A skeptical view of Bloom Energy IPO

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SAFE has never been a big fan of the Bloom Energy Corporation (“Bloom”) business model, which seems to be heavily dependent on government mandates and subsidies. See, e.g., Bloom Energy could be the last straw,
10/17/11.

[The] bulk of subsidies promised to attract the Bloom Energy fuel cell venture [to Delaware] would take the form of a non-cancellable, long-term tariff on Delmarva Power ratepayers. Why is such a tariff appropriate? Ratepayers get no benefits as electric consumers, and if there are economic benefits for the state as a whole – which we doubt – Delawareans who are not Delmarva ratepayers would get a free ride. Ergo, the tariff appears to be a discriminatory tax. Perhaps it was thought ratepayers would not notice a dollar or two a month [the actual amounts have run higher than this] charge on their electric bills, while taxpayer-funded payments from the state might attract more attention. But we and others have done our best to publicize the ploy.

We were far from alone in our skepticism. Consider these examples of what other critics were saying at the time.

•Delaware’s very own Solyndra, John Nichols & Paul Driessen, Washington Times,
9/23/11.

Bloom claims its “revolutionary new design” and “breakthroughs in materials science” make its new solid-oxide-fuel-cell (SOFC) technology “clean, reliable and affordable.” *** If that were the case, and if Bloom had a viable business plan, investors would be clamoring to get in on the action. There would be no need to stick Delaware ratepayers with a bloomin’ tariff (“green premium”) that will add a whopping $600 million to household and business electricity bills over the next 20 years - above what they would pay for electricity generated by combined-cycle natural-gas plants. There would be no need for the Economic Development Department to contribute another $16 million in startup costs.

•Delaware opens Pandora’s box with Bloom Energy black box, Lindsay Leveen [a subject matter expert re chemistry, energy & thermodynamics], eco-imperialism.com,
8/16/12.

Solid oxide fuel cells have been around for more than fifty years. However, Bloom claims it has improved on their performance, through proprietary breakthroughs in materials science. Perhaps so. But my doubts that its servers are capable of performing at the levels hyped by Bloom grew when the company never provided details about how its mysterious fuel cells actually worked. As I read the 163-page application [for a Coastal Zone permit], instead of revelations, I found techno-speak, questionable calculations and outright misinformation.

No matter, Bloom obtained the government approvals it sought and proceeded with its immediate operational plans in Delaware [fuel cell production facility; 30 megawatt utility scale deployment of fuel cells]. Now, years later, Bloom is preparing for an initial public offering of its stock.

Have we been wrong about the Bloom venture, or is the pending IPO a dicey proposition? We reviewed the draft (6/10/18) registration statement with these questions in mind.

A. Transparency – Investment scams are an age-old story, and the U.S. Security and Exchange Commission was created during the 1930s in an attempt to rein them in. The basic SEC approach is not to rule on the merits of proposed or outstanding stock, it is to require issuers to provide relevant, accurate & complete information to the public. Given the availability of such information, it is assumed (or at least hoped) that investors will be able to make informed choices about what securities to acquire or hold.

Reliance on transparency makes a lot of sense. Although investors probably do deserve some degree of protection from unscrupulous promoters, we wouldn’t want to see it provided by empowering government bureaucrats to rule on the merits of investment securities – thereby in effect picking winners and losers in the capital markets.

On the other hand, the exercise tends to be a bit mechanical. All concerned know that the historical numbers and facts must be presented accurately, and that there should be no material omissions. But what really matters in valuing a company’s stock is the future outlook, which is never known with certainty and in many cases is quite unpredictable.

Presenting a pleasing vision of the future without actually promising anything has become something of an art form, and if an issuer’s presentation fits the standard pattern the SEC staff may be inclined to approve the filing without asking probing questions.

The draft (6/12/18)
registration statement for Bloom’s proposed IPO neatly illustrates this pattern. For example:

•Page 9 - It is represented that Bloom has “incurred significant losses in the past” and does “not expect to be profitable for the foreseeable future.” It is also stated (p.50) that Bloom has never paid cash dividends on its stock and has no plans to do so in the foreseeable future.

