Power Purchase Agreement Programs

Overview

In mid-2010, the Company began offering its Energy Servers through its Bloom Electrons program, which the Company denotes as Power Purchase Agreement Programs, financed via investment entities. Under these arrangements, an operating entity is created (the "Operating Company") which purchases the Energy Server from the Company. The end customer then enters into a power purchase agreement ("PPA") with the Operating Company to purchase the power generated by the Energy Server(s) at a specified rate per kilowatt hour for a specified term which can range from 10 to 21 years. In some cases similar to direct purchases and leases, the standard one-year warranty and performance guaranties are included in the price of the product. The Operating Company also enters into a master services agreement ("MSA") with the Company following the first year of service to extend the warranty services and guaranties over the term of the PPA. In other cases, the MSA including warranties and guaranties are billed on a quarterly basis starting in the first quarter following the placed-in-service date of the energy server(s) and continuing over the term of the PPA. The first of such arrangements was considered a sales-type lease and the product revenue from that agreement was recognized up front in the same manner as direct purchase and lease transactions. Substantially all of the Company’s subsequent PPAs have been accounted for as operating leases with the related revenue under those agreements recognized ratably over the PPA term as electricity revenue. The Company recognizes the cost of revenue, primarily product costs and maintenance service costs, over the shorter of the estimated useful life of the Energy Server or the term of the PPA.

The Company and its third-party equity investors (together "Equity Investors") contribute funds into a limited liability investment entity (Investment Company) that owns and is parent to the Operating Company (together, the "PPA Entities"). The PPA Entities constitute variable investment entities ("VIEs") under U.S. GAAP. The Company has considered the provisions within the contractual agreements which grant it power to manage and make decisions affecting the operations of these VIEs. The Company considers that the rights granted to the Equity Investors under the contractual agreements are more protective in nature rather than participating. Therefore, the Company has determined under the power and benefits criterion of ASC 810 - Consolidations that it is the primary beneficiary of these VIEs.

As the primary beneficiary of these VIEs, the Company consolidates in its financial statements the financial position, results of operations and cash flows of the PPA Entities, and all intercompany balances and transactions between the Company and the PPA Entities are eliminated in the consolidated financial statements.

The Company established six different PPA Entities to date. The contributed funds are restricted for use by the Operating Company to the purchase of Energy Servers manufactured by the Company in its normal course of operations. Prior to the start of 2017, all six PPA Entities utilized their entire available financing capacity and have completed the purchase of their Energy Servers. Any debt incurred by the Operating Companies is non-recourse to the Company. Under these structures, each Investment Company is treated as a partnership for U.S. federal income tax purposes. Equity Investors receive investment tax credits and accelerated tax depreciation benefits.

The Operating Company acquires Energy Servers from the Company for cash payments that are made on a similar schedule as if the Operating Company were a customer purchasing an Energy Server from the Company outright. In the consolidated financial statements, the sale of Energy Servers by the Company to the Operating Company are treated as intercompany transactions after the elimination of intercompany balances. The acquisition of Energy Servers by the Operating Company is accounted for as a non-cash reclassification from inventory to Energy Servers within property, plant and equipment, net on the Company’s consolidated balance sheets. In arrangements qualifying for sales-type leases, the Company reduces these recorded assets by amounts received from U.S. Treasury Department cash grants and from similar state incentive rebates.

The Operating Company sells the electricity to end customers under PPAs. Cash generated by the electricity sales, as well as receipts from any applicable government incentive program, is used to pay operating expenses (including the management and services the Company provides to maintain the Energy Servers over the term of the PPA) and to service the non-recourse debt with the remaining cash flows distributed to the Equity Investors. In transactions accounted for as sales-type leases, the Company recognizes subsequent customer billings as electricity revenue over the term of the PPA and amortizes any applicable government incentive program grants as a reduction to depreciation expense of the Energy Server over the term of the PPA. In transactions accounted for as operating leases, the Company recognizes subsequent customer payments and any applicable government incentive program grants as electricity revenue over the term of the PPA.

