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Sign of the Times: A123Systems Expects DOE Funds to Outweigh Private Dollars

A123-automotive-cellBattery startup A123Systems, which filed for an initial public offering more than a year ago but has yet to go public, took home one of the biggest grants in this month’s round of awards under the Department of Energy’s grant program for electric vehicle battery and component manufacturing. But A123Systems is still hoping to bring in more funds from the DOE in order to help finance the same expansion project that won the $249 million grant, according to the Massachusetts-based company’s latest filing with the SEC.

A123 has its eye on the direct loan program called the Advanced Technology Vehicles Manufacturing Initiative, which after a long delay finally announced $8 billion in loan commitments in June, including $465 million for electric car startup Tesla Motors. (This was just the first round, and more awards will follow.) A123 wrote in its filing last week that it expects to get $235 million in loans to support its U.S. build-out — significantly less than the $1 billion that the company initially requested under the program just eight months ago. But the addition of $235 million in loans to A123’s $249 million in grants would mark a shift for the startup and a sign of the times for battery companies: government funding for A123 would for the first time exceed its hefty capital (more than $350 million) from private investors.

Even if another multimillion-dollar boost comes from the DOE, A123 does not expect its planned expansion to come cheaply. The company notes in its latest filing, dated Aug. 19, that under the battery grant initiative, it “will be required to spend up to $1 of our own funds for every incentive dollar we receive.” Under the loan program, the company expects to be required to spend $1 of its own funds for every $4 it borrows. In all, this means A123 expects it will have to come up with some $183 million for its manufacturing build-out in Michigan if the loans get approved.

Despite A123’s success in the highly competitive battery grant program, funding under the ATVM loan program is hardly guaranteed. And the company can’t count on loans going out within an ideal time frame for its project. But given that A123 snagged the second-largest grant and a massive vote of confidence from the DOE under the battery program, the agency seems set to ensure A123 plays a key role in building up a U.S. manufacturing base.

For A123, with plentiful venture funding, a deal with Chrysler, an established business making batteries for power tools and plans for a $175 million (or more) IPO, the question this summer has not been whether to aggressively expand its manufacturing capacity, but where. The company wrote in a June SEC update (before it received the DOE grant) that with sufficient aid from the U.S. government, it aims to take the lead in creating a battery manufacturing industry stateside. Without it, the startup, which now does manufacturing primarily in Korea and Changzhou, China, indicated that it just might stick with the sector’s existing hot spots overseas.

Of course, however A123’s fortunes unfold at the DOE, the success of its planned vehicle battery business will still depend in part on the health of the auto industry and the development of a mass-scale market for electric vehicles. But if projections that by the end of this year A123 will finally go public are on target, it could be one of the startups that sets the stage for a blockbuster year of cleantech IPOs in 2010.

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