo-generators. Relatively new.
Leichestershire,
U.K.
England and
Ireland
•
Allegheny Energy
Solutions
Greensburg, PA
U.S. and Canada
Alliant Energy
Madison, WI
•
•
•
U.S.
•
•
•
Cinergy
Plainfield, IN
Indiana, Ohio
and Kentucky
•
•
•
•
Conuar
Buenos Aires,
Argentina
Argentina
•
Emcon/OWT Solid
Waste Services
Various locations in
the Mid-west
Mid-west
•
•
Invensys Building
Systems
Mariah Energy
Corporation
Meidensha
Corporation
Various locations
in Pennsylvania,
California and
Illinois
Calgary, Canada
Pennsylvania,
California
and Illinois
•
NA
Tokyo, Japan
Japan
•
•
•
•
Mitsubishi
Tokyo, Japan
Japan
•
MWH Energy
Solutions
Chicago, IL
U.S.
•
Valley Detroit
Diesel Alison
City of Industry, CA
Los Angeles and
Orange County
•
Takuma
Amagasaki, Japan
Japan
•
Williams Distributed
Power Services
Tulsa, OK
U.S. and Mexico
•
•
Formerly the research and technology arm of British Gas, with $130
million in business in 30 countries.
Leading commercial provider of independent technology
and engineering services to customers in gas, pipelines and
associated industries worldwide.
A diversified energy company involved in generation and delivery of
electric power to more than 3 million customers.
Allegheny Ventures invests in and develops telecommunications
and energy-related projects.
Offers energy and environmental solutions in domestic and
international markets.
More than 1.3 million electric, natural gas and water customers
in the Mid-west.
Its international investments include power and cogen facilities in
China, New Zealand, Australia and Brazil.
Leading diversified energy company in the United States.
More than 1.4 million electric customers and 478,000 gas customers.
Active in U.S. power and natural gas markets.
Owns or operates more than 16,500 MW of electrical and
combined heat plant generation.
Conuar will sell, install and service Capstone microturbine power
systems throughout designated markets, focused on providing
turnkey energy solutions for combined heat-and-power, chilling
and distributed generation applications where the electric grid is
inadequate or nonexistent.
EMCON/OWT Solid Waste Services, a unit of The IT Group of
companies, is one of the largest providers of integrated solidwaste services in the United States.
EMCON/OWT focuses on business solutions that make
economic sense, including the integration of Capstone
microturbine technology in landfill gas services.
Invensys Building Systems, one of the world's largest manufacturers of
interoperable building control products, provides innovative control and
HVAC solutions for commercial and industrial users.
A distributed micro-utility and specialist in cogeneration solutions.
Offers turnkey systems on a build-own-operate basis.
A leading heavy electrical manufacturer in Japan. It was established in
1897. Fiscal 1999 net sales were approximately $1.8 billion.
Meidensha is also a leading solutions provider and integrator of
combined heat and power (CHP) systems.
Mitsubishi is engaged in repackaging Capstone microturbine
technology for use in cogeneration hot water, chilling and power output
systems and UPS/power quality applications.
MWH Energy Solutions (formerly Harza Energy, LLC) is a wholly
owned subsidiary of MWH Global, Inc. specializing in providing turnkey
distributed energy solutions.
Valley Detroit Diesel Allison operates primarily as a franchised
distributor and operator of service facilities for heavy-duty diesel
engines and transmissions from Detroit Diesel Corporation and the
Allison Transmission division of General Motors. The organization
provides engineering, procurement, fabrication, testing, commissioning
and maintenance capabilities in the 5 kW to 12 MW range for standby,
prime and cogeneration plants.
Company has an 85-year history of research and development in the
field of systems integration. This is primarily directed toward industrial
and general-purpose machinery, energy-related products such as
boilers and cogeneration equipment, operation and maintenance
services, and environmental conservation plants, including
incineration, recycling and water-treatment facilities.
Subsidiary of the internationally renowned Williams energy and
communications corporation.
Provides a broad range of services in the areas of natural gas,
petroleum, energy marketing, retail energy, and trading and finance.
Customer Base and Product Economics
Capstone’s customers currently include the Los Angeles Department of Water and Power,
Alternative Energy Corp., Advantica (formerly BG Technology), Copeland Corp. (part of Emerson, air
conditioner compressors), Mariah Energy (Canadian clean energy services company that ordered
126 turbines over two years beginning in October of 2000), the Denver Police Department, the Los
Angeles Department of Transportation, AVS, Williams Distributed Energy, and various other private
and municipal entities.
The customer economics for the units are a function of several costs: installation costs, unit costs, fuel
costs and maintenance costs. We have excluded the net benefit of the heat production of the units from
our cost assumptions for the sake of conservatism, although certainly the utilization of the exhaust heat
from the unit has the potential to affect the economics of a cogeneration system significantly.
Based on our own proprietary research of installed microturbine systems in California, we believe
that the current installation cost for a 30-kW unit including a heat exchanger ranges between $910
per kilowatt and $1,550 per kilowatt with noise cancellation. We assume that installation costs for the
60-kW unit are marginally higher in absolute terms than for the 30-kW unit since the increase in the
footprint size does not contribute significantly to installation costs, although it might in real estate
costs. On a per-kW basis, this represents a range of $0.025–0.042 kWh for the 30-kW unit. We
estimate an installation cost of $0.014–0.022 per kWh for the 60-kW unit.
The current unit prices are $28,000 for a 30-kW unit and $49,000 for a 60-kW unit. This translates to
a capital cost of $0.026 per kWh for the 30-kW unit and $0.022 per kWh for the 60-kW unit, based
on an assumption of 98% availability for 40,000 hours and 6.7% parasitic power loss. Combined with
installation costs, we estimate the fixed costs for Capstone microturbines are between $0.051 per
kWh for a 30-kW unit and $0.036 per kWh for the 60-kW unit at the low end of the range, and $0.068
and $0.044 per kWh, respectively, at the high end. These estimates are for the installation of a
single unit, which spreads the fixed costs across the smallest possible base and, therefore, should
be recognized as the high end of the per-kWh cost range.
The key variable cost is fuel, which depends on a number of factors. In the resource recovery mode,
the fuel is virtually free, as such, the cost per kWh of power can reasonably be estimated as the
fixed costs for the unit and installation. Therefore, we believe that in a resource recovery
environment, Capstone turbines currently produce power at a cost between $0.051 and $0.068 per
kWh. We believe this compares favorably with the $0.040–0.118 average electric utility revenue from
commercial and industrial customers in 1999, as reported by the DOE (we prefer 1999–2000
because, in our view, it represents a price range that is considered normal by regulatory authorities,
which still have a significant hand in where power gets priced).
When the fuel is not free, cost assumptions are usually made on the basis of assuming a fixed price
of the fuel over the life of the unit. If we assume that the fuel cost for delivered natural gas is fixed at
$7.00 per mBtu, this converts to $0.095 per kWh. If we assume the cost of gas is $6.00 per mBtu,
the result is $0.082 per kWh. At $4.00 gas, the result decreases to $0.054 per kWh. For the 30-kW
unit, this translates to an all-in power cost of $0.146 per kWh at $7.00 gas, $.133 per kWh at $6.00
gas and $0.105 per kWh at $4.00 gas.
For purposes of our cost economics, we assume that maintenance is marginal, since the design of
the unit only requires changing a fuel filter once a year and an air filter every year and a half.
Therefore, we assume maintenance costs are de minimus on a per-kWh basis.
134
Figure 49: CAPSTONE TURBINE CORPORATION—SUMMARY ECONOMICS (30- and 60-kW units)
Capstone Unit
Resource Recovery
30 Kilowatt
60 Kilowatt
Natural Gas
30 Kilowatt
60 Kilowatt
Kilowatt
Output
Avail.
Unit Life
(Hours)
KWh
28.0
57.0
98.0%
98.0%
40,000
40,000
1,097,600
2,234,400
$28,000
$49,000
28.0
57.0
98.0%
98.0%
40,000
40,000
1,097,600
2,234,400
$28,000
$49,000
Install
kWh
Fuel
(kWh)
Maint.
Total
(kWh)
$0.026
$0.022
$0.034
$0.018
$0
$0
$0
$0
$0.059
$0.040
$0.026
$0.022
$0.034
$0.018
Unit Cost


Per Unit Per kWh
@$7.00/mBtu1
$0.095
$0
$0.154
$0.085
$0
$0.125
1
Assumes low-pressure natural gas.
When the unit is used for cogeneration, where heat and power are both utilized, the cost per kWh is
estimated by management to be $0.081 assuming delivered gas prices of $6.00 per mBtu. When
added to installation cost, Capstone’s power cost ranges between $0.106 and $0.123, which is at
the high end of the range of power prices for industrial customers. Notably, customers in California
and New York pay some of the highest power prices, giving Capstone a large base of potential
customers domestically at the onset. This is also reflected in Capstone’s customer base, which
includes the Los Angeles Department of Power and Water, the company’s largest customer at
present, and the Los Angeles Department of Transportation.
Competitors
Capstone’s competitors can be classified according to the market opportunity it pursues. In the
resource recovery market, the company competes against traditional diesel-generator manufacturers
including Caterpillar (CAT $48.25), Ingersoll-Rand (IR $40.20), Cummins (CUM $34.27), Detroit
Diesel (subsidiary of DaimlerChrysler) and Elliot/General Electric. Many of the traditional internalcombustion engine manufacturers are developing microturbines to complement their product
offerings with a low-emission alternative and have existing distribution systems through which their
products can be promoted. General Electric (GE $40.41) is in the process of acquiring Honeywell’s
(HON $31.75) microturbine technology, which is based on a 75-kW microturbine unit that has been
demonstrated in several projects but has not yet begun to ship significant commercial volumes. In
Europe, AB Volvo (VOLVY $15.12) and ABB (ABB $9.83) have a joint venture to produce a
microturbine called Turbec. In addition, Ishikawajima-Harima Heavy Industries and Mitsubishi Heavy
Industries in Japan, and Turbo Genset in the U.K., which recently signed a joint development
agreement with DTE Energy (DTE $41.98) and Pratt & Whitney Canada, are proceeding with the
development of commercial microturbines.
In the low-emission market, Capstone faces competitors from numerous industry segments in the
power generation equipment business. There are several fuel-cell developers, including FuelCell
Energy (FCEL $14.50) and Ballard Power Systems (BLDP $28.19), that are in advanced
development stages in power ranges similar to what can be achieved by four 60-kW microturbines.
In addition, Capstone faces competition from the solar-panel equipment manufacturers, including BP
Solarex, AstroPower (APWR $34.05) and Evergreen Solar (ESLR $2.40). Wind turbines also provide
power with no emissions, as does hydroelectric power.
In the power quality and reliability market, Capstone faces competition from the backup generator
manufacturers and distributors and the UPS companies, which include Caterpillar, Emerson (EMR
$52.50), Kohler (private), Invensys, MGE UPS, Active Power (ACPW $5.53), American Power
Conversion (APCC $14.40), Power-Onea,b (PWER $9.83) and several other foreign competitors. The
power quality market is composed of not only manufacturers of backup generators but also makers
of UPS, which provide ride-through power that is almost essential for a backup system that is termed
as high reliability.
In the automotive market, Ballard Power Systems is also pursuing the municipal bus market.
Interestingly, General Motors (GM $43.75) has recently gotten itself into the low-emission business,
announcing that it would produce a fuel cell for the residential market. Capstone does not compete
for the residential customer, however.
Threat of entry. The threat of entry is high for Capstone Turbine, given the numerous technologies that
can be used to produce power. A landmark shift in the cost curve in the solar or wind industries could
result in products that compete comparably with Capstone’s in economic terms and simultaneously
satisfy the low-emissions requirement in some of Capstone’s targeted markets. In addition, existing
lower-cost reciprocating engines could be outfitted with new emissions-reduction technology.
Threat of substitution. While Capstone has established itself as the first company to produce a
commercial microturbine for the stationary power market, there are several other companies,
including Ingersoll-Rand, and a joint venture between Volvo and ABB, that are pursuing commercial
production of microturbines for the stationary market. Besides having access to greater amounts of
capital, both Ingersoll-Rand and ABB have significant research and development capabilities as well
as existing distribution channels.
Bargaining power of buyers. To date, Capstone’s prices have held steady, although we expect
that there may be an effect on the 30-kW unit price resulting from the market adoption of the 60-kW
unit, which on a per-kW basis is 13% less than the 30-kW unit. Ultimately, the bargaining power of
buyers will be determined by the level of wholesale power prices and the marginal benefit achieved
by the characteristics of the microturbine. If the low-emission, multi-option fuel input and high
reliability of the unit can be achieved through a combination of the grid and some other powerenhancement equipment, prices for Capstone’s units will have to fall in line in order to compete, in
our opinion.
Bargaining power of suppliers. Because of its strategic decision to produce its proprietary highspecification materials in-house, we believe Capstone puts itself at a distance from the bargaining
power of its suppliers. The purchase of technology and manufacturing rights from Solar for the
recuperator core used in Capstone’s turbine significantly decreases the company’s reliance on its
suppliers and improves its overall ability to manage manufacturing process inventory, in our opinion.
Rivalry among current competitors. There continues to be constant competition in the backup
generation market, with Caterpillar currently leading in market share terms. However, Cummins and
Detroit Diesel continue to provide strong competition to Caterpillar. In the low-emissions market,
ONSI, a division of International Fuel Cells that makes a stand-alone fuel cell for the commercial
market, is essentially unchallenged. Notably, there are no other commercially available fuel cells
currently in the market.
We have projected Capstone Turbine’s financial potential through 2005 including estimates for the
136
Revenues
Capstone currently has three main revenue streams: sales of 30-kW units, sales of 60-kW units, and
sales of subassemblies used in stationary and transportation applications. We estimate Capstone will
generate total revenue of $30.5 million in 2001, followed by $47.6 million in 2002 and $112.8 million in
2003. This translates to unit shipments of 938 in 2001, 1,365 in 2002 and 2,467 in 2003. The company
plans to add a 125–250-kW unit to its product mix in 2002, which we believe should contribute a
substantial percentage of revenue in 2003 and thereafter.
On a quarterly basis, we estimate Capstone will generate revenue of $4.7 million in the fourth
quarter of 2001. This translates to unit shipments of 130 in Q4:01. Capstone has experienced intraquarter seasonality in the first and second quarters of 2001, with a substantial portion of sales
recognized in the latter part of the quarters.
Backlog. Although the company has previously released formal backlog in units on an annual basis,
Capstone has indicated that it has visibility on sales of 104 units in Q4:01. Total unit backlog at the
end of 2000 was 806 (unit shipments in Q1:01 and Q2:01 totaled 728), up from 310 at year-end
1999 (unit shipments in Q1:00 and Q2:00 were 337). It would appear that first and second quarter
sales as a percentage of year-end backlog had been improving–to 90% at the end of Q2:01 up from
109% at the end of Q2:00–but it remains to be seen how backlog is generated in the fourth quarter
of 2001.
Product Mix. To date, Capstone’s sales mix has been mostly composed of sales of the 30-kW units,
which have been in the market longer but carry a lower margin than the 60-kWt units. In Q3:01,
sales of 30-kW units accounted for 67% of total unit revenue; the majority of second quarter
revenues was also sales of 30-kW units. We believe that the size of the company’s potential sales
base increases with output of its products, and thus, we estimate that the 60-kW units will overtake the
30-kW units as a percentage of revenue by the end of 2002. Going forward, we expect that the 125–
250-kW units will represent 24% of Capstone’s revenue stream by 2003 and 70% of sales by 2005.
In market terms, a substantial portion of demand for Capstone’s products is coming from customers
that are incorporating the turbines into micro-cogeneration, where the hot-air stream generated from
the unit is recycled to increase the overall efficiency of a distributed generation installation. Hybridelectric vehicle (HEV) sales represented approximately 5–10% of total sales in the second quarter,
and we continue to expect that the HEV segment will trend in the same general range over the next
several quarters at least.
Geographic Mix. Capstone management has estimated that more than 50% of the target market for
its products is outside of the United States. Year to date, however, North America has accounted for
approximately two-thirds of total sales. Asia, which is mostly a cogeneration market, accounted for
23% of total sales in the first six months of 2001, with Europe, South America and Africa making up
the balance.
Customer Mix. In the year 2000, 32% of sales were to two third-party distributors, Interstate
Companies and Williams Distributed Power Services (associated receivables were 42% of total
receivables). In 1999, 28% of sales were to a single customer (two customers represented 36% of
total receivables). Capstone California represented 30% of total sales in Q2:01.
The Sales Cycle and Revenue Recognition. Capstone’s sales cycle is currently 12–16 weeks, in
part because of the missionary nature involved in informing potential customers to the benefits of
microturbines as a distributed generation alternative. The process begins with the inquiry of
customer interest, and then proceeds with customer qualification and organizational meetings until
the sale is consummated. The length of the cycle is to some extent dependent on the type of
customer being targeted; in general, regulated utilities and government agencies take longer than
corporate entities. Capstone recognizes revenue upon shipment of the product to the customer.
Product sales have no rights of return.
Capstone has estimated that greater than 50% of the potential market for its products is outside of the
United States, which we expect will have a negative overall effect on the length of the sales cycle.
Pricing Trends. The list price for Capstone’s 30-kW unit is $29,000, or $976 per kW. Pricing in
Q2:01 decreased to $28,000. We have estimated annual price reductions for the 30-kW units of 3%
in 2001 (from $29,000 list), 5% in 2002 and 7% in 2003. Our estimates are motivated by an
expected increase in available power generation from a macroeconomic basis, and assume that
overall power prices will ease over the next several years with additional supply. The list price for
Capstone’s 60-kW unit is $48,000, or $800 per kW. We do not expect significant price erosion in the
near term for the 60-kW units.
Gross Margin
In our opinion, the most important driver in the potential of Capstone to successfully penetrate the
distributed generation market is its ability to cut costs. We expect gross margin will average (3)% in
2001, increasing to 12% in 2002 and 17% in 2003. Our long-term gross margin assumption is 26%.
As the product mix shifts to include more 60-kW units and, ultimately, more 125–250-kW units, we
expect the overall gross margin profile to improve dramatically. The current expected gross margin
for 30-kW units is approximately 15%, while 60-kW and 125–250-kW units are expected to have 30–
35% gross margins. Our current estimate for 30-kW unit gross margin is 1% in the third quarter and
2% in the fourth quarter. We do not expect to see improvement until 2002 when the company has
worked through an inventory of higher-cost recuperator cores.
Capstone includes direct material costs, assembly and testing, compensation and benefits,
overhead, and warranty reserve charges in its cost of goods sold. The single biggest component of
gross margin improvement continues to be scale, as higher unit volumes are spread across the high
relative cost of pre-production manufacturing equipment.
The company maintains a warranty reserve account on the balance sheet that accrues through
warranty reserve charges taken in individual quarters. For example, warranty reserve charges in the
second quarter of 2001 were 6.0% of total cost of goods sold compared to 21.0% of cost of goods
sold in the second quarter of 2000. Excluding these charges, gross margin improved to 10.2% in the
second quarter of 2001 from (7.7)% in the second quarter of 2000. In other words, the improvement
in gross margin year over year is to some extent a function of a reduction in the percentage
attributable to warranty reserve charges than strictly improvements in manufacturing costs.
We estimate sales, general and administrative costs (SG&A) will run approximately 129.2% of total
sales in 2001 and 79.9% in 2002. We expect SG&A as a long-term percentage of sales will continue
to progress toward a multi-distributor model that requires less direct selling for a given base of
customers. SG&A increased to 111.0% of revenue in Q1:01, as the company ramped up its direct
sales effort for Capstone California, then decreased to 80.0% of sales in Q2:01 as this staffing effort
better matches expected potential sales. With the dramatic decrease in unit sales in the third quarter
of 2001, SG&A as a percentage of sales ballooned to 275.0%.
Capstone expenses the amortization of its acquisition of marketing rights from Fletcher Challenge in
its SG&A line, which amounts to $453,000 per year. This amortization will continue through 2005.
138
We estimate Capstone will spend $10.9 million, or 35.7% of sales, on research and development
(R&D) in 2001, followed by $12.4 million in 2002 and $12.3 million in 2003, or 10.9% of sales. With
the majority of R&D now spent for development of the 60-kW model, the company will continue to
invest in R&D for its forthcoming 125–250-kW unit, which we expect will be available in 2003.
Management has indicated that it does not expect significant growth in R&D, which was $11.3
million in 2000. In addition, the company received a $10 million grant in 2000 from the DOE’s
Advanced Microturbine Systems program that can be used to offset the development costs of the
125–250-kW unit, although Capstone must still contribute $13 million to the overall $23 million cost
of the project.
Operating Income
We estimate that Capstone will turn operating income positive in Q3:04. Long term, operating margin
should reach approximately 11%, beginning with the 2005 period, based on a reduction in SG&A as
a percentage of revenue and overall improvement in gross margin as the 60- and 300-kW units
comprise a larger portion of total revenue.
Capstone had a current cash and short-term investments balance of $182 million at the end of
Q3:01, down $55 million in the nine months since year-end 2000. Given an annualized current burn
rate of $3.1 million per month, we believe the company has enough cash to last it five years. We estimate
that Capstone will turn operating cash flow positive in Q4:04 and free cash flow positive in 2005, well
within the window of its current cash position given our current revenue estimates.
The Current Account
We estimate that Capstone will have working capital of $182.3 million at year-end 2001. This is
largely a function of the company’s large cash and short-term investment equivalents, which
represented 67% of current assets at the end of the third quarter. However, we also expect that
Capstone will require a significantly higher percentage of available working capital given its plans to
sell more than half of its output in international markets, which traditionally have longer selling cycles
and concurrently longer receivables cycles.
Accounts Receivable. Capstone’s receivables were 226% of sales in the third quarter, an increase
from the 109% realized in Q2:01. We expect the company will carry average receivables of 150% of
fourth quarter sales. This is predicated on Capstone maintaining its revenue mix of 65% domestic
sales. As foreign sales increase as a percentage of total sales, we expect receivables as a
percentage of sales will likewise increase. Days receivable stood at 308 at the end of Q3:01, up
significantly from the second quarter average of 72 days.
Based on our research, we anticipate receivables will increase a function of the percentage of sales
generated outside North America. On average, we calculate that DSO for companies with less than
50% of sales outside North America is approximately 48 days; for companies with sales that are 60%
generated outside of North America, DSO increases to 55 days, or 15%. We have reflected this effect
in our model, increasing the company’s DSO 12%, to 66 days in 2004 from 59 days in 2003.
Inventory. Inventory as a percentage of cost of goods sold (COGS) was 494% at the end of the
third quarter, which reflects the dramatic slowdown in sales in the second half of the quarter.
Inventories are stated at the lower of standard cost or market value (FIFO). Capstone is currently
carrying an inventory of approximately 700 recuperators purchased from Solar that the company
estimates will be worked through by the end of the first quarter 2002, at which point we expect
inventory as a percentage of overall sales to decline as recuperator cores will be carried at a lower
standard cost and manufactured to a just-in-time inventory model. At the end of 2000, raw materials
accounted for 72% of total inventory. By Q1:01, the relationship had tightened to 90%, indicating that
the decision to produce recuperator cores in-house has had a significant effect on the potential level
of necessary inventory.
Fixed Assets and Capital Expenditures
At the end of Q3:01, net property, plant and equipment stood at $28.0 million, an increase of $16.0
million from year-end 2000. Capital expenditures during the first nine months of the year totaled $17
million; we expect full-year 2001 capital spending will be approximately $21 million. Because of
Capstone’s decision to bring the manufacturing of core recuperators in-house and the subsequent
increase in manufacturing assets related to this operation over the past six months, we expect that
capital spending in the last six months of 2001 will likely lag spending in the first six months.
Although we do not anticipate a major reduction in capital spending as a result of the murky sales
forecast in the fourth quarter, we believe management may hold some cash back over the next six
months if a clear sales picture fails to materialize by the end of Q4:01. We estimate capital
expenditures of $20 million in 2002, followed by $16 million in 2003, mainly for manufacturing
production equipment and leasehold improvements.
Manufacturing Capacity and Utilization
Capstone currently has two facilities in the northern Los Angeles region: a 98,000-square foot-facility
in Chatsworth, which houses corporate headquarters, manufacturing and assembly, and R&D; and a
new 79,000-square-foot facility in Van Nuys, used for manufacturing recuperator cores and
development testing. Management estimates that the Chatsworth facility can handle throughput of
20,000 turbines a year; based on current estimates, this is more than sufficient to handle expected
production output over the next five years.
Taxes
Capstone has generated $114.1 million in state net operating losses (NOLs), which are currently
being applied and expire in 2005; federal NOLs of $135.9 million, which can be applied from 2008 to
2020; federal tax credit carry-forwards of $4.8 million, which can be applied from 2008 to 2015; and
$3.3 million in state tax carry-forwards, which can also be applied in from 2008 to 2015. NOL usage
is capped at $57.6 million per year.
Capital Structure
Capstone’s capital structure is 100% equity; the company does carry $3.2 million as a long-term
portion of capital lease obligations. We do not anticipate any major change in this structure over the
next 12 months. While we do not expect that the company will require a substantial infusion of
capital until at least the end of 2003, we note that the implied cost of capital for Capstone naturally
increases as its sales outside of the U.S. increase as a percentage of overall sales. This is a result
of higher working capital requirements relative to companies with a largely domestic sales base.
Earnings Review and Operating EPS Outlook
We expect Capstone will post a loss of $42.8 million in 2001, followed by a loss of $39.9 million in
2002 and $31.2 million in 2003. We estimate net income of $40.1 million in 2005. On a per-share
basis, this translates to a $(0.56) operating loss per share in 2001, a $(0.51) operating loss per
share in 2002, a $(0.40) operating loss per share in 2003 and operating EPS of $0.50 in 2005.
140
Our quarterly net income estimate for Q4:01 is a loss of $10.6 million, or an operating loss per share
of $(0.14). We are currently forecasting Capstone will achieve profitability in Q3:04 and full-year
profitability in 2005.
Valuation
We have valued Capstone using a relative multiple analysis and discounted cash flow model.
Capstone, similar to many new energy technology companies, has no current earnings and currently
has negative cash flow per share. Given that this company is still in an early commercial phase, we
are highly concerned with measuring the downside given various scenarios of expected sales and
the expected turn to profitability. We provide a range of possible valuations based on these various
test assumptions.
Relative Multiple Valuation
Determining a value for Capstone based on relative multiple analysis is a process of combining a set
of near-comparable companies and assessing the reasons for differences in valuations among them.
We have grouped comparables into two categories: developmental, which includes H Power
(HPOW $2.87), Proton Energy (PRTN $6.35), Plug Power (PLUG $8.32), Ballard Power Systems
and FuelCell Energy; and product, which includes Cummins, Ingersoll-Rand and Emerson.
For the developmental group, the only ratio that can be used across all companies is price/sales.
However, we do not believe that a price/sales comparison will yield any significant information
regarding the future price of Capstone’s stock. Given that the company is not expected to have
earnings until 2004, we are also restricted in our ability to compare Capstone to the product
companies. As such, we have instead analyzed historical market capitalization/EBITDA multiples for
various growth rates and incorporated them into the terminal value of our DCF valuation.
We recognize the shortcomings of DCF analysis and have attempted to correct for them as best as
possible. First, for a company that has negative cash flows for the first several years of the analysis,
the bulk of present value is determined by the terminal value, which is the most difficult to predict.
Given Capstone’s recent significant reduction in sales visibility and the lack of any trend to
extrapolate, the estimation of sales in 2005 essentially becomes guesswork. We have developed our
terminal EBITDA multiple based on the historical multiple the market has paid for engine companies,
including Cummins, Ingersoll-Rand and Emerson Electric. Although these are mature companies
with long operating histories, the terminal multiple is used to forecast growth into perpetuity; for this
reason, we believe it is appropriate for Capstone at this stage. The average forward multiple of price
to forward EBITDA is 6–8x; we have discounted this to present value at a 25% rate.
pricing model (CAPM), the formula for which is the sum of the risk-free rate and a risk-adjusted equity
market premium, and an additional required return of 10%. The current risk-free rate based on ten-year
government bond is 5.23% (closing bid October 30, 2001, Bloomberg). The historical geometric risk
premium for the U.S. market between 1928–1999 is calculated at 6.05% by the Federal Reserve. There
is not enough data to calculate a beta for Capstone itself. To be conservative, we have used an Internet
stock average beta of 1.7, as calculated by Value Line, which results in a discount rate of 15.5%.
Valuation Summary
Based on the combination of our valuation parameters, we believe that shares of Capstone are
currently fairly valued and rate the shares of Capstone as Market Perform. We believe the lack of
near-term visibility in sales and earnings will translate to weak stock performance for the next
several quarters. As such, we believe the stock is currently fairly valued in the $5–6 range. Although
some analysts argue that given the company’s current cash per share of $2.36 and NOLs of $2.50
per share, the equity is trading at less than $1.00, we refute this notion as double counting.
Realistically, if the cash is removed from the company, then the equity will quickly have no value; the
forward sales used to determine the firm value would never materialize because development would
cease. NOLs would be attractive in a takeover, but we have difficulty handicapping acquisition
activity at this stage.
Investment Risks
Wholesale power prices decrease significantly. If prices for wholesale power decrease
significantly over the next several years, the economic assumptions at which Capstone’s power
output is price competitive compared with power available from the grid may differ dramatically from
prevailing prices. This could lead to weaker-than-expected demand for the company’s products.
