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Congratulating Chrysler and A123 Systems

On April 6th, Chrysler LLC announced the creation of a strategic alliance whereby A123 Systems, Inc. will become a primary battery supplier for Chrysler's planned line of plug-in electric vehicles. This is a huge step toward rebuilding America's domestic battery manufacturing infrastructure and both companies should be congratulated. The next steps I see in my murky crystal ball are finalization of A123's pending IPO coupled with an announcement that A123's $1.8 billion loan request under the DOE's Advanced Technology Vehicle Manufacturing Program has been approved. If the foundation has been properly laid, it will all come together very quickly.

I've been following A123 since it first filed its SEC registration statement. While the IPO was delayed by last fall's market implosion, its team stayed the course and announced plans to build a $2.3 billion battery manufacturing facility in early January. To help pay for the planned facility, A123 applied for a $1.8 billion loan under the DOE's Advanced Vehicle Technology Program. In an earlier article that focused on the ATVM loan requests from A123, Ener1 (HEV), Tesla Motors and Integrity Automotive, I questioned how those requests could be approved without proof that the applicants would have willing buyers for their products. Yesterday's announcement provides a clearer picture of the negotiations that have been going on behind the scenes for months.

Thirty years ago, Michael Milken popularized the use of letters that said Drexel Burnham Lambert was "highly confident" financing could be arranged on specified terms if the underlying business transaction could be negotiated. These letters then formed the basis for negotiations between sellers, bankers and other necessary parties. My guess is that A123 and Chrysler have used the same mechanism quite effectively. If I'm right, the Chrysler release is just the first piece falling into place and the others will quickly follow.

From a securities regulatory perspective, A123 is almost done with its IPO filings. The registration statement went through three rounds of staff review and comment last year and was basically ready to go by late November. Updating the registration statement to include year-end financial information and disclose the terms of the agreement with Chrysler and the terms that have presumably been negotiated with the DOE should be fairly simple. So the only critical timing issues seem to be a final DOE decision, a registration statement amendment and a road show.

This is great news for the energy storage sector because like I said last August, there is nothing like a high-profile IPO road show to draw market attention to energy storage in a new way and mark the beginning of a major upward trend in a basic industry that's been undervalued for years. It should be a fun spring after a dismally hard winter.

In addition to the visibility boost I think the Chrysler – A123 alliance will bring to the storage sector, there may well be a second tier of good news for other manufacturers of energy storage devices. The ATVM program allocated $22.5 billion to major manufacturers and set aside another $2.5 billion for loans to "small automobile and component manufacturers" that have fewer than 500 employees. While I originally questioned whether A123's loan request was part of the large manufacturer allocation or the small manufacturer set aside, it's now clear that A123 has been joined at the hip with Chrysler for months. Therefore, I think it's safe to assume that the $2.5 billion set-aside for small manufacturers will remain intact. While I remain skeptical about how the small company applicants will be able to meet the stringent business viability requirements I discussed in my earlier article on the ATVM loan program, it is entirely possible that similar behind the scenes negotiations are already in process on other ATVM loan requests.

While the Chrysler – A123 alliance will almost certainly spark a tidal wave of interest in the energy storage sector, I think it's important for investors to remember that the best opportunities are often found in the least glamorous stocks. The energy storage sector is a target rich environment that does not have a single ‘silver bullet’ technological solution. The root causes of the challenge include:
  • Storage needs that range from watt hours to megawatt hours or even gigawatt hours;
  • Discharge needs that range from seconds to hours or even days;
  • Cycling rates that range from infrequent (e.g. back-up power) to intense (e.g. recuperative braking);
  • Cycle depths that range from very shallow (e.g. engine starting) to very deep (e.g. fork lifts);
  • Technological improvements that are usually incremental gains instead of disruptive advances;
  • Products that require huge inputs of high value or exotic raw materials;
  • The need to carefully analyze costs and benefits for each potential storage application; and
  • The sheer immensity of the current and potential market for energy storage products.
The informed consensus is that annual revenues of companies in the energy storage sector will increase from $30 billion to $100 billion or more over the next several years. While I track a handful of pure-play public companies that are focused on billion-dollar market segments and likely to be strong competitors in those segments, none of their technologies has broad utility across the entire energy storage spectrum. So instead of a future where a couple of dominant competitors survive and the others fall by the wayside, it’s easy to envision a future where dozens of strong competitors will thrive by serving different billion-dollar market segments.

Over the last nine months I've written a total of 47 articles on the energy storage sector and the principal pure play companies that are active in the sector. The entire archive can be accessed from my Seeking Alpha author's page. While I have a strong personal preference for lead-acid technology, I also have a contingent of faithful readers who help round out the discussion so that a clear and informative picture emerges. You may find some of my analysis useful if you're looking at storage for the first time.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also holds small long positions in Active Power (ACPW), Exide Technologies (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.



was posted on AltEnergyStocks.com.


       

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Comments

Hi John,

Very useful article. How do you think this alliance might be impacted by a possible Chrysler bankruptcy, assuming it is an orderly bankruptcy?

Charles, even if Chrysler is forced into a Chapter 11 reorganization, it's business will not dry up and blow away. In fact, the political pressure will be immense for the EV initiative to survive and hopefully prosper. The A123 – Chrysler alliance is a big step in that direction.

The fact is that everybody needs a centerpiece EV project involving a U.S. auto manufacturer and a U.S. battery manufacturer. Chrysler needs a big project to support its restructuring plans. The DOE and the administration need a big project to show that the $25 billion in auto industry bailout money isn't simply being thrown down a rat-hole. Lastly, A123 needs a big project because all of its current manufacturing capacity is in Asia.

The business viability requirements of the ATVM rules are very strict and without a partnership of this magnitude, it would be almost impossible for anyone other than established lead-acid battery manufacturers like Exide and Enersys to make a compelling case. When it comes to Li-ion manufacturers, I'm inclined to think that A123 is the best and biggest of breed (although Valence fans might disagree).

I'm unwilling to predict whether the A123 – Chrysler alliance will in fact be a business success because I have lingering doubts about the economics of PHEVs in general, but it will certainly be a watershed event for the storage sector.

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