Different paths

I keep digging in the business models of hydrogen-oriented companies, more specifically five of them: 

>> Fuel Cell Energy https://investor.fce.com/Investors/default.aspx

>> Plug Power https://www.ir.plugpower.com/overview/default.aspx

>> Green Hydrogen Systems https://investor.greenhydrogen.dk/

>> Nel Hydrogen https://nelhydrogen.com/investor-relations/

>> Next Hydrogen (previously BioHEP Technologies Ltd.) https://nexthydrogen.com/investor-relations/why-invest/

I am studying their current reports. This is the type of report which listed companies publish when something special happens, which goes beyond the normal course of everyday business, and can affect shareholders. I have already started with Fuel Cell Energy and their current report from July 12th, 2022 (https://d18rn0p25nwr6d.cloudfront.net/CIK-0000886128/b866ae77-6f4a-421e-bedd-906cb92850d7.pdf ), where they disclose a deal with a group of financial institutions: Jefferies LLC, B. Riley Securities, Inc., Barclays Capital Inc., BMO Capital Markets Corp., BofA Securities, Inc., Canaccord Genuity LLC, Citigroup Global

Markets Inc., J.P. Morgan Securities LLC and Loop Capital Markets LLC. Strange kind of deal, I should add. Those 10 financial firms are supposed to either buy or intermediate in selling to third parties parcels of 95 000 000 shares in the equity of Fuel Cell Energy. The tricky part is that the face value of those shares is supposed to be $0,0001 per share, just as it is the case with the ordinary 837 000 000 shares outstanding, whilst the market value of Fuel Cell Energy’s shares is currently above $4,00 per share, thus carrying an addition of thousands of percentage points of capital to pay.

It looks as if the part of equity in Fuel Cell Energy which is free floating in the stock market – quite a tiny part of their share capital – was becoming subject to quick financial gambling. I don’t like it. Whatever. Let’s go further, i.e. to the next current report of Fuel Cell Energy, that from July 7th, 2022 (https://d18rn0p25nwr6d.cloudfront.net/CIK-0000886128/77053fbf-f22a-4288-b702-6b82a039f588.pdf ). It brings updates on two projects:

>> The Toyota Project: a 2,3 megawatt trigeneration platform for Toyota at the Port of Long Beach, California.

>> The Groton Project: a 7.4 MW platform at the U.S. Navy Submarine Base in Groton, Connecticut.

Going further back in time, I browse through the current report from June 9th, 2022 (https://d18rn0p25nwr6d.cloudfront.net/CIK-0000886128/9f4b19f0-0a11-4d27-acd2-f0881fdefbc3.pdf ). It is the official version of a press release regarding financial and operational results of Fuel Cell Energy by the end of the 1st quarter 2022. As I am reading through it, I find data about other projects:

>> Joint Development Agreement with ExxonMobil, related to carbon capture and generation, which includes the 7,4 MW LIPA Yaphank fuel cell project

>>  a carbon capture project with Canadian National Resources Limited

>> a program with U.S. Department of Energy regarding solid oxide. I suppose that ‘solid oxide’ stands for solid oxide fuel cells, which use a solid, ceramic core of fuel, which is being oxidized and produces energy in the process.     

I pass to the current reports of Plug Power (https://www.ir.plugpower.com/financials/sec-filings/default.aspx ). Interesting things start when I go back to the current report from June 23rd, 2022 (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001093691/36efa8c2-a675-451b-a41f-308221f5e612.pdf ). This is a summary presentation of something which looks like the company’s strategy. Apparently, Plug Power plans to have 13 plants with Green Hydrogen running in the United States by 2025, with a total expected yield of 500 tons per day. In a more immediate perspective, the company plans to locate 5 new plants in the U.S. over 2022 (total capacity of 70 tons per day) and 2023 (200 tons per day). Further, I read that what I thought was a hydrogen-focused company, has, in fact, a broader spectrum of operations: eFuel and methanol, ammonia, vehicle refueling, blending and heating, refining of natural oil, and the storage of renewable energy.  

