FuelCell Energy, Inc.

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FuelCell Energy, Inc.

3 Great Pasture Road
Danbury, Connecticut 06813
U.S.A.
Telephone: (203) 825-6000
Fax: (203) 825-6100
Web site: http://www.fuelcellenergy.com

Public Company
Incorporated: 1969 as Energy Research Corporation
Employees: 346
Sales: $31.4 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: FCEL
NAIC: 335999 All Other Miscellaneous Electrical Equipment and Component Manufacturing

FuelCell Energy, Inc. develops and manufactures high-temperature hydrogen fuel cells for electric power generation. In essence, fuel cells are like a continuous fuel battery, converting the chemical energy of a fuel directly into electricity without the need for generators, turbines, or any other mechanical equipment. As long as they are supplied with fuel and air they generate a steady stream of electricity. Also like batteries, the cells can be combined, "stacked," to create more powerful units. These fuel cells should not, however, be confused with automobile fuel cells, which start and stop generating power instantaneously without throwing off excess heat. The company's fuel cells take much longer to get up to speed but are designed to run for as long as five years. Its Direct FuelCell product line features three primary units: a 300 kilowatt plant designed for small building and light industrial customers and 1.5 megawatt and 3 megawatt versions suitable for larger buildings, such as hospitals, schools, and factories. The fuel cells do not require an external hydrogen supply or reactor. Rather, they can use a variety of ready fuels, including coal gas, coal-mine methane, methanol, natural gas, biogas, propane, and diesel. Moreover, the products are environmentally friendly, producing few emissions. They are also simple to maintain and inexpensive to operate. FuelCell is a public company listed on the NASDAQ and based in Danbury, Connecticut.

Origins of Fuel Cell Technology: 1800s

Regarded as cutting edge, fuel cell technology is in fact about as old as steam power. Although Sir Humphrey Davy discovered the principles of fuel cells as early as 1802, they were not properly applied until the work of British scientist William Grove, who was better known as the inventor of the "Grove Battery," a voltaic battery that was widely used by the telegraph industry. Less celebrated at the time, however, was his 1839 discovery that water decomposed through electrolysis could be reunited with hydrogen and oxygen atoms to produce electricity and water. This research led to Grove developing a "gas voltaic battery," the predecessor of contemporary fuel cells. It was actually a later scientist, William White Jaques, who coined the term "fuel cell." It was difficult technology to harness and it was not until the 1950s that fuel cells began to become a viable power alternative. In the 1960s they came of age when NASA chose fuel cells over nuclear power to provide electricity and water for the Gemini and Apollo spacecrafts.

FuelCell's founder, Dr. Bernard S. Baker, became exposed to fuel cells in the late 1950s. The son of a chemicals salesman, Baker was born in Philadelphia, Pennsylvania, in 1936. He received both bachelor's and master's degrees in chemical engineering from the University of Pennsylvania. He then became a Fulbright Fellow and went to work for Dutch scientist G.H.J. Broers at the Laboratory for Electrochemistry at the University of Amsterdam. Broers was a pioneer in the advancement of fuel cell technology. While typical fuel cells of the period relied on a "reformer," an external device to extract hydrogen from a hydrocarbon fuel such as natural gas, Broers eliminated the reformer entirely. He developed a high-temperature fuel cell that relied on molten salts to extract the hydrogen from the fuel inside the cell itself. When Baker returned to the United States he devoted his career to making fuel cells a practical and commercial technology. He went to work on fuel cells for Lockheed Aircraft Corporation as a senior scientist in the missile and space divisions, then moved to Chicago, where he became director of basic sciences at the Institute of Gas Technology while also completing his doctorate at the Illinois Institute of Technology in 1969.

Baker moved his family to Bethel, Connecticut, in 1969 and with partner and fellow chemical engineer Martin Klein founded a company to conduct research on electrochemical technologies for both fuel cells and rechargeable batteries. Klein's field of expertise was in advanced battery technology. Prior to joining forces with Baker, he had worked on batteries for the U.S. Army Signal Corps, Yardney Electric Corp., Electrochimica Corp., and Electro Optical Systems. The start-up company was incorporated as Energy Research Corporation (ERC) in 1969, and a year later the four-person operation set up shop in rented lab space in Danbury, Connecticut.

ERC's financial backing in the 1970s came from the U.S. military and utility companies. In the fuel cell area the company focused initially on low temperature systems (less than 400 degrees Fahrenheit). Following the oil embargo in 1973 that drove up fuel prices, fuel cells and other forms of alternative energy sources received a great deal of attention. "In those early days of the fuel cell," Baker wrote to shareholders in the company's annual report in 1997, "a euphoria existed based on the belief that low temperature fuel cells would become a universal panacea for power generation. It soon became apparent to us, however, that low temperature systems were highly unlikely to become commercially viable." Such systems were complex, requiring a great deal of extra, and expensive, equipment.