Manufacturing cost reductions fail to materialize. The largest single driver for the broad adoption
of Capstone’s products is the company’s ability to reduce costs in order to maintain relative
competitiveness with other incumbent technologies that also generate power, including the grid.
Products malfunction. None of the company’s commercial turbines has yet to run for 44,000 hours
(five years). As such, there is still the potential for unanticipated maintenance or warranty costs over
the next several years.
Competitors reduce emissions. There is the potential that Capstone’s competitors could modify their
designs or add additional equipment to more closely match the emissions profile of the Capstone units.
Regulators fiddle. The regulatory environment for the power industry has been in flux for the last
several years and has been subject to rampant political interference over the last 18 months.
142
Figure 50: CAPSTONE TURBINE CORPORATION—
INCOME STATEMENT ($ in millions, except per share data)
FY December
Net Sales
Cost of Goods Sold
Gross Profit
Gross Margin
1999
$6.7
(15.6)
(8.9)
(133.5)%
2000
$23.2
(27.8)
(4.7)
(20.1)%
2001E
$30.5
(31.5)
(1.0)
(3.3)%
2002E
$47.6
(41.8)
5.8
12.3%
2003E
$112.8
(93.7)
19.1
17.0%
2004E
$230.9
(176.5)
54.4
23.6%
2005E
$362.3
(267.0)
95.3
26.3%
(11.2)
(9.2)
—
—
(20.3)
(24.1)
(11.3)
—
—
(35.4)
(39.3)
(10.9)
—
—
(50.2)
(38.0)
(12.4)
—
—
(50.4)
(41.7)
(12.3)
—
—
(54.1)
(43.7)
(12.1)
—
—
(55.8)
(46.0)
(10.3)
—
—
(56.3)
(29.3)
(437.4)%
(40.0)
(172.9)%
(51.2)
(168.1)%
(44.6)
(93.6)%
(34.9)
(31.0)%
(1.4)
(0.6)%
39.0
10.8%
0.5
(0.7)
—
0.0
9.6
(0.9)
—
(0.1)
9.0
(0.6)
—
(0.0)
5.0
(0.4)
—
0.1
3.6
—
—
0.1
1.0
—
—
0.1
1.0
—
—
0.1
EBT
Income Taxes
Tax Rate
(29.5)
(0.0)
0.0%
(31.4)
(0.0)
0.0%
(42.8)
(0.0)
0.0%
(39.9)
—
0.0%
(31.2)
—
0.0%
(0.3)
—
0.0%
40.1
—
0.0%
Minority Interest
Extra. Items
—
(26.7)
—
—
(559.9)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Net Income
Earnings Per Share:
Operating EPS
(56.2)
(591.3)
(42.8)
(39.9)
(31.2)
(0.3)
40.1
$(24.53)
—
—
2.3
$(12.82)
—
—
46.1
$(0.56)
—
—
76.7
$(0.51)
—
—
77.9
$(0.40)
—
—
78.9
$(0.00)
—
—
79.9
$0.50
—
—
80.9
—
—
—
—
—
—
—
Growth Rates
Sales
Cost of Goods Sold
EBIT
Net Income
Diluted EPS
Cash EPS
7,869.0%
193.0%
(15.2)%
59.9%
38.1%
0.0%
246.0%
78.0%
36.8%
—
—
0.0%
31.5%
13.1%
27.9%
—
—
0.0%
56.2%
32.7%
(13.0)%
—
—
0.0%
137.0%
124.3%
(21.6)%
—
—
0.0%
104.7%
88.4%
(96.0)%
—
—
0.0%
56.9%
51.3%
(2,872.4)%
—
—
0.0%
Ratio Analysis
Gross Margin
SG&A/Sales
Engineering/Sales
Operating Margin
EBT Margin
Tax Rate
Net Margin
(133.5)%
167.2%
136.7%
303.9%
(437.4)%
(441.1)%
(0.0)%
(840.0)%
(20.1)%
103.9%
48.9%
152.8%
(172.9)%
(135.7)%
(0.0)%
(2,552.7)%
(3.3)%
129.2%
35.7%
164.8%
(168.1)%
(140.5)%
5.5%
(140.5)%
12.3%
79.9%
26.0%
105.9%
(93.6)%
(83.8)%
2.0%
(83.8)%
17.0%
37.0%
10.9%
47.9%
(31.0)%
(27.7)%
0.3%
(27.7)%
23.6%
18.9%
5.3%
24.2%
(0.6)%
(0.1)%
0.0%
(0.1)%
26.3%
12.7%
2.8%
15.5%
10.8%
11.1%
(0.0)%
11.1%
Last 12 Months (LTM) Return on Equity Analysis/Sales Basis
(437.4)%
(172.9)%
LTM Sales/Assets
18.1%
7.7%
Assets/Equity
(25.6)%
108.1%
LTM Interest Burden
100.9%
78.5%
LTM Tax Burden
100.0%
100.0%
(168.1)%
11.9%
106.4%
83.6%
100.0%
(93.6)%
22.0%
107.8%
89.5%
100.0%
(31.0)%
55.4%
120.5%
89.4%
100.0%
(0.6)%
92.1%
148.5%
21.7%
100.0%
10.8%
106.9%
162.2%
102.8%
100.0%
(17.8)%
(17.6)%
(16.7)%
(19.9)%
(19.6)%
(18.4)%
(18.5)%
(18.2)%
(15.3)%
(0.2)%
(0.2)%
(0.1)%
19.2%
18.9%
11.8%
SG&A
R&D
EBIT
Operating Margin
Interest Income
Interest Expense
Equity in Earnings
Other Income
EBITDA
20.5%
(335.8)%
(152.3)%
(11.2)%
(208.7)%
(195.8)%
Figure 51: CAPSTONE TURBINE CORPORATION—BALANCE SHEET ($ in millions)
FY December
Working Capital
Inventories
Deferred Taxes
1999
$6.3
6.9
2.4
8.8
2.2
—
2000
$238.1
236.9
3.7
14.1
1.7
—
2001E
$182.3
172.5
7.0
17.7
1.8
—
2002E
$131.0
117.6
14.4
19.8
2.1
—
2003E
$97.4
80.4
24.9
24.9
4.0
—
2004E
$104.5
56.5
58.8
43.0
7.0
—
2005E
$157.6
83.5
86.7
62.6
10.4
—
Current Assets
Short-Term Debt
Accounts Payable
Accrued Expenses
Accrued Warranty Reserve
Deferred Revenue
20.3
—
1.7
0.7
3.2
2.3
4.7
1.4
256.4
—
4.7
1.1
5.6
1.3
4.1
1.5
198.9
—
7.0
0.6
4.5
1.1
2.2
1.3
153.9
—
8.7
2.1
4.5
4.1
2.2
1.3
134.2
—
17.0
4.0
4.5
7.8
2.2
1.3
165.3
—
32.4
7.0
4.5
13.4
2.2
1.3
243.1
—
47.3
10.4
4.5
19.9
2.2
1.3
14.0
—
—
—
—
0.0%
0.0%
0.0%
18.3
1.9
48
0.6
149
54.4%
66.3%
159.5%
16.6
1.0
144
0.5
273
140.3%
99.8%
300.4%
22.8
1.4
67
0.9
120
77.5%
47.0%
120.0%
36.8
1.6
59
1.1
86
68.8%
46.5%
97.0%
60.8
1.4
66
1.3
68
80.0%
46.1%
80.0%
85.6
1.3
70
1.3
68
80.0%
45.6%
78.4%
—
—
—
0.7
0.8
(2.2)
1.9
(0.7)
10.6
1.3
2.8
0.2
2.7
4.3
5.8
2.5
6.9
6.5
2.6
7.4
5.5
7.9
4.9
—
—
3.8
11.6
27.0
—
—
7.0
30.3
23.3
—
—
3.1
41.7
7.7
—
—
12.8
44.2
—
—
—
25.4
36.7
—
—
—
48.7
23.7
—
—
—
71.9
16.6
45.6
56.7
62.2
69.5
85.4
95.7
36.9
45.0%
18.6%
302.0
15.1%
78.5%
255.6
22.2%
67.5%
216.1
28.8%
54.4%
203.7
34.1%
39.4%
250.7
34.1%
22.5%
338.8
28.2%
24.6%
4.5
156.5
4.0
—
2.9
—
2.9
—
2.9
—
2.9
—
2.9
—
Common Stock
Retained Earnings
Subscription Receivable
0.0
—
(144.2)
—
—
0.1
516.7
(237.4)
—
—
0.1
520.4
(280.2)
—
—
0.1
520.4
(320.1)
—
—
0.1
520.4
(351.3)
—
—
0.1
520.4
(351.6)
—
—
0.1
520.4
(311.6)
—
—
Total Equity
(144.2)
279.4
240.2
200.3
169.1
168.8
208.9
16.7
(3.1)%
(25.6)%
(861.4)%
283.4
1.4%
108.1%
98.6%
243.1
1.2%
106.4%
98.8%
203.2
1.4%
107.8%
98.6%
172.0
1.7%
120.5%
98.3%
171.7
1.7%
148.5%
98.3%
211.7
1.4%
162.2%
98.6%
Other Liabilities
Accrued Dividends Payable
6.2
—
—
0.3
—
(4.1)
—
(10.0)
—
(5.1)
—
18.3
—
41.5
6.2
0.3
(4.1)
(10.0)
(5.1)
18.3
41.5
36.9
—
302.0
—
255.6
—
216.1
—
203.7
—
250.7
—
338.8
—
—
—
—
—
15.4%
91.7%
6.7%
0.0%
13.0%
13.0%
25.0%
0.0%
13.0%
13.0%
25.0%
0.0%
13.0%
13.0%
25.0%
0.0%
13.0%
13.0%
25.0%
0.0%
13.0%
13.0%
25.0%
0.0%
Current Liabilities
A/R Turnover
DSO
Inventory Turnover
Days Inventory
A/R as % of Sales
A/P as % of COGS
Inventory as % of COGS
A/R Gap
A/P Gap
Inventory Gap
Long-Term Assets
Net PP&E
Investments in Long-Term Securities
Acquired Technology
Other Assets
Long-Term Assets
Total Assets
Cash/Total Assets
Capital Structure
Long-Term Debt
Preferreds
Total Capital
Total Debt/Equity
Assets/Equity
Balance
144
Figure 52: CAPSTONE TURBINE CORPORATION—NON-CUMULATIVE
STATEMENT OF CASH FLOWS ($ in millions)
FY December
Operating Sources:
Net Income
Depreciation
Other
1999
2000
2001E
2002E
2003E
2004E
2005E
$(29.5)
2.4
—
$(31.4)
7.1
—
$(42.8)
7.3
—
$(39.9)
8.6
—
$(31.2)
13.6
—
$(0.3)
19.4
—
$40.1
25.0
—
(27.2)
(24.3)
(35.5)
(31.3)
(17.7)
19.1
65.1
Operating Uses:
Inventories
Receivables
Exchange Loss
Other
(1.2)
(2.3)
(1.3)
6.0
(2.4)
—
(1.4)
(5.7)
(1.2)
0.6
4.5
(6.8)
—
(17.9)
(3.6)
(3.3)
(0.1)
(1.3)
(1.1)
—
(19.8)
(2.1)
(7.4)
(0.3)
6.2
—
—
(20.0)
(5.2)
(10.4)
(1.9)
14.0
—
—
(16.0)
(18.1)
(33.9)
(2.9)
24.0
—
—
(12.0)
(19.5)
(28.0)
(3.4)
24.8
—
—
(12.0)
(2.7)
(26.5)
(29.1)
(23.6)
(19.5)
(43.0)
(38.1)
Operating Cash Flow
(29.9)
(50.8)
(64.6)
(54.9)
(37.2)
(23.9)
27.0
Short-Term Debt
Long-Term Debt
Sale of Stock
Repurchase of Stock
Other
Dividends
—
—
—
—
31.6
—
—
—
173.2
—
107.6
—
(0.4)
—
—
—
1.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
31.6
280.8
0.6
—
—
—
—
Free Cash Flow
4.9
1.7
6.6
6.6
230.0
236.6
236.6
(64.0)
172.6
172.6
(54.9)
117.7
117.7
(37.2)
80.5
80.5
(23.9)
56.6
56.6
27.0
83.6
Figure 53: CAPSTONE TURBINE CORPORATION—REVENUE, MARKET PROJECTIONS
AND OTHER OPERATING DATA ($ in millions, except per unit data)
FY December
30-Kilowatt Units
Average Selling Price
Cost/Kilowatt
Total Revenues
Annual Growth Rate
Percentage of Total
Unit Cost
Cost of Revenues
1999
—
—
—
$6.7
0.0%
0.0%
—
—
2000
782
29,178.0
972.60
$22.8
240.9%
98.4%
—
—
2001E
795
28,300.0
943.33
$23.3
2.1%
76.1%
27,100.0
(24.8)
2002E
875
27,000.0
900.00
$23.6
1.4%
49.6%
25,049.1
(21.9)
2003E
1,010
25,008.8
833.63
$25.3
6.9%
22.4%
23,320.7
(23.5)
2004E
1,090
24,367.5
812.25
$26.6
5.2%
11.5%
21,711.6
(23.7)
2005E
910
24,367.5
812.25
$22.2
(16.5)%
6.1%
20,213.5
(18.4)
Gross Profit
Gross Margin
—
—
22.8
100.0%
(1.5)
6.3%
1.8
7.5%
1.7
6.8%
2.9
10.9%
3.8
17.0%
60-Kilowatt Units
Cost/Kilowatt
Total Revenues
Annual Growth Rate
Percentage of Total
Unit Cost
Cost of Revenues
—
—
—
—
—
—
—
—
8
46,825.0
1,560.83
0.4
—
1.6%
—
—
143
49,550.0
825.83
7.2
1,687.5%
23.9%
46,398.7
(7.6)
490
48,902.0
815.03
24.0
233.2%
50.4%
41,531.6
(19.9)
1,255
47,924.0
798.73
60.1
151.0%
53.3%
36,273.3
(45.3)
1,630
46,965.5
782.76
76.6
27.3%
33.2%
33,434.8
(54.5)
1,950
46,026.2
767.10
89.8
17.2%
24.8%
32,687.6
(63.7)
Gross Profit
Gross Margin
—
—
0.4
4.7%
0.5
6.5%
4.1
16.9%
14.9
24.7%
22.1
28.9%
26.0
29.0%
125–250-Kilowatt Units
Cost/Kilowatt
Total Revenues
Annual Growth Rate
Percentage of Total
Unit Cost
Cost of Revenues
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
202
960
1,920
— 135,784.6 133,068.9 130,407.5
—
678.92
665.34
652.04
—
27.4
127.7
250.4
—
—
365.7%
96.0%
—
24.3%
55.3%
69.1%
— 127,896.1 104,172.2 96,299.3
—
(24.8)
(98.4)
(184.9)
Gross Profit
Gross Margin
Annual Growth Rate
Percentage of Total
Cost of Revenues
—
—
—
—
—
—
—
—
2.6
9.4%
29.4
23.0%
65.5
26.2%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6.7
—
—
—
790
23.2
—
—
—
938
30.5
31.5%
—
—
1,365
47.6
56.1%
—
—
2,467
112.8
137.1%
—
—
3,680
230.9
104.6%
—
—
4,780
362.3
56.9%
—
—
23.2
100.0%
(1.0)
(3.3)%
5.8
12.3%
19.2
17.0%
54.4
23.6%
95.3
26.3%
23.9
23.9
32.4
56.4
55.7
112.0
105.6
217.7
130.7
348.4
144.7
493.0
Gross Profit
Gross Margin
Total Units
Total Revenues
Annual Growth Rate
Gross Profit
Gross Margin
Total Megawatts Sold
By Period
Cumulative
146
November 12, 2001
FuelCell Energy, Inc.
(FCEL $14.50)
Change in . . .
Rating:
Operating EPS F2001E:
Operating EPS F2002E:
Rev F2001E (MM):
Rev F2002E (MM):
Yes/No
No
No
No
No
No
No
Market Cap (MM):
Was
Is
MP
$(0.47)
$(0.67)
$25.7
$55.3
NA
$47–10
39.3
$570
979
$8.26
NM
FY October
Operating EPS:
1Q
2Q
3Q
4Q
Year
P/E
F2000
F2001 E
$0.00
$(0.07)
$(0.04)
$(0.05)
$(0.16)
—
$(0.09) A
$(0.16) A
$(0.08) A
$(0.15)
$(0.47)
NM
Revenue (MM):
1Q
2Q
3Q
4Q
Year
Eqty Mkt Val/Rev
F2000
$3.6
$4.9
$4.1
$8.1
$20.7
—
F2001
$5.3
$6.5
$7.6
$6.3
$25.7
22.2x
E
A
A
A
F2002 E
$(0.04)
$(0.15)
$(0.26)
$(0.21)
$(0.67)
NM
F2002 E
$3.8
$13.0
$22.1
$16.4
$55.3
10.3x
Investment Conclusion: We believe the stock is currently fairly valued. While the company could
be profitable and perhaps very profitable because of the potential shift in the nature of power
demand to distributed power, we believe the most important element of long-term success is to
reduce costs significantly, which is a process that will need to unfold over several quarters before
investors can have an indication as to what future value can be realized.
•
There is an increasing demand for generation placed close to the load. The strain on
electric power grid systems stemming from increased demand and complex load profiles
has created a need for high-efficiency base-load and backup generation that is distributed
close to the use site.
•
The company is transitioning from government development projects to commercial
products. FuelCell Energy has had a long history in producing development projects for
the DOE and various other government-sponsored agencies, but is rapidly deploying its
capital to increase its commercial manufacturing capability in anticipation of launching fullscale commercial products in 2002.
•
FuelCell is positioning itself to reduce costs and spur commercial demand. The
company is in the final phase of a production ramp up that should increase capacity
significantly and position it to begin a descent down the cost curve. Because the units are
high efficiency, the greatest area for near-term cost reduction is in the fuel-cell stack, and
the company plans to price an installed unit at $1,400–1,600 per kilowatt in 2005.
•
Expansion of the distribution channel is under way. With U.S., European and
Japanese distribution in place, the company is planning to build power plant components
ahead of orders to enable the distributor to tailor the balance of plant to a specific market
segment. FuelCell is also seeking to sign additional distributors over the next 12 months,
particularly in North American markets.
Company Summary
FuelCell Energy develops small-scale power plants that provide power at or near the site where
power is consumed. The company’s power plants, which are designed to provide between 250
kilowatts and 3 megawatts, are powered by a molten carbonate fuel cell, which runs on natural gas
or alternate fuels and operates at relatively high temperatures for high fuel efficiency (between 45–
55% in testing) while producing water and heat as byproducts. Based in Danbury, Connecticut, the
company tested its first fuel cell stack in 1993 and has received research and development contracts
since C1994 from the DOE that have totaled $187 million to date. In addition, FuelCell has
participated in numerous federal and municipal projects and field trials. The company has additional
manufacturing facilities in Torrington, Connecticut, and is constructing a new testing facility in
Danbury. There are approximately 190 total employees, roughly half of which are engineers.
To date, FuelCell’s product output has been for R&D projects and field trials. Year to date, 67% of
revenue has been from R&D contracts with the remaining 33% from product sales. We expect the
company will generate revenue of $25.7 million in F2001, followed by $55.3 million in F2002.
The majority of delivered power worldwide is produced with a centralized production and distribution
system. This system produces power in bulk at large power plants and then distributes the electrons
across long transmission and distribution wires to be consumed as needed by businesses and
individuals. The main advantage to this system is that since power is produced in bulk, provided
there is a plentiful feedstock, such as coal, it is cheap. The disadvantages to this system are that
distribution is expensive and regulated, and relatively unreliable. Worse yet, everyone feeds at the
same trough; mismatches between load demand and load supply create sags and surges in the
power network that disrupt the operation of microprocessor-controlled equipment.
The disadvantages to the centralized power system are the market opportunities for FuelCell Energy,
which sells mid-sized power plants based on a molten carbonate fuel cell that provide distributed
power. In our opinion, the initial driver of FuelCell Energy’s market opportunity is the fuel cell’s high
power output, high efficiency and low emissions. But more important still we view the fact that power
generated close to the load is inherently more reliable than power taken from the grid. In our opinion,
this factor gives FuelCell its broadest market opportunity. This requires a close matching of supply with
the load requirements of the potential customer, and how much the customer will pay for power
reliability. We believe that amount is high relative to the price paid for the unreliable power from the
grid. EPRI estimates that in 2000 U.S. businesses lost $46 billion due to power quality problems. Yet
spending on backup power systems in the same year was approximately $11 billion. The gap between
these two figures is the margin that can be made up in sales of high-quality power, in our view.
years, demand for high-quality and backup power has surged. The construction of new data centers
alone was expected to require 2,000 megawatts of power over the next several years. Not to
mention the power quality requirements of all of the other support components—central switching
offices, remote terminals, cell towers—necessary to create a functional network. Today it is clear to
us that a lot of those data centers are not going to get built. However, what is often overlooked is
that there are hundreds of thousands of data centers already in place. It is just that they are
embedded inside the rollers in a steel mill or the ovens in a bakery. In our opinion, the demand for
high-quality power comes as much from traditional companies with semiconductor-driven process
control equipment as it will from the server and storage markets. According to an EPRI study, 64%
of the total losses from power quality and reliability problems occurred in the fabrication and
essential services segments of the economy.
148
We believe that the market for FuelCell Energy’s products begins with several specific opportunities.
The first is municipal. There are currently 15 states with renewable energy programs and more than
$1 billion in funds to seed the adoption of renewable energy sources. Although not technically
renewable, as solar, wind and water can rightly claim, fuel cells are typically classified as such and,
given their high power density, have considerable advantages in footprint and siting. The second is
in resource recovery applications, where the economics are advantaged because the source fuel is
virtually free (although this benefit is of greater value to companies with technologies that are less
efficient than the fuel cell). Third, units could be used to provide small doses of power at places where
load pockets occur. We believe that in many cases, it is easier and more economic to match the load
at the site where the “pocket” on the grid occurs than to string more wires back to the power source.
If FuelCell Energy is successful in pushing through high manufacturing volumes and further reducing
costs to the point that the total cost to produce power is comparable with the grid, then we believe
the company can aggressively pursue the $11 billion power quality market. The company’s DFC
units are well suited for power quality applications because the load can be closely matched by 250kilowatt increments and because the fuel cell maintains its efficiency at half-load demand,
maintaining its economics across dynamic load draws.
FuelCell’s Business Model
The first aspect of FuelCell’s business model is that it is in transition from a model that sells primarily
to the government through long-term development contracts to a model that is predominated by
sales of commercial units to the base-load power market. This transition is currently under way as
the company builds up its manufacturing capacity to produce 50 megawatts of fuel cells in annual
throughput. FuelCell’s legacy with government funding is a long one—the DOE has invested $370
million in the company since the mid-1970s to support the development of the DFC.
FuelCell’s commercial model has several objectives. The basis of the model is to exploit the
competitive advantages of the company’s molten carbonate technology, which utilizes high
temperatures to avoid external reformation and allows the company to confine the fuel-cell system
costs to the fuel-cell stack and the balance of plant (BOP). The marketable characteristics of the
DFC fall into two categories: relative to the grid and relative to other distributed generation
equipment. Relative to the grid, the DFC has higher inherent power quality and the potential for
competitive economics over time. Relative to other distributed generation technologies, the DFC has
extremely high fuel efficiency (mitigating one of the principal cost components of a distributed generation
system), is best used in a base-load, or primary duty, mode and has extremely low emissions. In
addition, the DFC can be combined with other combustion devices for cogeneration applications,
increasing overall efficiency and lowering power costs further.
As part of its transition to commercial production, FuelCell has focused its near-term manufacturing
on the fuel cell stacks, which are native to all of the potential package designs. Because it operates
at high temperatures, the molten carbonate fuel cell stack developed by FuelCell uses commonly
available materials and does not require a noble metal catalyst (such as platinum) to separate the
electrons from the source fuel. As a result, the company plans to manufacture its fuel cell stacks into
inventory and let the marketplace determine the remainder of the package. In addition, FuelCell is
focusing its commercial development model on improving the power output of the fuel cell to the
point that a 50% improvement in power output can be achieved with the same capital and fuel costs
that are anticipated today (the government has committed $40 million to the company to increase
power density to 1.0 kilowatts per cell from 0.6 kilowatts per cell and increase the efficiency of the
fuel cell to 55%).
One of the most important objectives of FuelCell’s commercial model is cost reduction. The current
scale-up to 50 megawatts of annual factory throughput (50 1-MW plants) is the company’s first step
to get onto a controlled manufacturing cost curve. FuelCell has adopted numerous manufacturing
techniques found in the semiconductor capital equipment industry and other technology-related
industries. In addition, the design of the fuel cell itself enables the company to make higher-volume
purchases of raw materials including stainless steel, nickel and ceramic powders. Because each
fuel-cell stack is essentially a one-off production, current fuel-cell stack costs are between $6,000–
8,000 per kilowatt. The company plans to reduce this number to between $1,400–1,600 per kilowatt
by 2005. In addition, as the company increases both the absolute power output (the introduction of
the megawatt-class commercial product) and the power density of the fuel-cell stack, the relatively
fixed cost of the balance of plant should be spread over a higher number of kilowatts, again
decreasing overall plant costs.
With cost reduction under way, FuelCell enables its distributors to develop the design and features
of the power plant that best suit a given market demand. As such, the company will supply
distributors with near-assembled components of a power plant and enable the distributor to tailor the
finished package to the customer set. This model significantly reduces selling costs, allowing the
company to focus on the reduction of fuel-cell stack costs. We believe that the distributors should
head in the direction of the markets that have been exposed by the government’s development
funding—the resource recovery market, the cogeneration market and the military.
Business Strategy
FuelCell’s strategy in anticipation of the commercial production of base-load fuel-cell power plants
has been to cost share the production of fuel-cell power installations for field trials in environments
that are the most readily accessible at the beginning of the cost curve. Rather than attempt to create
a unique package for its fuel-cell stack and market it to a variety of commercial and industrial
segments, the company has dedicated significant capital to putting units into the field in different
configurations to test the viability of the technology within a wide set of potential markets. Current
field trials are testing various fuel-cell packages in the resource recovery, base-load industrial,
nautical propulsion and cogeneration markets.
FuelCell’s model is to enable its distributors to define the end product as a particular market
segment dictates. The key point in the execution of this model is getting more distributors. The
company currently has three major distributors: PPL in North America, MTU in Europe and Marubeni
in Japan. Although the MTU distribution is exclusive in Europe and the Middle East and is focused
on the cogeneration market, FuelCell has the ability to add additional distributors in most other
regions in the world, and is currently working with several utilities in North America to develop a
more defined presence domestically.
Finally, FuelCell Energy—and all distributed generation manufacturers—needs to continue to invoke
the support of both political parties and demonstrate to the utilities the potential revenue benefit
distributed generation presents and not as a competitor. Although it has been successful at raising
money from the government, the company must also focus on raising some of the barriers—such as
interconnection standards, islanding, standby fees and exit fees—that impeded the smooth
integration of distributed generation with the current power grid. At the same time, FuelCell must
ensure that the regulatory environment outside of the United States is also structured in a way that is
advantageous from the standpoint of the customer economics. In Japan, the Ministry of Economy,
Trade and Industry has stated that its mission is in part to provide for “an efficient energy supply and
promote energy policies in harmony with the environment.”
150
FuelCell’s Products and Technology
FuelCell Energy’s commercial power plants are expected to be initially introduced in 250-kilowatt, 1and 2-megawatt capacity increments. Over time, the company plans to increase the power output of
the fuel-cell stack to enable the production of 300 kilowatt, 1.5- and 3 megawatt without a significant
increase in total product cost. The units are to be sold through the distributors, which will likely
configure the balance of plant while FuelCell will deliver the fuel-cell stack that provides the power to
the unit.
Although there are no current commercial products available, the company expects to offer products
beginning in C2002. The fuel-cell stack is expected to need replacement every five years, or five to
six times throughout the life of the system, a process estimated to take two weeks (this translates to
96% availability of the unit). The structure of the maintenance contract for the units has not been
determined at this point, although we expect that this area will fall into the distributor’s side of the
court. We expect FuelCell will key its initial average sales price against current prices charged for
the ONSI fuel cell, which is the only commercially available fuel-cell power plant in the market. We
estimate that adjusted for power-density parity, FuelCell will charge between $4,500–5,500 per
kilowatt for its initial commercial products.
A fuel-cell power plant can be thought of as having two basic segments: the fuel-cell stack module,
the part that actually produces the electricity, and the BOP, which includes various fuel handling and
processing equipment, including pipes and blowers, computer controls, inverters to convert the DC
output of the fuel cell to AC, and other related equipment. FuelCell Energy provides the fuel-cell
stack modules, while the BOP is provided by the distributor.
Fuel Cell Technologies and FuelCell’s Molten Carbonate Technology
Fuel cells produce electricity through an electrochemical reaction, as opposed to combustion. In a
steam-based process, for example, the burning of fuel creates heat, which can then vaporize water
and create steam under pressure. This steam can then be channeled to spin a turbine, the
mechanical energy from which can be transformed into electricity by a generator. In a fuel cell,
electricity is generated directly from the fuel and at a much higher efficiency. There is no
combustion—instead electrons are forced to break off the atoms of the input fuel and are routed to
an external conductor. As a result, the emissions from fuel cells are significantly lower than from
combustion-based generators and are usually in the form of water.