As part of its strategy, Plug Power announces the acquisitions of companies supposed to bring additional technological competences: Frames Group (https://www.frames-group.com/ ) with power transmission systems and technology for building electrolyzers, ACT (Applied Cryo Technologies: https://www.appliedcryotech.com/ ) for cryogenics, and Joule (https://www.jouleprocess.com/about ) for the liquefaction of hydrogen. My immediate remark as regards those acquisitions, sort of intellectually straight-from-the-oven-still-warm-sorry-but-I-told-you-still-warm, is that Plug Power is acquiring a broad technological base rather than a specialized one. Officially, those acquisitions serve to enhance the Plug Power’s capacity as regards the deployment of hydrogen-focused technologies. Yet, as I am rummaging through the websites of those acquired companies, their technological competences go far beyond hydrogen.

Sort of contingent (adjacent?) to that current report is the piece of news, still on the Plug Power’s investors-relations site, from June 8th, 2022. It regards the deployment of a project in Europe, more specifically in the Port of Antwerp-Bruges (https://www.ir.plugpower.com/press-releases/news-details/2022/Plug-to-Build-Large-Scale-Green-Hydrogen-Generation-Plant-in-Europe-at-Port-of-Antwerp-Bruges/default.aspx ). This is supposed to be something labelled as a ‘Gigafactory’.

A little bit earlier this year, on my birthday, May 9th, Plug Power published a current report (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001093691/203fd9c3-5302-4fa1-9edd-32fe4905689c.pdf ) coupled with a quarterly financial report (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001093691/c7ad880f-71ff-4b58-8265-bd9791d98740.pdf ). Apparently, in the 1st quarter 2022, they had revenues 96% higher than 1Q 2021. Nice. There are interesting operational goals signaled in that current report. Plug Power plans to reduce services costs on a per unit basis by 30% in the 12 months following the report, thus until the end of the 1st quarter 2023. The exact quote is: ‘Plug remains focused on delivering on our previously announced target to reduce services costs on a per unit basis by 30% in the next 12 months, and 45% by the end of 2023. We are pleased to report that we have begun to see meaningful improvement in service margins on fuel cell systems and related infrastructure with a positive 30% increase in first quarter of 2022 versus the fourth quarter of 2021. The service margin improvement is a direct result of the enhanced technology GenDrive units that were delivered in 2021 which reduce service costs by 50%. The performance of these enhanced units demonstrates that the products are robust, and we expect these products will help support our long-term business needs. We believe service margins are tracking in the right direction with potential to break even by year end’.

When a business purposefully and effectively works on optimizing margins of profit, and the corresponding costs, it is a step forward in the lifecycle of the technologies used. This is a passage from the phase of early development towards late development, or, in other words, it is the phase when the company starts getting in control of small economic details in its technology.

I switch to the next company on my list, namely to Green Hydrogen Systems (Denmark, https://investor.greenhydrogen.dk/ ). They do not follow the SEC classification of reports, and, in order to get an update on their current developments, I go to their ‘Announcements & News’ section (https://investor.greenhydrogen.dk/announcements-and-news/default.aspx ).  On July 18th, 2022, Green Hydrogen Systems held an extraordinary General Meeting of shareholders. They amended their Articles of Association, as regards the Board of Directors, and the new version is: ‘The board of directors consists of no less than four and no more than nine members, all of whom must be elected by the general meeting. Members of the board of directors must resign at the next annual general meeting, but members of the board of directors may be eligible for re-election’. At the same extraordinary General Meeting, three new directors have been elected to the Board, on the top of the six already there.

To the extent that I know the Scandinavian ways of corporate governance, appointment of new directors to the Board usually comes with new business ties of the company. Those people are supposed to be something like intermediaries between the company and some external entities (research units? other companies? NGOs?). That change in the Board of Directors at Green Hydrogen Systems suggests something like the broadening of their network. That intuition is somehow confirmed by an earlier announcement, from June 13th (https://investor.greenhydrogen.dk/announcements-and-news/news-details/2022/072022-Green-Hydrogen-Systems-announces-changes-to-the-Board-of-Directors-and-provides-product-status-update/default.aspx ). The three new members of the Board come, respectively, from: Vestas Wind Systems, Siemens Energy, and Sonnedix (https://www.sonnedix.com/ ).

