December, 2003

Feature Story:

Top Emerging Energy Tech Companies Present
at Ardour Conference

It's always helpful to hear CEOs present the case for their companies. In late October, Ardour Capital lined up twelve prominent energy technology companies and gave them each a half hour to talk to an audience of institutional money managers and financial advisors.

Coudert Brothers, Ardour's strategic partner, hosted the one-day conference. Over 70 people attended, exceeding Ardour's expectations and pointing to the gap left open when Merrill Lynch and other large firms stopped covering the sector about 18 months ago. Ardour Capital is attempting to fill the niche by building a trading, investment banking and corporate finance business around the development and growth of the energy tech sector.

Of the 12 presenting companies, 9 are currently under coverage by Ardour - out of about 60 companies in the sector. The companies are involved in fuel cells, solar technologies, power conditioning, and on-site hydrogen production. The presentations focused on three broad themes: improving manufacturing processes; solutions to the growing transmission challenges facing the nation; and the growing demand for distributed energy capability.

The presenting companies were: Evergreen Solar (ESLR); Intermagnetics General (IMGC); American Superconductor (AMSC); Hydrogenics Corp. (HYGS); Millennium Cell (MCEL); Proton Energy (PRTN); Mechanical Technology (MKTY); Plug Power (PLUG); Fuel Cell Energy (FCEL); Satcon Technology (SATC); and two private companies, Energy Capital and NTDA Energia from Spain. The following day participants had the opportunity to tour FCEL and PRTN, both located nearby in Connecticut.

Improving the Manufacturing Process
When evaluating a company, its technology and manufacturing capacity are only part of the picture. Many executives that presented emphasized the importance of having efficient manufacturing processes as their firms mature. It's not enough to make lots of product; improving efficiencies in how products are made lowers the cost of producing units and drives down the costs to customers. Evergreen Solar CEO Mark Farber made the important distinction that proprietary process manufacturing technology is just as important as proprietary product knowledge if you want to bring the product to market at competitive prices. Gary Brandt, CFO of Hydrogenics Corp. explained that having extensive component knowledge allows supporting or ancillary systems to shrink, reducing the overall system cost.

MTI MicroFuel Cells CEO William Acker offered another way to lower total system costs - by forming partnerships to create standards. He views codes and standards as an essential element in bringing disruptive technologies into existing markets.

Electric Power Transmission Challenges
The existing electric power system is built around a central tenant: electricity must be produced when it is needed and used once it is produced. Unfortunately, this has led to congestion, now a billion dollar problem for the industry, and growing every year. Grid congestion is worst in constrained urban areas, said Philip Pellegrino, Sector President - Energy Technology, Intermagnetics General Corp. He explained how this is creating strong market potential for high temperature, superconducting (HTS) cable to deliver additional power to these markets where few if any other workable solutions exist. Besides replacing power lines, HTS technologies can also provide superior performance for existing technology such as HTS based transformers, according to Gregory Yurek, American Superconductor Corp. CEO. Indeed, Satcon Technology Corp CEO David Eisenhaure pointed out these are the 'low hanging fruit' solutions for today's power transmission challenges.

Distributed Generation Capability
Another solution to many energy-related problems is not to find better delivery solutions, but better ways to generate energy on-site. Fuel cells can handily replace diesel generators in many situations, especially where emissions are a constraint, noted Joseph Mahler, CFO of Fuel Cell Energy, Inc. Walter Schroeder, CEO of Proton Energy Systems reinforced this with the example that telecommunication providers are eager for an extremely reliable energy source that enables them to maintain broadcast capability for cell towers under all conditions. Proton uses electrolysis to convert surplus, off-peak electricity into hydrogen, which can be stored and used as a back-up or during peak hours as needed. Roger Saillant, CEO of Plug Power, Inc. pointed out that on-site hydrogen production costs 75 - 80% less than delivered hydrogen.

Impressions of the Presenters
Evergreen is a micro-cap and one of the few independent photovoltaic (PV) companies in the world; it competes with solar subsidiaries of multinationals like BP. When asked about his opinion about new, competing PV technologies like organics and dye - that claim to reduce the cost to a mere 20 cents per watt - Mark Farber responded that he is skeptical as to whether they will ever get out of the lab. And he is concerned about potential degradation problems with thin film technology,

Bob Preston, CEO of Craigmillar and one of the attendees, says he came away from the session feeling the PV business is not yet competitive with conventional fuels and can only play a niche role for the near future. While Evergreen is an interesting company it does not have the breakthrough technology he would look for as an investor.

Craigmillar holds shares of Intermagnetics General, a company best known for its superconductive technology used in the medical field, mostly in MRI machines. Preston believes this technology will receive more attention, especially if intermittent blackouts continue. He notes that the Federal Energy Regulatory Commission, under the authority of the Federal Power Act is expected to encourage deployment of advanced transmission technologies, including HTS cables.

Although American Superconductor is also advancing this technology and has over $140 million in government grants for the next five years, Preston views IMGC as a less risky way to invest in superconductor technology, because the company already uses the technology in its established, profitable health care division.

Stephen Tang, Millennium Cell's CEO believes he has the technology of choice for the cell phone market. Using his matchbook-size fuel cell instead of a battery, he claims phones stay charged four times longer and laptops three times longer, while providing more power. Although Preston thinks Millennium will find a market for its product, he doesn't see it as the breakthrough Tang does. The downside is the unit needs to be replaced about once a week for the average user, making it less convenient than many people may want. But, Bob notes, their process of storing hydrogen in borax that can safely store, generate and deliver pure hydrogen has promising military possibilities.

Craigmillar also owns shares of Proton Energy and Bob was impressed with their presentation.
"I like the fact that Schroeder combines a clear and powerful company vision - the development of a hydrogen based energy structure generated from renewable sources - with pragmatic realism. In the meantime, he says, we have to make money and here is our plan for generating cash flow."

It was interesting to observe the reactions of various conference attendees, Bob says. The energy tech sector of the market got hit hard during the bear market and investors who purchased stock before that and lived through the bear market were badly hurt and are thus cautious and skeptical now. Investors who purchased stock more recently seem more optimistic and excited about the companies' prospects. The companies also feel the investors' pain from the difficult stock market, but are generally very upbeat. From their point of view their prospects are steadily improving on the business side as the companies are focusing more on near-term markets. The market is much more receptive to their products than it was just several years ago. They are making sales and reducing their losses.

The energy transition from fossil fuels presents many investment opportunities. These opportunities are accelerating at a rate that deserves more than just an annual review. No doubt, there will be more energy round table discussions soon.