A fuel cell consists of an electrolyte sandwiched between two electrodes termed an anode and a
cathode. Pure hydrogen, or a fuel containing hydrogen, enters through the anode, while oxygen (air)
is fed to the cathode. A catalyst is typically part of the design and is used to accelerate the
separation of hydrogen atoms into their components, electrons and protons. Electrons are then
channeled through the external circuit providing power to the load demand.
The basic unit of a fuel-cell system is a fuel plate. To increase the power of the system, several fuelcell plates—which each generates a voltage between 0.5V and 1.0V—are combined into a stack.
The stack is then integrated with a fuel reformer and power electronics module. The following
describes a generic model of how the process of a fuel-cell takes place:
•
Fuel containing hydrogen flows to the anode where the electrons are stripped from
hydrogen atoms. The hydrogen atom is formed of only one electron and one proton; the
remaining positive hydrogen ions are protons. This reaction is accelerated by the presence
of a catalyst, usually platinum or other metal. In general, the lower the temperature of a
fuel cell, the greater its dependency on a catalyst. This is because the process of exciting
atoms gets easier with heat.
•
Since the electrolyte allows only the passage of protons or other ions, electrons at the anode
are forced to flow toward the cathode through an external circuit—this is the power output.
•
The ions (protons) remaining from the separation process diffuse through the electrolyte
(an internal circuit). At the cathode, oxygen from the air combines with the protons coming
through the electrolyte to form water. This process, which is called a proton exchange, also
creates controllable heat.
•
The process that occurs in a fuel cell is essentially the reverse of water electrolysis. In a
fuel cell, the electrochemical union of oxygen and hydrogen creates electricity and water is
a byproduct. By contrast, an electrolysis cell uses electricity to separate water into its
constituents, hydrogen and oxygen.
•
A generic fuel-cell plant includes a fuel-cell stack, some type of fuel reformer and a power
control system. The fuel reformer is needed for low-temperature systems that are fed with
fuel other than pure hydrogen. The reformer, essentially a miniaturized refinery, separates
hydrogen from fuel through a variety of processes including steam reforming, partial
oxidation and gasification. The power control system inverts the direct current power output
of the fuel cell into AC and controls the overall operation of the unit.
Types of Fuel Cells
Fuel cells can use either pure hydrogen or various fuels containing hydrogen as input; hydrogen can
be produced separately or extracted from the fuel in the reforming section of the power plant. One
should note that this was the description of a generic fuel cell. There are several classes of fuel-cell
designs with significant differences among them. Fuel cells are commonly classified by their
electrolytes (the middle part of the sandwich). A comparison of different types of fuel cells is
summarized in Figure 54.
Direct FuelCells (DFC)
In the Direct FuelCell (DFC), as the carbonate-type fuel cell produced by FuelCell Energy is called,
the electrolyte is actually molten. A DFC operates at temperatures of up to 650°C. These cells are
called direct because they can be fed with a variety of fuels that contain hydrogen (ethanol,
methanol, natural gas, biogas, etc.) directly, rather than using pure hydrogen produced in an
external fuel processor.
Direct fuel cells are inherently more efficient compared with external reforming fuel cells and can
generate power fuel efficiency as high as 50–60% in a single cycle. Given the high temperature of
the waste heat, the efficiency of a direct fuel cell can be increased further to 75% with cogeneration.
The higher operating temperatures of direct fuel cells also allow for a simple design and relatively
low material costs, but require a relatively large footprint. Given their size and the amount of time it
takes a direct fuel cell to warm up (several days), direct fuel cells are best suited for stationary baseload solutions.
The primary emissions from FuelCell’s DFC are a humid flue gas that is discharged at a temperature
of approximately 700–800 degrees Fahrenheit, water that is discharged at a temperature of
approximately 10–20 degrees Fahrenheit above ambient temperatures, and carbon dioxide.
152
Figure 54: COMPARISON OF MAJOR FUEL-CELL TECHNOLOGIES BY ELECTROLYTE
Polymer
Electrolyte
Membrane
PEMFC
Ion-exchange
membrane
Phosphoric Acid
Electrolyte
PAFC
Phosphoric acid
Electrolyte State
Solid
Immobilized Liquid
Charge Carrier
H+ (protons)
Cell Structure
Catalyst
Electrolyte
Carbonate
Electrolyte
MCFC
Molten alkali
(lithium,
potassium)
carbonate mixture
Immobilized Liquid
Solid Oxide
Electrolyte
SOFC
Yttria-stabilized
zirconia (YSZ) and
other electroceramics
Solid (ceramic)
H+
CO3=(carbonate
ion, negative)
O=(oxygen ion,
negative)
OH-
Polymer electrolyte
membrane matrix
C/metal hardware
SiC matrix, Teflonbonded electrolyte
C/metal hardware
High-temperature
alloys and
ceramics
Regular plastics
Platinum only
Platinum family
Perovskites (e.g.,
lanthanum
manganate)
(Ni/YSZ) anode
LaMnO3
Broad range of nonnoble metals and
oxides
Porous carbon
paper substrates
Liquid immobilized
inside porous
ceramic and
stainless steel
hardware
Nickel (no need for
noble metal
catalysts)
Nickel-based
materials
Electrode Material
Alkaline Electrolyte
AFC
Potassium
hydroxide
Liquid
Operating
Temperature °C
80° C
200° C
600–650° C
600–1,000° C
50–250° C
Cogen Potential
None
Moderate
High
High
Low
Efficiency
Less than 40%
37–42% (up to
85% w/ cogen)
50–60%
> 80% cogen
50–60%
85% cogen
Up to 70%
Fuel
Pure hydrogen
Natural gas,
methane, ethanol
Hydrogen (no CO2
contaminant)
Reforming
Reformed
externally
Reformed
externally
No need for
external reformer
No need for
external reformer
Not compatible H2
from electrolysis
Output Power
0.0001–0.25 MW
0.2–10 MW
0.1–3 MW
0.005–10 MW
0.05–0.1 MW
Target Cost $/W
$0.5–1.0
$3.5–4.5
$1.4–3.0
$1.0–1.5
$2.0–3.0
Applications
Portable, vehicle,
small, high density
Stationary
Large applications
at constant loads
Aerospace, vehicles,
stationary
Pros
Low operating
temperature, fast
start-up, high
energy density
Commercially
available
No external
reformer, no noble
metal catalyst,
high-quality waste
heat
Cons
Platinum required,
CO intolerant
Platinum required
higher cost
Developers
Avista Labs
Ballard Power Sys.
Electrochem
H Power
Int’l Fuel Cells
Plug Power
Proton Energy Sys.
Nuvera Fuel Cells
All carmakers
Others
2002
United Tech.
(ONSI)
Fuji Works (Japan)
Electrolyte is
corrosive; stainless
steel required
FuelCell Energy
HTU (Germany)
IHI (Japan)
Stationary, high
power, possibly
motor vehicles
Multiple fuels,
internal reforming;
few problems
with solid
electrolytes; highgrade waste heat
Exotic high-temp
materials needed
Siemens/
Westinghouse
Ceramatec
Ceramic Fuel Cells
Global
Thermoelectric
Acumentrix
Fuji
Ztek
Astris
ZeTek Power
1992
2002
2003
1999
Comm. Availability
Components other
than electrodes,
cheap, fast start-up
CO2 contaminates
electrodes
Source: Company reports, Fuel Cell Commercialization Group and Robertson Stephens.
Field Trials and Projects
The company has numerous field trials under way for units ranging between 250 kilowatts and 1
megawatt. We have summarized FuelCell’s current projects in Figure 55.
In addition to these field trials, FuelCell Energy has received an order from PPL Spectrum, a
subsidiary of PPL, for the purchase of a 250-kilowatt DFC power plant that will be installed at the
United States Coast Guard Air Station Cape Cod located in Bourne, Massachusetts. PPL will
develop the facility and install the fuel cell, while FuelCell Energy will supply the fuel-cell power plant.
The project will be owned and operated by the Coast Guard, with project sponsors including the
DOE’s National Energy Technology Laboratory, the Massachusetts Renewable Energy Trust and
Keyspan, Inc. The project is expected to be installed in the first half of C2002.
FuelCell is scheduled to deliver seven new fuel-cell power plants to MTU starting later this year.
MTU will site these commercial field trials for a variety of applications. The locations include:
(1) RWE, for heat and power at an energy park; (2) IZAR, base-load energy for ship building
company; (3) Deutsche Telecom, for DC backup power for a telecommunication center;
(4) EnBW/Michelin, for electricity and process steam for a tire manufacturing plant; (5) Eon/Degussa, for generation of power, heat and CO2 gas for industrial usage; (6) IPF KG, for backup
power and cogeneration for the Otto-v-Guericke University Medical Institute; and (7) VSE AG, for
cogeneration for industrial laundry and CO2 use for greenhouse fertilization.
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Figure 55: FUELCELL ENERGY, INC.—FIELD TRIALS AND PROJECTS
Project/Field Trial
Santa Clara Demo Project
Type
Project
Description
Total Size Date
1.93 MW, 44% electrical efficiency 1.93 MW 1996–1997
Danbury, CT Project
Project
One 263-kW fuel-cell stack
Bielefeld, Germany
Project
—
Installed at Univ. Bielefeld,
Germany, MTU design; efficiency
45%; 77% w/ cogen
November 1999–Present
Danbury, CT Endurance Project
Project
Commercial design endurance
project, multiple fuels
April 1998–July 2000
Rhon Clinic Project
Project
MTU, local gas company and local 250-kW
utility; 250 kW; hospitals; cogen
unit
Los Angeles Department of Water
and Power (LADWP)
Field Trial 250 kW; LADWP contributes
$2.4 million
Mercedes-Benz (in Alabama)
Field Trial 250-kW, MTU design; partnership —
w/ utilities Southern, Amea each
contributing $1 million
Start October 6, 2000
MTU
Field Trial Balance of plant
—
Ongoing
Marubeni
Field Trial Strategic alliance on distribution
Asia, Japan; equity investment
by Marubeni
45 MW
—
Clean Coal
Contract
2 MW fuel cell; part of 400 MW,
$432 million project partly funded
by the DOE; larger goal
gasification effort; the DOE fuelcell contribution $17 million
2 MW
Expected 2003
Ohio Coal Mine Methane
Contract
DOE National Energy Tech. Lab.,
250-kW DFC power plant;
cost $5.4 million shared 50/50
with the DOE
Vision 21 for DOE
Contract
Proof of concept for 40-MW
DFC/T 75% efficiency
power plant
Navy Phase II
Contract
*Purpose: develop fuel cells that —
use marine diesel. *Subscale fuel
stack tested in 1999
—
U.S. Coast Guard
Contract
KW fuel-cell power system, using —
methanol for fuel in Virginia
—
King County, WA
Contract
1-MW DFC, uses wastewater
digester gas; value $18.8 million
shared 50/50 with EPA
1 MW
Signed January 2001;
delivery 2002
University of Connecticut
Contract
—
250-kW
unit
Contract Q2:01;
delivery 2002
Connecticut Resources Recovery
Authority (CRRA)
Proposal
Pending; not clear when and if it is 26 kW
going to be approved by CT Dept.
of Public Utility Control
263 kW
February 1999–July 2000
n x 8 kW
250-kW
unit
2001
Signed May 2000
2002
250 kW
—
Pending as of
August 29, 2001
FuelCell has entered into distributor agreements with three main entities: PPL, which in September
2000 agreed to become the first distributor of DFC products in North America; Marubeni, which in
February 2000 agreed to site and test units in Japan; and MTU, which in December 1999 signed a
agreement to license the patent rights of the technology in Europe and the Middle East on an
exclusive basis, and in South America and Africa on a non-exclusive basis. In addition to these
formal agreements, the company has distributed its product through Southern Company, the superregional utility based in Atlanta, Georgia, which has the rights to negotiate for a distribution
agreement in southern U.S. states until the end of C2001, and is in discussions with five other utility
distributors in North America. Ultimately, FuelCell intends to have a network of 10–12 U.S.
distributors, while MTU will be responsible for developing a network of distributors in Europe.
MTU Friedrichshafen is a German manufacturer of large diesel engines and complete drive systems
that has worked on projects with Detroit Diesel. MTU’s New Technologies division is based in
Munich-Ottobrun. MTU first entered into a license agreement with FuelCell in 1989 and has
developed its own balance of plant designs for its intended markets. With its current agreement,
FuelCell Energy has exclusive royalty-free rights to use any improvements made to the DFC in any
market around the world except in Europe and the Middle East, and in turn, FuelCell sells its
components and fuel-cell stacks to MTU at cost plus a marginal fee. This agreement runs through
December 2004.
Marubeni is a diversified Japanese industrial corporation, headquartered in Tokyo and Osaka,
Japan. Through its distribution agreement, Marubeni’s energy division will provide field trial
marketing, management and distribution services, and has ordered five sub-megawatt class DFC
power plants. This agreement runs through December 31, 2001. Marubeni also has a utility and
infrastructure business that is working on wastewater treatment and environmental projects.
The distributor agreement with PPL, a Pennsylvania-based merchant provider of power and natural
gas across the United States, makes PPL the first distributor of the DFC in North America. As part of
the agreement, PPL has agreed to order at least 1.25 megawatts of field trial products by March
2002 and establish the next minimum order amount by the end of 2003. PPL also purchased
212,608 shares of FuelCell common equity at $47 per share. This agreement runs through
December 31, 2004 and is subject to three-year extensions prior to that date. As part of the
agreement, PPL intends to make “reasonable efforts” to promote and sell the DFC products,
although the agreement is non-exclusive.
Suppliers
FuelCell Energy relies on several suppliers that provide BOP components including the electrical
systems, inverter, software, mechanical systems, islanding systems (which stop the flow of power
back out onto the grid in the event that the grid goes down), as well as the gas and air flow systems.
The company currently uses ABB for electrical systems as well as GE and SatCon for additional
systems. Fluor Daniel’s Oil, Gas & Power unit is used for the design and engineering of the balance
of plant systems.
156
Patents
The company has 43 U.S. and 98 international patents, the majority of which are related to the fuelcell technology itself. The company has submitted 9 additional U.S. patents and 27 international
patents. The average remaining life on the patents is nine years. All of the U.S. patents that have
resulted from government-funded research are subject to march-in rights that grant the government
irrevocable rights to license the technology covered in the patent to other developers if the company
is not itself continuing to develop the technology.
Customer Economics
The customer economics for the DFC is a function of capital equipment costs, installation costs, fuel
costs, and maintenance and replacement costs. It is difficult at this stage to get an accurate picture
of what the costs for an installed DFC will be, given management’s indication that it is not yet on the
cost curve for commercial products. The capital equipment costs consist of the fuel-cell stack and
the BOP. The current forecast is that the fuel-cell stack needs to be replaced every 5 years and the
balance of plant will last 25 years. Since all cost work is based on the ultimate life of the plant, the
basis of the customer economics for the DFC is 25 years, or 208,050 hours at 95% availability. This
translates to 208,050,000-kWh.
Management has suggested that it will be able to produce a megawatt fuel-cell unit that can be
delivered and installed for $1,500 per kilowatt if it pushes 400 megawatts of production through its
facility in F2005. We have extrapolated further from this estimate to arrive at a potential long-term
cost to produce power by taking into account the fact that the BOP represents half of the cost of the
delivered unit. This also requires a guess at what installation costs might entail, which we have
estimated might be in the $225,000 area. Since the fuel-cell stack needs to be replaced every five
years or sooner, and there is a maintenance contract attached, the only true fixed costs are the BOP
and the installation. If the installed cost is $1,500 per kilowatt for 1,000 kilowatts the aggregate upfront cost is $1.5 million. If we subtract $225,000 for installation from this number, we get $1.3 million
for the fuel-cell stack and BOP, or $637,500 each. Replacing the fuel-cell stack every 5 years brings
the total expenditure for fixed costs to a net present value of $3.6 million over 25 years discounted at
3%, or $0.017 per kWh of fixed costs.
We do not have an estimate of what maintenance will entail—it could be marginal or it could be
substantial—since no stack has ever run for 40,000 hours continuously (the longest a unit has run
continuously is 17,500 hours, and not for a megawatt stack). To calculate potential fuel costs, we
convert the 6,824 effective estimated heat rate (at 50% efficiency) and the cost of natural gas
measured in Btus to arrive at a per-kilowatt estimate of fuel costs. The efficiency of the unit—
between 50–55%—is what gives it an advantage over other non-fuel-cell power generation devices,
which is demonstrated by the cost per kilowatt of fuel. For a static $6 per Btu natural gas price, the
cost of fuel per kilowatt produced based on management’s projected heat rate is $0.041 for a
megawatt plant. For $7 gas, it is $0.048 and for $4 gas, it is $0.027.
Taking the anticipated fixed costs together with projected fuel costs, we calculate that the total cost
to produce power is $0.045–0.065 excluding maintenance. While we believe that this range of
economics is an attractive starting point for competitive base-load generation, it is based on some
optimistic and unproven assumptions. First, there is the issue of maintenance costs, which is a
legitimate concern given the assumption that the stack can run more than 40,000 hours when the
longest a given field-test stack has run is less than 40% of that. Second, there is the assumption that
the stack will run for five years; again, there is no experience to support this assumption. Third, and the
most overwhelming, is the pace at which fuel-cell costs can be brought down. Change the price of the
installed unit to $2,000 per kilowatt and the total economics increases to $0.071 at $7 gas. At $2,500
per kilowatt, the economics increases to $0.078. While all of these estimates are currently in the range
necessary to compete with the grid, we do not believe we will have a reasonable estimate of the
customer economics until units are actually sold to customers and installation and maintenance costs
can be more accurately projected, as well as the pace of fuel-cell stack cost reduction.
Threat of entry. The threat of entry is high for FuelCell Energy, given the numerous technologies
that can be used to produce power. A landmark shift in the cost curve in the solar or wind industries
could result in products that compete comparably with FuelCell in economic terms and simultaneously
satisfy the low-emissions requirement in some of the company’s targeted markets. In addition, existing
lower-cost reciprocating engines could be outfitted with new emissions-reduction technology.
Threat of substitution. While FuelCell Energy is one of the first companies that is in the process of
rounding the bend toward commercial offerings of fuel-cell-based power plants, there are numerous
other companies in the process of developing molten carbonate fuel cells specifically, including
Toshiba, Hitachi, IHI, Mitsubishi Heavy and Ansaldo, and fuel cells in general, including Ballard
Power Systems and International Fuel Cells. Beyond the potential for substitution by competitors’
fuel cells, the company’s products are also subject to a substitutive threat from other distributed
generation technologies, including microturbines, wind and solar arrays.
Bargaining power of buyers. With few commercial buyers currently in place, it is difficult to assess
what kind of bargaining power they may possess. In our opinion, it would seem that since power from
the grid can be readily marked-to-market the value of the DFC’s power quality characteristics will
determine the extent to which buyers are willing to accept prices that are at a premium to the grid.
Bargaining power of suppliers. Given that the company’s fuel-cell design was developed around
the use of a catalyst made from readily available commodity materials, we do not anticipate any
serious bargaining pressure from suppliers on the fuel-cell stack itself. The BOP, which may prove to
be a difficult cost to reduce, is of greater concern. However, if FuelCell is successful in migrating the
function of BOP construction to the distributors, then the corresponding risk of supplier cost will be
put to the distributor and not to FuelCell Energy.
Rivalry among current competitors. The rivalry among FuelCell’s current competitors is somewhat
a function of who is considered a competitor. There is little rivalry among developers of fuel cells
since only one—International Fuel Cells, a United Technologies company—has a commercial
product on the market. Among producers of base-load generation equipment, there is a gap
between the 1- to 15-megawatt range, where FuelCell’s products are initially targeted. However, the
most formidable current competitor—the public power grid—has in many areas a host of unfair
advantages, including standby fees and disconnect fees, to go along with a delivered power price
that is difficult for any base-load distributed generation equipment to meet.
We have projected FuelCell Energy’s financial potential through F2005, including estimates for the
158
Revenues
The majority of the company’s revenue to date has been from government contracts. Government
contract revenue accounted for 87% of total revenue in F2000, 87% of total revenue in F1999 and
100% of F1998 revenue. FuelCell recognizes revenue for its government and project business using
the percentage-of-completion method, which is based on the ratio of cost incurred for a period
relative to the total estimated cost of the project. The government contracts are typically multiyear
projects that are based on cost reimbursement. The normal cash cycle for a percentage-ofcompletion project is 10% cash up-front, which becomes deferred revenue, and another 40% of cash
when materials are ordered. When materials are received, revenue is booked, usually as
components are built into inventory. The maximum revenue at this point is less than 50%; much of
the revenue recognition is at the back end of the project, generally a positive for cash flow.
We estimate that FuelCell Energy will generate $25.7 million in revenue in F2001, a 24% increase
when compared with F2000. Our estimate for F2002 revenue, the first year in which the company
expects to sell commercial products, is $55.3 million, followed by $94.8 million in F2003. Our
revenue estimate for F2005 is $347.0 million.
If the company achieves its objectives in current field-trial projects and introduces a commercial
product according to the current schedule of projections, then the mix of revenue recognition will
favor recognized upon shipment over percentage of completion by F2004.
Sales Mix. The current sales mix is a combination of government and municipal contracts, including
the ship service U.S. Navy Phase II diesel fuel contract, the Clean Coal synfuel project, the Vision 21
project 40-megawatt fuel cell/turbine project, and the King County, Washington, digester gas project.
In the first six months of F2001, FuelCell also recognized revenue from projects with the Los
Angeles Department of Water and Power, Mercedes-Benz, and Marubeni. We expect the Navy,
Clean Coal, Vision 21 and King County projects will contribute significantly to Q4:F01 revenues.
The Sales Cycle. The current sales cycle for the company’s existing contracts is approximately one
year. Because of various staggered contracts that require higher percentages of expenses in certain
quarters than in others, there is lumpiness in the revenue stream. For 2H:F01, revenues are
expected to be higher than in the first half of the fiscal year as the Navy Phase II, Vision 21 and King
Country contract and demonstration revenues increase. In commercial production, FuelCell expects
total turnaround in a range of 60–90 days for 250-kilowatt units and 90–180 days for megawatt
power plants. As the company’s strategy depends, to some extent, on the ability of distributors to
generate sales, the edge of these ranges will be determined by the sales cycle determined by the
distributors. The length of the sales cycle is also subject to the permitting process, although given
the DFC’s low emissions profile this is not expected to be a major obstacle.
Contract Type. FuelCell’s commercial demonstration and field trials contracts are structured as
fixed price or cost sharing. A fixed-price contract consists of a fixed price that is set in advance
regardless of costs. A cost-sharing contract includes an agreed contribution by the company to fulfill
the project. Most of the company’s contracts are currently cost shared.
Projected Pricing. FuelCell plans to set its initial prices for its project units to be comparable to the
price charged for the International Fuel Cell ONSI product, which is the only commercially available
high-power fuel cell currently on the market. FuelCell plans to price the units at approximately
$5,000 per kilowatt; the ONSI unit is priced at $4,200 but has less efficient use of fuel. For
commercial products, the ultimate cost per kilowatt is a function of both cost reduction and the final
size of the unit; the 250-kilowatt plant is expected to be scaled up to 375 kilowatts by F2004, while the
1-megawatt plant is expected to be scaled up to 1.5 megawatts and the 2-megawatt unit is expected to
be scaled up to 3 megawatts. Based on management’s gross margin expectations of 5% in F2002
scaling to 25% in F2004, we estimate FuelCell’s price per kilowatt will be in the $1,700–1,800 range by
F2004. The capital cost for the units is calculated by dividing the total number of hours the units are
expected to run by the kilowatts produced per hour.
Royalty Agreements and License Fees. FuelCell has several agreements that require royalty
payments to development partners in the event that the project developed reaches a certain level of
units or total megawatts per year. Under an agreement with the Los Angeles Department of Water
and Power, FuelCell is required to pay 2% of net sales revenue when sales of fuel cells reach 50
megawatts per year, capped at $5 million. The company also has royalty agreements with MTU,
Santa Clara County, California, and EPRI. FuelCell has also agreed to pay the DOE 10% of the
annual license income the company receives from MTU.
Gross Margin
As is true with all of the distributed generation companies, the key driver in future sales is cost
reductions; the demand for low-emission and high-reliability characteristics increases significantly
when costs are comparable with existing power on the grid. FuelCell Energy currently sells its
commercial product at a loss. The government projects are recorded with a gross margin that
averaged 2.0% in the first nine months of F2001. As a result, the company breaks its revenues into
two lines, commercial and government, charging cost of goods sold against the commercial sales
and government contracts against research and development. We estimate the company will
achieve a gross margin of (1)% on its commercial sales in F2002, 11% in F2003, and 15% in F2004,
which translates to a gross profit loss of $0.1 million in F2002, followed by $6 million in F2003 and
$18 million in F2004. We believe gross margin will be subject to the factors listed in the following.
The timing of the first large-scale orders. Although the company expects to make a modest margin
on these units, the real benefit of such an order is to push units through the facility and better assess
cost-reduction estimates and processes.
The degree to which the cost of the balance of plant decreases. The BOP is a relatively fixed
cost that accounts for a significant portion of the total unit cost to the customer (although BOP may
be designed and constructed by the distributor, the invoice for the total unit comes from FuelCell).
For the 250-kilowatt unit, the BOP represents a higher percentage of total cost than it does for the
megawatt unit, so future gross margin implications are also a function of the mix between smaller
units and larger units. In other words, we do not expect a significant absolute reduction in the cost of
the BOP, but that relative to the cost of other components in the unit, gross margin is advantaged on
larger units.
Our model currently assumes management’s projected cost reductions and builds pricing
assumptions from those cost assumptions. Without a large-scale order in place, and with the
majority of current sales derived from government contracts, it is difficult to determine one way or the
other the extent to which the company can reduce its costs and on what time line. Cost of goods
sold for FuelCell’s currently produced units averages approximately $8,000 per kilowatt; the
company expects that at 50 megawatts of throughput (full capacity utilization given current facility
plans) the cost decreases to $2,500–3,300 per kilowatt, depending on the size of the unit. For
instance, management estimates that if all 50 megawatts were produced as 2-megawatt units the
average cost would be $2,500 per kilowatt, the low end of the expected range. Management has
estimated that at 400 megawatts of throughput (a 700% increase over currently planned capacity),
the average cost per kilowatt would be approximately $1,200.
160
SG&A
We estimate that SG&A will run approximately 35% of sales in F2001, 30% of sales in F2002 and
decrease significantly thereafter. FuelCell’s strategy focuses on selling to distributors as opposed to
end customers and, thus, does not require a large direct sales force. Instead, we expect the main
components of SG&A will be for installation instructors, maintenance instruction and customer service.
FuelCell Energy’s research and development (R&D) expense line is directly tied to its government
contracts and accommodates cost-sharing contracts. We expect R&D expenses of $52.5 million in
F2002 and $36.7 million in F2003. By F2004, we expect the bulk of commercial product R&D will be
deployed and that absolute R&D will fall off to $31.0 million and $24.0 million in F2005.
Depreciation
FuelCell’s depreciation is mostly tied to its capital expenditures on manufacturing facilities, which are
straight-lined over a seven- to eight-year period. We estimate depreciation expense of $2.2 million in
F2001, $6.8 million in F2002, $13.3 million in F2003, $17.6 million in F2004 and $21.3 million in F2005.
Our estimates are based on a given year’s capital expenditures divided by seven and a half years.
Operating Income
We estimate that FuelCell Energy will turn operating income positive in F2005, based on throughput
of 200 megawatts. We estimate long-term operating margin will average between 5–10%, beginning
with the F2005 period, based on gross margin estimate of 25% and significantly lower R&D as a
percentage of total revenue.
Net Income and Earnings per Share Analysis
We estimate a net loss in F2001 of $(16.3) million, although net income in F2001 is essentially a
function of accounting for government contracts and is more a reflection of the schedules of those
contracts than a general business trend. This translates to a $(0.47) operating loss per share.
FuelCell’s management regards potential profitability as a function of the timing of its manufacturing
capacity, and points to a capacity of 400–500 megawatts per year as necessary to achieve a profit.
Given the expected adoption rate for the company’s products, this level of capacity could be reached
in F2005, which would likewise be FuelCell’s first year of profitability.
We estimate a net loss in F2002 will of $(26.7) million, which translates to a $(0.67) operating loss
per share. Our net loss estimate in F2003 is $(17.7) million, or an operating loss per share of
$(0.43), followed by $(13.0) million, or a $(0.31) operating loss per share, in F2004. Our net income
estimate for F2005 is $9.0 million, by which time we expect FuelCell will be generating the majority
of its revenue from sales of commercial products.
Manufacturing Capacity and Utilization; Capital Expenditures
FuelCell is currently in the midst of a transition from a manufacturing facility capable of producing 5
megawatts of fuel-cell stacks to a factory with a capacity of 50 megawatts. This transition is
expected to be complete by year-end C2001. We estimate that capacity utilization will run
approximately 5% in F2001 and 6% in F2002.