Upon sale or liquidation of a PPA Entity, distributions would occur in the order of priority specified in the contractual agreements.

The table below shows the details of the Investment Companies from inception to the periods indicated (dollars in thousands):



	PPA I			PPA Company II			PPA Company IIIa			PPA Company IIIb			PPA Company IV			PPA Company V
Overview:
Maximum size of installation (in megawatts)	25			30			10			6			21			40
Term of power purchase agreements (years)	10			21			15			15			15			15
First system installed	Sep-10			Jun-12			Feb-13			Aug-13			Sep-14			Jun-15
Last system installed	Mar-13			Nov-13			Jun-14			Jun-15			Mar-16			Dec-16
Income (loss) and tax benefits allocation to Equity Investor	99%			99%			99%			99%			90%			99%
Cash allocation to Equity Investor	80%			99%			99%			99%			90%			90%
Income (loss), tax and cash allocations to Equity Investor after the flip date	22%			5%			5%			5%			No flip			No flip
Equity Investor ¹	Credit Suisse			Credit Suisse			US Bank			US Bank			Exelon Corporation			Exelon Corporation
Put option date ²	10th anniversary of initial funding date			10th anniversary of initial funding date			1st anniversary of flip point			1st anniversary of flip point			N/A			N/A

Activity as of December 31, 2018:
Installed size (in megawatts)	5			30			10			5			19			37
Company cash contributions	$	180,699		$	22,442		$	32,223		$	22,658		$	11,669		$	27,932
Company non-cash contributions ³	$	—		$	—		$	8,655		$	2,082		$	—		$	—
Equity Investor cash contributions	$	100,000		$	139,993		$	36,967		$	20,152		$	84,782		$	227,344
Distributions to Equity Investor	$	(81,016	)	$	(116,942	)	$	(4,063	)	$	(1,807	)	$	(4,568	)	$	(66,745	)
Debt financing	$	—		$	144,813		$	44,968		$	28,676		$	99,000		$	131,237
Debt repayment—principal	$	—		$	(65,114	)	$	(4,431	)	$	(3,953	)	$	(15,543	)	$	(5,780	)
Activity as of December 31, 2017:
Installed size (in megawatts)	5			30			10			5			19			37
Company cash contributions	$	180,699		$	22,442		$	32,223		$	22,658		$	11,669		$	27,932
Company non-cash contributions ³	$	—		$	—		$	8,655		$	2,082		$	—		$	—
Equity Investor cash contributions	$	100,000		$	139,993		$	36,967		$	20,152		$	84,782		$	227,344
Distributions to Equity Investor	$	(81,016	)	$	(111,296	)	$	(3,324	)	$	(1,404	)	$	(2,565	)	$	(60,286	)
Debt financing	$	—		$	144,813		$	44,968		$	28,676		$	99,000		$	131,237
Debt repayment—principal	$	—		$	(53,726	)	$	(3,041	)	$	(3,077	)	$	(13,697	)	$	(2,834	)
Activity as of December 31, 2016:
Installed size (in megawatts)	5			30			10			5			19			37
Company cash contributions	$	180,699		$	22,442		$	32,223		$	22,658		$	11,669		$	27,932
Company non-cash contributions ³	$	—		$	—		$	8,655		$	2,082		$	—		$	—
Equity Investor cash contributions	$	100,000		$	139,993		$	36,967		$	20,152		$	84,782		$	213,692
Distributions to Equity Investor	$	(81,016	)	$	(107,336	)	$	(2,584	)	$	(1,002	)	$	(180	)	$	(50,827	)
Debt financing	$	—		$	144,813		$	44,968		$	28,676		$	99,000		$	131,237
Debt repayment—principal	$	—		$	(39,759	)	$	(2,129	)	$	(2,356	)	$	(12,426	)	$	—

¹ Investor name represents ultimate parent of subsidiary financing the project.
² Investor right on the certain date, upon giving the Company advance written notice, to sell the membership interests to the Company or resign or withdraw from the Company.
³ Non-cash contributions consisted of warrants that were issued by the Company to respective lenders to each PPA Entity, as required by such entity’s credit agreements. The corresponding values are amortized using the effective interest method over the debt term.

