FuelCell Energy (FCEL) “B” Shares: A Unique Opportunity to Capitalize as Firm Makes Significant Restructuring Progress - Profitable Business Model Within Sight
Paul Borisoff - Sep 25, 2019
FuelCell Energy’s “B” Shares closed at $85.25 per shares on September 24th, 2019 – and represent a unique opportunity to realize outsized returns as the company moves towards a successful restructuring conclusion...
FuelCell Energy’s “B” Shares closed at $85.25 per shares on September 24th, 2019 – and represent a unique opportunity to realize outsized returns as the company moves towards a successful restructuring conclusion – which will likely include the resumption of the company’s quarterly dividend obligations on the FCEL “B” shares (5% Series B Cumulative Convertible Perpetual Preferred Stock).
The “Bs” were issued at $1,000 per share in 2004 and have a $50 per year annual dividend obligation. They trade on the OTC market under symbol “FCELB.” Significantly, the “Bs” have a $64 million “Liquidation Preference” over the FCEL common shares, and unlike common shareholders they have not been diluted in recent years (there are only 64,020 “B” shares outstanding based on recent filings).
The holders of Series B Preferred Stock are entitled to receive, in the event the company is liquidated, dissolved or wound up, whether voluntarily or involuntarily $1,000 per share plus all accumulated and unpaid dividends to the date of that liquidation, or winding up (“Liquidation Preference”). – Jan 10/19 10-K
Also, there are a number of other “fundamental changes” where the “B” holders can require the company to redeem the “Bs” at $1,000 per share– including if a “person” or “group” becomes the beneficial owner of 50% or more of the company’s capital stock with the power to vote in the election of directors.
While the last few years have seen multiple company setbacks, which led to a severe cash crunch earlier this year, recent developments suggest that FCEL is poised to be “re-introduced” to the investment community shortly – with a new business plan and path to profitability. I believe that this “re-introduction” will include a new senior credit facility, re-confirmed commitments from the company’s construction finance partners - and a resumption of the company’s dividend obligations on its “B” shares.
FCEL did not declare or pay its May quarterly “B” dividend obligation (or August) – which along with details of the company’s financial constraints led to the plunge in the share price this year. These missed dividends which now total $25 per share are “cumulative” though and subject to a penalty for each period they are not fully paid out and caught-up. As per the company’s September 9th, 2019 8-K:
B Preferred Stock will be entitled to receive, when, as and if, declared by the Board of Directors of the Company, dividends at a dividend rate per annum equal to: the normal dividend rate of 5% [on $1,000 face value], plus an amount equal to the number of dividend periods for which the Company failed to pay or set apart funds to pay dividends multiplied by 0.0625%, for each subsequent dividend period until the Company has paid or provided for the payment of all dividends on the shares of Series B Preferred Stock for all prior dividend periods.
If FCEL does not reinstate their quarterly dividend by August 2020 (misses six quarterly dividend payments) it would trigger a voting right entitlement for the “B” shareholders - allowing them to elect up to two new “B” Directors onto the Board of Directors. See FCEL’s 5% Series B Cumulative Convertible Perpetual Preferred Stock – Amended Certificate of Designation for more information.
Until FCEL resumes dividend payments on the “B” shares though the company will be viewed to still have a “going concern” issue with both investors, their finance partners and their customers. FCEL will likely want to reinstate the “B” dividend as soon as possible.
I believe that recent company developments are leading to a successful restructuring conclusion – and that the following is imminent: 1) a new business plan will be accepted by the Board of Directors, 2) a new and more flexible senior credit facility will be announced, 3) the company will receive re-confirmed commitments from their construction finance partners - and 4) the company will resume payment of the “B” share dividend obligations.
Update on Recent Developments
FCEL has made significant “restructuring progress” in recent months – as outlined in their last 10-Q filed on September 9th, 2019 for quarter ending on July 31st, 2019 – and in subsequent 8-K updates:
- Closed the $35.4 million acquisition of the 14.9 MW Bridgeport Fuel Cell Park on May 13th - with $25 million of senior financing split between Fifth Third Bank and Liberty Bank – and $6 million of subordinate financing provided by the CT Green Bank.
- Received $10 million from ExxonMobil on June 12th - for a non-exclusive license for their Carbon Capture technology.
- Retired all but $27,000 of the previous problem “floorless” Series C and Series D preferred shares as of July 31st, 2019. These “death spiral financings“ effectively cut the company off from raising additional critical equity capital, which then led their senior secured lender to demand repayment of the debt owed to them, which then put other lending agreements in jeopardy, and left the company with no working capital . This is now behind the company, although previous common shareholders paid the price with severe dilution.