We expect that total capital expenditures for the plant transition will be approximately $18 million in
F2001, including plans to spend $5 million to expand the testing facilities at the Danbury
headquarters. At the end of F2002, if production estimates are met and there is significant visibility in
order flow, we expect the company will add another 70 megawatts of manufacturing capacity in
F2003, at an estimated cost of $20 million. We estimate that further capacity additions of 60
megawatts in F2003, 100 megawatts in F2004 and 100 megawatts in F2005, which would bring total
capacity to 380 megawatts, will require an additional $40 million in capital expenditure.
We estimate FuelCell Energy will have working capital on hand of $285.7 million in F2001 and
$245.7 million in F2002. As of the end of Q2:F01, FuelCell Energy had a cash and marketable
securities total of $59.0 million; a subsequent secondary offering of stock raised $240 million in early
June, bringing total cash on hand to approximately $300 million, or $9.50 per share. We estimate
that cash and equivalents currently represent approximately 90% of total assets.
We estimate FuelCell Energy will generate free cash flow of $213 million in F2001, $(47) million in
F2002 and $(23) million in 2003. Thereafter, we expect free cash flow of $(8) million in F2004 and
$11 million in F2005. Based on investment expenditures of $25 million in F2001, $20 million in
F2002 and $20 million in F2003, we estimate a cash-burn rate of $7–9 million per quarter over the
next 24 months. We believe the company’s current cash balance will extend well past this burn rate,
all other factors held constant. Typical contracts require 10% of cash up-front, 40% on receipt of
materials and the remainder on acceptance of the unit.
Receivables
Receivables as a percentage of sales have averaged 77% year-to-date F2001, with the most recent
quarter representing 83% of sales. This represents turnover of 1.4 and DSO of 65. As is the case
with the revenue mix, the majority of receivables are derived from government contracts,
representing 73% of receivables at F2000 and 90% of receivables at F1999. We expect receivables
as a percentage of sales will increase to 75% in F2002 and F2003 based on current manufacturing
turnaround estimates.
Inventory
We estimate that inventory as a percentage of sales will be approximately 35% at year-end F2001.
With 50 megawatts of capacity installed at year-end C2001, the company expects to begin
producing fuel-cell stacks into inventory. We expect these stacks will be recorded in inventory at
cost, which is currently $7,000 per kilowatt. We estimate FuelCell will produce more than 14–16
megawatts of fuel cells in F2002, but that booked revenue will likely lag production of fuel-cell stacks
by six months or so. As a result, we expect inventory as an average percentage of sales to increase to
38% in F2002. Thereafter, we expect inventory as a percentage of sales to stay in the 37–38% range
in F2003 and F2004.
Capital Structure
On the surface, FuelCell Energy’s capital structure looks fairly straightforward: $325 million in equity
and $5 million in debt in the form of a Connecticut Development Authority loan and a small credit
facility. However, in reality the capital committed to the company is much more complex, notably
because of the significant capital deployed by the DOE since 1994. The aggregate amount of DOE
contracts from the period December 1994 to December 2003 is expected to reach $213 million, of
which the DOE contributes $135 million in cash. The remainder of the capital necessary for these
contracts, which are essentially research and development for FuelCell’s commercial projects, is
contributed by the company—that is, other investors. The remaining amounts for the DOE in F2002
and F2003 are approximately $13 million per year. Of the $78 million difference between what the
DOE contracts will spend and what the company must provide, 70%, or $55 million, has been
funded by partners, licensees, other private agencies and utilities in the form of in-kind or direct costshare sources. This puts the required equity contribution of FuelCell Energy currently at $23 million,
which can easily be covered by the $240 million in public equity raised in June 2001.
162
In our opinion, this is the best kind of leverage: for a $213 million R&D project, which can potentially
be translated into commercial products for the company, the company is required to put up only 37%
of the capital in equity. On top of that, the 77% of required capital to finish the project that the
company does not have to pay has no associated interest expense or principal payments. In other
words, the equity holders of FuelCell Energy get $1 worth of free capital for every $0.58 they put in.
If the contributions of licensees, other private agencies and utilities (in the form of in-kind or direct
cost-share sources) is also taken into account, then the public equity investors only have to pay
approximately $0.12 for $1 worth of free capital, while retaining the vast majority of the upside from
the project.
Additional equity contributions have come from a secondary offering of stock in April 2000, which
raised $61 million, a $10 million purchase of equity by PPL Energy Plus for $23.50 per share in
September 2000, a $5 million purchase of equity by Enron Merchant for $31.10 per share in October
2000, and a $10 million equity contribution from Marubeni.
In addition, FuelCell is participating in a $3.1 million contract with the DOE as part of the Vision 21
fuel-cell/turbine project, to be completed in C2002. The company plans to contribute $744,000 to this
project. FuelCell is also in the midst of a $16.5 million contract with the U.S. Navy to produce a marine
fuel cell by C2003, to which the company contributes $3.3 million. FuelCell also has a $5.4 million
contract with the DOE to utilize methane gas in its fuel cell, to which the company contributes $2.7
million. In addition, the company has an $18.8 million project to deliver a 1-megawatt fuel-cell plant
that runs on digester gas to King County, Washington, in C2002. FuelCell plans to contribute $9.9
million to this project. To summarize, the company has approximately $33.8 million in additional
contracts (and contract cost obligations of $16.2 million) apart from the $26.0 million remaining on
the large DOE project.
To calculate the cost of capital for FuelCell Energy, we have weighed reality against theory and
compromised between the two. As we noted previously, the company has in reality enjoyed significant
leverage in its capital base over the last seven years in the form of DOE contracts that are in effect
research and development grants for commercial products. However, from the standpoint of the standard
cost of capital calculation, government grants are typically not considered.
Valuation
FuelCell Energy, similar to many energy technology companies, has no current earnings; company
management has intimated it can turn a profit in F2004. Furthermore, like many new energy
technology companies, it could either hit huge (we estimate the potential market is in excess of $11
billion), be eclipsed by another technology, or fail to live up to expectations.
Relative Multiples
We believe that an analysis of relative multiples is more a function of investors treating many new
energy technology companies in aggregate terms and not a function of the similarities within the
actual products or businesses. However, we do believe that both Capstone Turbine and Ballard
Power Systems are fairly close comparables to FuelCell Energy. Ballard is currently developing a
commercial 250-kilowatt stationary fuel cell that will compete with FuelCell’s 250- to 300-kilowatt
DFC. Capstone is also working to develop a 300-kilowatt turbine and can already achieve these
power levels by combining five 60-kilowatt turbines. Each of the companies is also expected to turn
the corner on commercial development in the same general time frame of C2002–C2003. Because
each of these companies has no expected earnings during this same time frame, it is difficult to find
a comparative ratio for valuation other than price to sales. Instead, we have taken historical market
capitalization-to-EBTIDA multiples generated from a study of incumbent engine companies to arrive
at a terminal multiple for our discounted cash flow model.
Discounted Cash Flow
We have based our discounted cash flow (DCF) model on a 6–8x terminal EBITDA multiple and a
25% discount rate. The 6–8x terminal EBITDA is determined by average EBITDA multiples paid by
the market for a collection of engine companies, including Cummins, Ingersoll-Rand and Emerson
Electric. We believe this is an appropriate starting point given the fact that FuelCell is in the
generation business, and there are few publicly available companies against which to compare what
the market will pay over the long term for companies in this business.
Discount Rate Calculation. We have calculated a base discount rate of 25% by combining the
capital asset pricing model (CAPM), the formula for which is the sum of the risk-free rate and a riskadjusted equity market premium, with an additional 10% required return to accommodate the
riskiness of the investment. The current risk-free rate based on the ten-year government bond is
5.23% (closing bid October 30, 2001, Bloomberg). The historical geometric risk premium for the U.S.
market between 1928–1999 is calculated at 6.05% by the Federal Reserve. There is not enough
data to calculate a beta for Capstone itself. To be conservative, we have used an Internet stock
average beta of 1.7, as calculated by Value Line. This results in a CAPM discount rate of 15.5%, to
which we have added 10.0%.
Valuation Summary
We believe that the shares of FuelCell Energy are currently fairly valued given the near-term sales
outlook and timing of cost reductions. In our opinion, the implied discount rate (or terminal growth
rate) in current valuations suggests little flexibility in the market’s expectation of the technology’s
viability, the company’s business model and the strategy for distribution. We rate the shares of
FuelCell Energy as Market Perform.
Investment Risks
Wholesale power prices fall significantly. Base-load generation is the broadest potential market
segment for FuelCell Energy, and indeed any distributed generation equipment. If prices for
wholesale power fall significantly over the next several years, the economic assumptions at which
FuelCell’s power output is price competitive compared with power available from the grid may differ
dramatically from prevailing prices. This could lead to weaker-than-expected demand for the
company’s products.
Manufacturing cost reductions fail to materialize. The largest single driver for the broad adoption
of FuelCell’s products is the company’s ability to reduce costs in order to maintain relative
competitiveness with other incumbent technologies that also generate power, including the grid.
Assuming that the company’s projected cost reductions are sufficient to remain competitive with
competing technologies, we believe investors should follow closely the company’s ability to execute
on that plan on schedule.
Products malfunction. FuelCell’s products are expected to run in a base-load, or primary duty,
mode in order to achieve maximum potential benefit. The company’s results from its field trials have
largely been deemed successful by management. However, none of FuelCell’s commercial turbines
have yet to run for the expected life of 40,000 hours (five years). In fact, the longest any field trial
has lasted is 17,500 hours, or less than 40% of the expected life of the unit. As a result, there is still
the potential for unanticipated product malfunction, maintenance or warranty costs over the next
several years.
164
Competitors reduce emissions. FuelCell Energy competes against Ballard Power Systems (BLDP
$28.19) and Capstone Turbinea (CPST $4.80), which are both also working to produce an ultra lowemission, high-efficiency commercial base-load power plant in the 250- to 300-kilowatt range. At the
same time, Caterpillar (CAT $48.25), Hess (AHC $61.86), Ingersoll-Rand (IR $40.20), Detroit Diesel
(subsidiary of DaimlerChrysler), Cummins (CUM $34.27) and various other manufacturers are
dedicating resources to reducing the emissions of existing reciprocating engines. While we believe
that FuelCell has a technological design edge to these competitors in terms of its low-emission
profile, there is the potential that its competitors could modify their designs or add additional
equipment to more closely match the emissions profile of the FuelCell units.
Regulators fiddle. The regulatory environment for the power industry has been in flux for the last several
years and has been subject to rampant political interference over the last 18 months. Although we are
optimistic that there will be increasing motivation on the part of regulators to enable the rapid deployment
of distributed generation devices in tandem with the electric power grid, we have been dismayed by the
relative lack of recognition of its potential by the current presidential administration.
Figure 56: FUELCELL ENERGY, INC.—REVENUE, MARKET PROJECTIONS AND
OTHER OPERATING DATA ($ in millions, except per share and per unit data)
FY October
1999
2000
2001E
2002E
2003E
2004E
2005E
250- to 375-Kilowatt Units
Megawatts/Unit
Total Megawatts
Average Price Per Kilowatt
Revenues
Annual Growth Rate
Percentage of Total
Backlog
Average Cost of Revenues/Kilowatt
Cost of Revenues
Gross Profit
Gross Margin
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9
0.3
2.3
5,000.0
$11.3
—
43.8%
—
(7,000.0)
$(15.8)
(4.5)
(40.0)%
15
0.3
3.8
4,013.2
$14.3
26.9%
25.8%
—
(4,250.0)
$(14.9)
(0.6)
(4.2)%
13
0.3
3.3
2,367.6
$7.6
(46.5)%
8.1%
—
(2,012.5)
$(6.5)
1.1
15.0%
18
0.3
4.5
1,981.7
$8.9
16.4%
5.9%
—
(1,625.0)
$(7.3)
1.6
18.0%
34
0.3
8.5
1,781.3
$15.0
69.3%
4.3%
—
(1,425.0)
$(12.0)
3.0
20.0%
1- to 1.5-Megawatt Units
Megawatts/Unit
Total Megawatts
Revenues
Annual Growth Rate
Percentage of Total
Backlog
Cost of Revenues/Kilowatt
Cost of Revenues
Gross Profit
Gross Margin
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,000.0
—
—
—
—
(7,000.0)
—
—
—
12
1.0
12.0
4,013.2
$41.1
—
74.2%
—
(4,250.0)
(39.0)
2.1
5.0%
18
1.3
22.5
2,367.6
$52.6
28.1%
55.5%
—
(2,012.5)
(44.7)
7.9
15.0%
31
1.5
46.5
1,981.7
$92.0
75.0%
61.3%
—
(1,625.0)
(75.5)
16.6
18.0%
60
1.5
90.0
1,781.3
$159.5
73.3%
46.0%
—
(1,425.0)
(127.6)
31.9
20.0%
2- to 3-Megawatt Units
Megawatts/Unit
Total Megawatts
Revenues
Annual Growth Rate
Percentage of Total
Backlog
Cost of Revenues/Kilowatt
Cost of Revenues
Gross Profit
Gross Margin
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.3
—
5,000.0
—
—
—
—
(7,000.0)
—
—
—
—
2.5
—
4,013.2
—
—
0.0%
—
(4,250.0)
—
—
—
6
2.5
15.0
2,367.6
$34.6
—
36.5%
—
(2,012.5)
$(29.4)
5.2
15.0%
10
2.5
25.0
1,981.7
$49.2
42.5%
32.8%
—
(1,625.0)
$(40.4)
8.9
18.0%
39
2.5
97.5
1,781.3
$172.5
250.3%
49.7%
—
(1,425.0)
$(138.0)
34.5
20.0%
Revenues from Commercial Units
Revenues from Development Units
Total Revenues
% of Revenues from Commercial Units
% of Revenues from Development Units
Annual Growth Rate, Commercial Units
Annual Growth Rate, Development Units
Total Revenue Growth
Total Backlog
1.4
18.6
20.0
7.1%
92.9%
—
—
—
—
2.7
18.0
20.7
13.2%
86.8%
93.3%
(3.1)%
3.8%
—
7.4
18.3
25.7
28.6%
71.4%
169.7%
2.0%
24.1%
—
9.6
45.7
55.3
17.4%
82.6%
31.1%
149.1%
115.3%
—
58.0
36.8
94.8
61.2%
38.8%
501.3%
(19.5)%
71.3%
—
119.1
31.0
150.1
79.3%
20.7%
105.3%
(15.6)%
58.4%
—
323.0
24.0
347.0
93.1%
6.9%
171.2%
(22.6)%
131.1%
—
Cost of Revenues from Commercial Units
Cost of Revenues from Development Units
Gross Profit from Commercial Units
Gross Margin
Gross Profit from Development Units
Gross Margin
Total Gross Profit
Gross Margin
Factory Capacity (Megawatts)
Total Megawatts
Capacity Utilization (at end of period)
(1.0)
(13.2)
0.4
27.4%
5.3
28.8%
5.7
28.7%
—
—
—
(5.0)
(13.1)
(2.2)
(82.0)%
4.9
27.2%
2.7
12.8%
—
—
—
(18.1)
(18.0)
(10.7)
(145.9)%
0.3
1.6%
(10.4)
(40.6)%
50.0
2.3
4.5%
(9.7)
(52.5)
(0.1)
(1.0)%
(6.9)
(15.0)%
(6.9)
(12.6)%
120.0
15.8
13.1%
(51.8)
(36.7)
6.2
10.6%
0.0
0.1%
6.2
6.6%
180.0
40.8
22.6%
(100.8)
(31.0)
18.3
15.4%
0.0
0.1%
18.4
12.2%
280.0
76.0
27.1%
(254.0)
(24.0)
69.0
21.4%
0.0
0.1%
69.0
19.9%
380.0
196.0
51.6%
166
Figure 57: FUELCELL ENERGY, INC.—INCOME STATEMENT ($ in millions, except per share data)
FY October
1999
2000
2001E
2002E
2003E
2004E
2005E
$20.0
(12.4)
7.5
37.8%
(6.6)
(1.8)
—
(1.4)
(9.8)
$20.7
(5.0)
15.7
76.0%
(7.9)
(13.1)
—
(1.5)
(22.5)
$25.7
(36.1)
(10.4)
(40.6)%
(8.9)
—
—
(1.9)
(10.8)
$55.3
(9.7)
45.6
82.4%
(16.6)
(52.5)
—
(6.8)
(75.9)
$94.8
(51.8)
42.9
45.3%
(13.0)
(36.7)
—
(13.3)
(63.1)
$150.1
(100.8)
49.4
32.9%
(15.0)
(31.0)
—
(17.6)
(63.6)
$347.0
(254.0)
93.0
26.8%
(34.7)
(24.0)
—
(21.3)
(79.9)
(2.2)
(11.3)%
0.2
(0.2)
—
1.5
—
(6.7)
(32.5)%
2.1
(0.1)
—
0.3
—
(21.3)
(82.8)%
4.7
(0.1)
—
0.3
—
(30.3)
(54.8)%
3.2
—
—
0.4
—
(20.1)
(21.3)%
2.0
—
—
0.4
—
(14.2)
(9.5)%
1.2
—
—
—
—
13.1
3.8%
0.6
—
—
—
—
EBT
Income Taxes
Tax Rate
Minority Interest
Extraordinary Items
(0.7)
(0.3)
NM
—
—
—
(4.5)
—
0.0%
—
—
—
(16.3)
—
0.0%
—
(26.7)
—
0.0%
—
(17.7)
—
0.0%
—
(13.0)
—
0.0%
—
13.7
(4.7)
34.5%
—
—
—
—
—
—
Net Income
(1.0)
(4.5)
(16.3)
(26.7)
(17.7)
(13.0)
9.0
$(0.04)
—
—
25.0
$(0.16)
—
—
28.7
$(0.47)
—
—
34.4
$(0.67)
—
—
39.9
$(0.43)
—
—
40.9
$(0.31)
—
—
41.9
$0.21
—
—
42.9
(0.5)
(4.9)
(19.1)
(23.5)
(6.8)
3.3
34.3
Growth Rates
Sales
Cost of Goods Sold
EBIT
Net Income
Diluted EPS
Cash EPS
(17.9)%
(14.9)%
115.0%
157.9%
(37.0)%
—
3.8%
(60.0)%
199.6%
353.8%
295.6%
—
24.1%
627.4%
216.1%
265.3%
205.0%
—
115.3%
(73.0)%
42.6%
63.8%
41.1%
—
71.3%
432.2%
(33.6)%
(33.7)%
(35.3)%
—
58.4%
94.4%
(29.4)%
(26.6)%
(28.4)%
—
131.1%
152.0%
(192.0)%
(168.8)%
(167.2)%
—
Ratio Analysis
Gross Margin
SG&A/Sales
Engineering/Sales
Operating Margin
EBT Margin
Tax Rate
Net Margin
37.8%
33.1%
9.1%
49.0%
(11.3)%
(3.5)%
(41.9)%
(4.9)%
76.0%
38.2%
63.2%
108.5%
(32.5)%
(21.6)%
0.0%
(21.6)%
(40.6)%
34.8%
0.0%
42.2%
(82.8)%
(63.5)%
3.2%
(63.5)%
82.4%
30.0%
94.9%
137.2%
(54.8)%
(48.3)%
1.0%
(48.3)%
45.3%
13.7%
38.7%
66.5%
(21.3)%
(18.7)%
0.2%
(18.7)%
32.9%
10.0%
20.6%
42.3%
(9.5)%
(8.7)%
0.1%
(8.7)%
26.8%
10.0%
6.9%
23.0%
3.8%
3.9%
0.0%
2.6%
Last 12 Months (LTM) Return on Equity Analysis/Sales Basis
(11.3)%
(32.5)%
LTM Sales/Assets
1.01
0.23
Assets/Equity
1.34
1.09
LTM Interest Burden
30.9%
66.4%
LTM Tax Burden
141.9%
100.0%
(6.6)%
(5.4)%
(6.0)%
(5.4)%
(5.0)%
(4.9)%
(82.8)%
0.08
1.01
76.7%
100.0%
(5.1)%
(5.1)%
(5.1)%
(54.8)%
0.18
1.03
88.1%
100.0%
(9.2)%
(9.1)%
(8.9)%
(21.3)%
0.32
1.08
88.1%
100.0%
(6.5)%
(6.4)%
(6.0)%
(9.5)%
0.50
1.14
91.6%
100.0%
(5.0)%
(5.0)%
(4.4)%
3.8%
0.92
1.39
104.6%
65.5%
3.3%
3.3%
2.4%
Net Sales
Cost of Goods Sold
Gross Profit
Gross Margin
SG&A
Research and Development
Amortization of Intangible Assets
D&A
EBIT
Operating Margin
Interest Income
Interest Expense
Equity in Earnings
License Fee Income
Other Income
Earnings Per Share:
Operating EPS
EBITDA
Figure 58: FUELCELL ENERGY, INC.—BALANCE SHEET ($ in millions, unless otherwise noted)
FY October
1999
2000
2001E
2002E
2003E
2004E
2005E
Working Capital
Inventories
Deferred Taxes
$7.2
6.2
2.3
1.2
0.4
0.3
$71.8
74.8
3.5
0.3
0.6
0.3
$285.7
287.3
4.4
2.2
0.8
0.1
$245.7
240.0
11.4
5.6
0.3
—
$221.3
217.1
17.8
8.7
1.3
—
$213.9
208.8
26.6
12.9
1.4
—
$232.1
220.1
67.5
32.4
3.7
—
Current Assets
Short-Term Debt
Accounts Payable
Accrued Expenses
Deferred License Fee Income
Customer Advances
10.4
—
0.5
1.8
—
0.0
0.6
0.3
79.4
—
1.6
3.6
—
0.0
0.7
1.6
294.8
—
3.8
5.3
—
0.1
—
—
257.3
—
9.8
1.7
—
0.1
—
—
244.9
—
15.3
8.2
—
0.1
—
—
249.8
—
22.8
13.0
—
0.1
—
—
323.7
—
57.9
33.7
—
0.1
—
—
3.2
0.2
702
866.2%
276.2%
1,073.1%
(1.6)
1.1
(14.2)
7.6
1.9
49
56.7%
16.8%
12.6%
3.7
3.1
3.9
9.1
1.4
68
75.3%
53.0%
35.2%
0.6
(3.0)
0.4
11.6
1.5
67
74.5%
52.4%
38.5%
1.1
(9.2)
(0.1)
23.6
1.4
64
73.8%
51.9%
37.7%
3.2
(8.7)
3.7
36.0
1.4
64
73.0%
51.4%
37.0%
4.7
(13.0)
5.6
91.6
1.5
60
72.3%
50.9%
36.2%
15.2
(21.2)
22.3
Long-Term Assets
Net PP&E
Goodwill and Intangible Assets
Other Assets
Long-Term Assets
7.2
—
2.2
9.4
9.8
—
1.8
11.6
25.4
—
1.4
26.8
38.6
—
3.6
42.2
45.3
—
5.6
50.9
39.7
—
8.5
48.2
30.5
—
21.8
52.2
Total Assets
Cash/Total Assets
19.8
47.6%
31.1%
91.0
12.8%
82.1%
321.6
8.3%
89.3%
299.5
14.1%
80.1%
295.8
17.2%
73.4%
298.1
16.2%
70.1%
376.0
13.9%
58.5%
1.6
—
—
14.1
0.7
—
14.8
—
—
0.0
87.0
(3.8)
—
83.3
1.3
—
0.0
339.0
(20.1)
—
318.9
1.3
—
0.0
339.0
(46.9)
—
292.1
1.3
—
0.0
339.0
(64.6)
—
274.4
1.3
—
0.0
339.0
(77.6)
—
261.4
1.3
—
0.0
339.0
(68.7)
—
270.3
16.4
11.0%
133.9%
90.1%
83.3
0.0%
109.3%
100.0%
320.1
0.4%
100.9%
99.6%
293.4
0.4%
102.5%
99.6%
275.6
0.5%
107.8%
99.5%
262.6
0.5%
114.0%
99.5%
271.6
0.5%
139.1%
99.5%
—
0.2
0.2
—
0.2
0.2
—
(7.7)
(7.7)
—
(5.5)
(5.5)
—
(3.4)
(3.4)
—
(0.5)
(0.5)
—
12.7
12.7
19.8
—
91.0
—
321.6
—
299.5
—
295.8
—
298.1
—
376.0
—
1,193.7%
1,327.5%
7,816.8%
0.0%
214.4%
627.0%
0.0%
0.0%
8.1%
51.3%
0.0%
0.0%
8.1%
51.3%
0.0%
0.0%
8.1%
51.3%
0.0%
0.0%
5.0%
45.0%
0.0%
0.0%
5.0%
45.0%
0.0%
0.0%
Current Liabilities
A/R Turnover
DSO
A/R as % of Sales
A/P as % of COGS
A/R Gap
A/P Gap
Inventory Gap
Capital Structure
Long-Term Debt
Preferreds
Common Stock
Retained Earnings
Total Equity
Total Capital
Total Debt/Equity
Assets/Equity
Other Liabilities
Minority Interest and Other
Balance
168
Figure 59: FUELCELL ENERGY, INC.—STATEMENT OF CASH FLOWS ($ in millions)
FY October
1999
2000
2001E
2002E
2003E
2004E
2005E
Operating Sources:
Net Income
Depreciation
Other
(1.0)
1.8
(4.5)
1.9
(16.3)
2.2
(26.7)
6.8
(17.7)
13.3
(13.0)
17.6
9.0
21.3
0.8
(2.6)
(14.2)
(19.9)
(4.4)
4.5
30.2
Operating Uses:
Inventories
Receivables
Effects of Currency
Other
(1.2)
1.4
0.2
(2.0)
(1.2)
—
0.4
0.9
(1.1)
(0.2)
3.1
(4.2)
—
0.0
(1.9)
(0.9)
(0.2)
3.2
(17.5)
—
(7.6)
(3.5)
(7.0)
0.7
2.4
(20.0)
—
—
(3.1)
(6.4)
(1.0)
12.0
(20.0)
—
—
(4.2)
(8.8)
(0.2)
12.4
(12.0)
—
—
(19.5)
(40.9)
(2.3)
55.7
(12.0)
—
—
(2.3)
(1.5)
(24.9)
(27.4)
(18.5)
(12.8)
(19.0)
Operating Cash Flow
(1.5)
(4.0)
(39.1)
(47.3)
(22.9)
(8.2)
11.2
Short-Term Debt
Long-Term Debt
Sale of Stock
Repurchase of Stock
Other
Dividends
—
(0.7)
0.5
—
(2.4)
—
(0.3)
57.8
—
15.2
(1.6)
1.4
251.5
(0.6)
0.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2.6)
72.6
251.6
—
—
—
—
Beginning Cash and Equivalents
Change in Cash
10.3
(4.1)
6.2
68.6
74.8
212.5
287.3
(47.3)
240.0
(22.9)
217.1
(8.2)
208.8
11.2
6.2
74.8
287.3
240.0
217.1
208.8
220.1
Ending Cash and Equivalents
PUBLIC ENERGY TECHNOLOGY
COMPANIES NOT COVERED BY
ROBERTSON STEPHENS
American Superconductor Corporation
(AMSC $10.90)
Westborough, Massachusetts
Overview
American Superconductor Corporation is involved in developing products using superconducting
materials and power electronic switches. The company sells products based on these technologies
to electrical equipment manufacturers, industrial power users and businesses that produce and
deliver power. The company’s HTS wire is capable of carrying more than 140 times the electrical
current of conventional copper wire of the same dimensions.
Products and Services
American Superconductor offers two core enabling technologies and products: HTS wires and power
electronic switches. The company has also developed and commercialized advanced power
electronic switches that control, modulate and move large amounts of power with higher efficiency
and at lower cost. The company also manufactures and sells superconducting magnetic energy
storage (SMES) systems.
Strategic Partnerships
•
ABB Power Transmission and Distribution Company, the world’s leading
manufacturer of transformers
•
Alstom, a global power equipment company
•
Electricité de France, the world’s largest electric utility
•
EPRI
•
GE Industrial Systems, a global leader in manufacturing products used to distribute,
protect and control electrical power and equipment
•
Northrop Grumman Ship Systems, a leading ship builder
•
Pirelli, the world’s largest producer of power cables
Financials
F2001 Revenue:
F2001 Cash:
F2001 Total Assets:
Market Cap. (as of 11/12/01):
$16.8 million
$89.1 million
$239.9 million
$222.1 million
Recent Press Releases
•
October 16, 2001, American Superconductor announced that it was selected by the General
Electric Company as the primary supplier of HTS wire for development of the world’s first 100MW HTS generator. The HTS generator project, valued at $26 million is one of seven recently
announced projects that are part of the U.S. Department of Energy Superconductivity
Partnership Initiative Program (SPI).
•
September 11, 2001, American Superconductor and GE announced that they have received an
order from TVA for a distributed superconducting magnetic energy storage (D-SMES) power grid
reliability solution. American Superconductor and GE have a strategic alliance to market and sell
a new D-SMES solution as a co-branded product to U.S. utilities.
AstroPower, Inc.
(APWR $34.05)
Newark, Delaware
Overview
AstroPower began as a division of Astrosystems Inc., founded in 1983 as an outgrowth of
semiconductor work initiated at the University of Delaware. In 1989, the company was incorporated
in Delaware. The company now employs more than 430 people. AstroPower West is the newest
business unit of the company, operating from Concord, California, with the directive of developing
on-grid residential, commercial and utility business in the United States. Internationally, AstroPower
supplies products worldwide and currently has regional offices in South Africa and Singapore.