Still earlier this year, on April 12th, Green Hydrogen Systems announced ‘design complications in its HyProvide® A-Series platform’, and said complications are supposed to affect adversely the financial performance in 2022 (https://investor.greenhydrogen.dk/announcements-and-news/news-details/2022/Green-Hydrogen-Systems-announces-technical-design-complications-in-its-HyProvide-A-Series-platform/default.aspx ). When I think about it, design normally comes before its implementation, and therefore before any financial performance based thereon. When ‘design complications’ are serious enough for the company to disclose them and announce a possible negative impact on the financial side of the house, it means some serious mistakes years earlier, when that design was being conceptualized. I say ‘years’ because I notice the trademark symbol ‘®’ by the name of the technology. That means there had been time to: a) figure out the design b) register it as a trademark. That suggests at least 2 years, maybe more.

I quickly sum up my provisional conclusions from browsing current reports at Fuel Cell Energy, Plug Power, and Green Hydrogen Systems. I can see three different courses of events as regards the business models of those companies. At Fuel Cell Energy, broadly spoken marketing, including financial marketing, seems to be the name of the game. Both the technology and the equity of Fuel Cell Energy seems to be merchandise for trading. My educated guess is that the management of Fuel Cell Energy is trying to attract more financial investors to the game, and to close more technological deals, of the joint-venture type, at the operational level. It further suggests an attempt at broadening the business network of the company, whilst keeping the strategic ownership in the hands of the initial founders. As for Plug Power, the development I see is largely quantitative. They are broadening their technological base, including the acquisitions of strategically important assets, expanding their revenues, and ramping up their operational margins. This a textbook type of industrial development. Finally, at Green Hydrogen Systems, this still seems to be the phase of early development, with serious adjustments needed to both the technology owned and the team that runs it.

Those hydrogen-oriented companies seem to be following different paths and to be at different stages in the lifecycle of their technological base.

The real deal

I am blogging again, after months of break. My health required some attention, and my life priorities went a bit wobbly for some time, possibly because of the opioid pain killers which I took in hospital, after my surgery. Anyway, I am back in the game, writing freestyle.

Restarting after such a long break is a bit hard, and yet rewarding. I am removing rust from my thoughts, as if I were giving a new life to an old contrivance. I need to work up to cruise speed in my blogging. Currently, I am working on two subjects. One is my concept of Energy Ponds: a solution which combines ram pumps, hydropower, and the retention of water in wetlands. The other one pertains to business models in the broadly spoken industry of new sources of energy: electric vehicles (I am and remain a faithful investor in Tesla), technologies of energy storage, hydrogen and fuel cells based thereon, photovoltaic, wind and nuclear.

As I am thinking about it, the concept of Energy Ponds is already quite structured, and I am working on structuring it further by attracting the attention of people with knowledge and skills complementary to mine. On the other hand, the whole business models thing is foggy theoretically, and, at the same time, it is important to me at many levels, practical strategies of investment included. I know by experience that such topics – both vague and important – are the best for writing about on my blog.

Here comes the list of companies which I observe more or less regularly with respect to their business models:

>> Tesla https://ir.tesla.com/#quarterly-disclosure

>> Rivian https://rivian.com/investors

>> Lucid Group https://ir.lucidmotors.com/

>> Nuscale Power https://ir.nuscalepower.com/overview/default.aspx 

>> First Solar https://investor.firstsolar.com/home/default.aspx

>> SolarEdge https://investors.solaredge.com/

>> Fuel Cell Energy https://investor.fce.com/Investors/default.aspx

>> Plug Power https://www.ir.plugpower.com/overview/default.aspx

>> Green Hydrogen Systems https://investor.greenhydrogen.dk/

>> Nel Hydrogen https://nelhydrogen.com/investor-relations/

>> Next Hydrogen (précédemment BioHEP Technologies Ltd.) https://nexthydrogen.com/investor-relations/why-invest/

>> Energa https://ir.energa.pl/en

>> PGE https://www.gkpge.pl/en

>> Tauron https://raport.tauron.pl/en/tauron-in-2020/stock-exchange/investor-relations/

>> ZPUE  https://zpue.com/   

Two classifications come to my mind as I go through that list. Firstly, there are companies which I currently hold an investment position in: Tesla, Nuscale Power, Energa, PGE, Tauron et ZPUE. Then come those which I used to flirt with, namely Lucid Group, First Solar and SolarEdge. Finally, there are businesses which I just keep watching from a distance: Rivian, Fuel Cell Energy, Plug Power, Green Hydrogen Systems, Nel Hydrogen, and Next Hydrogen.

