Scientech Issue Alert: Plug Power's Stock Jumps (Once Again) with New Distribution Agreements

Fuel-cell developer Plug Power, Inc. (NYSE: PLUG) said June 27 that affiliates of General Electric Co. and DTE Energy have tentatively agreed to invest another $10 million in Plug Power as part of expanded distribution agreements. Plug Power shares surged 15.67 percent in early trading on June 27, climbing $2.17 to $23.27 in the first 45 minutes of trading. Plug Power's new agreements, which define new distribution pacts for the Latham, N.Y.-based company's fuel cell systems for stationary power applications, are subject to negotiating definitive changes to current distribution agreements with GE and DTE.

Analysis: This has been a great week for Plug Power, full of developments that further position the company as a leader in the fuel cell space. Along with direct-line competitors such as FuelCell Energy (Nasdaq: FCEL), Ballard Systems (Nasdaq: BLDP) and H Power (Nasdaq: HPOW), Plug Power is riding the wave of unprecedented interest in fuel cells among investors, energy companies and the federal government. While fuel cells may still be several years away from being commercially viable, the technology has found a new place in the spotlight based on its promise to become a low-emission, reliable and readily available (as opposed to solar and wind) supplement to traditional forms of power generation.

For background, Plug Power was formed in 1997 through a joint venture between DTE Energy and Mechanical Technology, Inc. The company continues to focus on R&D efforts for its fuel cells systems, which are expected to be sold globally for residential and small commercial applications. Fuel cells convert the energy of a fuel (hydrogen, natural gas, methanol, gasoline, etc.) and an oxidant (air or oxygen) into useable electricity. There are several different types of fuel cells, including phosphoric acid, alkaline, molten carbonate, solid oxide and PEM (proton exchange membrane). Plug Power is specifically focused on the design and development of on-site generation systems that use PEM fuel cells for stationary applications, as it believes this technology can be manufactured less expensively and is more efficient and practical in small-scale applications.

Plug's stock has seen its share of ups and downs since its IPO in November 1999. A year ago, Plug shares were priced at around $71.62, but they hit a year-low in December 2000 of about $9.12. The oscillation, which has also been evident in other alternative- and renewable-power companies, is reflective of the volatility of the energy industry and the uncertainty of when new technologies will result in company profits. Most recently, Plug Power took a dip when FERC issued its price mitigation policy, which caused the stock of virtually every company operating in the energy space to drop by varying degrees. As of June 28, Plug shares are priced at about $22.63.

The recent upswing in Plug Power's profile began with its June 8 filing with the SEC to sell 4.75 million shares of stock, which would raise about $132.9 million for the company (based on the offering price of $29.70 a share). The second offering should take place sometime this summer, and Plug Power is hopeful that the uncertainty surrounding traditional forms of power generation will spark the interest of investors. For months, Plug Power has maintained that it needs to raise significant funds to continue operations (a condition that is common among many fuel-cell companies that have yet to make their products available on the mass market). As of March 31, 2001, Plug Power had an accumulated deficit of $154.2 million and admits that the company has not yet achieved profitability and anticipates continued losses for the next several years as it continues to develop its technology. Plug Power has said that funds raised from the second offering should support development efforts through 2004.

Then, just last week, Plug Power confirmed that it had signed a $7 million contract with the Long Island Power Authority (LIPA) for the construction of a new site on which 75 Plug Power fuel cell systems will be placed to provide electric power to LIPA customers. The construction site will be located at LIPA's West Babylon, N.Y., substation, where 5 kw power plants will be connected to the utility's distribution grid. During the two-year duration of the program, Plug Power's fuel cells are expected to produce one million kilowatt hours of electricity. As electricity demand on Long Island is reportedly increasing at a rate of 3.5 percent per year, the use of fuel cells has been highly publicized as one solution to New York's power supply problems. The announcement of the LIPA deal sent Plug's shares up about 18 percent to $33.25

The new distribution agreements that Plug Power has formed appear to be keeping the company's stock in the mid-$20 range. Let's take a quick look at the separate but parallel memoranda of understanding (MOUs) that Plug Power has formed with the GE subsidiaries and DTE Energy, which expand upon already-existing relationships. In a nutshell, Plug Power is receiving $10 million in additional funding in exchange for offering common shares and providing GE and DTE Energy subsidiaries with exclusive distribution contracts for Plug Power's fuel-cell generators. The generators are typically small (about the size of a water heater) and average about 7 kw in output. The cost is still expensive ($20,000 to $30,000/kw) and Plug Power is working toward making the generators more cost-competitive for widespread commercial application.