Through a joint venture headquartered in Spain, called AstraSolar, the company has created a
business exclusively dedicated to helping solar entrepreneurs and distributors enter into the solarmodule manufacturing business.
AstroPower develops, manufactures, markets and sells a range of solar electric power generation
products, including solar cells, modules, panels and SunChoice™ prepackaged systems for the
global marketplace. Solar cells are the core component inside every solar electric power system. In
addition to its solar power generation product offerings, AstroPower sells wholesale solar electric
power under long-term purchase agreements through a joint venture with GPU International, Inc.
Strategic Relationships/Partnerships
•
GPU International, Inc.
Financials
2000 Revenue:
2000 Cash:
2000 Total Assets:
$49.8 million
$24.5 million
$78.0 million
$481.2 million
•
174
October 16, 2001, AstroPower announced that its solar electric power systems are playing an
integral role in the Living Smart™ program announced last week by Pardee Homes, Inc. One of
San Diego’s largest homebuilders and an AstroPower partner, Pardee Homes is offering solar
electric power as a feature in its new home construction. The Living Smart program provides
state-of-the-art energy conservation, environmental and health options to new homebuyers.
Living Smart program features will be incorporated into Pardee Homes’s 97-home Santa Barbara
community in San Diego's Pacific Highlands Ranch early next year.
Avista Labs
(Subsidiary of Avista Corporation [AVA $11.96])
Spokane, Washington
Overview
Avista Labs has developed a modular PEM fuel cell that delivers reliable, affordable and clean
distributed power solutions. The modular design allows fuel-cell cartridges to be easily removed and
replaced without interrupting power. In addition to its modular-based PEM fuel cell, Avista Labs is
dedicated to commercializing a broad array of components to complement its fuel cell in order to
deliver system solutions to residential, industrial and commercial markets.
Avista Labs’s design eliminated many of the complex and expensive subsystem components of the
traditional PEM fuel cell and replaced them with one moving part—a high-efficiency fan. This is part
of a patented self-humidified operation that is intended to scale down cost and repair, while
increasing reliability. The Avista Labs fuel cell significantly reduces routine maintenance with its “hot
swappable” power cartridges. The company currently markets a 500-watt fuel-cell system, the SR12, and a 3-kW fuel-cell system, the SR-72. It also markets a hydrogen sensor and is developing
power conversion components for the distributed generation industry.
•
Avista Corporation, parent company
•
Black & Veatch, a global leader in engineering, procurement and construction
•
Logan Industries, Inc., has been manufacturing and assembling Avista Labs fuel-cell units for
field testing since early 1999
•
Visiontec, Inc., assembles the HySense 1100 Intelligent Hydrogen Sensing System—a
hydrogen sensor developed for the fuel cell and hydrogen generation industries
•
October 17, 2001, Avista Labs announced that its affiliate H2fuel, LLC is developing new
technology that would greatly reduce the cost of producing hydrogen for use in fuel cells. H2fuel
is a developer of hydrogen extraction and purification technologies for use in the fuel-cell
industry. The new membrane-based technology works by eliminating carbon dioxide and carbon
monoxide from readily available fuels, such as natural gas and propane, thus allowing the
production of nearly pure hydrogen. This is important for fuel cells, because the cleaner the
hydrogen fed into them, the more efficiently they tend to run.
•
July 27, 2001, Avista Labs announced the introduction of a hydrogen sensor product for fuel-cell
developers and other hydrogen users. The hydrogen sensor component detects hydrogen in
varied applications and is believed to be a necessary component of any fuel-cell system.
Ballard Power Systems, Inc.
(BLDP $28.19)
Burnaby, British Columbia
Overview
Ballard Power Systems, Inc. develops and commercializes PEM fuel cells and fuel-cell systems. A
PEM fuel cell is an environmentally clean power generator, which combines hydrogen fuel (which
can be obtained from methanol, natural gas or petroleum) with oxygen (from air), without
combustion, to produce electricity, with pure water and heat as the only byproducts. Along with its
alliance partners, the company is developing PEM fuel cells and PEM fuel-cell system products for
applications in the transportation, stationary power and portable markets.
Ballard Power Systems develops, manufactures and markets zero-emission PEM fuel cells for use in
transportation, electricity generation and portable power products. The company’s proprietary fuelcell technology is enabling automobile, electrical equipment and portable power product
manufacturers to develop environmentally clean products for sale.
•
Alstom SA
•
Ford
•
California Fuel Cell Partnership
•
GPU International
•
Coleman Powermate
•
Johnson Matthey
•
DaimlerChrysler
•
Microcoating Technologies
•
EBARA
•
Tokyo Gas Ltd.
Customers
•
Honda
•
Cinergy
•
Nissan
•
Coleman Powermate
•
Volkswagen
•
Matsushita Electric Works
•
Yamaha
Financials
2000 Revenue:
2000 Cash:
2000 Total Assets:
176
$27.5 million
$192.5 million
$706.6 million
$2.5 billion
•
October 2, 2001, Ballard Power Systems, DaimlerChrysler and Ford Motor Company announced
the signing of an agreement in which Ballard will acquire the interests of DaimlerChrysler and
Ford in XCELLSIS GmbH and Ecostar Electric Drive Systems LLC. XCELLSIS and Ecostar were
formed as part of the vehicular fuel-cell alliance between Ballard, DaimlerChrysler and Ford in
1998. These acquisitions will provide Ballard with an expanded range of products, from
components to power generators and vehicular fuel-cell power trains, and an intellectual
property portfolio.
•
October 1, 2001, Ballard Power Systems announced that it signed a Memorandum of
Understanding (MOU) with EBARA Corporation to enhance their strategic relationship and
simplify their stationary power alliance. Under the MOU, Ballard will acquire EBARA’s interest in
Ballard Generation Systems (BGS), Ballard’s stationary power products subsidiary. The MOU is
consistent with Ballard’s plan to enhance its ownership of BGS and streamline the development
of Ballard’s commercial stationary power generators.
Beacon Power Corporation
(BCON $0.85)
Wilmington, Massachusetts
Overview
Beacon Power designs and develops flywheel energy storage systems that provide highly reliable,
high-quality, uninterruptible electric power for communications and computer networks, the Internet,
industrial manufacturing, commercial facilities and distributed generation products.
The company’s initial product will provide 2 kWh of energy at up to 1 kW of power. Thus, the 2-kWh
flywheel would be able to provide 10 hours of backup power to a telecommunications site that
requires 200 watts of power. For a site using the full 1-kW capacity of the conversion electronics, the
flywheel would provide backup power for two hours.
•
SatCon Technology
Customers
•
Verizon Communications
•
Century Communications
•
WinDBreak Cable
Financials
LTM Sales:
LTM Earnings:
Cash:
Total Assets:
$0.1 million
$(24.0) million
$47.9 million
$55.3 million
$36.3 million
•
October 24, 2001, Beacon Power Corporation announced the installation of a 2-kWh flywheel
energy storage system for Cox Communications. The unit will supply backup power for
telecommunications needs at Quonset Davisville, a 3,000-acre, world-class intermodal, industrial
and commerce park located in North Kingstown, Rhode Island. From a former military base, The
Rhode Island Economic Development Corporation (RIEDC) has created one of the bestequipped industrial parks on the East Coast. Quonset Davisville has been designed to meet the
needs of the world’s largest companies.
•
September 13, 2001, Beacon Power announced that it has been advised by SatCon Technology
Corporation of its intention to make a pro-rata distribution of 5,000,000 shares of Beacon
Power’s common stock held by SatCon to its shareholders, effective September 28, 2001.
SatCon currently owns 9,705,910 shares, or approximately 23% of Beacon Power’s outstanding
common stock. Beacon Power was founded by SatCon as a wholly owned subsidiary in 1997.
After the distribution, SatCon will own 4,705,910 shares, or approximately 11% of Beacon
Power’s outstanding common shares.
•
July 12, 2001, Beacon Power announced that prototypes of its next-generation 6-kWh flywheel
energy storage system successfully completed continuous performance tests at the rated
operating speed of 22,500 rpm. The testing also indicated that this new generation flywheel can
provide continuous backup power for up to 30 hours, a new record in the flywheel energy
storage industry.
Catalytica Energy Systems, Inc.
(CESI $5.40)
Mountain View, California
Overview
Catalytica Energy Systems develops catalytic combustion of fossil fuels with more than 19 patents
issued and pending. The company is applying its Xonon (pronounced "Zo-non") catalytic technology
in gas turbines used for electric power generation and gas pipeline compression applications.
Catalytica’s Xonon Cool Combustion prevents the formation of chemical pollutants without
diminishing combustion efficiency. Stable combustion is achieved at lower temperatures by using a
catalyst that combusts the fuel without a flame. The Xonon catalyst acts as a molecular thermostat
and controls the temperature of the reaction. It avoids the excursion temperature of a normal
combustor in a gas turbine and, as such, essentially eliminates the formation of oxides of nitrogen
(NOx), a major precursor to harmful pollutants. It also burns the fuel completely and, thus, reduces
emissions of carbon monoxide and unburned hydrocarbons.
178
•
Solar Turbines
•
Kawasaki Motors
Customers
•
Department of Energy
•
Gas Research Institute
•
General Electric
•
McDermott, NIST
Financials
LTM Revenue (as of 6/01):
LTM Earnings (as of 6/01):
2001 Cash (as of 6/01):
2001 Total Assets (as of 6/01):
$6.7 million
$(13.6) million
$49.3 million
$59.9 million
$92.9 million
•
October 9, 2001, Catalytica Energy Systems and Solar Turbines announced the start of a new
developmental program, which would combine Catalytica’s Xonon™ Cool Combustion
technology with Solar Turbines’s Taurus™ 60 (a 5-MW gas turbine), as part of a $3.0 million
grant recently awarded to Solar Turbines by the California Energy Commission (CEC).
•
September 25, 2001, Catalytica Energy Systems announced that the CEC has released a
Notification of Proposed Award of $3 million to Catalytica Energy Systems to help fund
application of the company’s Xonon™ Cool Combustion system to a multi-combustor gas turbine
engine. Catalytica was one of three companies to receive the top score out of 47 proposals
received by the Environmentally Preferred Advanced Generation Program sponsored by the
CEC’s Public Interest Energy Research (PIER) Program.
Electric City Corp.
(ELC $1.65)
Elk Grove Village, Illinois
Overview
Electric City Corp. is a developer, manufacturer and integrator of energy saving technologies and
custom electric switch gear. The company’s premier energy saving product is the EnergySaver
system, which reduces energy consumed by lighting by 20–30% with minimal lighting-level
reduction. This technology has applications in commercial buildings, factories and office structures,
as well as street and parking lot lighting. In addition to its EnergySaver system, the company
manufactures custom electric switch gear, including the TP3 line of prepackaged electrical
distribution panels designed for use in telecommunications and Internet network centers, through its
subsidiary, Switchboard Apparatus, Inc.
The EnergySaver system is a lighting-control system that reduces energy consumption in indoor and
outdoor commercial, institutional and industrial ballasted lighting systems while maintaining appropriate
lighting levels. The EnergySaver is a freestanding enclosure that contains control panels with
electrical parts and is connected between the power line and the building’s electrical lighting circuits.
The GlobalCommander system is an advanced lighting controller capable of providing large-scale
demand-side management savings without turning off the lights. The GlobalCommander bundles the
EnergySaver technology with an area-wide communication package to allow for maximum energy
reductions across entire systems in response to the guidelines of a customer’s facility manager.
The company designs and manufactures a wide range of commercial and industrial custom electrical
switching gear and distribution panels, which serve to distribute electricity from the electric utility’s
main power bus in a building to the various electrical requirements. The company has built a
reputation for custom manufacturing of 120/208, 120/240 and 277/480V single- and three-phase
switch gear for virtually any application.
Customers
•
California State University
•
San Francisco Airport
•
City of Norwalk, California
Financials
LTM Sales:
LTM Earnings:
Cash:
Total Assets:
Market Cap. (as of 11/12/01)
$11.0 million
$(11.7) million
$0.3 million
$12.1 million
$50.7 million
•
180
September 10, 2001, Electric City Corp. announced that it closed on a $16 million convertible
preferred stock issuance with CIT, a subsidiary of Tyco International Ltd., Duke Capital Partners,
LLC, a wholly owned subsidiary of Duke Energy, EP Power Finance, LLC, a wholly owned
subsidiary of El Paso Corporation, and affiliates of Morgan Stanley.
Energy Conversion Devices, Inc.
(ENER $20.40)
Rochester Hills, Michigan
Overview
Energy Conversion Devices, Inc. (ECD) has developed the enabling proprietary core technologies in
the fields of energy storage (nickel metal hydride [NiMH] batteries and Ovonic Solid Hydrogen
Storage Systems), energy generation (Ovonic Regenerative Fuel Cells) and thin-film, flexible, lowcost photovoltaic (solar) products, and information storage and retrieval (Ovonic Unified Memory and
phase-change rewriteable optical memory technology).
Energy Storage—Using ovonic materials, the company’s Ovonic Battery Company subsidiary has
developed the proprietary NiMH battery technology that has achieved recognition by major battery
manufacturers throughout the world. Ovonic NiMH batteries store more than twice as much energy
as standard nickel cadmium (Ni-Cd) or lead-acid batteries of equivalent weight.
Energy Generation—Ovonic Regenerative Fuel Cells are being developed for commercial use in a
full range of stationary and portable power applications, which can eliminate dependence on
electricity supplied through grid distribution or portable fossil-fuel-powered generators.
Information Technologies—Ovonic Unified Memory (OUM) is designed to provide non-volatile
computer data storage with the speed of current volatile DRAM semiconductor system memory, as
well as to decrease the cost of production. OUM also offers an opportunity to develop new, fast
computer architectures so as to eliminate the use of multiple tiers of memory, as well as data
transfer bottlenecks caused by the current computer memory hierarchy.
Thin-Film Synthetic Materials—ECD has developed a range of vapor-deposited thin-film materials
and cost-effective roll-to-roll production technologies, including a high-rate microwave plasmaenhanced chemical vapor deposition (MPCVD) process. The major commercial application for this
technology is high-performance optical coatings.
Customers
•
Rare Earth Ovonic
•
Texaco Ovonic Hydrogen
•
Texaco Ovonic Fuel Cell
Financials
2000 Cash (as of 6/01):
$24.2 million
$(5.1) million
$81.9 million
$166.1 million
$446.4 million
•
Sept. 10, 2001, United Solar Systems Corp., a joint venture between Energy Conversion
Devices, Inc. and N.V. Bekaert S.A. (Bekaert), announced that Bekaert ECD Solar System LLC
(Bekaert ECD) has shipped 148 kW of its building-integrated photovoltaic (BIPV) products to
Energy Australia.
•
Sept. 5, 2001, Energy Conversion Devices, Inc. announced that, pursuant to the Stock Purchase
Agreement between ECD and Texaco Inc., Texaco has exercised its right to maintain its 20%
interest in ECD following an increase in ECD’s outstanding common stock due to the exercise of
warrants on July 31, 2001. Texaco purchased an additional 448,358 shares of ECD common
stock for approximately $8.9 million.
Evergreen Solar, Inc.
(ESLR $2.40)
Marlboro, Massachusetts
Overview
Evergreen Solar, Inc. develops, manufactures and markets solar power products that are capable of
providing reliable and environmentally clean electric power throughout the world. In the company’s
String Ribbon technique, strings are pulled vertically through a shallow pool of molten silicon, and
the silicon solidifies between the strings to form a continuous ribbon of crystalline silicon. Once the
ribbon has reached the desired length, it is cut and prepared for cell fabrication. If its development
programs are successful, the company expects to continue to increase the conversion efficiency and
wattage of its solar panels as it expands manufacturing capacity and shifts from 5.6-centimeter-wide
String Ribbon wafers to eight-centimeter-wide String Ribbon wafers in 2001.
Evergreen Solar’s frame-less solar panel that is being developed will provide an advantage in ongrid, building-integrated solar systems and off-grid rural electrification solar systems, as well as for
other applications where international shipping, remote installation and/or thin solar panels are
required. Its frame-less solar panel will be thin, light, easy to ship, easy to install and long lasting.
The company is also developing solar roofing tiles and other building-integrated solar power
products for the building industry.
•
Kawasaki Heavy Industries, Ltd
Customers
•
SOLUZ, Inc.
•
California residents and businesses
•
WorldWater Corporation
182
Financials
LTM Sales:
LTM Earnings:
Cash:
Total Assets:
$2.1 million
$(8.6) million
$34.1 million
$51.4 million
$27.3 million
August 8, 2001, Evergreen Solar announced that it received certifications from Arizona State
University Photovoltaic Testing Laboratory and Underwriters Laboratory for its new Cedar Line™
series of photovoltaic modules. The completion of these certifications allows the company to market
its Cedar Line series worldwide.
Global Thermoelectric Inc
(GLE $1.07)
Calgary, Alberta
Overview
Global Thermoelectric Inc manufactures and distributes thermoelectric generators for use as remote
power sources. The group produces a range of generators, from 15 to 550 watts, that use heat to
directly produce electrical power for applications requiring up to 5,000 watts. The generators operate
on natural gas, propane or liquefied petroleum gas to provide highly reliable and cot-effective remote
power solutions for many applications including the telecommunications and oil and gas industries.
The fuel-cell division of the group was committed to the development of commercially viable solidoxide fuel-cell (SOFC) technology. SOFC systems of the group are leading-edge technology and
have the potential to be significantly less costly to produce and have longer lives.
Generators—Global Thermoelectric is the world’s largest supplier of thermoelectric generators. A
vertically integrated manufacturer with an ISO 9002 registered QA program in place, Global has 25
years of experience in the engineering, manufacturing and installation of remote power systems. The
company was established in 1975 to commercialize the unique lead-telluride thermoelectric
generator technology developed by 3M Corporation in the 1960s for the Apollo space program.
Based on this initial technology, Global has developed a product line of thermoelectric generators
using high-quality, field-proven components, which has resulted in the company’s worldwide
recognition for economic and reliable remote power solutions.
Fuel Cells—The company has successfully enhanced the base fuel-cell technology. Client testing
has confirmed that both the cells and stacks function well. Global’s mission is to become the
recognized planar SOFC technology leader, and to become the world’s leading supplier of scalable
SOFC products. The company continues to realize significant improvements in basic fuel-cell
design. Global believes its cells have the highest published power densities for commercial-sized
SOFC membranes in the world. Changes in cell composition and design have resulted in these
improved power densities. Higher power densities contribute to lower weight, size and cost of fuelcell systems.
Financials
2001 Cash (as of 6/01):
$14.6 million
$79.9 million
$96.9 million
$220.1 million
•
October 10, 2001, As part of its North American initiative to develop distribution partnerships for
its fuel-cell products, Global Thermoelectric announced that Global and Citizens Gas & Coke
Utility of Indianapolis, Indiana signed an MOU regarding a project to modify Global’s residential
SOFC products as well as engaging Citizens to distribute Global’s SOFC products.
H Power Corp.
(HPOW $2.87)
Clifton, New Jersey
Overview
H Power Corp. designs, develops, manufactures and sells PEM fuel-cell systems. Founded in 1989,
and incorporated in the state of Delaware, H Power has developed, owned and has been granted the
exclusive rights to significant patents, proprietary technology and trade secrets covering fuel cells and
ancillary systems, particularly fuel-cell stacks and fuel processors. The company’s PEM fuel cells are
designed to provide electricity for a wide range of stationary, portable and mobile applications.
H Power is completing the development of residential cogeneration units (RCUs), which provide 3.0–
4.5 kilowatts of continuous power, peak power of up to 10 kilowatts and power spikes of up to 20
kilowatts. The RCUs have been designed to provide the electricity needs of an average home in the
United States. The company has also developed smaller portable and mobile power units, which
operate on hydrogen, that can produce power of 15–500 watts. These units can power equipment
such as highway variable message signs, various communications apparatuses, sensor and
metering devices, specialty electric vehicles, and personal portable electronic devices. The
company’s initial target market for RCU products will be rural, remote homes.
•
ECO Fuel Cells LLC
•
Naps Systems Oy
•
DuPont
•
Mitsui & Co.
Financials
2000 Revenue:
2000 Cash:
2000 Total Assets:
184
$3.6 million
$49.4 million
$105.4 million
$154.6 million
•
October 9, 2001, H Power Corp. reported its Q1:F02 results for the period ended August 31,
2001. Some of the company’s achievements for the quarter included the following: Announced
several significant distribution, development and supply chain management relationships. The
company opened a new 90,000-square-foot manufacturing and testing facility in Monroe, North
Carolina. H Power identified all of the specific actions required to reduce RCU costs by 20%, and
achieved more than half of this goal in the first four months of the fiscal year. The company
made significant progress in increasing system reliability and made substantial investments in its
Montreal, Canada, and Monroe, North Carolina, testing facilities.
•
September 4, 2001, H Power announced the formation of H Power Japan in partnership with
Mitsui & Co., Ltd. and Mitsui and Co. (U.S.A.), Inc. Mitsui & Co., Ltd., based in Tokyo, is Japan’s
largest general-trading company with operations throughout the world focused on international
trade-related activities and the creation of new trade flows, enterprises and industries. Both
parties will have a 50% ownership in the newly created company, which will be a Japanese
corporation headquartered in Tokyo.
Integrated Electrical Services Inc.
(IEE $3.52)
Houston, Texas
Overview
Integrated Electrical Services Inc. is a provider of specialty contracting services in the United States.
The company began operations in order to create a nationwide provider of electrical services. It has
expanded its focus to include a complementary core business in the communications market.
Integrated services the commercial, industrial and residential markets. The residential market
consists primarily of electrical installations in new single-family housing and low-rise multifamily
housing for customers, which include local, regional and national homebuilders and developers. The
company is a major provider of electrical contracting services to the residential construction market
in the United States. The company’s service and maintenance revenues are derived from service
calls and routine maintenance contracts and tend to be recurring and less sensitive to economic
fluctuations. In addition, Integrated has become a national designer and installer of communications
and information technology systems.
The company’s commercial and industrial work consists primarily of electrical installations and
upgrade, renovation and replacement work in office buildings, high-rise apartments, condominiums,
theaters, restaurants, hotels, hospitals, school districts, manufacturing and processing facilities,
military installations, airports, and refineries, petrochemical and power plants.
•
MetStream Communications, Inc, an integrated communications service provider
Customers
•
Home Depot
•
Dell Computera
•
Lucent Technologies
•
Wal-Marts
•
Federal Express
•
Motorola
Financials
LTM Sales:
LTM Earnings:
Cash:
Total Assets:
$1,784.2 million
$36.6 million
$0.4 million
$1,017.9 million
$135.5 million
•
May 24, 2001, Integrated Electrical Services announced that it successfully closed a new senior
credit facility involving nine lending institutions, including lead banks Chase Manhattan, Credit
Lyonnais, Bank of Nova Scotia and Toronto Dominion. The aggregate principal amount of $150
million, made up of a $50 million term facility and a $100 million revolver, expires May 2004. This
new facility will replace the existing senior revolving credit facility and will be used for general
corporate purposes.
Intermagnetics General Corporation
(IMGC $30.99)
Latham, New York
Overview
Intermagnetics General Corporationa is a leading developer and manufacturer of LTS and HTS
materials, magnets and devices utilizing LTS and HTS wire, cable and tape, related refrigeration
equipment and radio-frequency (RF) coils. The company derives current revenues primarily from
LTS products used in medical diagnostic magnetic resonance imaging systems and from cryogenic
vacuum and related processes. Intermagnetics has accelerated efforts to develop secondgeneration HTS materials and devices designed primarily to provide more efficient, effective and
environmentally responsible transmission and distribution capabilities for the rapidly evolving energy
technology industry. Intermagnetics is based in Latham, New York, with manufacturing facilities in
New York, Connecticut, Pennsylvania, Wisconsin and California, and employs more than 700 people
with diverse technical skills.
186
Intermagnetics is a worldwide developer and manufacturer of superconducting materials,
electromagnetic components and cryogenic refrigeration systems. The company designs, develops,
manufactures and sells products in three segments: magnetic resonance imaging (MRI),
instrumentation and energy technology. Through IGC-MBG, the company manufactures and sells
superconductive MRI magnet systems to MRI system integrators for use in stationary and mobile
applications. Intermagnetics’s IGC-Polycold subsidiary manufactures and sells a line of lowtemperature refrigeration systems in the (40)–(90) degrees Celsius range. Using initially firstgeneration and, subsequently, second-generation HTS conductor, the company intends to develop
electric power devices for sale primarily into the electric power utility marketplace.
Financials
F2000 Revenue:
F2000 Cash:
F2000 Total Assets:
$138.2 million
$27.7 million
$152.2 million
$501.8 million
•
July 9, 2001, Intermagnetics General announced that its common stock would begin trading on
the NASDAQ National Market effective July 11, 2001, under the ticker symbol IMGC. At that
time, the stock was traded on the American Stock Exchange under the symbol IMG. “We believe
moving to NASDAQ will enhance our recognition as an attractive growth company and our
visibility as a leading player in the emerging field of energy technology,” said Glenn H. Epstein,
president and chief executive officer. “We expect the move will improve the liquidity of
Intermagnetics’s common stock, making it even more attractive to many institutional investors.
Additionally, our peer companies in energy technology and related fields also trade on NASDAQ.”
•
May 29, 2001, Intermagnetics announced that its wholly owned subsidiary, IGC-SuperPower,
signed agreements with Los Alamos National Laboratory granting it worldwide exclusive licenses
to patents and applications related to manufacturing second-generation HTS. SuperPower also
received an exclusive license to technology related to fault-current controller systems. In
addition, SuperPower received exclusive rights to sublicense any of these technologies.
International Fuel Cells
(Subsidiary of United Technologies [UTX $57.06])
South Windsor, Connecticut
Overview
International Fuel Cells (IFC), a unit of United Technologies, is the world leader in fuel-cell
production and development for commercial, transportation, residential and space applications. One
of the largest companies in the world solely devoted to fuel-cell technology, IFC has more than 40
years of experience in the fuel-cell business. Since 1966, all of the more than 100 U.S.-manned
space flights have operated with IFC-supplied fuel cells. IFC’s fuels cells provide efficient, reliable
electrical power (as well as drinking water for astronauts) and have logged more than 90,000 hours
in space.
PC25—The PC25 is a 200-kW stationary fuel-cell power plant with a phosphoric-acid cell stack.
More than 200 PC25 units have been delivered around the world. Fuel-cell power plants using PEM
technology are currently in development for transportation, commercial stationary and residential
applications. IFC is working with five automakers and two bus manufacturers, as well as the DOE,
on development and demonstration programs for automobiles.
PEM Cell-Stack Activities—IFC’s PEM-cell development takes advantage of the company’s passive
water management approach, which simplifies the power plant system and achieves superior
performance under any operating condition. Current IFC development activities are reducing the size,
weight and cost, and improving performance of the PEM cell stack for commercial application.
Space and Defense—IFC develops fuel-cell systems for space and defense applications. The
company designed, developed and continues to produce the fuel-cell power plants for NASA’s
Space Shuttle Orbiter and is working with NASA and aerospace companies to evaluate fuel cells for
future applications.
•
Shell Hydrogen, a unit of Shell Oil Products Company
•
September 4, 2001, International Fuel Cells announced the sale of a fuel-cell system that will
power a recreational center in Woking, England and be the first commercial fuel cell operating in
the United Kingdom.
•
June 27, 2001, Shell Hydrogen US and IFC announced the formation of HydrogenSource LLC, a
50/50 joint venture to develop, manufacture and sell fuel processors and hydrogen generation
systems for the emerging fuel-cell and hydrogen fuel applications.
•
May 16, 2001, IFC announced the sale of a PC25 fuel-cell system to the Los Angeles
Department of Water and Power (LADWP). The fuel cell, which will be installed at the Playa
Vista Project in West Los Angeles, will be the 17th PC25 unit IFC has delivered to California
since it began producing the PC25 in 1991.
Maxwell Technologies, Inc.
(MXWL $10.75)
San Diego, California
Overview
Maxwell Technologies develops, manufactures and markets high-reliability electronic components
and power and computing systems for use in the transportation, telecommunications, consumer and
industrial electronics, medical, and aerospace industries. The company’s products include
PowerCache ultracapacitors, electromagnetic interference (EMI) filters for implantable medical
devices, radiation-shielded microelectronics, and custom power and computing systems for OEMs.
188
Ultracapacitors—Maxwell offers its proprietary PowerCache ultracapacitors in several form factors,
ranging from 5-farad postage-stamp-size cells to 2,500-farad large cells that measure two inches by
two inches by six inches.
EMI-Filtered Feedthroughs—Maxwell designs, manufactures and markets proprietary ceramic-filter
capacitors that protect implantable medical devices, such as cardiac pacemakers and implantable
defibrillators, from EMI.
Radiation-Shielded Microelectronics—Maxwell designs, manufactures and markets radiationshielded microelectronics, including integrated circuits, power modules and single-board computers,
primarily for the satellite and spacecraft market.
Applied Computing and Power Quality Systems—A diverse line of application-ready computing
platforms and single-board computers based on advanced, industry-standard electromechanical
architectures is designed, manufactured and marketed by Maxwell.
•
Exide Technologies
Customers
Guidant Corporation; Pacesetter Division of St. Jude Medical, Inc.; Lockheed Martin; Boeing;
Motorola; Compagnie Finciere; Alcatel; Deutsche Telecom AG; Rockwell International Corporation;
GE Medical Systems Division of GE; Toshiba; and Siemens.