Some of the Company's PPA Entities contain structured provisions whereby the allocation of income and equity to the Equity Investors changes at some point in time after the formation of the PPA Entity. The change in allocations to Equity Investors (or the "flip") occurs based either on a specified future date or once the Equity Investors reaches its targeted rate of return. For PPA Entities with a specified future date for the flip, the flip occurs January 1 of the calendar year immediately following the year that includes the fifth anniversary of the date the last site achieves commercial operation. The Company had full ownership of PPA Company I for the years ended December 31, 2018, and 2017.

The noncontrolling interests in PPA Company II, PPA Company IIIa and PPA Company IIIb are redeemable as a result of the put option held by the Equity Investors. The redemption value is the put amount. At December 31, 2018, and 2017, the carrying value of redeemable noncontrolling interests of $57.3 million and $58.2 million, respectively, exceeded the maximum redemption value.

PPA Entities’ Aggregate Assets and Liabilities

Generally, Operating Company assets can be used to settle only the Operating Company obligations and Operating Company creditors do not have recourse to the Company. The aggregate carrying values of the PPA Entities’ assets and liabilities in the Company's consolidated balance sheets, after eliminations of intercompany transactions and balances, were as follows (in thousands):



	December 31,
	2018		2017

Assets
Current assets:
Cash and cash equivalents	$	5,295	$	9,549
Restricted cash	2,917		7,969
Accounts receivable	7,516		7,680
Customer financing receivable	5,594		5,209
Prepaid expenses and other current assets	4,909		6,365
Total current assets	26,231		36,772
Property and equipment, net	399,060		430,464
Customer financing receivable, non-current	67,082		72,677
Restricted cash	27,854		26,748
Other long-term assets	2,692		3,767
Total assets	$	522,919	$	570,428
Liabilities
Current liabilities:
Accounts payable	$	724	$	520
Accrued other current liabilities	1,442		2,378
Deferred revenue and customer deposits	786		786
Current portion of debt	21,162		18,446
Total current liabilities	24,114		22,130
Derivative liabilities	3,626		5,060
Deferred revenue	8,696		9,482
Long-term portion of debt	323,360		342,050
Other long-term liabilities	1,798		1,226
Total liabilities	$	361,594	$	379,948

As stated above, the Company is a minority shareholder in the PPA Entities for the administration of the Company's Bloom Electrons program. PPA Entities contain debt that is non-recourse to the Company. The PPA Entities also own Energy Server assets for which the Company does not have title. Although the Company will continue to have Power Purchase Agreement Program entities in the future and offer customers the ability to purchase electricity without the purchase of Energy Servers, the Company does not intend to be a minority investor in any new Power Purchase Agreement Program entities.

The Company believes that by presenting assets and liabilities separate from the PPA Entities, it provides a better view of the true operations of the Company's core business. The table below provides detail into the assets and liabilities of Bloom Energy separate from the PPA Entities. The following table shows Bloom Energy's stand-alone, the PPA Entities combined and the Company's consolidated balances as of December 31, 2018, and December 31, 2017 (in thousands):



	December 31, 2018						December 31, 2017
	Bloom		PPA Entities		Consolidated		Bloom		PPA Entities		Consolidated

Assets
Current assets	$	646,350	$	26,231	$	672,581	$	383,209	$	36,772	$	419,981
Long-term assets	220,399		496,688		717,087		267,350		533,656		801,006
Total assets	$	866,749	$	522,919	$	1,389,668	$	650,559	$	570,428	$	1,220,987
Liabilities
Current liabilities	$	246,866	$	2,952	$	249,818	$	247,464	$	3,684	$	251,148
Current portion of debt	8,686		21,162		29,848		1,690		18,446		20,136
Long-term liabilities	293,739		14,120		307,859		513,367		15,768		529,135
Long-term portion of debt	388,073		323,360		711,433		579,155		342,050		921,205
Total liabilities	$	937,364	$	361,594	$	1,298,958	$	1,341,676	$	379,948	$	1,721,624