- FCEL's unrestricted cash balance was reported at $16 million as July 31st. In a subsequent 8-K filing on September 12th the company announced they had sold 34.4 million new common shares on the market between September 10th and 11th via the company’s “at-the-market” facility - which raised net proceeds of $14.2 million. They directed $4.3 million of this additional money raised to further pay down their “problem” senior secured credit with Hercules Capital – to $1.4 million.
- On August 20th FCEL announced that Director Jason Few who joined the Board in late 2018 was appointed as FCEL’s new CEO – and that the restructuring officers hired earlier in the year would now report directly to him and the Board. This was highly significant in my opinion. Jason was not involved with the company’s prior “extremely bad” decisions to raise capital via back-to-back “floorless” preferred shares yet has been intimately exposed to both company’s restructuring hurdles and company’s business opportunities. The very fact that Jason decided to take on the CEO role recently after working closely with the “Chief Restructuring Officer” (CRO) hired by the Board of Directors earlier in the year suggests that the company is getting close to emerging from its “restructuring process.” Jason has a great resume in my opinion, and I do not believe he would move his family to Connecticut and take on this new, much more involved role with the company, if the company was moving in the opposite direction, and getting closer to formal restructuring under Chapter 11 – which would have likely been led by the “CRO” already in place.
- FCEL's September 9th 8-K confirmed that projects “paused” earlier in the year due to a lack of working capital have resumed. Specifically, FCEL confirmed that their 2.8 MW Tulare BioMAT project in California is now near completion, and that large-scale work on the company’s 7.4 MW project located on the U.S. Navy submarine base in Groton, CT has resumed. From an article in The Day published on September 20th, 2019: “There’s been a lot of positive developments at FuelCell Energy over the past few months, including the naming of our new CEO Jason Few. And while we did pause the project for a short period of time earlier this summer, we are now underway will full on-site construction with an anticipated fully operational date early in early spring 2020.” – Tom Gelston, FCEL Senior Vice President for Finance and Investor Relations.
FCEL’s New Business Plan: A Path to Profitability is Within Sight
A few years ago, FCEL changed its business plan to one of retaining certain projects directly on their balance sheet (their “Generation Portfolio”) along with selling and servicing fuel cell power plants. The reason for this goal stated at the time – and then stated repeatedly over the last few years in conference calls - was that these retained projects have very “attractive gross margins” – which can be as high as 50% in some cases (mentioned in various conference calls by the previous CEO). Note, these retained power plant assets generate both electricity revenue and other revenue streams under long-term contracts (often 20 years) to utilities and other large credit worthy “off-takers” (i.e. Pfizer, Campbell’s Soup, etc.). These projects are attractive to the off-takers for a variety of reasons: cost, increased reliability, increased security, avoidance of transmission lines, modular, easy to site, quick to build, clean, etc.
FCEL’s previous “near-term” goal was to retain 60 MW of projects on the company’s balance sheet – as that level was expected to achieve cashflow break-even – with higher levels expected to lead to sustained profitability.
FCEL now has a retained “Generation Portfolio” of 26.1 MW on its balance sheet – after the closing the 14.9 MW Bridgeport Fuel Cell Park acquisition in May this year (during the company’s ongoing “restructuring).”
Near-term the company is expected to announce the commercial start-up of the 3.7 MW Triangle Street project and the 2.8 MW Tulare BioMAT project in California – which could both be operational by October 31st this year. Next up is this 5.0 MW Bolthouse Farm project (Campbell’s Soup) targeted for fiscal Q2 2020 start-up – and then the 7.4 MW Groton Sub Base project in Q3 2020 – or earlier as per the recent The Day article.
FCEL now has visibility to a 45 MW retained portfolio over the next few quarters
Note, FCEL has been working with Huron Consulting since March 15th (Jun 17/19 10-Q) which then evolved into the appointment of two Huron employees as “Restructuring Officers” on June 2nd. The fact that FCEL closed on the purchase of 14.9 MW Bridgeport Fuel Cell Park on May 13th, 2019 – after starting to work with Huron in March, and then highlighted the acquisition in their September 9th 8-K - after the new CEO was appointed - indicates that both Huron Consulting and the new CEO see the merit of FCEL retaining projects on FCEL’s balance sheet. FCEL’s September 2019 Company Update also refers to a growing “Generation Portfolio”.
Earlier this year FCEL eliminated a significant number of positions within the company as part of their restructuring process. Also, in the new CEO’s words in FCEL’s August 20th press release announcing his appointment: “We also intend to instill a culture based around lean principles, focus on operational effectiveness, maintain our focus on fiscal discipline, and continue to work to optimize our capital structure.”