Financials
2001 Cash (as of 6/01):
2001 Total Assets (as of 6/01:)
$96.6 million
$(16.2) million
$29.7 million
$114.5 million
$109.3 million
•
June 27, 2001, Avista Labs, the distributed power affiliate of Avista Corporation, selected
Maxwell Technologies’s PowerCache® ultracapacitors to optimize performance and
reduce the cost of its unique, modular fuel-cell systems and components.
•
May 17, 2001, Exide Technologies, the global leader in stored electrical energy solutions,
signed a multiyear development and supply agreement with Maxwell Technologies to
develop and market advanced, integrated stored energy systems for military, commercial
and certain types of passenger vehicles.
Millennium Cell Inc.
(MCEL $3.88)
Eatontown, New Jersey
Overview
Millennium Cell Inc. invented, patented and developed Hydrogen on Demand™, a proprietary
process that safely generates pure hydrogen or electricity from environmentally friendly raw
materials. In the process, the energy potential of hydrogen is carried in the chemical bonds of
sodium borohydride, which, in the presence of a catalyst, release hydrogen or produce electricity.
The primary input components of the reaction are water and sodium borohydride, a derivative of
borax, which is found globally in substantial natural reserves. Hydrogen from this system can be
used to power fuel cells, as well as fed directly to internal-combustion engines. In addition, the
company has a patented design for boron-based longer-life batteries. The process can be used to
generate hydrogen for use by fuel cells in the production of electricity; generate hydrogen for use by
modified internal-combustion engines; and power longer-life batteries.
Millennium Cell has incorporated its Hydrogen on Demand technology into several automotive
prototypes to demonstrate the feasibility of this technology, including retrofitting and modifying a
former New York City taxi to burn hydrogen gas in its internal-combustion engine. The company is
developing longer-life batteries based on boron chemistry. These batteries are targeted for
consumer products such as laptop computers and cell phones. Furthermore, not only do the
batteries last longer, the also offer environmental advantages and can be disposed of in the regular
waste stream without harmful effect.
•
Air Products and Chemicals
•
Avantium Technologies
•
•
DaimlerChrysler
•
Oak Ridge National Laboratory
•
Rohm & Haas
•
U.S. Borax
Financials
2000 Revenue:
2000 Cash:
2000 Total Assets:
190
$0.1 million
$30.1 million
$31.4 million
$105.8 million
•
September 27, 2001, Millennium Cell announced that its Hydrogen on Demand technology
would be demonstrated with the new Nexa™ power module from Ballard Power Systems
October 11–13 at the Wasserstoff (Hydrogen) Expo in Hamburg, Germany. Ballard announced
the commercial launch of the Nexa the same day—the world’s first volume-produced PEM fuelcell system designed for integration into a wide spectrum of end products.
•
September 17, 2001, Millennium Cell announced that it had provided the Ford Motor Company a
prototype Hydrogen on Demand fuel system for automotive application evaluation. The system
will be evaluated by Ford at its research laboratories in Dearborn, Michigan, in order to validate
the capabilities of the fuel system to deliver hydrogen to either a fuel cell or an internalcombustion engine.
Pepco Energy Services
(Subsidiary of Potomac Electric Power Company [POM $21.75])
Washington, D.C.
Overview
Pepco Energy Services is one of the mid-Atlantic’s leading providers of energy and energy-related
products and services for the full range of energy users from residential and small-business
customers to large commercial, institutional and industrial users, as well as to state, municipal and
federal governments. A wholly owned, separately managed subsidiary of Potomac Electric Power
Company, Pepco Energy Services also provides energy suppliers and large energy users, such as
utilities, municipalities, cooperatives and aggregators, with an array of energy management services
including risk management and acquisition and management of power generation assets.
For residential customers and small businesses, the company offers a variety of energy and energyrelated products and services, including home energy surveys to maximize comfort and reduce
energy; energy-efficient windows and siding; a variety of lighting products; generators for standby
power supply; home and appliance warranties; HVAC systems repair and maintenance; power
quality products for home and office; as well as natural gas and electricity.
•
Potomac Electric Power Company
•
August 10, 2001, Pepco Energy Services was awarded a $120 million contract by the General
Services Administration to supply electric power to 105 major federal government facilities in the
Washington, D.C. area. Under the terms of the 25-month contract, these federal facilities are
guaranteed to save more than $6 million over what Pepco would have charged them with a
standard rate. Pepco will manage the power supply for such Washington landmarks as the U.S.
Capitol and the Lincoln Memorial, as well as agencies including the U.S. State Department and
the U.S. Department of Justice. The newly contracted facilities use more than 1.5 billion kWhs of
electricity annually, which is equivalent to the amount of power necessary to serve more than
125,000 homes.
•
August 3, 2001, Marketer Pepco Energy Services announced that it signed deals to supply six
big customers in Baltimore Gas & Electric territory, including Andrews Air Force Base. The new
customers represent a total load of approximately 11 MW, and the contracts are worth
approximately $7.6 million, according to PES, an unregulated affiliate of Potomac Electric Power.
Plug Power Inc.
(PLUG $8.32)
Latham, New York
Overview
Plug Power Inc. is a designer and developer of on-site energy generation systems utilizing PEM fuel
cells for stationary applications. The company’s goal is to manufacture reliable, efficient and safe
fuel-cell systems at affordable cost for mass-market consumption. Plug is focusing its efforts on
overall system design, component and subsystem integration, assembly, as well as quality control
processes. The company was formed as a joint venture between Edison Development Corp., a DTE
Energy Company, and Mechanical Technology Incorporated. Plug Power intends to manufacture
residential and small commercial stationary systems that will be sold globally through a joint venture
with GE MicroGen Inc. DTE Energy Technologies will distribute these systems in Michigan, Illinois,
Ohio and Indiana.
•
Advanced Energy Systems
•
Celanese AG
•
DTE Energy
•
Gastec
•
GE Power Systems
•
MTI
•
Vaillant
Financials
2000 Revenue:
2000 Cash:
2000 Total Assets:
$8.4 million
$55.5 million
$150.8 million
$416.6 million
•
192
October 10, 2001, Plug Power Inc. announced that it received a $1.2 million award from the
United States Army Corps of Engineers, Construction Engineering Research Laboratory (CERL)
to supply fuel cells to the Watervliet Arsenal in Watervliet, New York. Under the terms of the
contract, Plug Power will manufacture, install and operate ten fuel-cell systems at the Arsenal.
The systems are intended to provide power to various buildings and facilities on the Army Post.
Installations of the fuel-cell systems are scheduled to be completed in December.
Proton Energy Systems, Inc.
(PRTN $6.35)
Rocky Hill, Connecticut
Overview
Proton Energy Systems, Inc. designs, develops and manufactures PEM electrochemical products.
The company’s proprietary PEM technology is embodied in two families of products: hydrogen
generators and regenerative fuel-cell systems. Its hydrogen generators produce hydrogen from
electricity and water in a clean and efficient process. The company is currently manufacturing and
delivering late-stage development models of its hydrogen generators to customers for use in
commercial applications. The regenerative fuel-cell systems, which Proton Energy is currently
developing, will combine its hydrogen generation technology with a fuel-cell power generator to
create an energy device that is able to produce and store the hydrogen fuel it can later use to
generate electricity. By providing the hydrogen fuel used by fuel cells, its core technology can enable
fuel cells to function not only as power generating devices, but also as energy storage devices.
Proton makes HOGEN® hydrogen generators and UNIGEN® regenerative fuel-cell systems.
Proton’s HOGEN hydrogen generators make high-purity, process pressure hydrogen from water and
electricity for diverse uses in semiconductors, metallurgy, electrical generator cooling, meteorology
and fuel-cell applications. Proton’s UNIGEN fuel-cell systems have the potential to capture, store
and release electrical energy more cost-effectively and efficiently than batteries or other alternatives.
PEM technology has a 40-year history of demonstrated reliability in critical military and aerospace
life-support applications. Proton is committed to PEM applications in commercial markets.
•
NASA
Financials
2000 Revenue:
2000 Cash:
2000 Total Assets:
$0.7 million
$1.4 million
$180.8 million
$210.2 million
•
October 16, 2001, Proton Energy Systems, Inc. hosted an official groundbreaking ceremony with
Governor John G. Rowland and other dignitaries at the Wallingford site of its future company
location. Proton’s new 100,000-square-foot facility is being built to accommodate its projected
growth within the emerging alternative energy sector. The building will include the company’s
corporate headquarters and space for manufacturing, research and product development activities.
•
October 15, 2001, Proton Energy Systems, a leader in practical applications of PEM
electrochemical technology and products, announced that it signed a contract worth up to $6.2
million with the Naval Research Laboratory (NRL) for advanced fuel-cell technology
development. This cost plus fixed fee, or CPFF, contract is comprised of two phases. During
phase I, which is for $3.2 million, Proton will provide initial technology development, which will
begin immediately. The contract also includes a $3.0 million phase II option in which Proton
could provide prototype fabrication and testing.
Quantum Technologies
(A division of IMPCO Technologies [IMCO $16.68])
Cerritos, California
Overview
Quantum, a division of IMPCO Technologies, Inc., develops and manufactures cost-effective and
efficient gaseous fuel storage, fuel delivery and electronic control systems for OEM passenger and
fleet vehicles. The Quantum division also targets the emerging fuel-cell industry, which includes the
mobile vehicle, and stationary and portable power generation markets. The division’s capabilities
include research and development; application engineering and validation; fuel-cell power system
controls and validation; hydrogen and compressed natural gas fuel storage and testing; testing
procedures to meet different global regulations and emission-control standards; fuel-control devices
and technology for gaseous fuels and other gases for use in internal-combustion engines; fuel cells
and other applications requiring metering of gases; and manufacturing.
Quantum’s core products include gaseous fuel storage, fuel delivery and electronic controls for fuelcell systems used in mobile vehicle, stationary power generation and portable power markets.
•
The fuel-storage products include cylindrical and conformable tanks. Quantum provides
lightweight, all-composite storage tank technologies for compressed hydrogen. The lightweight
nature of the tank, coupled with high hydrogen mass by volume, improves the range of
hydrogen-powered fuel-cell vehicles. The conformable tank maximizes hydrogen storage in a
given space, optimizing the volume of hydrogen stored on-board.
•
The fuel-delivery products consist of regulators, injectors and valves. The company has
designed its patented in-tank regulator for use with hydrogen for fuel-cell applications. The
design provides greater safety by eliminating the need for high-pressure fuel lines outside of the
fuel storage tank. The unit is also more cost-effective because it incorporates the features of
many independent components, thereby eliminating the need to install several separate and
more costly components.
•
The electronic-control products use microprocessors with varying capacities. These units
precisely control the flow and pressure of gaseous fuels, such as hydrogen, and other gasses,
such as air. The company currently uses these electronic controls, coupled with its proprietary
software, to optimize fuel pressure and flow management for fuel-cell applications.
Customers
BMW, Kohler, Caterpillar, Linde, Clark Material Handling, Lowry Industrial Lift-Trucks, Clark
Samsung of Korea, Mazda, Climaveneta, Mitsubishi, Combi-Lift, NACCO Material Handling,
Cummins, Nissan, Daewoo, Orchard-Rite, Detroit Diesel, Power Systems India, Ford Motor
Company of Australia, Scania, Generac Power Systems, Tecogen, General Motors, Toyota, JCB
Excavators, Waukesha Engine, Adam Opel AG, Plug Power, DaimlerChrysler, Sandia National
Laboratories, DCH Technology, South Coast Air Quality, Ford Motor Company, Management
District, SunLine Transit Agency, Hyundai Motor Company, ISE Research, United States
Department of Energy, Lawrence Livermore National Laboratory and Yamaha Motor Company.
194
SatCon Technology Corporation
(SATC $5.56)
Cambridge, Massachusetts
Overview
SatCon Technology Corporation, organized in 1985 and reincorporated in 1992, is developing
enabling technologies for the emerging distributed power generation and power quality markets. The
company designs, develops and manufactures high-efficiency, reliable and long-lived electronics
products, and a variety of standard and custom high-performance motors to suit specific
applications. Its power and energy management products convert, condition, store and manage
electricity for businesses and consumers that require high-quality uninterruptible power. The
company is utilizing its engineering and manufacturing expertise to develop products that it believes
will be integral components of distributed power generation and power quality systems. Its specialty
motors are typically designed and manufactured for unique customer requirements such as high
power-to-size requirements or high efficiency.
The electronics segment includes power electronics and control software such as controllers, fuelcell power conversion systems, hybrid microcircuits, thin-film substrates and amplifiers. The motion
control segment includes high-performance motors and electric drivetrains such as motors for fuel
cells, magnetic levitation systems, shaker vibration test systems, electric drivetrains, industrial
automation and machine tool motors. SatCon performs funded research and development in
connection with government programs and for third parties. The company pursues funded research
and development in areas where it has technical expertise and where it believes there is significant
commercial application for the developed technology. SatCon also has been developing flywheels
for energy storage and other applications since 1985.
•
Duquesne Enterprises
•
H Power
Customers
•
United States Department of Defense
•
United States Department of Energy and Applied Materials
Financials
LTM Sales:
LTM Earnings:
Cash:
Total Assets:
$41.9 million
$(15.1) million
$26.0 million
$69.4 million
$80.6 million
•
October 4, 2001, SatCon Technology announced the establishment of a supplier agreement with
Controlled Systems. SatCon will supply Controlled Systems with frequency converters used in
ground power systems for military aircraft. SatCon’s frequency converters are currently the only
ISO9001-supplied product with UL approval for this industry.
Stuart Energy Systems Corp
(HHO CN $5.90)
Mississauga, Ontario
Overview
Stuart Energy, through its proprietary water electrolysis technology, is a world leader in the
development and provision of hydrogen fuel appliances. These devices use electricity to produce
hydrogen at the pressure and purity needed for fuel uses. The convergence of electric power
deregulation, commercialization of fuel cells and the goal of sustainable development has propelled
the company’s hydrogen fuel supply technology to the forefront of clean energy applications for
transportation and regenerative power.
Stuart currently offers a wide range of industrial hydrogen products for a variety of applications
including electric power, power system management, chemical processes, edible oils, furnace
atmosphere, industrial gases and meteorology. The company has been actively participating in key
demonstration projects, providing hydrogen fuel for vehicles. The most recent project is at SunLine
Transit where Stuart’s Bus Fueler™ is providing hydrogen to fuel-cell vehicles at the facility.
•
The Bus Fueler can be scaled to provide fuel for a fleet of 1 to 200 or more buses. On-site fuel
production and storage can significantly reduce operating costs. A bus can be refueled in four
minutes to one hour, depending on requirements.
•
The Community Fueler™ is designed for refueling cars and trucks at corner gas stations, or for
fleets of up to 200 vehicles. A car or truck can be refueled in anything from two to three minutes,
up to an hour, as required.
•
The Personal Fuel Appliance (PFA) 2000™ is currently being refined, and the Ford Motor
Company has agreed to test and evaluate a series of fuel appliances over a two-year period.
The release of the PFA will coincide with the mass marketing of fuel-cell cars, scheduled for
showrooms in 2004.
Stuart also offers hydrogen equipment including:
•
The TTR unit is a fully automated on-site hydrogen generator, which makes electrolytic hydrogen
competitive with hydrogen supplied in cylinders or tube trailers.
•
The MET CST is a compact hydrogen generator designed to provide a reliable, safe and
economic source of on-site hydrogen for meteorological balloon filling stations.
•
Cheung Kong Infrastructure Holdings
Financials
LTM Sales:
Cash:
Total Assets:
196
$4.3 million
$92.2 million
$100.6 million
$49.8 million
PRIVATE ENERGY TECHNOLOGY
COMPANIES
The information contained in this section is based on facts, assumptions and estimates provided by the companies included. While
the information used in the report and the opinions contained herein are based on sources believed to be reliable, Robertson
Stephens has not independently verified this information. Accordingly, Robertson Stephens makes no representation or warranty,
expressed or implied, relative to this subject matter, and no reliance should be placed on the fairness, accuracy, completeness or
correctness of the information and opinions contained in this report.
Acumentrics Corporation
Westwood, Massachusetts
Overview
Based in Westwood, Massachusetts, Acumentrics Corporation is an innovator of power protection
and distributed generation products. The company was founded in 1994 and has concentrated on
developing products associated with power generation, power conversion and power quality. Current
products include composite flywheel-based UPS systems, AC and DC UPS systems, and powerinverter modules. In the near future, a wide range of products based on the company’s proprietary
tubular solid-oxide fuel cells will be announced.
Acumentrics’s product lines address the needs of the power quality and distributed generation
marketplace. Products include single-phase ruggedized battery UPS, three-phase flywheel-based
UPS, DC flywheel energy storage and OEM three-phase power-inverter modules. Future distributed
generation product families will include portable and stationary SOFC for the broadband,
commercial, residential, remote and auxiliary vehicle markets.
•
General Dynamics Communication Systems
•
Northeast Utility System
•
Texaco
•
September 28, 2001, General Dynamics Communication Systems, a business unit of
General Dynamics, announced that it had taken delivery of a tubular SOFC developed by
Acumentrics. General Dynamics plans to integrate Acumentrics’s fuel cell stacks in a
series of advanced power sources (generators and auxiliary power units), which will
operate using fuels already in the military inventory, in near silence, at approximately twice
the fuel efficiency of conventional combustion generators.
AFS Trinity Power Corporation
Medina, Washington
Overview
AFS Trinity Power Corporation owns one of the world’s largest portfolios of flywheel technologies.
Since 1993, U.S. government agencies and contractors have been customers and/or funding
sources for the technologies that have been developed by AFS Trinity’s predecessor companies,
American Flywheel Systems, Inc and Trinity Flywheel Power.
AFS Trinity’s first commercial product is expected to ship in 2001. This product will provide a critical
source of ride-through power, including power for Internet data centers, telecommunications centers
and co-location server centers. The company’s flywheels are designed to be used in conjunction
with UPSs, and to provide start-up and load-following for microturbines and fuel cells, thereby
making distributed generation systems capable of operating without chemical batteries or connection
to the grid. AFS Trinity’s products are expected in the future to act as energy storage systems for
solar, wind and other renewable energy systems, as well as to store braking energy in hybrid
transportation. Long-term applications also include large-scale peak-shaving, electric vehicle and
spacecraft applications.
•
Calpine Power
•
FuelCell Energy
•
Inverpower
Allegro Development
Dallas, Texas
Overview
Allegro Development develops software systems for oil and gas producers, energy traders, gas
processors, transporters, pipelines, refiners, petroleum distributors, electric and gas utilities, power
generators, and energy consumers. The company has offices in Dallas and Houston, Texas,
London, England, and Calgary, Alberta.
•
Coal and Crude Oil—Manages buying, selling, transportation and storage of coal and
crude oil. It gives traders, credit managers, risk managers, schedulers and accountants
instant access to data.
•
Exploration and Production—Creates joint interest bills, tracks lease information,
generates delay rental payments, generates prepayments and manages well information.
•
Financials—Controls transactions and measures financial performance and generates
checks for G&A expenses, post cash receipts and the reconciliation of bank accounts.
Produces both aged/open A/R and A/P, and allows for customized financial
statements. Creates fixed-asset record, and calculates and records DD&A based on
user-definable schedules.
•
Natural Gas—Manages contract administration, sales invoices and purchase validation or
statements, and accommodates buy, sell, balancing, physical options and exchanges.
Manages scheduling, nomination submission/receipt and gas control.
•
Natural Gas Liquids—Fractionation, deethanization, CO2 extraction, component-based
pricing, component inventory management, and integrate physical and paper transaction.
200
•
Power—Physical and paper trading, manage physical options and expedite transmission requests.
•
Refined Products—Manages flexible pricing using one or multiple price indexes, rack exchange
agreements, inventory by product and grade, and regrading and bleeding processes.
•
Risk Management—Captures and values all physical and financial transactions, enables
a quick view at financial and physical positions, measures current mark-to-market, and
calculates value-at-risk.
Customers
Bord Gais, TransCanada, Berry Petroleum, Phillips Petroleum, Unocal, Merrill Lynch, Mirant,
Electricite de France, Sempra, BHP and Occidental Petroleum
•
September. 25, 2001, Allegro Development announced that ANP Marketing Company, a
subsidiary of American National Power, Inc., licensed its natural gas, risk management and
power applications.
•
September 11, 2001, Innogy Holdings and Allegro Development announced that Innogy, a
leading U.K.-based power company, has implemented Allegro’s applications for its natural
gas, risk management, coal and power management activities.
•
August 1, 2001, Allegro Development opened its Calgary office. The company announced
that it established a new local office in Calgary, Alberta, in order to better serve its growing
list of Canadian clients.
@TheMoment, Inc.
San Mateo, California
Overview
@TheMoment, Inc. is a developer of dynamic trading solutions for Global 2000 enterprises. The
highly scalable Trade@TheMoment platform provides the foundation for businesses to build and
deploy real-time trading applications that enable rapid market response, increased revenues and
profitability, and enhanced competitive position.
Trade@TheMoment delivers the industry’s widest range of easy-to-deploy real-time trading
capabilities out of the box. With Trade@TheMoment, market managers can select from an array of
configurable market types or produce a customized market to meet their specific business needs.
The platform supports more than 1,000 trading types, including forward and reverse auctions and
bid/ask exchanges.
In addition, Trade@TheMoment supports optimized dynamic commerce systems that allow
enterprises to leverage up-to-the-minute market data for establishing optimal selling strategies and
maximizing revenue. The platform also features a build-to-forward contract application that creates
simple forward contracts that mature ahead of the manufacturing cycle, thereby becoming orders. By
linking dynamically into order-entry and inventory management systems, this application can
improve demand forecasting, streamline manufacturing operations and reduce inventory overhead.
•
Altra Energy Technologies, Inc.
•
BroadVision
•
Epicentric
•
Iconixx
•
PROS Revenue Management
•
TIBCO Software, Inc.
•
VeriSign, Inc.a,b
Customers
•
IBM
Reliant Energy
•
Rosenbluth International
•
•
October 29, 2001, @TheMoment, Inc. announced that Reliant Energy Wholesale Group, a unit
of Reliant Resources, selected and implemented the Trade@TheMoment platform to conduct
the first-ever online auctions of standardized power generation capacity products. Reliant
created CapTrades, a new marketplace to enable the capacity auctions and the subsequent
power scheduling process, and chose @TheMoment to develop an advanced, multiround
auction to comply with the complex regulations related to the sale of power generation capacity
in Texas.
•
August 6, 2001, The company announced the successful completion of its fourth round of
venture funding totaling $7 million. The round was led by new investor Voyager Capital and
included continuing investments from Tarrant Venture Partners (an affiliate of Texas Pacific
Group), TIBCO Software Inc. and VantagePoint Venture Partners.
•
July 2, 2001, Altra Energy Technologies, Inc., together with its subsidiaries, and @TheMoment
announced a strategic alliance to provide energy companies with dynamic trading solutions for
the deployment of online private trading exchanges.
CES International
Alpharetta, Georgia
Overview
CES International is a global supplier of real-time software solutions for distribution utilities. CES’s
flagship product, the Centricity™ operations resource management (ORM) system, optimizes
distribution-network operations, and includes software suites that provide an information
infrastructure and applications for the delivery of the “high 9s” reliability and power quality levels.
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Centricity is an integrated and configurable software system developed to reduce restoration time,
improve operational efficiency, and safeguard workers and the public. Centricity supports trouble call
management, outage analysis, operations dispatch, crew management, switching order
development, safety documentation, reporting and other critical operations. Centricity is comprised
of four solution suites including:
•
OpsCentricity—Based on the InterSys Enterprise Application Integration (EAI) solution for
distribution utilities, includes a fault-tolerant, real-time message bus, and productized templates
and adapters to integrate multiple business information systems. The suite also includes outage
management, trouble call management, switching management, storm management, power flow
and tagging/safety solutions.
•
CrewCentricity—Includes crew management and dispatch modules as well as functionality to
support Web-based work execution and standardized integration to leading mobile workforce
management vendors.
•
CommandCentricity—Includes modules supporting traditional and Internet-based performance
management for distribution company operations and customer support functions.
Advanced Control Systems, BV Solutions Group, Compaq, Eliop, ESRI, ExtenSys, Foxboro,
Hewlett-Packard, Hunt Technologies, Live Data, Inc., Logica, MDSI, Microsofta, Mincom,
Oraclea, PricewaterhouseCoopers, SchlumbergerSema, Siebela eEnergy, Sun Microsystemsa
and Syntellect.
Customers
Southern Company, Con Edison, Northeast Utilities, Northern Ireland Electricity, United Energy of
Australia, Cinergy, Alliant, Public Service of New Mexico, Toronto Hydro, City of Garland Texas, San
Diego Gas and Electric, PEPCO and Railtrack UK.
•
July 30, 2001, New alliance partners CES International and Hunt Technologies announced their
first joint customer—electrical cooperative Crow Wing Power—at the National Rural Electric
Cooperative Association’s CEO Leadership Conference.
•
July 26, 2001, Bermuda Electric Light Company Limited (BELCO) has gone live with software
from CES International and ESRI Inc., giving the island utility the ability to restore power quicker
during outages and improve day-to-day network reliability and efficiency.
Cupertino Electric, Inc.
San Jose, California
Overview
Founded in 1954, Cupertino Electric, Inc. provides total power, energy and technology solutions,
including backup energy systems and on-site permanent distributed electrical power generation
facilities. The company has three divisions:
1. Cascade Controls provides advanced instrumentation and control construction services to the
technology industry and is one of the leading instrumentation and control contractors in the country.
2. Ceitronics is one of the leading systems integration contractors in the western United States.
Ceitronics provides integration services within the disciplines of Internet/eBusiness, audio and
video systems, voice/data/fiber optics, education, fire life safety systems, security systems, and
post-completion services.
3. Frank Electric is one of Northern California’s premier design/build electrical contractors. Frank
Electric provides turnkey services on a variety of technology, commercial and industrial projects.
Cupertino provides electrical infrastructure, power generation, distribution and backup, network
communications, and instrumentation and control solutions to the computer, Internet, semiconductor,
software, telecommunications, biotechnology and other technology-dependent industries and
institutions. This includes the recent implementation of an initiative to offer the engineering,
installation and commissioning of on-site power generation systems to customers, as well as a nearterm program to provide a range of temporary backup energy options for California businesses.
Customers
•
Hewlett-Packard
•
Intela
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Microsoft
•
Oracle
•
August 9, 2001, Cupertino Electric, Inc. announced the formation of two new divisions, which will
address the growing needs of businesses in today’s energy-strapped, technology-driven
economy. The Energy Solutions division will focus on offerings that reduce customers’ energy
costs, decrease reliance on the power grid and guard against power interruption. The
Technology Services division will concentrate on end-to-end systems integration solutions to
ensure that customers have the IT infrastructure they need to advance their businesses.
•
March 15, 2001, The company announced that it was selected by Terremark Worldwide Inc., a
global leader in Internet infrastructure and managed services, to build the electrical infrastructure
for the NAP of the Americas, the first tier-1 NAP strategically located to serve as an international
Internet gateway connecting North and South America. The project is owned and operated by
Terremark Worldwide Inc.
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Encorp, Inc.
Windsor, Colorado
Overview
Encorp is a provider of products, services and solutions that address the growing demand for clean,
reliable on-site power systems. The company’s power technology products include gridinterconnection switch gear and energy-automation software. Encorp’s products, in combination with
its engineering-services team, create dependable on-site power solutions that can reduce the overall
cost of energy for commercial and industrial customers operating in the digital economy. Encorp’s
technology-neutral solutions are designed to simplify and automate the control of a wide variety of
distributed power resources, such as engine-generator sets, microturbines, fuel cells, combined heat
and power (CHP or cogeneration), and energy storage devices.
•
Power Control Technology—At the core of Encorp’s power technology is the enpower
generator power control (GPC). The GPC is an integrated control system, combining the
functionality of several traditional control modules, communications and protective relays into a
single solid-state assembly, or “gold box.”
•
Automatic Paralleling Switches—The enpower APS (automatic parallel switch) is designed to
be used as a peak-shaving control system that allows the generator to operate only when the
utility is available. The enpower-APS is a fully integrated control, display and circuit breaker
panel. The generator can synchronize individually on and off to the power source in a soft
transition mode, supplementing utility power to perform a peak-shaving operation.
•
Paralleling Switch Gear—Encorp offers a complete line of switch-gear solutions for a variety of
applications, including standby/critical power, cogeneration and peak shaving. All switch gear
features Encorp’s unique generator power control—the enpower GPC.
•
Energy Automation Software—Encorp’s Windows-based applications create a simple, userfriendly interface for both local and remote monitoring and control capabilities. The virtual
maintenance monitor (VMM) provides in-depth maintenance, test and trouble-shooting
functionality. Complementing the VMM, the Virtual Power Plant™ allows users to remotely
dispatch, aggregate and control multiple distributed generation assets.
•
September 27, 2001, Encorp designed and built paralleling switch gear for installation on 16
Chow II Power Plant generators that produce and supply 49 MW of power exclusively for the
Pacific Gas & Electric utility grid.
•
September 5, 2001, Encorp announced that it had moved to its new 80,000-square-foot office
and production facility at Diamond Valley Tech Center in Windsor, Colorado.