The other classification is based on the concept of owners’ earnings such as defined by Warren Buffett: net income plus amortization minus capital expenses. Tesla, PGE, Energa, ZPUE, Tauron, First Solar, SolarEdge – these guys generate a substantial stream of owners’ earnings. The others are cash-negative. As for the concept of owners’ earnings itself, you can consult both the investor-relations site of Berkshire Hathaway (https://www.berkshirehathaway.com/  ) or read a really good book by Robert G.Hagstrom « The Warren Buffett Way » (John Wiley & Sons, 2013, ISBN 1118793994, 9781118793992). I guess the intuition behind hinging my distinctions upon the cash-flow side of the house assumes that in the times of uncertainty, cash is king. Rapid technological change is full of uncertainty, especially when that change affects whole infrastructures, as it is the case with energy and propulsion. Besides, I definitely buy into Warren Buffett’s claim that cash-flow is symptomatic of the lifecycle in the given business.

The development of a business, especially on the base of innovative technologies, is cash-consuming. Cash, in business, is something we harvest rather than simply earn. Businesses which are truly able to harvest cash from their operations, have internal financing for moving to the next cycle of technological change. Those in need of cash from outside will need even more cash from outside in order to finance further innovation.

What’s so special about, cash in a business model? The most intuitive answer that comes to my mind is a motto heard from a banker, years ago: “In the times of crisis, cash is king”. Being a king means sovereignty in a territory, like “This place is mine, and, with all the due respect, pay respect or f**k off”. Having cash means having sovereignty of decision in business. Yet, nuance is welcome. Cash is cash. Once you have it, it does not matter that much where it came from, i.e. from operations or from external sources. When I have another look at businesses without positive owners’ earnings – Nuscale Power, Rivian, Fuel Cell Energy, Plug Power, Green Hydrogen Systems, Nel Hydrogen, and Next Hydrogen – I shift my focus from their cash-flow statements to their balance sheets and I can see insane amounts of cash on the assets’ side of the house. These companies, in their assets, have more cash than they have anything else. They look almost like banks, or investment funds.

Thus, my distinction between business models with positive owners’ earnings, on the one hand, and those without it, on the other hand, is a distinction along the axis of strategic specificity. When the sum total of net income and amortization, reduced by capital expenses, is positive and somehow in line with the market capitalization of the whole company, that company is launched on some clear tracks. The business is like a river: it is predictable and clearly traceable in its strategic decisions. On the other hand, a business with lots of cash in the balance sheet but little cash generated from operations is like lord Byron (George Gordon): those guys assume that the only two things worth doing are poetry and cavalry, only they haven’t decided yet the exact mix thereof.      

That path of thinking implies that a business model is more than a way of conducting operations; it is a vehicle for change through investment, thus for channeling capital with strategic decisions. Change which is about to come is somehow more interesting than change which is already there. Seen under this angle, businesses on my list convey different degrees of vagueness, and, therefore, different doses of intellectual provocation. I focus on the hydrogen ones, probably because in my country, Poland, we have that investment program implemented by the government: the hydrogen valleys.

As I have another look at the hydrogen-oriented companies on my list – Fuel Cell Energy, Plug Power, Green Hydrogen Systems, Nel Hydrogen, and Next Hydrogen – an interesting discrepancy emerges as regards the degree of technological advancement. Green Hydrogen Systems, Nel Hydrogen, and Next Hydrogen are essentially focused on making and supplying hydrogen. This is good old electrolysis, a technology with something like a century of industrial tradition, combined with the storage and transport of highly volatile gases. Only two, namely Fuel Cell Energy and Plug Power, are engaged into fuel cells based on hydrogen, and those fuel cells are, in my subjective view, the real deal as it comes to hydrogen-related innovation.