I suspect that FCEL’s new business plan will involve retaining projects on the company’s balance sheet for their “Generation Portfolio” – but that a level lower than 60 MW will be required to achieve break-even levels. FCEL’s near-term 45 MW retained Generation Portfolio may be able to get the firm close to break-even levels.
FCEL has an Additional 65.5 MW of Projects in their Development Pipeline (September 9th 10-Q):
Project: Location: Off-Taker: Capacity: Exp Op Date: PPA Term:
NY (LIPA) Long Island, NY PSEG/LIPA 7.4 MW 1Q21 20 Years
San Bernardino SB, CA San Bernardino 1.4 MW 2Q21 20 Years
CT DEEP RFP Derby, CT United Illuminating 14.8 MW 3Q21 20 Years
Toyota Los Angeles, CA SCE; Toyota 2.2 MW 1Q22 20 Years
NY (LIPA) Long Island, NY PSEG/LIPA 18.5 MW 1Q22 20 Years*
CT DEEP RFP Hartford, CT Eversource 7.4 MW 3Q22 20 Years
NY (LIPA) Long Island, NY PSEG/LIPA 13.9 MW 4Q22 20 Years*
* Currently “awarded” - awaiting signed PPAs to be officially “under contract” and part of backlog.
Note, all indications are that the two LIPA projects totaling 32.4 MW (worth an expected $636.4 million in future backlog “Generation Portfolio” revenue as per recent 10-Q) will be under contract shortly. FCEL is continuing to work its way through the onerous project development process in New York which requires that all ancillary agreements are signed-off prior to entering into a Power Purchase Agreement (PPA). FCEL’s total “backlog and projects awards” totaled $2.1 billion as of July 31st, 2019 – up from $1.9 billion a year ago – which includes the two LIPA project awards.
Both FCEL’s New Management Team and the Huron “Consultants” Have Significant Financial Incentives to Produce a New Business Plan
CEO Jason Few was just paid 50% of his $500,000 signing bonus to move his family to Connecticut a few days ago – and the other 50% will paid to him in 2020 - contingent on him delivering an accepted business plan for the fiscal 2020 year to the Board of Directors. FCEL installed the Huron Consulting “Restructuring Officers” on Jun 2/19 (8-K) to among other things “reviewing and restructuring the Company’s business plan for power generation and sales.” The agreement with Huron includes a “Success Fee” of $500,000 based on a “Successful Restructuring” – referring to right sizing or the extension of the business, and/or asset sales, and/or an extension of refinancing the Company’s credit facility - if signed-off by FCEL’s Board. Also, in FCEL’s Jul 15/19 8-K the four key FCEL executives that have been working closing on the company’s restructuring efforts with the Huron Consultants (prior to the new CEO being named) are also eligible to receive a $495,000 bonus pool which would be split between them if certain milestones are achieved: 1) the receipt of certain customer payments, 2) the closing of a refinancing of the Company’s senior secured credit facility, 3) the submission of an updated 3-year business plan to the Board of Directors.
While investors remain in the dark on numerous business plan aspirations, and financing details, I strongly believe that the company will be able to deliver a business plan shortly which will be attractive to both their financing partners and to their current investors and future investors.
Other Potential Near-Term Catalysts
FCEL may be able to free up close to a $17 million shortly with a sales-leaseback deal for their 3.7 MW Triangle Street project.
This is the company’s 1st High Efficiency SureSource 4000 and is fully completed now and generating electricity revenue for the firm. FCEL is currently trying to secure a PPA for this project I believe - which should then facilitate finalizing a sales-leaseback deal. I estimate this project could be sold for ~$24 million with the buyer receiving back $7 million via the federal Investment Tax Credit (ITC) and FCEL freeing up ~$17 million of new cash back on their balance sheet.
POSCO Energy “Situation” – Potentially on the Cusp of Finally Being Resolved…
POSCO Energy was FCEL’s largest and most important strategic partner and investor dating back many years ago – and has a license to sell certain of FCEL’s original power plant technology in Asia. Towards the end of 2016 reports started to circulate regarding POSCO Energy’s dissatisfaction with the profitability of their Fuel Cell Division. Since then there have been additional management changes at POSCO Energy – and it was reported at various times over the last few years that POSCO Energy wanted to get out the fuel cell business, then that they were looking for a joint venture partner – and then that they wanted out of the business again.