•Pages 20/47 – Having already summarized “risk factors” in the prospectus summary, the exercise is repeated at greater length. Just about any risk one could think of is mentioned, other than nuclear war or an asteroid striking the Earth, and prospective investors are cautioned that this recitation may not be complete.

While we believe the risks and uncertainties described below include all material risks currently known by us, it is possible that these may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.

Many of the risk factors would apply to any business, e.g., estimates or forecasts may prove inaccurate, so little purpose is served by enumerating them. And the tedious presentation tends to distract readers from risks that are uniquely relevant to Bloom’s business prospects, such as the potential drying up of government subsidies (page 28).

Our business currently depends on the availability of rebates, tax credits and other financial incentives. The reduction, modification, or elimination of government economic incentives could cause our revenue to decline and harm our financial results. [Three paragraphs of specifics follow re federal and state incentives.]

•Page 48 – Readers are cautioned that there may be forward-looking statements in the prospectus, and that Bloom will not be accountable for any disappointments so long as the statements are expressed in appropriately qualified terms.

This prospectus contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “predict,” “intend,” “could,” “would,” “should,” “expect,” “plan” and similar expressions are intended to identify forward-looking statements. *** We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

•Pages 70/157 – A discussion of Bloom’s business history, place in the energy industry, and future prospects is presented in two segments: (1) Management discussion and analysis of financial conditions and results of operations, and (2) Business. Despite references to a huge potential market for Bloom fuel cells, technological improvements in its products, etc., all of the comments about the future seem to fall within the safe harbor for “forward-looking statements.”

•Financial information – Financial statements and summary financial data based on the financial statements are presented up to March 31, 2018. There are, however, no forecasts or estimates of future results.

B. Evaluation (first cut) – Bloom hasn’t been profitable in the past and the company provides no assurance of profits in the future. There is no reason to expect dividends. And the company’s balance sheet (F-3) is weak. Here’s a summary as of 3/31/18.

Screen Shot 2018-06-17 at 1.45.23 PM

The energy sector is huge, however, and Bloom’s fuel cells may make sense for certain applications, e.g., data centers seeking backup power sources to replace inefficient diesel generators and international opportunities in areas not served by an electric grid. Revenues have been trending up of late, losses have narrowed, and the proceeds from an IPO would further strengthen the company’s position. Bloom stock offering draws yawns, Doug Rainey, delawarebusiness.com, 6/14/18.

Based on information in the filing, the company remains in a tight spot, with less than $100 million in cash on hand. A public offering that has a placeholder value of $100 million would allow some breathing room.

Assuming future success, public investors would naturally hope for an equitable share in the profits. But existing stockholders would be ensured a dominant voice in the future direction of the company by virtue of holding Class B shares having ten times the voting power per share of the Class A shares to be sold in the IPO.

Moreover, the shares of convertible preferred stock and convertible debt that are currently outstanding would be automatically converted into Class B shares effective as of the closing of the offering. Page 15. As a result, the number of Class B shares would increase from the current level of 15.6 million shares to 130.8 million shares.

Although it’s unknown whether any existing shareholders are planning to sell shares after the IPO, sales of this nature could take place subject to compliance with applicable legal restrictions. Prospective investors are advised of this possibility and informed about the ground rules. Pages 197-199.

In sum, Bloom's IPO doesn’t strike us as an exciting opportunity, but a case could be made for considering it.

C. High-tech spin – There are no hard and fast rules for assessing the merit of equity investments, particularly when it comes to start-up companies without a proven track record. While thoughtful consideration of the available information is important, investor sentiment may ultimately be even more important in determining the success or failure of an IPO.

Eighty-three companies have reportedly gone public so far this year, raising a total of $25 billion (an average of $300 million). Like Bloom, the majority of them aren’t currently profitable, but their share prices have been rising anyway and “technology IPOs” have reportedly been the best-performing sector. Bloom reveals $157M loss in ’17, Karl Baker, News Journal,
6/16/18.

So is Bloom a technology company? It surely sounds like one from the registration statement. Prospectus summary, pp. 1-9.

