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By jimpiccard
August 7, 2006

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I attended the annual meeting outside Boston last week. Thankfully the temperature at night was down so that sleeping in the parking lot of the nearest Mass Turnpike service area inside my car was not too unbearable.

I got some individual face time with a few of the execs; the CEO; the head of the utility stuff; and the head of the Wires division. (I also talked to him about a separate space application I might be able to get another company interested in for his wire; but, that is not financially relevant here, so I digress....)

I held the three copper cables vs. the few strips of HTS wire; it really is impressive, when you think about it. Also they are getting some good indications (though that's all for now) as to good durability. Not a small item. As he mentioned, the ConEd cables in NYC recently (Queens?) that failed, really did fail- as in, overheated and burned out due to the load. He explained technically that that flat out wouldn't have happened if it had been replaced with a cable made by their wire. BTW; the LIPA (Long Island) cable test is to be energized in less than sixty days; they already lengthened the initial test in the last year. If this one is successful, it will be extended from the 2000 feet of total cable, to over five miles, along the Centeral spine of the Long Island grid.

The Columbus, Ohio cable - not only a different utility, but also a different cable manufacturer - as well as a totally new tri-axial design) should be energized by now.
(I like the fact that the grid cables are different designs, by different designers, with different utilities, in different states, by the way. Good way to test).

The 5 MW motor for the Navy was finished in its sim and performance testing at the facility in Florida some time ago, and is now in the Philadelphia yards. The 36.5 MW motor is done for the Navy, and being shipped in pieces via another contractor to Philly. Neither will see the water.

They are adamant that they are pulling out all the stops to make sure the third DDX- ship (two ships already are ordered ith standard motors) will have two HTS motors, powered by AMSC.
However, since then, I know that the DDX/-1000 program is running into budget difficulties in Congress (surprise, surprise), having nothing to do with the motors. So that's the bad news; the good news is, however, it is not a practical possibility - IMHO - for the Navy to buy ANY HTS motor for a real ship, that isn't AMSC HTS. No one else has the pedigree; has built motors, run them through Navy testing, et al et al. (Not to mention the big 40 MW generator the Navy has already ordered).

HTS generators - like motors - also save fuel, by the way; another reason to incentivize the real Navy folks if they are at all satisfied with the results so far. (And i think they are; otherwise, the generator order would not have followed the first two ship motor orders).

I talked face-to-face with the CEO on the whole commercial ship motors business (which is basically any ships NOT US government ships). He started nodding vigorously when I went into why I thought he had to be really disappointed that no non-Navy ship motor orders had come in, yet. I asked him if he thought a militarized motor had to actually be on the water before anyone else would be; he was very quick to say that not one ship integrator has said that to him, at all. He said they are all waiting on Navy 'validation' first; and that 'validation' in this case means that the Navy, through NavSea (not naval research) orders on honest-to-god militarized ship motor for a real ship. He said that is turning out - to his disappointment - to be the defining moment for them, not waiting the full one to two years after that till a running ship actually hits the water with it.

This all makes sense to me. He's still disappointed because, after all, the cruise industry didn't wait for the Navy to go electric on its ships before they decided to go electric, first. They did so because it made economic sense. And the thing with the SuperMachines products (i.e, the ship motors, generators; and the SuperVar products for the grid), is that they are an economic value proposition even with one-g wire, unlike straight grid wire applications, which require 2g wire to be economic.

Ship motors with HTS motors are even a better economic value with one-g wire now, with copper prices soaring to a degree that AMSC never dreamed would ever be possible. Yet, the shipyards are already busy; and until the Navy puts a true, operational motor order in, they've made clear to AMSC they won't order, even though it is costing them money increasingly to wait. This is not an unheard of story. Depending on the industry, capitalists can be very brave - or very, very cowardly and lazy, especially when demand is such that they don' t have to compete that hard.

Note, that they do have their first 'commercial' 1-g HTS products being built now: the first two of a five-machine order for the TVA to plug into the grid. I asked the CEO if we were making money off of those very first two; he said no....that the run-up in all materials prices had caught them as well. (The initial quote to TVA for what the five would cost them was made by the company to TVA in 2003. Things have changed a bit since then, and hard to blame the company for it, iMO).


The good news is that the first SuperVar - the prototype - that TVA tested for two years had the bejeesus worked out of it - by an order of magnitude greater than TVA had initially thought. (My opinion: by placing it on the grid outside a particularly electrically noisy, arc-furnace driven steel mill, TVA's 2003 plans no way envisioned the subsequent explosion in steel orders worldwide that happened in the subsequent 2 years). After this successful trial-by-fire, TVA ordered the first two operational units - and increased the size they needed by 50% over the original.