In early 2017 POSCO Energy signed a Memorandum of Understanding (MOU) with FCEL that let FCEL directly market in Asia for brief period starting in 2017 - while POSCO Energy decided what they wanted to do with the business. On September 5th, 2017 FCEL announced the direct sale of a 20 MW Fuel Cell Park to the Korea Southern Power Company (KOSPO) – a wholly owned subsidiary of the Korea Electric Power Company (KEPCO) - which was then built on-time over the next few quarters – and generated approximately $60 million in revenue for FCEL. Subsequently, FCEL signed a 20-year service contract for this same project on July 26th, 2018 – which was reportedly worth in excess of $100 million to FCEL (Service Backlog) – which includes the periodic replacement of the fuel cell stacks over the project life.
In early 2018 POSCO Energy revoked the MOU allowing FCEL to sell directly into the Asian market - and subsequently filed an “arbitration claim” against FCEL later that year for various unresolved items between the companies. FCEL filed counter claims against POSCO Energy – which were never detailed. Significantly, FCEL reported earlier this year via an 8-K filing that the matter was settled between the companies – and that there no material exchange of cash.
Separately, on July 3rd, 2019 FCEL confirmed that their first direct power plant project sale in South Korea
referred to above had significantly exceeded all contracted output requirements after its first year of operation – which was confirmed by customer Korea Southern Power Company – a government owed utility.
Confused yet? POSCO Energy has the largest installed base of FuelCell Energy based powerplants in the world, which will require approximately 300 MW of stack replacements over the next ten to fifteen years based on FCEL technology. POSCO Energy was rumoured to have been fighting to gain access to FCEL’s “advanced technology” for the last few years on favourable terms – a reason often cited for the relationship breakdown. My understanding is that POSCO Energy did not have access to FCEL’s new 7-year stack technology, and does not have access to their new “Higher-Efficiency” SureSource 4000 Power Plant, their Carbon Capture technology, their Tri-Generation (produces Electricity, Heat and Hydrogen), their Solid Oxide Fuel Cell Technology, etc. The recent settlement agreement between the two companies could possibly have seen FCEL provide access to their new 7-year fuel cell stacks to POSCO Energy – but I would be surprised if it included any other products.
Significantly, on August 27th, 2019 it was reported in the South Korea press (reported by FuelCellsWorks in English on August 31st) that POSCO Energy had signed a new long-term service agreement (LTSA) with the 59 MW Gyeonggi Green Energy fuel cell park (currently the largest in the world) after 6 months of negotiations.
This breakthrough was also expected to provide smooth negotiations to sign new LTSAs for another 20 fuel cell facilities in South Korea - originally sold by POSCO Energy and currently serviced by POSCO Energy. The reported financial terms of this agreement look similar to how FCEL’s single direct South Korean service contracts was priced – and at a minimum should result in significant new royalty income for FCEL as the existing stacks are replaced on these facilities.
Subsequently, it was reported on September 9th by Ame News in South Korea that at POSCO Energy’s September 6th Board meeting the company decided to separate its Fuel Cell Division into a separate 100% owned firm - and that it planned to strengthen key partnerships so that it “can lead the Molten Carbonate market [FCEL technology].” So, while investors are still in the dark as to what happens next – it does seem like things are moving in the right direction on this front - finally. Note, the South Korean market has the largest installed base of stationary fuel cell projects in the world, and there are hundreds of MWs of upcoming projects being discussed in various reports out of South Korea – including some very large 100 MW projects specifically designed to generate hydrogen as a byproduct (I have not seen any equipment suppliers named yet – but these “hydrogen generating” fuel cell projects seem to be designed around current FCEL technology – which POSCO Energy does not have rights to based on previous disclosure).
Note, South Korean giant Doosan which entered the fuel cell market in 2014 with acquisition of United Technologies original Phosphoric Acid Fuel Cell technology is also spinning off its Fuel Cell Division into a separately traded public company shortly. According to an April 16th, 2019 Business Korea article Doosan won over USD $882 million in orders last year – and expects to receive USD $1.2 billion in orders this year – and expects its business to grow more than 20% per year - on average until 2040 – in-line with the government’s roadmap to activate the hydrogen economy. In my opinion FCEL’s technology has numerous advantages of Doosan’s older technology – i.e. higher efficiency, easier to scale, and others.
Summary and Conclusion
FCEL’s recent problems were “self-inflicted” and due to the company’s prior decision to raise capital via the previously referred to “floorless” preferred shares – which then effectively cut FCEL off from raising additional capital. Shareholders were left significantly diluted and disillusioned. FCEL has survived on the public markets since 1992 by being able to raise capital via the equity markets - so the inability to do so caused some problems! The good news is that this problem is now almost fully behind FCEL, and they have been able to recently raise equity capital again.