Unique technical capabilities – readily adaptable to customer needs – can be clustered in various configurations “to form solutions from hundreds of kilowatts to many tens of megawatts” – provides clean & sustainable, reliable electric power without reliance on the electric grid – “typically provides a lower cost of electricity to our customers than traditional grid power” coupled with “greater-cost predictability versus rising grid prices.”

Hmm, sounds great, but is this description realistic? Consider the following points:

#ENVIRONMENTAL – Is the electric power produced from Bloom fuel cells truly “cleaner” than that produced from other sources? Certainly it has an edge over coal power in that respect, and there shouldn’t be much ash involved since power is generated by oxidizing natural gas versus burning it.

Also, harmful airborne emissions are minimized because the sulfur content in natural gas as well as benzene are trapped by a membrane instead of being emitted. This raises an issue, however, which doesn’t appear to be discussed in the registration statement: how are the contaminated membranes disposed of? It is our understanding that Bloom has not always dealt with this issue in a transparent and responsible manner. Surprise in Delaware: Bloom Energy’s “green” fuel cells need sulfur filter, Joel Pollak, breitbart.com,
11/26/14.

What about “sustainability?” The registration statement (p. 155) claims this box is ticked in that Bloom fuel cells “reduce carbon emissions and save water compared to traditional power generation systems.” OK, but we would offer two caveats:

•Whatever the other issues with wind and solar power, e.g., high capital costs, big environmental footprints, and intermittency, they don’t result in CO2 emissions. Accordingly, many environmentalists consider fuel cell power as an unsatisfactory substitute for the “renewable” (aka sustainable) source power that they favor. (A similar argument could be made for nuclear power, although nuclear power plants are out of favor for other reasons.)

•Combined cycle natural gas power (CCNG) plants operate with equal or greater efficiency than Bloom fuel cells, producing the same CO2 or less per unit of electrical output. Comparing a proposed new power source to the installed capacity currently powering the grid is illogical; the proper approach would be to determine the best available alternative for the replacement or added capacity that is under consideration.

#COST – There are numerous references in the registration statement to the affordability of fuel cell power, but any conclusions on this score are dependent on the standard of comparison. To our knowledge, Bloom fuel cell power is several times more expensive than power produced by a CCNG power plant.

For example, consider the arrangement between Bloom Energy (including assignees) and Delmarva Power Company, whereby two fuel cell installations with a combined capacity of 30 megawatts are operated to provide electricity, which electricity is sold to the grid at the prevailing market price. The qualified fuel cell provider (QFCP) tariff is paid by Delmarva customers in Delaware; Delmarva operates only as a collection agent.

The tariff charges represent Bloom’s reimbursed costs less the proceeds from selling the electric power at market price. Since 2012, Bloom’s costs have exceeded the power revenues by about a 5:1 margin. Costly fuel cells, John E. Greer, Jr., P.E. (ret), SAFE newsletter,
Spring 2018.

We appreciate that Bloom’s fuel cells have been improved over time and that the equipment generating power under the contract with Delmarva may not be up to date. Thus, according to the registration statement (p. 7), “Bloom Energy Servers are capable of delivering five times the power of our first-generation system introduced only nine years ago, while staying within approximately the same service footprint.”

Query what this means exactly, e.g., is the claim that (a) five times as much power is being produced from the same amount of natural gas, (b) five times as much natural gas is being oxidized in a fuel cell of a given size, or (c) some combination of these possibilities?

In any case, it seems rather odd that Bloom would continue to use obsolete equipment to produce electric power in Delaware under a “take or pay” contract that will run into 2033 instead of saving money for Delaware consumers by introducing the more advanced and economical fuel cells that are now available. Has anyone from Delmarva Power, the Public Service Commission, the Department of Natural Resources and Environment, the General Assembly, the Governor’s office, or the media seen fit to ask Bloom Energy about this?