CHINA
The CEO had just gotten back from China; and I pigeonholed him on a real concern of mine; i.e, IP protection in China, particularly if 2g 'comes into its own' and AMSC can't ramp up fast enough to meet demand). (That is the case now, by the way; for the incrementally more 2g wire being made, AMSC is 'sold out' (these aren't at commercial prices, mind you), through most of next year. It is pretty clear utilities world-wide have under-invested, and are seriously checking out their possibilities. Currently, three AMSC HTS test thingy's have been tested in China; a small grid section; a fault current limiter; and something else I can't remember.

They have 750+ patents owned/licensed worldwide. But I told him my concern with China is that there is experience now that says Chinese courts will only in the end recognize Chinese -no international - patents. So, do they have plans at this point to get any? And what about my general concern about China in the IP reqard? His answers were three-part:
1. no current plan to spend lots bucks (my words) getting Chinese patents.
2. The current, sharply increasing Chinese business -e.g, the power controllers for European-built wind turbines - are not something he worries about; because their 'secret sauce' in that power-electronics space is NOT the hardware - but the controlling software. "And they are not going to get that - ever. And I"m also certain we are several years ahead of them in that regard".
3. As far as 2g superconductors: the secrets are in how to make the darn things - not the design. As long as they keep wire manufacture totally in house - which they will -- they can examine the design all they want, but he has zero concerns they can get to manufacturing (at any cost) from looking at the design.


The good news is AMSC is transitioning to 2g wire much faster than they had even anticipated in early 2004. Their technical progress has even surprised them (e.g, the consistency of the 2g ribbon coming off the spools, right off the bat). Just one year ago they were very happy that they would be up to 300k meters/year by December 2007; that number is no up to 700k meters/year by then. Note, though, that wire) break-even doesn't occur with 2g until they get over 2-million meters/year. (Company break-even can come before that, though, keep in mind; in fact, they expect the Power Systems Division, for its sake, to be profitable from here on out; period).

There are two ways to get into the millions of meters per year order level. (And for the record, Have had at least one expression of interest for a single order of 2-m m of wire; so it ain't just theoretical. And that doesn't require a Japanese maglev or anything. For reference; two motors into one navy destroyer - if that order came - would be over 300k meters of wire alone into the motors).


One is to make clones of the pre-production line; i.e the 4-cm wide ribbons that can make 700k meters/year of 2g. However, their current plan is to get to The Big Time by going with 10-cm wide ribbons. While there is no guarantee of being able to do that without hiccups, keep in mind they went from the original 1-cm wide strips, to 4-cm wide - a 400% increase -with less trouble than they thought they'd have (or actually, with higher quality than they thought they'd have). Going to 10-cm wide strips is not as big a jump as that. And if there are problems...they can just start cloning the 4-cm wide line.
But they've already started ordering parts for the 10-cm wide machinery; so they are going for it. (All the parts for the 700k meter/year, 4-cm line have already been ordered. No more significant capex left on that one).

If you'll check their forward looking statements, they've already estimated that they can get from here, to completion of the 10-cm line, with current resources- just. But as dduct has pointed out, it is clear they are going to look for opportunities to raise more capital for safety reasons if nothing else. IF the shares climb in 2007 - even for a brief time - look for them to sell some more equity no later than then, for that reason. One thing I like, though, is that these guys really do drive and drive on costs. Note that just producing the two lines - the Pre-Pilot and Pilot - both came in/and are coming in, under original costs. They are laser-like focused on manufacturing costs and related technology.

One last thing; call this the 'burned ships' motivation. Unlike their plans of as recently as 2004, they have totally stopped all 1-g wire production; no going back. Up through 2004 their plans for reaching breakeven (by this time, by the way) were based on: Profitable Power Systems business (it is now profitable, and doesn't use HTS wire); Supermachines - which at least theoretically can be profitable without 2-g wire (though that hasn't happened yet). And efficient production of 1-g.

When 2005 showed they had made greater-than-expected 2-g manufacturing progress, they made the strategic - and, almost irrevocable decision - to throw everyting into 2-g, and stop one g, which they now have. Like Cortez, "he burned his ships....so his crew was well-motivated'. And these guys are. They have staked their futures on this in a way no one else has chosen - or been stupid even to do.

I talked to them about IMGC. Since they are in a quiet period due to the Philipps acquisition, that's why we've heard nothing from SuperPower. But, AMSC clearly believes Philipps will carry out IMGC's plan to spin out SuperPower on its own.

This is a long and rambling, unchecked writeup. Hope it wasn't too confusing.

jp


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