The MOU with GE expands GE Fuel Cell Systems' distribution rights to include Plug Power's fuel cell-powered generators, of any electrical output (including greater than 35 kw) for use in any stationary power applications. Through the expanded partnership, GE has exclusive distribution rights outside the four-state territory that is included in the MOU with DTE Energy (to be discussed subsequently). In addition, Plug Power has extended its ownership in GE Fuel Cells to 40 percent from 25 percent. Also, GEPS Equities, another GE subsidiary, has made a binding commitment to purchase for $5 million in cash additional Plug Power shares, at a price that has been established in the IPO that is currently in registration with the SEC. This expands upon GEPS Equities' current ownership of 5.25 million shares of Plug Power, 11.8 percent of which is currently outstanding.

In the separate MOU with DTE Energy, which by the way was one of the founding companies of Plug Power, DTE Energy Technologies has expanded its distribution rights to include Plug Power's generators of any size within the states of Michigan, Illinois, Ohio, and Indiana. DTE Energy Technologies can distribute the generators for use in any power application except propulsion. The MOU also commits Edison Development Corp., another DTE Energy subsidiary, to purchasing additional Plug Power shares for $5 million, thus making the total of $10 million in new investments in the company when combined with the GEPS Equities' investment. DTE already owns more than 30 percent of Plug Power.

In its SEC filing, Plug Power noted that "the timing looks pretty good" for a second offering of its stock. This projection may have some validity, considering that an estimated 1,500 federal officials and members of Congress attended the inaugural Congressional Fuel Cell Expo earlier this week. The Expo gave various companies operating in the fuel cell space an opportunity to display their technologies. Delivering a keynote address at the Expo, Energy Secretary Spencer Abraham noted that the Bush administration has asked for nearly $120 million in fiscal year 2002 "to carry out fuel cell and supporting partnerships with industry in buildings, transportation, fossil energy power generation, and hydrogen research."

>From an investment perspective, venture capitalist (VC) interest in energy technologies remains strong. While energy-related business still account for a relatively small percentage of all VC funds in the United States (less than 3 percent for 2000), investment interest in this sector is increasing dramatically. For instance, VC funding for energy-related businesses reached only about $50 million in 1995, rising to $400 million by 1997 and almost $1.5 billion in 2000. As deregulation has unfolded and concerns about traditional power supply have increased, energy technology stocks have become one of the hot bets among investors.

However, within the fuel cell space, Plug Power faces some stiff competition. Ballard Power, FuelCell Energy, Inc., and H Power are the three companies most clearly operating in the same market space as Plug Power. All three companies are focused on a particular niche within fuel cell technology that makes them distinct. For instance, as noted, Plug Power has focused on PEM technology for small-scale applications. By comparison, FuelCell Energy's Direct FuelCell® technology eliminates external fuel processing to extract hydrogen from a hydrocarbon fuel; Ballard appears more focused on the automobile industry, along with electrical equipment and power product manufacturers; and H Power has found a niche in providing co-generation products for rural, remote homes and back-up power units for mobile applications. As of mid-morning trading on June 28, Ballard stock was priced at $43.90, FuelCell Energy was at $23.30, and H Power was at $9.05

The wide range between the four fuel cell companies that I've discussed is most likely attributed to still-undecided fate of fuel cells regarding their place in the nation's fuel mix. As I've said before, the general consensus among analysts is that alternative fuels and new technologies have a strong potential in the energy industry, especially as a substitute to vulnerable electric markets such as California. However, investors are looking for near-term returns and may quickly become impatient with technologies that are still several years away from being commercially prevalent. Distribution agreements that extend the reach of the technology, such as the ones that Plug Power has formed with GE and DTE, give an added boost to the fuel cell market. Whether or not fuel cells, and the companies developing them, will remain high on the industry's radar remains to be seen.

SCIENTECH's IssueAlerts^(SM) are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues.

Copyright 2001. SCIENTECH, Inc. All rights reserved.

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