Power Purchase Agreement Programs

Overview

In mid-2010, we began offering our Energy Servers through its Bloom Electrons program, which we denote 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 us. 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 us 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 our 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. We recognize 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.

We and our 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. We have considered the provisions within the contractual agreements which grant us power to manage and make decisions affecting the operations of these VIEs. We consider that the rights granted to the Equity Investors under the contractual agreements are more protective in nature rather than participating. Therefore, we have determined under the power and benefits criterion of ASC 810 - Consolidations that we are the primary beneficiary of these VIEs.

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

The Operating Company acquires Energy Servers from us for cash payments that are made on a similar schedule as if the Operating Company were a customer purchasing an Energy Server from us outright. In the consolidated financial statements, the sales of our Energy Servers 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 our condensed consolidated balance sheets. In arrangements qualifying for sales-type leases, we reduce 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 we provide 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, we recognize 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, we recognize 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.

We 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 us in our normal course of operations, 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 us. 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. In 2016, we purchased the tax equity investor’s interest in PPA Company I ("PPA I"), which resulted in a change in our ownership interest in PPA I while we continued to hold the controlling financial interest in this company. The table below shows the details of the five continuing Investment Companies and their cumulative activities from inception to the periods indicated (dollars in thousands):



	PPA Company II		PPA Company IIIa		PPA Company IIIb		PPA Company IV		PPA Company V
Overview:
Maximum size of installation (in megawatts)	30		10		6		21		40
Installed size (in megawatts)	30		10		5		19		37
Term of power purchase agreements (years)	21		15		15		15		15
First system installed	Jun-12		Feb-13		Aug-13		Sep-14		Jun-15
Last system installed	Nov-13		Jun-14		Jun-15		Mar-16		Dec-16
Income (loss) and tax benefits allocation to Equity Investor	99%		99%		99%		90%		99%
Cash allocation to Equity Investor	99%		99%		99%		90%		90%
Income (loss), tax and cash allocations to Equity Investor after the flip date	5%		5%		5%		No flip		No flip
Equity Investor ¹	Credit Suisse		US Bank		US Bank		Exelon Corporation		Exelon Corporation
Put option date ²	10th anniversary of initial funding date		1st anniversary of flip point		1st anniversary of flip point		N/A		N/A
Company cash contributions	$	22,442	$	32,223	$	22,658	$	11,669	$	27,932
Company non-cash contributions ³	$	—	$	8,655	$	2,082	$	—	$	—
Equity Investor cash contributions	$	139,993	$	36,967	$	20,152	$	84,782	$	227,344
Debt financing	$	144,813	$	44,968	$	28,676	$	99,000	$	131,237
Cumulative Activity as of March 31, 2019:
Distributions to Equity Investor	$	116,942	$	4,246	$	1,907	$	4,982	$	68,944
Debt repayment—principal	$	67,985	$	5,209	$	4,238	$	16,111	$	6,644
Cumulative Activity as of December 31, 2018:
Distributions to Equity Investor	$	116,942	$	4,063	$	1,807	$	4,568	$	66,745
Debt repayment—principal	$	65,114	$	4,431	$	3,953	$	15,543	$	5,780

¹ Investor name represents ultimate parent of subsidiary financing the project.
² Investor right on the certain date, upon giving us advance written notice, to sell the membership interests to us or resign or withdraw from the investment partnership.
³ Non-cash contributions consisted of warrants that were issued by us 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 our 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 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 March 31, 2019, and December 31, 2018, the carrying value of redeemable noncontrolling interests of $58.8 million and $57.3 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 us. The aggregate carrying values of the PPA Entities’ assets and liabilities in the consolidated balance sheets, after eliminations of intercompany transactions and balances, were as follows (in thousands):



	March 31,		December 31,
	2019		2018

Assets
Current assets:
Cash and cash equivalents	$	9,071	$	5,295
Restricted cash	5,040		2,917
Accounts receivable	7,431		7,516
Customer financing receivable	5,717		5,594
Prepaid expenses and other current assets	3,172		4,909
Total current assets	30,431		26,231
Property and equipment, net	391,121		399,060
Customer financing receivable, non-current	65,620		67,082
Restricted cash	27,851		27,854
Other long-term assets	2,614		2,692
Total assets	$	517,637	$	522,919
Liabilities
Current liabilities:
Accounts payable	$	426	$	724
Accrued other current liabilities	1,100		1,442
Deferred revenue and customer deposits	786		786
Current portion of debt	21,827		21,162
Total current liabilities	24,139		24,114
Derivative liabilities, net of current portion	5,611		3,626
Deferred revenue, net of current portion	8,502		8,696
Long-term portion of debt	317,958		323,360
Other long-term liabilities	1,938		1,798
Total liabilities	$	358,148	$	361,594

As stated above, we are a minority shareholder in the PPA Entities for the administration of our Bloom Electrons program. PPA Entities contain debt that is non-recourse to us. The PPA Entities also own Energy Server assets for which we do not have title. Although we 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, we do not intend to be a minority investor in any new Power Purchase Agreement Program entities.

We believe that by presenting assets and liabilities separate from the PPA Entities, we provide a better view of the true operations of our 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 these consolidated balances as of March 31, 2019, and December 31, 2018 (in thousands):



	March 31, 2019						December 31, 2018
	Bloom		PPA Entities		Consolidated		Bloom		PPA Entities		Consolidated

Assets
Current assets	$	609,411	$	30,431	$	639,842	$	646,350	$	26,231	$	672,581
Long-term assets	191,802		487,206		679,008		220,399		496,688		717,087
Total assets	$	801,213	$	517,637	$	1,318,850	$	866,749	$	522,919	$	1,389,668
Liabilities
Current liabilities	$	236,372	$	2,312	$	238,684	$	246,866	$	2,952	$	249,818
Current portion of debt	15,683		21,827		37,510		8,686		21,162		29,848
Long-term liabilities	255,010		16,051		271,061		293,739		14,120		307,859
Long-term portion of debt	385,610		317,958		703,568		388,073		323,360		711,433
Total liabilities	$	892,675	$	358,148	$	1,250,823	$	937,364	$	361,594	$	1,298,958