Enermetrix
Maynard, Massachusetts
Overview
Enermetrix’s eBusiness solution suite, the Energy Operating System (EOS), is designed to help
companies automate complex processes to generate revenue and reduce costs and risk in volatile
energy markets. The company’s software solutions are deployed out of the box or are customized
and are supported in deployment with services including system customization and integration,
education, and business transformation. The company’s customers include energy utilities, energy
traders and marketers, energy service companies, and commercial and industrial users of energy.
•
The EOS Suite—The EOS includes BuyerMetrix and SellerMetrix, which consist of advanced
database and software applications for energy buyers. The database houses and manages
information about physical facility locations, and details about natural gas and electricity
accounts, including local utility rates and tariffs, delivery points for energy historical consumption,
historical costs, terms and conditions of energy contracts and credit information about accounts
and counter-parties. Applications capabilities include customizable Web interfaces and the ability
to perform advanced analysis and reporting. Applications allow for aggregation of loads, analysis
of load shapes against market conditions and the creation of intelligent, secure buy/sell orders
for real-time competitive bidding.
•
Provider of Last Resort (POLR) Metrix—POLR, for regulated utilities, is designed to reduce
POLR obligations by empowering customers to procure competitive energy.
•
Enermetrix ProServices—Provides strategic consulting evaluating business practices,
strategies and processes to utility customers.
•
Enermetrix Network—Marketplace for retail natural gas and electricity trades.
ConneXt, Accenture, Alliant Energy Industrial Services and First International Bank.
•
August 31, 2001, Enermetrix announced the posting of a buy order to supply 100% of the default
service load for the Fitchburg Gas and Electric Light Company (FG&E). The buy order totals 38
million kWhs over six months.
•
March 21, 2001, More than 10% share of western Pennsylvania commercial and industrial
electric market offered on Enermetrix network. Enermetrix announced the posting of a buy order
on the Enermetrix Network for 1.7 billion kWhs of annual load. The buy order seeks offers to
supply more than 10% of the western Pennsylvania commercial/industrial electric market.
•
March 7, 2001, ConneXt, a Seattle-based software developer of billing and customer care
solutions for the utility industry, announced the formation of a joint marketing agreement with
Silicon Energy and Enermetrix. This partnership creates the possibility for ConneXt to deliver a
commercial and industrial billing solution that combines customer care with the partnering
companies’ load-management and eBusiness energy procurement applications.
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Envenergy
Santa Barbara, California
Overview
Envenergy provides hardware, software and networking solutions for facility and energy management.
Envenergy’s solutions are a key piece of the infrastructure needed to bring information from facility
systems (building automation, energy, lighting, access control, metering, etc.) into an enterprise IT
environment. Envenergy’s core technology is the Multi-Protocol Exchange™ (MPX), a robust,
integrated hardware and software platform that includes the company’s innovative Broadway
Framework. Its primary purpose is to function as the facility systems agent, providing a common
presentation and management interface for all of the devices and systems within a facility by
interfacing with the different communications protocols that the facility uses.
The MPX is an open, intelligent platform. It can be used simply to Web enable an individual piece of
equipment such as a meter or building control system. However, it is designed to run many services
and protocols at the same time and still respond to events such as load curtailment or pricing signals.
For example, the MPX can be used to run several services such as distributed generation
management, load shedding and predictive maintenance by interfacing with many systems and
devices in a multivendor, multiprotocol environment. The MPX is remotely upgradeable across an
enterprise, which allows service providers to add new services to an installed base of MPX’s over time.
Customers
•
Energy service companies and facility management providers
•
System integrators and IT consultants
•
Equipment and building automation system manufacturers
•
Utilities
•
Enterprise energy management software providers
•
May 16, 2001, Envenergy introduced the MPX. The MPX is an embedded Linux device that offers a
comprehensive set of capabilities including gateway functionality, routing, processing, firewalling,
extensive input/output, and data acquisition and control—all within a single, compact unit.
•
February 16, 2000, Envenergy completed a second round of venture funding of an undisclosed
amount. Investors included private individuals from the energy, real estate and high-tech sectors.
EYP Mission Critical Facilities Inc.
New York, New York
Overview
EYP Mission Critical Facilities Inc. designs and upgrades existing and new technically sophisticated
mission-critical facilities that must remain in operation 24/7. The company’s projects range from
corporate data centers and Web hosting/co-location facilities, to point of presence sites (POPs),
trading floors, digital switch installations, network operations centers, call centers and broadcasting
studios. EYP provides consulting, design, facilities operations management and information
technology services to financial, telecommunication and computer/Internet corporate clients
throughout the world from its nine offices.
EYP Mission Critical provides worldwide services in the areas of facilities operations management,
design, consulting and information technology systems.
•
In the area of design, the company provides services including systems configuration, shortcircuit and coordination studies, design development, bid evaluation, equipment, specifications,
and construction documents.
•
In consulting, EYP Mission Critical provides power quality surveys, failure investigations,
harmonic analyses, grounding studies, single point of failure studies, electromagnetic
investigations, capacity and demand analysis, surge-suppression analysis, energy savings
evaluations, feasibility studies and reliability studies.
•
Facilities operations management includes peer review of facilities management practices and
systems, policies, practices and procedures for critical system operations, predictive
maintenance program, emergency operating procedures, development of staffing models and
help find appropriate staff, staff training, best practices and QA/QC procedures, consulting on
system-design issues, and commissioning of new systems and recommissioning of old ones.
•
Information technology services encompasses advanced technology infrastructure design to
accommodate current applications, legacy systems and emerging technologies, and architectural
infrastructure and information pathway designs that incorporate the flexibility to promote change
and the adaptability to future-proof facilities.
Customers
•
Merrill Lynch
•
AT&T
•
America Online
•
Bell Atlantic
•
IBM
•
PepsiCo, Inc.
•
Microsoft
•
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May 16, 2001, TA Associates, a private equity firm with more than $5 billion in investments, took
a majority stake in EYP Mission Critical Facilities.
Excelergy Corporation
Lexington, Massachusetts
Overview
Excelergy is a developer of business-to-business transaction management, customer relationship
management and eCommerce services for the retail energy industry. The company has designed an
end-to-end suite of Internet-enabled solutions and services that allow retail energy companies to
capitalize on opportunities arising from the convergence of energy market deregulation and the
Internet. The company facilitates business processes and provides a means to enable end-use
customers to choose their service providers.
•
Excelergy ABP 3000—A scalable, flexible customer relationship management and billing
system for retail energy companies.
•
Excelergy eXACT—A business-to-business transaction management solution that enables
customers to manage and exchange data electronically.
•
e-ChoiceNet—The product enables retail energy companies to establish a privately branded
Internet portal that allows end users to conduct online auctions to select their energy providers,
and access pricing and service information.
•
System integrators: Accenture, CapGemini Ernst & Young, IBM, PricewaterhouseCoopers
and La Vista Consulting.
•
Service providers: Alliance Data Systems, EBT Express, Retx.com and US Power Solutions.
•
Software developers: Altra, Derivion, edocs, Inc., Siebel and Silicon Energy Corp.
Customers
Allegheny Power Service Corporation, BP Amoco, Constellation Energy Group, Boston Gas, First
Energy Services Corporation, Computer Sciences Corporation, American Electric Power, ANY-G
(Holland), BGE, EBT Express (Canada), Hydro One (Canada), London Hydro (Canada), Maverick
Energy (U.K.), New West Energy, Sempra Energy Solutions, Toronto Hydro (Canada) and
Constellation Energy Services.
•
October 10, 2001, Excelergy signed an agreement with Vectren Source, the unregulated retail
unit of Vectren Corporation, to rapidly implement two configurations of the Excelergy Advanced
Business Package™—the core customer care, and billing and prospecting configurations.
Vectren Source is in the process of launching natural gas, electricity supply and other energyrelated products and services in the Mid-west United States.
•
September 26, 2001, Excelergy signed an agreement to significantly expand its relationship with
the United Kingdom’s Maverick Energy, a leading provider of power to U.K.-based businesses,
energy brokers and aggregators.
•
September 20, 2001, The company announced it had added five new colleagues to its growing
global sales and channels force. The new hirings came as Excelergy’s sales had increased
330% over last year’s levels.
•
August 13, 2001, Excelergy announced it had rapidly implemented the new Excelergy Partner
Explorer™ software product with a major North American client. Now commercially available,
Excelergy Partner Explorer streamlines a client’s operations, reduces back-office costs,
improves cash collections and accelerates cash flow.
Henwood Energy Services, Inc.
Sacramento, California
Overview
Henwood Energy Services is a provider of software, consulting and data services serving vertically
restructured markets in the power industry worldwide. Henwood’s business solutions provide
business solutions to manage and optimize the daily operations of generation operators, wholesale
traders and retail supply businesses. Henwood currently serves clients on five continents.
•
Power Market Analysis—Provides price forecast, generation valuation, market analysis and
information to support investment decisions. Customers include publicly and investor-owned
electric utilities, power generation companies, generation developers and operators, financial
institutions and ISOs.
•
Power Business Solutions—Support daily operational decisions of generation plant owners,
power demand forecasting, power trading and wholesale energy scheduling. Customers
include publicly and investor-owned electric utilities, private and public generation operators
and power marketers.
•
Retail Solutions—Support daily operations of competitive retail markets including retail customer
management, load forecasting, retail pricing, energy settlements and scheduling. Customers include
competitive retail electric providers in open power markets and existing retail suppliers.
NGI (Natural Gas Intelligence) and Integrity Treasury Solutions (Integrity)
•
October 15, 2001, Henwood announced it is preparing to release its newest EnerPrise software
component, Marketsym, for power market analysis in workgroup environments.
•
October 5, 2001, Henwood released its new generation manager software product,
GenerationManager, that optimizes nominations and tracks plant PPA-level settlements.
•
August 10, 2001, Vectren, Southern Indiana Gas and Electric Company (SIGECO), announced it
had chosen Henwood Energy Services to support its Mid-west ISO scheduling and settlement
coordination functions as it transitions to the new ISO deployment with Henwood’s suite of
EnerPrise software products.
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•
July 5, 2001, Henwood announced that it had been chosen by the CEC to provide its
MarketPlace™ software application to assist in determining strategic geographic locations for
development of future generators. MarketPlace will analyze the zonal pricing areas and identify
which regions of the state are experiencing the greatest price volatility. The CEC can assess
new generation investments and/or transmission investments that can be used to reduce
volatility and ultimately lower prices.
Hydrogen Burner Technology
Rancho Dominguez, California
Overview
HbT designs, develops and manufactures hydrogen fuel processors for fuel-cell systems and
industrial hydrogen generators for industrial-manufacturing applications. In addition, HbT is
developing hydrogen generation systems that can be used in numerous industrial-manufacturing
applications as well as hydrogen refueling stations to fuel municipal bus systems and other fleet
vehicles. Furthermore, as an associate member of the California Fuel Cell Partnership, HbT is an
active participant in one of the leading industry associations for the advancement of fuel-cell
commercialization. HbT was the first to begin installing a natural gas-based on-site hydrogen
generation system and refueling station for fuel-cell buses at the SunLine Transit Agency.
HbT’s product mix for the industrial gas market is the 600-scfh and 4200-scfh under-oxidized burner
(UOBTM) on-site hydrogen generators and the 900-scfh and 6000-scfh UOB/auto thermal reactor
(ATR) on-site hydrogen generators. In the stationary fuel-cell market, HbT is designing products for
residential and small commercial market applications. The10-kW product offering is a natural gasfired fuel processor for fuel cells that serves the stationary residential and small-business market.
This will then be adapted for propane operation and followed by larger-scale 15- to 75-kW fuel-cell
fuel processors for both commercial and light-industrial stationary applications.
Several aspects of HbT’s patented and patent-pending ATR technologies provide unique product
advantages over competing products. For the evolving stationary fuel-cell market, competition can
be summarized into two groups—small-scale SMR units and alternative ATR units. First, HbT has
demonstrated its ATR hardware configurations, with patent pending, that achieve higher fuel
processing efficiencies and related higher hydrogen concentrations than competitors’ ATR units.
This relates to an 8–12% operating cost advantage over competitors’ products. In addition, HbT has
adopted a product development pathway that focuses on the verification of low-cost solutions in
comparison to some of its competitors’ over-engineered, high-cost solutions. Another aspect of this
cost advantage is the company’s strategic relationship with Visteon. Early in the development cycle
HbT ensures that the most cost-effective approaches are used by adopting Visteon’s automotive
product development expertise. Techniques such as design for manufacturing/design for assembly
are the foundations for its product and not afterthoughts left for later developments.
•
•
•
Engelhard Corporation
Gaz de France
Visteon Corporation
Current Customers
•
H Power
•
Plug Power
•
SunLine Transit Agency
KWI
London, England
Overview
KWI assists energy enterprises in forward-market trading, portfolio management and risk management.
The majority of KWI’s software is deployed in the European, Scandinavian and Asian markets.
•
KW3000—KW3000 is a suite of applications designed to manage risk and trading in the global
energy markets. It offers integrated trading, risk management and settlement platform for power,
gas and oil. The suite has been developed to handle complex characteristics of the deregulated
power industries including the limits on storage, the link with fuel markets, the correlation
between market prices and volumes, and the potential for real-time transactions. It also gives
front- to back-office visibility.
•
EnergyRisk—Embedded into software product kW3000 and designed for physical players in
energy markets, energyRisk focuses on simulating risk scenarios at the time of delivery to
assess their likely effect on total profitability and margins. Works by combining the value-at-risk
approaches with profit-at-risk methodologies formulated to energy market requirements. Enables
users to test the effect of different hedging strategies on portfolios.
Customers
Bonneville Power, Cinergy, Ontario Power, TVA, Atel, Norsk Hydro, Powergen, Southern Company
Europe, Statkraft, Alliant Energy and WPS Energy Services.
•
September 24, 2001, KWI’s fifth annual user group turned out to be the most successful yet, with
a record number of delegates attending. More than 80 risk consultants and energy professionals
from Europe, North America and Asia attended the Barcelona event, held by the leading
enterprise and risk management system provider to the energy market.
•
September 17, 2001, KWI announced it was selected by ICIS Technology, the commodities software
specialist, as its preferred supplier of trading and risk management solutions for energy companies.
•
August 28, 2001, Alliant Energy selected KWI for enterprisewide trading and risk management.
KWI announced that Alliant purchased the kW3000 system, KWI’s flagship product, for front- to
back-office management of trading, scheduling and generation assets.
•
July 23, 2001, KWI announced that it will supply enterprisewide risk management platform to
WPS Energy Services; thus, continuing the company’s expansion into the North American
energy market. KWI announced it was awarded a contract to supply its kW3000 system to WPS
Energy Services.
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LODESTAR Corporation
Peabody, Massachusetts
Overview
LODESTAR is a provider of world-class software solutions that automate critical business processes
for energy market participants. Energy providers use LODESTAR’s software for pricing, billing, load
profiling and settlement, financial management, and transaction management. The LODESTAR
Customer Choice Suite™ (CCS™) provides complete, flexible, scalable and reliable software to
competitive retail companies, distribution companies, independent system operators, wholesale
companies, and transmission and generation companies.
•
Retail—CCS includes strategic pricing and profitability analysis, pricing negotiation, CRM and
call center support, billing and payment, credit analysis and A/R, remittance processing, financial
reporting and collection programs, forecasting, scheduling and settlement, transactions and
trading partner management, and energy trading and risk management.
•
Distribution—CCS for distribution companies is an integrated software solution that seamlessly
connects customer relationship and contact center management, outage management, network
management, mobile field force management, work management and load analysis.
•
Independent System Operators—CCS for ISOs includes a proven solution for load research; a
profile and settlement system, which enables up to six settlements daily; BillingExpert, which has
a full understanding of each customer’s billing terms; and a financial management extension
(FME), which enables customized sub-ledgers, provides interface between the other
components of the CCS and the customer’s accounting software, and helps the collection and
aging of accounts receivable.
•
Generation—The CCS for generation builds and calculates costs for generation dispatch
schedules, models physical attributes of plants and units, bills wholesale and retail customers
and bills for multiple types.
•
Transmission—CCS for transmission initiates processed-based billing, manages transmission
contracts, manages unbundled billing, bill transmission schedules, supports revenue neutrality,
and bills for re-dispatch and curtailments.
Accenture, Alstom, AMS Utilities, Caminus, Power Measurement and Oracle
Customers
Reliant, Ercot, Shell Energy, Allegheny Power and Entergy Services
•
September 20, 2001, Caminus and LODESTAR announced a strategic business alliance at the
LODESTAR Annual Users Conference in Boston, Massachusetts.
•
August 27, 2001, LODESTAR unveiled its new graphical user interface for the company’s CCS.
The flexible, scalable and reliable suite provides solutions for pricing, billing, load profiling and
settlement, financial management, and transaction management.
•
July 30, 2001, LODESTAR and American Management Systems announced that E.ON Benelux
is implementing LODESTAR’s PricingExpert™ and BillingExpert™ software solutions to meet
the requirements of deregulation. AMS is providing consulting and systems implementation
services for the project.
Metallic Power
Carlsbad, California
Overview
Metallic Power is a developer of regenerative zinc/air fuel-cell technology for clean, efficient energy.
The company is developing power products for applications requiring power levels above 1 kW. Its
zinc-air fuel cell and regeneration unit is a closed, clean and quiet source of electrical energy that is
expected to displace lead-acid batteries and internal-combustion engines in certain applications.
Zinc/Air Power Systems—The fuel cell is similar to a battery but it is environmentally friendly (zero
emissions), quiet, has many times the energy density of lead-acid batteries, is much more efficient
than an internal-combustion engine and is cost-effective. In addition, the total energy of the fuel-cell
system can be increased by simply increasing the size of the zinc storage vessel without modifying
the fuel cell itself. The company’s initial product is a power source that will deliver 2–3 kW of
continuous power for a period of three to six hours. Units may operate in parallel to produce higher
power levels. This product will provide a source of silent, clean, convenient backup or auxiliary
power for a variety of applications including: computers, servers, distributed communications
equipment, camping, recreation, at-home emergency backup, military and job-site applications,
among others.
A zinc/air fuel cell produces electrical energy by the same electrochemical processes that occur in
primary zinc/air batteries. In contrast to being discharged and then discarded like a primary battery,
slowly recharged like a secondary battery, or rebuilt like a mechanically recharged battery, a zinc/air
regenerative fuel cell can be recharged automatically when the primary source of electricity becomes
available. The zinc/air fuel cell is expected to displace lead-acid batteries where higher specific
energy or longer run time are valuable, and displace internal-combustion engines where zero
emissions, quiet operation, or lower maintenance costs are important.
•
Briggs & Stratton
•
South Coast Air Quality Management District
•
Toro
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•
October 22, 2001, In fulfillment of a South Coast Air Quality Management District (SCAQMD)
technology advancement contract, Metallic Power provided a demonstration of a fuel-cellpowered riding greens mower and 2-kW portable power system suitable for turf and garden care
at the recently held SCAQMD board meeting.
•
May 14, 2001, Metallic Power announced that it had shipped the first of its 1.5-kW portable
power sources for test and evaluation by a number of the company’s collaborators.
Peace Software
Miami, Florida
Overview
Peace Software is a developer of management solutions software for utility and retail energy
companies. The company’s software suite is designed to enable energy suppliers to consolidate
customer information, and streamline communications and billing. Peace Software’s product suite
integrates customer and commodity management for commercial and industrial and mass markets.
Peace Software’s Energy™ suite comprises several functions, including a customer care component
that is designed to consolidate customer information, streamline communications, automate work
flows and provide efficient customer service that enables the offer of new services to customers. The
enrollment component manages customer enrollments from sign-up to switch date.
The commercial and industrial component handles interval billing and contract management for
commercial and industrial customers. An electricity supply component provides the trading side of
retail energy companies with forecasting and settlement tools. The suite’s B2C component enables
retail energy companies to build privately branded Web sites, while the B2B element is designed to
automate and simplify data exchanges and transactions with multiple trading and business
operations partners, as well as third-party information providers.
•
Integration: IBM, Deloitte Consulting, PricewaterhouseCoopers and
American Management Systems
•
Equity: Insight Venture Partners and Kinetic Ventures
•
Technology: BEA Systems, Oracle, Sun Microsystems, Informix Software, SGI, 4 J’s
Development Tools and Rational Software
•
Product alliance: Siebel, EC Power and Exolink
Customers
Palmerston North City Council, AEP, Dominion, Mid-American Energy, Nordic, Pepco Services, BC
Gas, Advance Energy, Enbridge and XcelEnergy.
•
October 10, 2001, Country Energy, a leading Australian energy company, announced it licensed
Peace Software’s Energy suite for the customer management of its nearly 750,000 electricity
and gas customers, and for its distribution operations. Country Energy is the largest regionally
based company in Australia and serves both residential and commercial and industrial
customers. Its customer base is located in Queensland, Victoria, and South Australia, and
covers three-quarters of New South Wales.
•
July 25, 2001, Peace Software and Rational Software, the e-development company™,
announced that Peace Software had deployed Rational Software’s configuration tools to further
scale its development center to support its expanding and broadening customer base in
regulated, transitional and competitive energy markets.
Plurimi, Inc.
San Francisco, California
Overview
Plurimi, based in San Francisco, California, provides real-time, Web-based demand-response
solutions to the electricity industry. Energy suppliers use these solutions to automate loadcurtailment programs in which they communicate price incentives to their large commercial and
industrial customers to regulate the demand for electricity based on price. Demand-response
solutions allow suppliers to more efficiently manage capacity, better serve customers, hedge against
large wholesale price changes, and smooth out their demand curve to match supply. These
solutions enable large commercial and industrial customers participating in load curtailment
programs to more efficiently manage their consumption, better understand the value of the energy
service and save money. In addition, these solutions enable the large electricity users to manage
their costs in order to prepare for real-time electricity pricing in the future.
Plurimi’s product, PRISEM the virtual peaker, uses the Internet to simplify and optimize loadcurtailment programs—regardless of whether they are interruptible, demand buyback, real-time
pricing or ISO programs. PRISEM allows customers to:
1.
2.
3.
4.
Alert customers via e-mail, telephone, wireless and pager about upcoming curtailment events;
Broadcast details of demand buyback, interruptible and system reliability events;
Customize events, including price splits, timing, usage thresholds, or government regulations;
Target communications by service area, type of program, or individual customer using PRISEM’s
sorting and filtering capabilities; and
5. Track and report all curtailment requests, responses and commitments on both an aggregate
level and by individual customer.
Customers
•
Nevada Power Company
•
Oklahoma Gas and Electric
•
Rochester Gas and Electric Corporation
•
Sierra Pacific Power Company
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•
July 24, 2001, Plurimi announced an agreement to supply Oklahoma Gas & Electric (OG&E) with
its PRISEM load-curtailment solution. Launched July 2, 2001, the OG&E program is expected to
involve more than 100 of its largest commercial and industrial customers, with the ability to shed
up to 160 MW of electricity.
•
July 15, 2001, Plurimi announced the release of PRISEM™ v1.8. This new release allows large
commercial and industrial electricity customers to preview and analyze their forecasted demand
so they can make more informed consumption decisions when asked to curtail their usage.
•
July 1, 2001, Plurimi announced the release of PRISEM v1.7. This release adds enterprise
security functionality to what was already the industry’s most robust, easy-to-use peak load
management system. The release marks the first time this functionality has been made available
to the industry as a component of load-curtailment software. The company added this ability to
administer user rights based on the administration and reliability needs of its customers, some of
the nation’s leading utilities.
Powercell
Burlington, Massachusetts
Overview
Powercell is a manufacturer of electric energy storage and power management systems. The
company’s products combine advanced energy storage technologies, including zinc-flow, with stateof-the-art power electronics and control software with the goal of producing completely integrated
systems for power quality and electric reliability.
Powercell’s PowerBlock is intended to be a completely integrated system designed for electrical
energy storage and multimode dispatch in the utility environment. PowerBlock is designed to solve
power quality problems that typically require multiple vendors and individual pieces of equipment. It
is specified to correct both incessant and transient current and voltage disturbances as seen by the
load, as well as to provide momentary and extended outage protection, peak shaving, and energy
management dispatch options.
Power Measurement
Saanichton, British Columbia
Overview
Power Measurement is a leading provider of enterprise energy management systems for energy
suppliers and consumers worldwide. The company’s ION® Web-ready software and intelligent electronic
devices comprise a complete, real-time information and control network that supports billing for complex
energy contracts while improving power quality and reliability as well as reducing energy costs.
The company’s ION devices support three-phase revenue-class metering, power quality analysis,
data logging and control. Devices also measure other utilities such as gas, water or steam, and can
monitor and control equipment such as generators, UPSs and flywheels. Power Measurement’s
networked ION software supports enterprisewide energy management and seamless information
sharing with third-party automation and business systems. The company’s patented technology
provides powerful out-of-the-box functionality, while allowing devices and software to be customized
to suit any application, and features to evolve as needs change.
•
ABB
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GE
•
Siemens
Customers
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Oracle
•
Duke University
•
SmithKline Beecham
•
September 25, 2001, Power Measurement announced a channel partner agreement with Current
Thinking, Inc. of Hamilton, Ontario. Current Thinking will incorporate Power Measurement’s ION
technology into its service lineup, which includes power quality testing, turnkey permanent-metering
solutions, electromagnetic interference mitigation and power factor correction, as well as
troubleshooting and diagnostics for a wide range of process control and automation devices.
•
September 25, 2001, The company announced a channel-partner agreement with E&M of San
Francisco, California. E&M will offer Power Measurement’s ION hardware and software systems
as part of its complete automation solutions for process control applications across a broad
range of industrial environments.
•
September 10, 2001, The National Rural Telecommunications Cooperative (NRTC) and Power
Measurement announced a strategic relationship to provide enterprise energy management
(EEM) system solutions to rural electric utilities. The EEM solutions combine distributed
information technology to deliver extensive energy profiling, power quality and reliability analysis,
and supervisory control and data acquisition (SCADA) capabilities and services to meet the
unique needs of rural utilities. A featured product of this alliance will be Power Measurement’s
ION 8000™ series of transformer-rated power meters to complement NRTC’s LINK Power
Quality Monitoring and Automated Meter Reading system.
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Powerspan Corp.
New Durham, New Hampshire
Overview
Powerspan is a developer of proprietary energy technology for the environmentally friendly
conversion of multiple pollutants to flue gas. The company builds cost-effective and timely solutions
for the existing power-generating base. Powerspan’s research and development efforts focus on
unique applications of its proprietary technology to improve the efficiency and reduce the
environmental impact of power generation.
The company’s core technology, Electro-Catalytic Oxidation (ECO) applied to coal-combustion
systems, provides the functionality of four separate emission-control technologies in a single
integrated system and produces valuable byproducts that become the feedstock for other industrial
processes. Powerspan’s first commercial demonstration will take place in 2002 with full-scale
commercial ECO systems to follow.
The Arc Snubber filter improves the performance and efficiency of electrostatic precipitators (ESP).
The filter is a low-cost ESP upgrade, which enhances particle collection efficiency by improving the
electrical characteristics of the power supply serving the ESP. The filter consists of an inductive coil
and a length of proprietary absorber material. It is typically designed as a simple, bolt-in device and
is installed on the secondary side of the ESP power supply, or transformer/rectifier set.
•
Cinergy
•
Allegheny Energy Supply
•
June 19, 2001, The DOE announced that Powerspan would receive funding to study the mercury
removal capability of the company’s ECO technology. ECO is a cost-effective multi-pollutant
control process designed to reduce smokestack emissions from coal-fired power plants that
contribute to mercury contamination, respiratory problems, ozone production and acid rain.
•
May 30, 2001, Frank R. Alix, chairman and CEO of Powerspan, testified before U. S. Senator
Bob Smith at a Senate Field Hearing on innovative environmental technologies. Smith, chairman
of the Environment and Public Works Committee, held the hearing to highlight recent advances
in energy technologies that may be affected by federal legislation.
QuestAir Technologies Inc.
Burnaby, British Columbia
Overview
QuestAir Technologies develops and commercializes proprietary Pressure Swing Adsorption (PSA)
technology that separates and enriches oxygen and hydrogen gases in a safe and environmentally
sound manner. QuestAir’s advances in PSA enable the separation and enrichment of various types
of gas streams at extremely high speeds and in extremely compact spaces. QuestAir’s technology
enables the development and cost-effective commercialization of fuel-cell systems for use in both
vehicles and stationary power generation. The company currently employs more than 100
engineers, scientists, technicians, and production and support staff at its facilities in the Vancouver
suburb of Burnaby, British Columbia, Canada.
QuestAir’s HyQuestor system is a first-generation hydrogen separation technology that combines
patented QuestAir rotary valving technology with conventional adsorbents. HyQuestor units operate
with approximately one-minute cycles compared with four to ten minutes per cycle for conventional
PSA. HyQuestor units require only one-quarter of the space of conventional PSA and, with only two
valves, are simpler to operate. HyQuestor is currently available in a range of sizes designed to meet
the needs of small- to medium-size hydrogen users for applications such as heat-treating and oil
hydrogenation. HyQuestor is uniquely suited to incremental hydrogen needs of refineries through onsite generation or off-gas recovery.
QuestAir’s Industrial Pulsar technology combines the company’s patented rotary valving technology
with its structured adsorbent in oxygen-separation systems that increase cycle speeds to between
20 and 100 cycles per minute. The company’s Compact Oxygen units enrich the oxygen fed to a cell
that, in turn, significantly increases net power output. Increased power density allows a reduction in
fuel-cell size without diminishing power output.