#THE GRID – There are some caustic comments in the registration system about this country’s supposedly archaic electric grid. For example, at page 8:

The existing electric grid architecture features centralized, monolithic power plants and mostly above-ground transmission and distribution wires. This design has numerous points of failure and limited redundancy, and the daisy-chain topology can cascade outages rather than contain them. For example, in 2003, an initial failure blamed on a tree branch in Ohio set off outages that cascaded across eight states and parts of Canada, cutting power for 50 million people. *** According to data from the U.S. Department of Energy (DOE), the United States electric grid loses power 285% more often than in 1984, when data collections on blackouts began. These outages result in an annual loss to American businesses of as much as $150 billion, with weather-related disruptions costing the most per event. *** In 2017, Accenture Consulting published the report “Outsmarting Grid Security Threats,” which stated that “57% of utility executives believe their countries could see interruption of electricity supply due to cyber-attacks within five years” and that “only 48% of utility executives think they are well prepared for the challenges of an interruption from cyber-attack.”

It is also pointed out that grid stability is being undermined by the growing use of intermittent power sources, i.e., wind and solar power. We agree that this is a valid concern, and would have further suggested discussion of the massive damage to the grid that could result from a massive solar storm (like the one that fried the telegraph system back in 1859) or an upper atmosphere nuclear detonation over the United States by a hostile power (aka electromagnetic pulse attack).

That being said, Bloom fuel cells aren’t necessarily the best answer for installations that require very high assurance of uninterrupted power. Another possibility is to build a state-of- the-art gas power plant on site, which can ensure availability of the power needed for the installation, and sell the excess produced to the grid. Newark data center, SAFE newsletter,
Summer 2014 (scroll down).

The Newark data center project was eventually canceled due to highly organized opposition by environmentalist in the Newark area, too bad in our opinion, but the CEO’s reasons for preferring the gas power plant over Bloom fuel cells still resonate. The cost of the Bloom fuel cells would have been several times higher, he explained, destroying the economic attractiveness of the proposal (which by the way was not reliant on government handouts).

#SUBSIDIES – It wouldn’t be productive to spell out all the tiresome details, but there is no question that Bloom’s business model has grown dependent on government subsidies at both the federal and state level. In fact, the recent restoration of a federal 30% investment tax credit for fuel cells (which had been allowed to expire at the end of 2016) is commonly credited for a big bump in Bloom’s revenue in the first quarter of 2018 that supported a revival of its previously shelved plan for an IPO. Bloom Energy IPO: 5 things to know about the Silicon Valley clean-energy “unicorn,” Claudia Assis, marketwatch.com,
6/14/18.

Bloom Energy delivered on 166 orders in the first quarter, an increase of 39.5% compared with 119 in the year-ago period, but first-quarter product revenue increased 338%, from $27.7 million to $121.3 million. The big difference between the rise in product revenue and the rise in deliveries, or acceptances, in company parlance, was thanks in part to one-time product revenue benefit from the retroactive ITC renewal as well as price increases linked to the tax credits’ return.

We are dead set against this kind of special interest tax breaks (many others were also resurrected), and advised House Ways and Means Committee Chairman Kevin Brady of our objections. SAFE letter,
2/26/18. No response from Rep. Brady has been received to date.

D. One more thing – In accordance with SEC requirements, the registration statement provides several pages (181-185) of information about the principal stockholders. The presentation seems incomplete, however, because all of the convertible preferred stock and convertible debt is to be converted to Class B shares (increasing the number thereof by a factor 8) when the IPO becomes effective and it isn’t disclosed who owns the convertible securities.

Do prospective investors need to know the principal stockholders as of the time of the IPO, which might include different names or ownership percentages than are being disclosed, or is it sufficient that they be advised as to who owns the currently outstanding common stock? It strikes us that more complete disclosure might be appropriate.

**********FEEDBACK**********

# When the Bloom subject first hit the news [in 2011] I wondered why more wasn't revealed about the technology. I am an engineer, not a financial wizard. As more was reported I became suspicious that some facts were deliberately being withheld. At that time, I decided it was a SCAM. Nothing here, today, changes my mind. The IPO proposal sounds like an effort to share the pain or spread the blame. An investigation into what was known by whom and what was withheld initially might be in order. – SAFE member (DE)

# I always thought that our elected representatives were there to protect us from scoundrels such as those... SAFE member (DE)

# This take on the whole sordid mess is a great history lesson. – SAFE director




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