How I Think About Plug Power NOLs

Plug Power ($PLUG) has 3/4 of a billion in net operating losses (NOLs) it has accumulated over the last 15 years. I am trying to find out the worth of these NOLs for a potential acquirer in a tax free transaction. I am assuming for this exercise that the capital structure is composed only of common equity. In addition, to keep the arithmetic simple, I assume the acquirer would pay $100 million in stock for the company. $PLUG trades at a fraction of this number and therefore this assumption is unrealistic.

The following method has been derived with the help of our accountant.

The amount of annual NOL the acquiring company gets to offset income with is calculated by a statutory formula since there will be more than a 50% change in ownership in the company being acquired. 

The value immediately before the acquisition of the loss company being acquired multiplied by the long term tax exempt bond rate (currently about 3.5%) = the amount of annual NOL deduction allowed by the acquiring company.  NOLs have an expiration date, generally 20 years.  So, the value of Plug Power corp. as well as the years in which its NOLs were generated are key factors in determining how much of the NOL will actually be used.  

For example, if the acquirer pays $100 million for 100% ownership in Plug Power today, the formula to determine the acquirer annual allowable NOL deduction is as follows: 

$100 million multiplied by the long term tax exempt bond rate of about 3.5%=$3,500,000 allowable annual NOL deduction.  (Plug Power’s total $750 Million NOL may never be fully absorbed depending on the years Plug Power’s NOLswere generated & the value of Plug Power immediately before the tax free exchange.) 

Plug Power has generated cumulative NOLs of $750Million over the last 15 years.  This means some of the older NOLs are going to expire shortly…the older NOLs should be absorbed first. 

The cumulative value of the allowable annual NOL deduction is about $70 million over a 20 year period for a $100 million investment. The net investment would be about $30 million when taking into account the allowable deduction.

I think going through this exercise is helpful to understand the value structure of $PLUG.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family hold about 3% of Plug Power. We intend to increase our position if the company's results confirm our thesis through time. 

Plug Power is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. We have been wrong on many of our thesis before.

Written by Michael Bigger. Follow me on Twitter and StockTwits.