A123 Systems Files For Bankruptcy

After days of speculation, battery maker A123 Systems (NASDAQ: AONE) confirmed it will seek Chapter 11 bankruptcy protection.

Another promising clean technology company hasn’t been able to make it under current economic conditions, this time in the slowly advancing electric car and energy storage markets.

It’s been reeling from 14 consecutive quarters of losses and $65 million in charges in a class action suit related to Fisker Automotive’s battery recall.

Yesterday, the company failed to make a $2.8 million interest payment to bondholders. Those bondholders, who are owed $143.8 million plus interest, are listed in the bankrupty filing as the company’s largest unsecured creditors.

A123 Systems makes advanced lithium-ion batteries used in EVs and large-scale batteries that store power on the electric grid and assist with the integration of renewable energy. 

Founded in 2001, A123 is a spin-off from technology developed at Massachusetts Institute of Technology (MIT). It went public in 2009 and built the largest lithium ion battery plant in North America, in Michigan.

The company is a beneficiary of the now infamous US Department of Energy’s loan program, awarded $249 million in 2009 to build two manufacturing plants in Michigan – it only used half of that.

A123 is one of 48 battery and electric drive projects to receive $2.4 billion under the Recovery Act to jump start the electric drive industry in the US.

Its technology, widely hailed as innovative, is used in electric cars like GM’s Chevy Spark and future GM vehicles, Chrysler, and 3,000 hybrid buses worldwide.  The company is backed by venture capital from BraemerGeneral Electric, Procter & Gamble, and many others.

In terms of large-scale energy storage, A123 completed projects in Chile, New York, and elsewhere.

The Bankuptcy Deal

In August, it looked like A123 would get a financial lifeline from Wanxiang Group, China’s largest automotive components company, but A123 decided against it. 

Instead, Johnson Controls will buy the company’s automotive assets for $125 million (unless someone bids more during the bankruptcy proceedings), along with $72.5 million in bridge financing to meet A123’s debt obligations and allow its two factories to keep operating, supporting 800 employees. 

The deal with Johnson Controls covers A123 Systems’ EV battery technologies and its contracts with EV companies such as Fisker Automotive and GM; its facilities in Livonia and Romulus, Michigan; its cathode powder manufacturing site in China; and A123’s equity interest in Shanghai Advanced Traction Battery Systems Co.    

As part of the deal, Johnson Controls will license back to A123 "certain technology for its grid, commercial and government businesses," which may also be sold in the future, says A123.

David Vieau, CEO of A123 Systems, says:

“We believe the asset purchase agreement with Johnson Controls, coupled with a Chapter 11 filing, is in the best interests of A123 and its stakeholders at this time. We determined not to move forward with the previously announced Wanxiang agreement as a result of unanticipated and significant challenges to its completion. Since disclosing the Wanxiang agreement, we have simultaneously been evaluating contingencies, and we are pleased that Johnson Controls recognizes the inherent value of our automotive technology and automotive business assets.

We are also pleased that we have received indications of interest that recognize the value of our grid and commercial businesses. We are encouraged by the significant interest we have received, as multiple parties have submitted proposals for these businesses. As we move through this transaction process, we expect to continue operating and working with customers and suppliers.”

A123 Systems’ automotive business will complement Johnson Controls’ ongoing expansion of its own advanced lithium-ion business, says Alex Molinarol, president of John Controls Power Solutions. Johnson Controls’ technology is used by Daimler AG and BMW, among other companies.

“Requirements for more energy efficient vehicles continue to increase, which is driving automotive manufacturers to pursue new technologies across a broad spectrum of powertrains and associated energy storage solutions," says Molinaroli.

A123 Systems’ deal with Johnson Controls must be approved by the bankruptcy court and could be superseded by a better offer, either for the division or the entire company.

Backlash Expected

Unfortunately, the A123 Systems bankruptcy filing provides more ammunition for the Republican Party’s campaign against federal funding for cleantech and clean energy investments.

Former Representative Pete Hoekstra (R-MI) tweeted, "Obama/Stabenow choose badly with $ borrowed from China. A123 goes bankrupt and our kids are left holding the bag." 

Yet, ClimateProgress points out that Hoekstra co-signed a letter in 2009 requesting funds for A123’s Michigan plant, saying such investments are "vital home-grown technologies and job creation in a new industry essential to jump start the development of a U.S. manufacturing base."

In fact, dozens of Republican lawmakers – including Vice Presidential Candidate Paul Ryan – asked for hundreds of millions of dollars in grants and loan guarantees under the Recovery Act for clean energy projects in their districts. "But that was before it became a political strategy to exploit the failure of innovative companies in order to win an election," says ClimateProgress.

"The fact that the advanced-battery sector is growing 25 percent a year doesn’t mean that every company will be a winner," Mindy Lubber, president of Ceres, told Bloomberg.

Who’s Left?

Getting a new industry off the ground isn’t easy during a worldwide recession.

A123 is one of several advanced battery manufacturers to seek bankruptcy protection: Valence Technology and Ener1  filed earlier this year. Ener1 says it will exit bankruptcy with $86 million in new equity funding and a stronger balance sheet.

That basically leaves ultracapacitor maker Maxwell Technologies (Nasdaq: MXWL) and Altair Nanotechnologies (Nasdaq: ALTI) in the energy storage space.

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