FCEL’s projects are financeable and attractive to multiple stakeholders. FCEL closed on the acquisition of the 14.9 MW Bridgeport Fuel Cell Park on May 13th, 2019, for $35.4 million – during their restructuring efforts - with $25 million of senior financing split between Fifth Third Bank and Liberty Bank and $6 million of subordinate financing provided by the CT Green Bank. The rate on the bank financing was 5.09% -after swap agreements - and the rate on the subordinate financing was 8.00%. From the September 20th, 2019 The Day article cited above: Bob Ross, executive director of the state’s Office of Military Affairs, which helped secure approval for the microgrid project, said it has the attention of top Navy officials in Washington, who see it as a model that could be replicated across the country, given the partnership of the base, state, local utilities and private industry. “This project is really important to big Navy. It has lots of visibility inside the Beltway.”
While FCEL’s financial crisis has triggered understandable concern from their construction finance provider Generate Capital (various 8-K filings) - which they started working with last December with a $100 million commitment (expandable to $300 million if certain conditions are met) I believe that recent developments (FCEL being able to raise equity capital once again, and the current senior secured debt facility almost fully paid down) make a lending relationship a lot more solid than when Generate signed the original deal with FCEL.
FCEL now has a ~$55 million market capitalization based on its closing price of $0.34 per share on September 24th (~160 million common shares outstanding as of September 12th). Note, the company can still sell another $8.3 million of additional equity under its current “at-the-market” financing facility as of their September 12th 8-K – and the company currently has a maximum authorized share count of 225 million shares. If FCEL delivers on expected upcoming developments (new finance facility and business plan) I believe the market will respond with a higher common stock price. Note though, FCEL will likely need to ask shareholders to increase their “authorized shares” next year - and likely also register for another “at-the-market” financing facility - to give them some more financial flexibility. Also, whether or not the company will be forced to do another reverse split next year to regain compliance with NASDAQ listing requirements will depend on how the market reacts to upcoming developments.
The “B” shares remain a much “easier” investment in my opinion. From a “B” shareholder perspective the more equity the company raises at any level – the safer the “Bs” are. Note though, with only 64,020 shares outstanding the “Bs” are very illiquid, and only ~33,000 shares have changed hands in 2019 through September 24th. Total “B” volume for 2018 was 20,978 shares. In sharp contrast, the company’s common shares are listed on the NASDAQ Global Market and regularly trade 10 million+ shares per day. One idea for “long-term” common shareholders to consider is to switch all or a part of their holdings into “B” shares – and then re-establish their common stock position with cash - when and if the dividends begin to flow. If the dividends don’t start to flow again on the “Bs” shortly – the “Bs” will be in a significantly safer place to be during a more involved restructuring – and could end with most of the equity in the company.
I believe though that there is a good chance that FCEL reinstates the “B” dividend in November this year (the normally scheduled next payment). If reinitiated again in November, the company could pay out ~ $80 per share in dividends over the twelve months starting in November – including the two missed dividends and penalties associated with them. As far as the potential “B” trading price I believe it could quite easily trade back to $300+ per share. The “Bs” closed 2018 at $260 per share and had a $155-$469 range in 2018. In 2014, prior to the company delivering multiple years of disappointments, the “Bs” traded in the $450 to $650 per share range. One more thing. If FCEL sorts out its finances as expected – the company may decide to buy back some of the “Bs” on the market. In my opinion this would be in-line with Jason Few’s reference in the August 20th press release to “continue to work to optimize our capital structure.”
I have recommended both FCEL and the FCEL “B” shares to clients in the past. I currently hold a position in the company’s common shares, and the “B” shares - along with direct family members. I have also bought and sold options on FCEL in the past – and currently hold a small position. I have recently added to positions in both FCEL’s common share and the “B” shares and may buy or sell positions in the future.
My current exposure to the company is primarily via the “B” shares – and my clients collectively hold a significant percentage of the “B” issue. I also believe that my clients, along with myself and related family, have been one of the largest net buyers of the “B” shares in recent months based on the reported trading volume.
FCEL’s share price has always been extremely volatile – which I expect to continue. It is appropriate only for risk tolerant investors, or for the “aggressive” or “speculative” portion of your portfolio.
As always, please do not hesitate to contact me if you have any questions.
Paul J. Borisoff BBA, CIM, FCSI, AIFPTM, RIAC
Senior Vice President, Portfolio Manager
Senior Investment Advisor