Nature of Business and Operations

6 Months Ended

Jun. 30, 2011

Nature of Business and Operations

Nature of Business and Operations

Note 1.  Nature of Business and Operations

Nature of Business

Beacon Power Corporation (collectively the “Company,” “Beacon,” “we,” “our,” or “us”) was incorporated on May 8, 1997, as a wholly owned subsidiary of SatCon Technology Corporation.  Since our inception, we have been primarily engaged in the development of flywheel devices that store and recycle energy on a highly efficient basis.  In 2000, we completed an initial public offering of our common stock and raised approximately $49.3 million, net of offering expenses. Since our initial public offering, we have raised approximately $125.0 million as of June 30, 2011, through the sale of our stock and warrant exercises.

Prior to June 2011, we were accounted for as a development stage company under the Financial Accounting Standards Board’s Accounting Standard Codification (ASC) Topic 915 because we had not yet generated a significant amount of revenue from our principal operations.  During June 2011, our Stephentown, New York, flywheel energy storage plant reached its full 20 megawatt (MW) capacity.  Since we are now generating significant revenue from our principal operations, as of June 30, 2011, we are no longer accounted for as a development stage company.

We expect to continue to increase revenues from the commercialization our Smart Energy Matrix™ flywheel system that provides frequency regulation services to the electricity grid in North America. We also expect to sell turnkey systems outright or on a fractional basis, both within the United States and internationally, that will also be used to provide frequency regulation as well as related energy balancing services. We believe that as we expand our production capabilities and continue to lower system costs, we will be able to market other cost-effective applications for our flywheel systems that will further expand revenues.

Operations

We have experienced net losses since our inception and, as of June 30, 2011, had an accumulated deficit of approximately $245.7 million. We do not expect to have positive EBITDA (earnings before interest, taxes, depreciation and amortization) or positive cash flow from operations until we have deployed a sufficient number of merchant plants and/or sold turnkey systems. In the future, as the number of our merchant regulation facilities increases and we develop sustainable cash flows from operations and the sale of turnkey plants, we expect to fund additional plants from a combination of cash flow from operations, non-recourse project financing and project equity.

On August 6, 2010, our wholly-owned subsidiary, Stephentown Regulation Services, LLC (SRS), closed on a credit facility (the “FFB Credit Facility”) with the Federal Financing Bank (FFB), pursuant to which the FFB agreed to make loans to SRS from time to time in an aggregate principal amount of up to $43,137,019, subject to the terms and conditions set forth in the loan documents governing the FFB Credit Facility (collectively, the “FFB Loan Documents”).   The loans made to SRS by the FFB under the FFB Loan Documents are guaranteed by the U.S. Department of Energy (DOE).  Proceeds of the loans made under the FFB Loan Documents, together with $26 million of cash and in-kind assets contributed by Beacon through its wholly-owned subsidiary, Stephentown Holding LLC (“Holding”), are being applied to pay the estimated $69 million total project cost of our 20 megawatt (MW) frequency regulation plant in Stephentown, New York.  Advances under the FFB Credit Facility began in September 2010, and are based upon eligible project spending, with the last day for an advance of May 30, 2012.  Each loan disbursement is subject to the satisfaction of certain conditions.

We began earning frequency regulation revenue in January 2011 at our Stephentown plant. In June 2011, our Stephentown plan achieved its full 20-MW capacity.

On February 28, 2011, we announced we had signed a lease agreement with NorthWestern Corporation d/b/a NorthWestern Energy for a one-megawatt (1MW) Beacon Smart Energy Matrix flywheel energy storage system.  The system will be installed by us and operated in conjunction with the Dave Gates Generating Station (formerly known as the Mill Creek Generating Station), a gas-fired regulating reserve plant recently commissioned in Montana and owned by NorthWestern Energy.  Our system is expected to be operational by the end of 2011. The initial term of the lease will be 15 months, which can be extended up to two additional 12-month terms at NorthWestern Energy’s option. NorthWestern Energy will pay us $500,000 for the first 15-month term and $500,000 for each subsequent term should it choose to extend the lease. At any point, NorthWestern Energy can opt to purchase the 1 MW system outright for approximately $4 million.  A portion of the lease payments made under the agreement would be applied to the purchase, depending on when the purchase is made.

In addition to the revenue we earned from our Stephentown plant, we also earned frequency regulation revenue during the first half of 2011 from approximately 1 MW of capacity operating at our Tyngsboro facility under the ISO-NE pilot program. During the first half of 2010, we had 3 MW in service at this site; however, during the third quarter of 2010 we redeployed a portion of those assets to the Stephentown plant in partial fulfillment of our equity contribution to SRS.  In April 2011, we temporarily discontinued our participation in the ISO-NE pilot program in order to prepare the remaining flywheels for shipment to NorthWestern Energy.  In July 2011, we resumed limited participation in this pilot program.

We plan to increase revenues by building and operating additional 20 MW facilities. We have been awarded a $24 million DOE Smart Grid stimulus grant to support a plant in Hazle Township, Pennsylvania, which is in the Mid-Atlantic ISO (PJM) region.  In April 2011, we were approved by the DOE to proceed to Phase II tasks, subject to final expected approval of the revised project budget.  We expect the project budget to be approved before the end of the third quarter of 2011. Once formally approved, we will be allowed to draw Phase II funds of up to 95% of the $24-million grant.  Under Phase I, we were limited to a spending cap of 4% of the grant amount.  We have site control and have filed an interconnection application and DOE has completed and approved the environmental assessment for the Hazle Township site.

We are identifying other plant locations for future merchant facilities, as well as marketing our systems to domestic and foreign utilities that lack open-bid markets with the objective of selling our plants in those markets on a turnkey basis.  Additionally, we are exploring other potential flywheel applications, including the sale of systems for wind/diesel/flywheel energy storage hybrid power systems on islands and remote grids, frequency response, as well as military applications.  In September 2010 we were awarded a two-year $2.2 million ARPA-E contract to develop the initial design of a new type of flywheel that would have the capability of delivering four times the energy as our current Gen4 flywheel.  If successful, this new flywheel design would be capable of delivering 100 kW for up to one hour.  Additional effort would be required once a design is developed before this new flywheel could be commercialized. Target applications for this device would include ramp mitigation for wind and solar generation whose power output may exceed local ramp rate limitations, demand limiting for commercial, industrial, institutional and government facilities that pay high electricity demand charges, and back-up power supply for a portion of the Uninterruptable Power Supply (UPS) market that requires extended time to achieve orderly shutdown because the customer lacks back-up generation capability.

To continue to build merchant plants, fund operations and continue as a going concern, we will require additional funding through a combination of equity, debt and/or cash proceeds from the sale of plants. Although the Stephentown plant began generating revenue in January 2011, the terms of the FFB loan require us to escrow a significant amount of the cash expected to be generated from SRS operations in 2011 and beyond to create required reserves for debt service, maintenance and ongoing operations. We estimate that we will need to raise an additional $5 to $10 million during 2011 to fund operations into the second quarter of 2012.