•
BOC Gases
•
•
Fuel Cells Canada
•
Xcellsis
•
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April 9, 2001, QuestAir Technologies announced that it completed a CN $20 million private
equity offering of its Class B preferred shares to a group composed of new and existing
investors. The net proceeds of the offering will be used toward research and development
expenditures, to fund strategic relationships and for general corporate purposes.
RealEnergy LLC
Los Angeles, California
Overview
RealEnergy is a provider of on-site power plants for commercial properties. Utilizing clean CHP
technologies such as reciprocating engines, fuel cells and microturbines combined with its Webbased energy management system, the company creates comprehensive energy solutions that
produce bottom-line value for commercial properties. Services include aggregated buying of power
from the grid, on-site power generation systems (i.e., fuel cells and microturbines), buildingenhanced system reliability and associated benefits management.
RealEnergy designs and installs, typically in the existing mechanical space of the building or on its
roof, a system capable of generation approximately 50–60% of the building’s peak electric load as
well as approximately 35% of the buildings chilled-water needs. These systems typically offer the
equivalent of an 11–30% discount on commodity energy, with no fixed-price contracts or energy
pricing liability (RealEnergy charges precisely what the utility charges, less the access fee or discount).
•
CalPERS
•
Detroit Edison
•
GFI Energy Ventures
•
Global Innovation Partners
Customers
•
AEW Management
•
Arden Realty
•
CalPERS
•
CB Richard Ellis
•
Commonwealth Partners
•
Divco West Inc.
•
KorGroup
•
Layton-Belling Group
•
Walton Street Advisors
•
September 7, 2001, RealEnergy LLC announced that as part of its corporate plan to encourage
the installation of renewable energy technologies in commercial buildings around the world, it will
deploy, at its own cost, additional renewable on-site energy generation capacity at several sites
in California where the company is now installing cogeneration power systems.
Service Resources Inc.
Marietta, Georgia
Overview
Service Resources is a provider of business process outsourcing services focused on corporate
facility management. The company is also an energy procurement firm delivering total facility,
energy and procurement management solutions that support corporate properties. In addition, the
company’s real estate management group engages client locations with a broad array of Internetenabled property management solutions.
•
Energy Management Business Process Outsourcing (BPO)—The firm provides a
comprehensive service to procure and manage energy usage, including strategic planning, bill
analysis and payment, sourcing, 24-hour energy center, risk management and capital projects.
•
National Operations Center—This product provides services such as call handling, dispatching,
work planning, and operational, financial and quality measurement reporting. In addition, it features
technology developed to drive preventative maintenance scheduling, response maintenance,
help desk support, call escalation, centralized purchasing and customer reporting.
•
Retail Energy Services—Due to the deregulation of the electric power industry, the company
has created and provided a team of advisors to manage energy supply procurement.
•
Integrated Facility Management Services—This service includes designing portfolio facility
management programs, providing a mobile, truck-based preventative maintenance, centralized
call management and purchasing.
•
Facility Maintenance—This service is designed specifically for portfolios of small buildings. The
company has developed a mobile, truck-based service operation that utilizes a multiskilled
craftsman to perform a scope of mechanical, electrical and structural maintenance activities.
•
Encompass Services Corporation, a $4 billion facility services firm, supports Service
Resources’s national delivery infrastructure with a network of more than 15,000 technicians.
•
PricewaterhouseCoopers is the world’s largest professional services organization with more
than 150,000 employees in 150 countries and a sizeable real estate consulting practice.
•
FacilityPro, a major eMarketplace provider Service Resources created for specializing in
online maintenance, repair and operations products and services, currently serving more
than 2,500 users at 600 locations in 43 states.
•
BayLogics Inc. is the leading provider of CRE software and service solutions for businesses
that proactively address large portfolios of leased and owned real estate assets.
•
July 27, 2001, Service Resources announced the signing of a five-year agreement with Beverly
Enterprises, Inc., a leading provider of elder-care services in the United States, to outsource
facilities and energy management business processes for approximately 500 skilled nursing and
assisted-living locations nationwide.
•
May 18, 2001, Service Resources announced that it closed $32.5 million in first-round funding
from sole investor, Frontenac Company. Frontenec gains two seats on the board as a result of
the round, bringing the total number of directors to eight.
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Serveron Corporation
Hillsboro, Oregon
Overview
Serveron is a provider of turnkey equipment and services to monitor the health of electric generation,
transmission and distribution substation equipment. The company’s instrumentation, continuous
monitoring services and Web-accessible data analysis improve reliability and maintain efficiency
across the grid. The company offers CellSense battery condition monitors, TrueGas on-site
dissolved gas analyzers, and remote online monitoring services for power utilities.
•
TrueGas transformer gas analyzers monitor the levels of volatile dissolved gases in the
insulating oil of large transformers and other oil-filled equipment. Using on-site gas
chromatography (GC) to detect trace levels of transformer fault gases, the company assists
utilities in achieving levels of safe operation.
•
CellSense battery monitors reduce the maintenance activity required to ensure that critical
battery systems are fully operational while improving battery charging and performance.
•
August 1, 2001, Serveron leased 23,000 square feet of office and manufacturing space in
Hillsboro, and hired executives to fill three key new positions.
•
June 21, 2001, Serveron announced that the company received financing totaling $16.5 million.
The investment will fuel aggressive growth for Serveron. Nth Power Technologies of San
Francisco, a venture fund focused on energy-related technologies and businesses, served as
lead investor for this round of funding.
Silicon Energy Corp.
Alameda, California
Overview
Silicon Energy is a provider of enterprise energy management (EEM) software solutions that enable
interaction between energy providers and energy users to reduce energy usage, lower energy costs
and optimize energy procurement processes. Silicon Energy’s EEM Suite is an integrated
collection of Internet-based energy technology software product modules, which incorporate multiple
geographically dispersed energy management systems and equipment into an enterprisewide
network. The company’s software combines powerful analysis tools, external data sources,
advanced data visualization, and Internet-based monitoring and control of energy assets to allow
energy users and providers to transform information into meaningful cost and risk reduction and
improved operational efficiency.
•
EEM Suite—EEM Suite integrates real-time data from existing systems across geographically
dispersed facilities onto a single enterprise network providing commercial and industrial end
users, utilities and energy service providers to manage energy cost through enterprise-level cost
analysis and procurement capabilities. EEM Suite provides integrated data on energy supply and
demand, improved management of energy bills and budgets, and proactive energy management
of facility operations.
•
Services—Silicon Energy offers a comprehensive selection of services to its customers,
including professional services, training and managed services provider (MSP) subscriptionbased value-added services.
•
Accenture
•
Carrier Corporation
•
Echelon Corporation
Customers
•
3M
•
Nike
•
California State University Long Beach
•
Neiman Marcus
•
Consolidated Edison
•
Pacific Gas & Electric
•
General Electric
•
October 10, 2001, Silicon Energy announced a new business strategy built on market-leading
alliance partners to provide seamless energy technology and services for large utilities, and
Global 1000 commercial and industrial customers.
•
September 6, 2001, Portland General Electric announced a new service using technology
developed by Silicon Energy has been saving Nike tens of thousands of dollars in energy costs.
The product, MyE-Manager.com, was created by PGE using Silicon Energy’s EEM Suite to help
businesses optimize energy use. MyE-Manager.com allows facility managers to analyze their
energy consumption online at 15-minute intervals.
Sixth Dimension, Inc.
Fort Collins, Colorado
Overview
Sixth Dimension has developed a service-delivery infrastructure called the Intelligent Network for the
energy industry. The Internet-based network provides a platform for energy services companies,
solutions providers, and their customers to monitor energy use, remotely control on-site generation
and curtailable loads, and receive vital pricing information and is fully managed by Sixth Dimension.
224
The company’s network architecture is based on distributed intelligence and is designed to ensure
high levels of reliability and security. With a device-neutral design, most any equipment can be
networked, including engine- and turbine-driven generators, fuel cells, and microturbines.
•
6D iNET—The 6D iNET network provides connectivity with an unlimited number of customer-site
resources anywhere in the world. Built with a layered architecture, and available 24/7, 6D iNET
enables energy providers to securely monitor and control thousands of customer-owned devices.
•
6D PowerPortal—The 6D PowerPortal provides a gateway to all of the functionality. It presents
viewable data and the tools used by customers to monitor and control information remote assets,
and market opportunities on the Intelligent Network.
•
6D PowerPak—This product enables power providers to offer services from real-time metering to
real-time monitoring and control, asset aggregation, verification and pricing. Some of the product’s
other components include broadcast messaging, real-time metering, real-time monitoring and
alarming, resource aggregation, custom user interface, real-time control, scheduled dispatch, power
operator EMS integration, external data integration and data management.
•
Silicon Energy
•
Woodward Governor Company
•
Peak Industries
•
NCR Corporation
•
EDeploy.com
•
October 15, 2001, Silicon Energy and Sixth Dimension announced an alliance to develop and
market fully integrated solutions for large-scale, high-volume energy projects.
•
September 21, 2001, Woodward Governor Company joined Sixth Dimension in a program to
demonstrate the capabilities of a comprehensive networked-generation control system for
electric power generation equipment.
•
June 26, 2001, Sixth Dimension closed the initial tranche of its third round of investment funding.
According to CFO Lauren Arnold, $5.5 million in new capital was raised in the first tranche of the
round. The company agreed to accept additional funds over the following 60 days as several
strategic investors indicated a strong interest in investing.
SmartSynch
Ridgeland, Mississippi
Overview
SmartSynch is a provider of wireless data software for the energy and utility industry. The company
delivers wireless data solutions that enable two-way communication between corporate assets:
people, devices and systems. The company’s end-to-end solutions are designed to generate new
value by providing online business-to-asset connections. SmartSynch offers a total energy and utility
solution enabling anytime access to data embedded in remote commercial and industrial meters.
The on-demand access to critical devices, such as meters, delivers valuable content to mobile and
in-house personnel.
M32 System—The product connects remote devices to the Internet, corporate intranets and
information management systems through public networks. It displays information from devices,
generates reports, uses external databases, has customizable alarms, and graphs historical and
real-time data.
•
Motorola
•
Siemens Power Transmission and Distribution
•
SkyTel Telemetry Services
Customers
•
Florida Power & Light, a principal subsidiary of FPL Group, Inc. (FPL)
•
April 17, 2001, SmartSynch announced that it raised $23 million in venture capital funding.
Beacon Group Energy Funds, an affiliate of JPMorgan Partners, LLC, led the investment round.
Other participants included Nth Power Technologies, Cinergy Ventures, Exelon Capital Partners
and JPMorgan Partners. In addition, Kinetic Ventures and Siemens Venture Capital, previous
SmartSynch investors, provided funding as well. New board members, Bryan Martin of
JPMorgan Partners and Nancy Floyd of Nth Power Technologies were also announced.
SoftSwitching Technologies Corporation
Middleton, Wisconsin
Overview
SoftSwitching Technologies develops, manufactures and markets patented and proprietary solutions
that enhance the quality and reliability of electric power used in critical manufacturing and
information technology applications. The company also provides power electronics to distributedresource OEMs and is introducing new products and services for the power monitoring and energy
information markets.
226
SoftSwitching offers its customers a highly functional, reliable and cost-effective portfolio of solutions
that can be rapidly installed and integrated into its operations to ensure the delivery of high-quality
and reliable electricity. Its products and services position the company to capitalize on many
emerging and mainstream opportunities within the power quality, power reliability, distributed
resources, power monitoring and energy information markets.
•
Dynamic Sag Corrector—DySC™ products protect industrial and commercial loads from the
statistically dominant forms of power quality problems, including shallow and deep voltage sags,
momentary loss of voltage, spikes, surges and swells, which account for 92–100% of the powerrelated problems the company’s customers’ experience.
•
UPSEnhancer™—UPSEnhancer supplements UPS systems by protecting against all shortduration power quality and reliability events, thereby reducing UPS battery cycling and extending
UPS battery life. The unit also protects loads when UPS systems are under maintenance or
repair, or its batteries fail.
•
Power Electronics—Cost-effective, efficient, reliable, compact and robust power electronics
platforms are an enabling technology for the emerging distributed resources market and can be
used with fuel cells, reciprocating engines, energy storage systems and related applications. The
company has designed and is currently manufacturing the power electronics for a fuel-cell UPS
to be assembled and sold by a major consumer products company.
•
I-Grid™—The company expects that I-Grid will become the backbone of an effective, low-cost
power monitoring network that will elevate the awareness of power quality and reliability issues,
and provide useful benchmarking information. The system will consist of a nationwide network of
geographically dispersed, Internet-enabled I-Sense™ monitors, which will provide a range of
functionality including the rapid examination of power quality events, outage notification and
energy consumption monitoring.
Customers
•
•
•
•
•
Applied Materialsa
Anheuser-Busch
Engines, Inc.
General Motors
Lucent Technologies
•
•
•
•
•
Air Liquid
Kodak
BMW
FSI International
LTV Copperweld
•
•
•
John Deere
Motorola
Ford Motor Company
•
•
Proctor & Gamble
KLA-Tencora
•
October 9, 2001, R&D Magazine recognized SoftSwitching Technologies’s DySC as one of the
100 most technologically significant new products of the year. Winning entries included dramatic
technical developments in materials science, semiconductors, communications, biotechnology
and many other fields. Award winners came from around the globe including Canada, Germany,
Japan, Israel, Russia, the Netherlands and Switzerland.
SPL WorldGroup, Inc.
San Francisco, California
Overview
Established in 1994, SPL WorldGroup is a provider of customer management solutions to the energy
and service-related industries in regulated and deregulated markets worldwide. SPL employs more
than 600 professionals in North America, Europe and Asia/Pacific, and has delivered its customer
management products to more than 50 energy, water and waste-management customers worldwide.
SPL WorldGroup has a customer management product that is designed to help clients innovate,
adapt and excel—CorDaptix™. CorDaptix is the first fully upgradable customer management product
that will withstand the tests of time, growth, scale and product-line introduction and extinction.
CorDaptix is the universal customer management engine that handles all transactions from customer
initiation through product and service delivery—through time.
Siebel, PeopleSofta, Accenture, BEAa, IBM, Hewlett-Packard, Oracle, Sun, CGE&Y, Deloitte
Consulting, Logica, KPMG and PricewaterhouseCoopers.
•
October 16, 2001, TransFormance, a consulting division of SPL WorldGroup B.V., announced
that Marc F. Jacobson joined the group as principal. The TransFormance Group helps
companies develop people, processes and technology to enable and foster innovation and
transformation in response to rapidly evolving industry business models.
•
October 1, 2001, SPL WorldGroup announced its support for Siebel 7, the seventh major release
of Siebel eBusiness Applications from Siebel Systems. The integration between Siebel 7 and
SPL’s flagship product CorDaptix, which will be validated within 90 days of general release, will
provide organizations with complete eBusiness solutions that increase productivity, maximize
revenue and profit, and significantly enhance customer acquisition, satisfaction and retention.
•
September 5, 2001, SPL WorldGroup was selected by JEA, Florida’s largest municipally owned
electric power and water utility, to supply its market-leading customer management product.
Designed and built by SPL and marketed by PeopleSoft into the municipal market, JEA will
implement the product to help manage and serve its 340,000 electric and water customers in
Jacksonville and parts of three adjacent counties.
228
STM Power Inc.
Ann Arbor, Michigan
Overview
STM Power manufacturers on-site, mechanical, electrical and cogeneration systems utilizing
external combustion (Stirling cycle) engine technology. The company’s first-generation product, the
25-kW PowerUnit, began testing in 1999 and is currently being shipped to commercial and industrial
customers. The STM PowerUnit absorbs heat from a wide range of sources and converts it to
electricity with minimal emissions (will meet most CARB and TNRCC standards) and low
maintenance requirements. Typical heat sources include standard gaseous and liquid fuels with
options to accept landfill and digester gas, petroleum flare gas and other low-grade waste fuels. Raw
heat from solar concentrators or flue gas stacks can also be converted to electricity, with zero fuel
costs and no incremental emissions. Applications include:
•
Stationary Power (base load, peak shaving, load following)
•
Cogeneration (hot water)
•
Renewables (solar, landfill and digester gas)
•
Biomass (animal waste, farm waste)
•
Industrial Waste Heat (furnaces, incinerators, foundries)
With their expected 50,000-hour design life, PowerUnits are expected to be more economical than
other energy conversion technologies (fuel cells, microturbines, wind and photovoltaic systems)
while still delivering excellent environmental performance.
The STM PowerUnit is a self-contained modular power system (measuring 6’6” x 2’5” x 3’5”) and can
be configured to operate either in conjunction with the existing utility grid (grid parallel) or as remote
or backup power (grid independent). Products can be multipacked to serve loads from 25 kW to 500
kW. STM proprietary technology offers numerous benefits, including:
•
NOx emissions below 8 ppm (0.47 lbs/MWh) across the entire power output range;
•
Fewer parts than typical reciprocating IC engines;
•
Low sound and vibration levels;
•
30% net conversion efficiency;
•
Fully automatic start-up and autonomous operation;
•
Built-in diagnostics for remote monitoring and operation; and
•
Operation at low gas pressures, with no gas compressor required.
Beta program in progress with unit shipment expected in 2002, and commercial production
scheduled for the second quarter of 2003.
•
Bosal International BV
•
DTE Energy Technologies
•
General Motors (through 1998)
•
North American Philips
•
Ricardo
•
Singapore Technologies
•
U.S. Department of Energy
Customers
•
The company targets customers from the commercial and industrial markets. Distributors include
DTE Energy Technologies and Singapore Technologies (34 of 50 Beta units have been sold to date).
•
May 1, 2001, STM Power selected Ricardo, Inc. as its technical partner in the product
development process of the STM 4-120 external combustion (Stirling cycle) engine. Ricardo’s
role will be aligned with core competencies that include design, determining and meeting
durability and reliability targets, and design development for manufacturing volumes.
•
April 9, 2001, STM Power announces the completion of its $25 million, Series A Convertible
Preferred Stock financing. Investors in this financing included the Beacon Group Energy
Investment Fund II, L.P., Nth Power Technologies Fund II, L.P., Singapore Technologies
Kinetics Ltd., Micro-Generation Technology Fund, L.L.C., J.P. Morgan Partners L.L.C., DTE
Energy Technologies, Inc., Ricardo, Inc. (a subsidiary of Ricardo plc), and a number of individual
investors affiliated with STM Power and the principal investors.
SurePower Corporation
Danbury, Connecticut
Overview
SurePower Corporation has applied the principle of RAID (redundant array of independent devices)
architecture to the generation of electrical power. Its systems incorporate multiple generators such
as turbines, fuel cells and gas-reciprocating engines into patent-pending configurations that do not
depend on any individual component to operate. As a result, SurePower can guarantee 99.9999%
energy reliability and computer-grade electricity, a 1% chance of failure over 20 years, while
delivering an economic advantage over conventional backup technologies. The company’s systems
provide users such as data centers, Web-hosting hotels, high-tech manufacturing operations and
energy utilities with substantially increased uptime, allowing for higher revenues and fewer
unexpected losses.
230
•
Ultra-Green—Developed for data processing needs at financial institutions and corporate data
centers, the system is scalable from 200 kW to 1.5 MW and utilizes fuel-cell technology to be
highly eco-sensitive.
•
Mega-Growth—Developed for Web-hosting server farms and large manufacturing facilities, this
configuration scales in modules from 1 MW to 25 MW. For utility use, it can incorporate loadmanagement options. Its applications include Internet-hosting data center, service provider
network hubs, semiconductor fabs and high-tech manufacturing processes.
•
Mega-Growth Plus—Same as the Mega-Growth but its applications include electric utility, gas
utility and energy service companies.
International Fuel Cells; Piller, Inc.; Trane; Tesla; Robicon; RW Beck;
Automated Logic; and High Point Rendel
•
September 14, 2001, SurePower opened new offices in Newport Beach, California, and Denver,
Colorado. “With Southern California and Denver being high-technology and telecommunications
hot spots, there is an obvious demand not only for energy, but for ultra-reliable energy,“ said
Whit Allen, vice president of sales at SurePower. “Opening these new offices solidifies
SurePower’s ability to leverage and develop relationships with leading companies in these
markets by offering non-stop, high-quality electricity.”
•
August 27, 2001, SurePower entered into a strategic alliance with Trane, the nation’s largest
provider of applied commercial and industrial air-conditioning systems, equipment, controls,
service and parts. Through the partnership, Trane will provide HVAC systems for SurePower’s
patent-pending systems. Together, the two companies will enable energy-dependent businesses,
such as data centers, high-tech manufacturers and energy utilities, to install independent, highreliability, primary power sources, filling a need in the market for both a constant supply of
uninterruptible, computer-grade electricity and state-of-the-art cooling systems.
Our rating system is based upon 12-month price targets that assume a flat market.
For stocks with market cap of $2 billion or greater:
Strong Buy describes stocks that we expect to appreciate by 25% or more.
Buy describes stocks that we expect to appreciate by 10–25%.
Market Perform describes stocks that we expect to change plus or minus 10%.
Market Underperform describes stocks that we expect to decline by more than 10%.
For stocks with market cap of less than $2 billion:
Strong Buy describes stocks that we expect to appreciate by 50% or more.
Buy describes stocks that we expect to appreciate by 20–50%.
Market Perform describes stocks that we expect to change plus or minus 20%.
Market Underperform describes stocks that we expect to decline by more than 20%.
This research report is a product of Robertson Stephens, Inc.
If noted in the text of this report, the following may apply:
(a)
(b)
(c)
(s)
Robertson Stephens maintains a market in the shares of this company.
Robertson Stephens has been a managing or comanaging underwriter for or has privately placed securities of this company
within the past three years.
A Robertson Stephens officer sits on the board of directors of this company.
Fleet Meehan Specialist, Inc. (Member NYSE), an affiliate of Robertson Stephens, Inc., is the specialist that makes a market
in this security, and at any given time, Fleet Meehan Specialist may have an inventory position, either “long” or “short,” in this
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orders executed on the floor of the Exchange in this security.
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Although opinions and estimates expressed herein reflect the current judgment of Robertson Stephens, the information upon which
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Unless otherwise noted, prices are as of Friday, November 9, 2001.
Copyright  2001 Robertson Stephens
Robertson Stephens Research Coverage
TECHNOLOGY
Communications Components/Semiconductor Devices
Arun Veerappan
Tore Svanberg
Igor Ilic, Ph.D.
Victor Lim
Thomas Lavia
Jeremy Kwan
Terence Whalen
415.693.3391
415.248.4266
415.693.3440
415.676.2707
415.693.3213
415.623.7544
415.623.7541
Communications/Networking
Research Director
Barry Tarasoff 415.693.3442
European Research Director Graeme Davies +44 (0) 20.7798.6548
M EDI A
Advertising/Publishing
Brian S. Shipman, CFA
John Cristiano
646.366.4292
646.366.4102
Broadcasting/Satellites
James M. Marsh Jr., CFA
Rory Maher, CFA
David Murphy
646.366.4417
646.366.4416
646.366.4454
Entertainment/Cable/Internet
Lowell J. Singer
A. Saša Zorovic, Ph.D.
Michael Cibula
Christopher R. Samway
Paul Johnson, CFA
Sachin Divecha
Eileen M. Segall
646.366.4415
646.366.4404
646.366.4402
Paul Silverstein
Eileen M. Segall
Sachin Divecha
646.366.4440
646.366.4402
646.366.4404
SERVI CES
Brokerage and Asset Management
646.366.4477
646.366.4451
Financial Services: Credit and Lending
Communications/Networking
Design Enabling Technologies
John O. Barr
Lucas Bianchi
Digital Media Systems
Michael Kim
415.693.3485
Electronic Manufacturing Products and Services
J. Keith Dunne, CFA
David Alonso, CFA
Ofer Grinbaum
415.676.2756
415.248.4311
415.693.3274
Energy Technology
Michael Graham, CFA
Betty Y. Chen
Paul Oppenheim
European Semiconductor Capital Equipment
Scott Ingham, Ph.D.
+44 (0) 20.7798.6378
European Semiconductor Design and Devices
Gary Kelly, ACA
+44 (0) 20.7798.6370
European Specialty Communications/Electronic Systems
Nicklas Gustafsson
+44 (0) 20.7798.6377
Infrastructure: Systems and Software
Dane E. Lewis
Evren Dogan
Colin Davitian
Kaushik Roy
415.248.4071
415.248.4705
415.248.4890
IT Services
Joseph A. Vafi
Douglas N. MacBean
415.248.4977
415.248.4888
Semiconductor Equipment/Foundries
Sue Billat
Suresh Balaraman
Heidi Poon
Emma Park
650.289.7226
650.289.7228
650.289.7229
650.289.7207
Eric Rothdeutsch
Peter M. Karazeris
Tai Nguyen
415.693.3241
415.676.2865
415.248.4670
Semiconductors/Computer Hardware
SOFTW ARE/ I NTERNET
Business-to-Business eCommerce
Eric B. Upin
Michael J. Beckwith
Matthew G. McKay, CFA
Kristen B. Schaeffer
Sandeep A. Bhatt
Kara A. Frederick
Matthew J. Adams
415.693.3441
415.248.4540
415.693.3249
415.623.7543
415.693.3342
415.248.4676
+44 (0) 20.7798.6391
+44 (0) 20.7798.6324
Telecom Software
Marianne Wolk
Malindi Davies
646.366.4427
646.366.4286
TELECOM SERVI CES
Wireless Telecom
Frank Marsala, CFA
Dave B. Rao
646.366.4442
646.366.4230
Wireline Telecom
Jim Friedland
Chetan S. Karkhanis
415.676.2731
415.676.2732
646.366.4248
646.366.4130
646.366.4269
646.366.4104
646.366.4108
European Life Sciences
Sam Williams, Ph.D.
Karl Hanks
+44 (0) 20.7798.6385
+44 (0) 20.7798.6383
Genomics
Edward A. Tenthoff
646.366.4272
Large Capitalization/Specialty Pharmaceuticals
Robert C. Hazlett III
Jason I. Cohen
646.366.4101
646.366.4171
Medical Technologies
Wade H. King, M.D.
Christine M. Pui
Anjali Shah
415.693.3434
415.248.4325
415.248.4583
CONSUM ER
Broadline Retailing: Discount and Department Stores
Bill Dreher
646.366.4413
Multichannel and Internet Retailing
Lauren Cooks Levitan
Sarah G. Gragg
William Urda
Arthur Wu
Melissa Tang
415.693.3309
415.248.4738
415.676.2868
415.248.4717
415.623.7540
Restaurants
Paul L. Westra, CFA
Brandon Kaplan
David J. Housey, CPA
415.248.4091
415.248.4225
Specialty Retailing/Apparel Manufacturers
European Software and IT Services
Jason D. Brueschke
Stephen Farrugia
Andrew W. Jeffrey, CFA
Dan Fannon
Michael G. King Jr.
Steven D. Harr, M.D.
Eric Shen, M.D.
Ellen A. Lubman
Nouhad T. Husseini
+44 (0) 20.7798.6360
+44 (0) 20.7798.6374
+44 (0) 20.7798.6678
415.248.4610
415.693.3519
415.248.4851
Transaction Processing
+44 (0) 20.7798.6639
European Media and Communications
415.248.4595
415.676.2737
Jordan Hymowitz
Richard B. Shane Jr.
Michael Gaul
HEALTH CARE
Biopharmaceuticals
European Communications Services
James C. Stanzler
Justin Hughes, CFA
Melissa M. Kerin
646.366.4521
Hugh M. Anderson
Florin Morosan
415.676.2769
415.248.4737
415.693.3467
415.248.4078
415.248.4940
415.248.4711
Janet Joseph Kloppenburg
Elizabeth A. Montgomery
Ankit Goyal
Caroline Costin
646.366.4410
646.366.4243
REAL ESTATE
REITs/REOCs/Real Estate Services
Jay P. Leupp, CPA
David T. Copp
Brett D. Johnson
David R. Ronco
GAM I NG AND
Gaming and Lodging
415.693.3575
415.248.4204
415.623.7542
LODGI NG
Harry C. Curtis, CFA
Smedes Rose
Gloria Fu
646.366.4251
646.366.4408
646.366.4111
CONVERTI BLE RESEARCH
Consumer/Technology/Telecom
Gregory S. Hermanski
415.693.3310
Health Care/Internet/Services
Richard S. Hochman
415.693.3413
Hugh M. Anderson
Hugh is a vice president and senior research analyst
following energy technology companies at Robertson
Stephens. Prior to joining the firm, Hugh was an
analyst with Banc of America Securities, where he
cofounded the energy technology research group and
followed the diversified energy and power companies.
He previously covered oil services and major oil
companies at Salomon Brothers and Brown Brothers
Harriman. Hugh earned a BA from Trinity College and
also attended University College at Oxford University.
Atlanta
Boston
Chicago
London*
Munich*
New York
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San Francisco
Tel Aviv**
* Robertson Stephens International, Ltd. is
regulated by the Financial Services Authority
in the United Kingdom and is not a U.S.
broker-dealer.
** Robertson Stephens Israel, Ltd. is an affiliate
of Robertson Stephens International, Ltd. and
is not a U.S. broker-dealer.
robertsonstephens.com

Energy Technology

Transcription

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