ERC enjoyed better success with battery development in the 1970s. With funding from the U.S. Navy, the company developed a new type of battery. Instead of lead acid and nickel cadmium, ERC batteries used silver and zinc. The silver-zinc batteries were used by the Navy in a variety of ships, including the Trieste, a bathyscaph that held the record for the world's deepest ocean dive. But as was the case with ERC's fuel cells, the silver-zinc battery offered limited commercial appeal.

Change of Focus in 1980s

ERC changed its focus in both fuel cells and batteries in the early 1980s. The company now pursued high temperature carbonate fuel cell technology, which would lead to the development of the flagship product, the Direct Fuel Cell. It offered greater commercial possibilities because it was able to use such readily available fuels as natural gas. It was also more efficient at producing electricity than low temperature systems and did not require the costly support equipment of the earlier system. In batteries, ERC built on its experience with silver and zinc to develop a battery that relied on nickel oxide and zinc. This new system offered a high energy density, allowing for a much lighter battery, making it easier to transport and ideal for marine applications. In addition, the materials had less of an impact on the environment, important for a battery used on the water. As Baker wrote to shareholders in 1997, "By the early 1980s, ERC had developed full size electric vehicle batteries and tested them in various types of electric vehicles. While vehicle performance was good, cycle life was limited to about 150 cycles or about 20,000 miles of normal driving."

After 20 years in operation, ERC in the 1990s continued to build on its research and neared the goal of developing commercially viable products that could complement one another. In a nutshell, the fuel cell generated electricity and rechargeable batteries became the electrical energy storage component of an integrated power system. Fortunately, the company did not lack for funding. In 1990, for example, ERC won a $32 million Department of Energy contract to design, build, and test fuel cells in the 100-kilowatt range that could operate on natural gas or coal-derived gas. It also appeared in the early 1990s that fuel cells were on the verge of coming into their own. As the Wall Street Journal noted in a 1992 article, "Tighter environmental regulations are forcing power producers to install expensive anti-pollution equipment. That had shrunk fuel cells' capital-cost difference to 25% more than a coal-fired plant, for example. With high-volume production, fuel-cell makers say, the technology will become competitive with conventional energy sources." A pioneer in the field, ERC now faced competition from Westinghouse Electric Corporation and Japanese giants Mitsubishi Heavy Industries Ltd. and Toshiba Corporation, as well as a dozen other companies interested in fuel cells.

Taken Public in 1992

ERC took advantage of the growing interest in fuel cell technology to go public in 1992, making an initial offering of stock that raised $6.5 million. While forecasts about the imminent arrival of fuel cells proved wrong, ERC continued to plug away, refining its Direct FuelCell unit, targeting the 2 megawatt range, which the company felt was a practical size to fit into a grid-connected utility environment. ERC reached a significant milestone in 1992 when it successfully tested a 120 kilowatt Direct FuelCell unit. A year later an improved version was tested in Denmark by the Elkraft Power Company. Then, in 1996, a 2 megawatt Direct FuelCell power plant went online in Santa Clara, California, connected to the grid of the Santa Clara municipal electric system. Partners in the effort included the City of Santa Clara, the Electric Power Research Institute, the Los Angeles Department of Water and Power, the Sacramento Municipal Utility District, Southern California Edison Company, and the U.S. Department of Energy's Morgantown Energy Technology Center.

In batteries during the early 1990s, ERC worked on extending cycle life. In 1990 Martin Klein resigned as executive vice-president, and remained as director for two more years before selling his stake in the company. During his 20 years at ERC, Klein headed all research concerning silver-zinc, nickel-zinc, nickel-cadmium, nickel-hydrogen, silver-hydrogen, zinc-oxygen, and zinc-bromine rechargeable batteries. In 1992 Klein founded another company, Electro Energy Inc., to develop batteries for the military.

Company Perspectives:

FuelCell Energy, Inc. based in Danbury Connecticut, is a world leader in the development and manufacture of high temperature hydrogen fuel cells for clean electric power generation.

