FuelCell Energy Inc. (FCEL) may be the first company to turn a profit producing systems that generate power chemically from natural gas, as the fuel’s historic price plunge drives sales.
Revenue began exceeding manufacturing costs a year ago, and Chief Financial Officer Michael Bishop expects to report a profit once annual fuel cell production exceeds 80 megawatts, up from 56 megawatts this year, a target that’s in sight as partnerships in Europe and Asia spur demand.
“Fuel cells are beginning to turn the corner after decades of struggle,” Dan Reicher, executive director of the center for energy policy and finance at Stanford University, said in an interview. “Low natural gas prices are helping drive the market.”
The century-old concept provided electricity on the space shuttle and is becoming financially viable on the ground as a glut of shale gas in the U.S. drove down prices 80 percent from mid-2008. That’s making electricity from FuelCell’s systems more competitive with utilities, said Walter Nasdeo, an analyst at Ardour Capital Partners LLC in New York.
“The economics are becoming very compelling,” said Nasdeo, who raised his 12-month target price on the shares to $2.50 from $1.50 in March. “Cheap gas makes it that much easier for FuelCell to sell their story.”
Stationary fuel cells, shipping container-sized systems that can power a large building or small campus, generate power by pushing gas through a membrane. That triggers a reaction, producing heat, water and electricity, and about half the carbon emissions of plants that burn fossil fuels.
“When we meet with investors, the first thing our CEO does is thank them for their patience,” Bishop said in an interview at FuelCell’s Danbury, Connecticut, headquarters. “We’re getting to the point where their patience will pay off.”
A key part of FuelCell’s growth strategy is forming partnerships with international companies that can deliver government and industrial customers.
FuelCell’s biggest customer and biggest backer is South Korea’s largest steelmaker Posco, which ordered 70 megawatts of power plants in 2011 and agreed to buy an additional 120 megawatts in March. Posco, which owns 17 percent of FuelCell, is using the systems at factories and reselling them in Asia. The steel company also licensed the technology and expects to begin making them in 2015.
FuelCell has partnerships to expand in other continents. Abengoa SA (ABG), a Spanish renewable-energy developer, agreed in December to build projects in Europe and Latin America using the company’s systems and is installing a 300-kilowatt FuelCell device at its headquarters.
Germany’s Fraunhofer IKTS formed a joint venture with FuelCell in February to develop European projects.
The company has reported losses every year since 1997 and its shares are down 98 percent from $51.50 in 2000 when FuelCell broke ground on its first commercial factory.
FuelCell has backlogged orders to install 182 megawatts of systems and the shares have gained 14 percent this year. Net losses are expected to decline 54 percent this year to $22.2 million, according to data compiled by Bloomberg.
There are two main types of fuel cells. FuelCell and a handful of rivals, including Bloom Energy Corp. and United Technologies Corp. (UTX), offer large, stationary units. Companies such as Plug Power Inc. (PLUG) sell smaller devices for electric vehicles. Neither market has been profitable for the companies that make them.
Dedicated Power Source
Fuel Cell’s power plants cost about $3 million to $3.6 million a megawatt of capacity. The largest is 2.8 megawatts. Installation adds another $800,000 to $1.2 million a megawatt. The company markets them as on-site power sources for large corporate buildings, hospitals, schools or factories.
FuelCell’s systems produce electricity for about 15 cents a kilowatt hour. That’s cheaper than solar farms, which sell power for an average of 16.9 cents a kilowatt-hour. And, unlike sunlight, fuel cells run constantly.
Fuel cells aren’t as cheap as buying electricity from utilities, which charge an average of 11.4 cents a kilowatt-hour for U.S. residential power.
“We’re reaching the tipping point and getting repeat customers,” said Mike Glynn, marketing director for United Technologies’ UTC Power unit, which doesn’t report separate financial results. “In a couple years we expect cost reductions will allow us to market them without subsidies.”
“We’ve been watching fuel cells for a long time,” Greg Pool, the retailer’s renewable energy director, said in an interview. An on-site power supply may be valuable during an emergency, such as a hurricane in the Gulf Coast region. With on-site electricity, “the Wal-Mart store may be the only thing open -- with ice and water and power -- within 100 miles.”
FuelCell runs its factory in Torrington, Connecticut, nonstop, five days a week. By boosting that to seven days a week, as FuelCell plans to do, the company will turn out systems with about 90 megawatts of capacity a year.
“As they accelerate production I’d expect to see profitability late this year or early next year,” predicted Ardour’s Nasdeo.
Falling Production Costs
When combined annual production from Posco (005490) and the Connecticut factory reaches 210 megawatts, FuelCell’s average cost of power production will drop as low as 9 cents a kilowatt-hour, Bishop said.
That’s based on a gas price of $8 per million British thermal units, about four times the current price.
Gas futures reached a decade-low of $1.91 per million British thermal units on April 19. Prices have dropped 51 percent in the past year and are down 82 percent since mid-2008.
“Posco provides the validation they needed,” said Mike Lew, an analyst at Needham & Co. in New York who has a hold rating on the shares. “Now that they’re gross-margin positive with a pipeline visibility of about 80 megawatts a year, they are on the right path to grow.”
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