By 1997 ERC, in the opinion of Baker, was in need of a more commercially oriented executive to take the company to the next level. He was also thinking of the day he would have to retire and wanted to make sure a succession plan was in place. "My first love was research and development," he told the Wall Street Journal in a 2001 article. "I wasn't a business man and I knew I wasn't a business man." In the fall of 1997 he hired Jerry D. Leitman to become ERC's chief executive officer. Leitman's previous experience included a stint with Swedish multinational FLAKT AV and serving as president of Asea Brown Boveri's global air pollution control business. Leitman told the Wall Street Journal that he was wary about taking the job because he was worried about Baker looking over his shoulder. The transition proved to be a smooth one, however. Reported the Wall Street Journal, "According to Messrs. Baker and Leitman, the two have been successful because they recognize their unique skill sets and try to use them to their advantage. For example, Mr. Baker will talk to the public whenever technology is the focus, but Mr. Leitman handles presentations to investors who are more concerned about how the company is operated on a day-to-day basis."

Under Leitman's leadership ERC began a concerted effort to commercialize its fuel cell and battery technologies. In 1998 the company successfully demonstrated its nickel-zinc batteries for use in electric cars, bicycles and scooters, wheelchairs, trolling motors, and lawn motors. The batteries offered 2.5 times the range of a lead acid battery. Although batteries and fuel cells shared much of the same technology, they were generally marketed to different customers. As a result, the company found its focus increasingly divided, leading to the battery business being spun off as a separate company, Evercel, Inc. in 1999. As the Fairfield County Business Journal explained in an article at the time, "selling an expensive, tennis court-sized, megawatt power plant with four fuel cell stacks is a vastly different matter than selling a rechargeable battery designed to power an electric scooter."

Because fuel cells were now ERC's sole focus, the company changed its name to FuelCell Energy, Inc. in 1999. In that same year, the company's first 250 kilowatt power plant began operations. Again, there was no shortage of willing partners. In Germany DaimlerChrysler's MTU division fired up a cogeneration power plant using a FuelCell unit. Then, in 2000, Mercedes-Benz U.S. International Inc., Southern Company, and Alabama Municipal Electric Authority agreed to team up with FuelCell to install a 250-kilowatt fuel cell power plant at the Mercedes-Benz plant in Tuscaloosa, Alabama, in a pilot demonstration project. Also in 2000 FuelCell was awarded a Department of Energy contract for product design and improvement, as well as commercial contracts to install power plants in Washington state, Los Angeles, Asia, and elsewhere.

There was a great deal of enthusiasm for fuel cell technology in general, due almost entirely to the energy crisis in California, which brought the idea of alternative sources of power generation to the forefront. As a result, FuelCell's stock surged as it became the darling of Wall Street within the large fuel cell category. But once energy supplies rebounded, enthusiasm waned and the price of the company's stock plummeted. FuelCell had been in the business for a long time, however, was well stocked with cash, and continued to follow its own game plan. Yet it would have to do so without Baker. He retired in June 2002, handing over the chairmanship to Leitman. Two years later he died just short of his 68th birthday from a series of strokes related to cancer.

By now FuelCell had a commercially viable product in hand but had to wait for market acceptance. Because of an energy glut the fuel cell industry was in disarray in 2003, and FuelCell was forced to cut costs by reducing payroll. Nevertheless, the company was healthy enough to acquire a Canadian company, Calgary-based Global Thermoelectric Inc., in a stock deal valued at $80 million. At the same time, FuelCell also paid $2 million for a 16 percent stake in an Illinois fuel cell company, Versa Power Systems. Global's focus was on thermoelectric generators intended to supply electricity to rural and other remote locations. Several months later, FuelCell sold off the Global generator product line that did not fit with its focus, pocketing $17 million.

FuelCell was hardly in need of extra money. In the fall of 2004 it was reported to have $170 million in cash and a few weeks later announced that it planned to make a private placement of $75 million in stock, the money earmarked for further development and commercialization of its fuel cell products. In 2005 the company branched into a different area of fuel cell technology, teaming up with Pennsylvania-based Air Products and Chemicals as part of a Department of Energy project to develop a new type of pumping station for hydrogen-powered cars. Fuel was to be fed through a fuel cell to produce hydrogen that could be purified for use in hydrogen-powered cars.

As oil prices soared in 2005, fuel cells and other forms of alternative power generation, received a boost, just as they had every time energy costs soared. Whether fuel cells would finally find their place in the power field remained to be seen, however. What was not questioned, after 35 years of commitment, was that FuelCell was in for the long haul.

Principal Subsidiaries

Xiamen-ERC High Technology Joint Venture, Inc. (24.5%)

Principal Competitors

Ballard Power Systems Inc.; Energy Conversion Devices; Honeywell International Inc.

Key Dates:

1969:: Company is founded as Energy Research Corporation by Bernard S. Baker and Martin Klein.
1990:: Klein resigns as vice-president.
1992:: Company is taken public.
1997:: Baker steps down as CEO, replaced by Jerry Leitman.
1999:: Battery business is spun off; company changes name to FuelCell Energy, Inc.
2002:: Baker retires; Leitman assumes chairmanship.