Power Purchase Agreement Programs

Overview

In mid-2010, we began offering our Energy Servers through our 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 our Energy Servers from us. The end customer then enters into a power purchase agreement ("PPA") with the Operating Company to purchase the power generated by our Energy Servers 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 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 master services agreements 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 upfront 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"). These 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 our 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.

On June 14, 2019, we entered into a PPA II upgrade of Energy Servers transaction, and as a result we determined that we no longer retained a controlling interest in the Operating Company in PPA II and therefore, the Operating Company was no longer consolidated as a VIE into our consolidated financial statements as of June 30, 2019. See further discussion below. On November 27, 2019, we entered into a PPA IIIb upgrade of Energy Servers transaction where we bought out the equity interest of the third-party investor, decommissioned the Energy Servers in the Operating Company and sold new Energy Servers deployed at customer sites through our managed services financing option. The PPA IIIb Investment Company and Operating Company became wholly-owned by us but no longer met the definition of a VIE. However, we continue consolidating PPA IIIb in our consolidated financial statements. See further discussion below.

In accordance with our Power Purchase Agreement Programs, 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 sale of Energy Servers by us to the Operating Company are treated as intercompany transactions and as a result eliminated in consolidation. 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 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 amortize 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 and service 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 have established six different PPA Entities to date. The contributed funds are restricted for use by the Operating Company to the purchase of our 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 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. In 2019, we bought out the tax equity investors' interest in DSGH, the PPA II Investment Company, and admitted two new equity investors as a member of the PPA II Operating Company, retaining only a minor contingent future equity interest in the Operating Company. One of the new equity investors became the managing member which resulted in a change in our ownership interest in the Operating Company and discontinued our controlling financial interest in the PPA II Operating Company. In December 2019, we purchased the tax equity investors' interest in PPA IIIb, which resulted in a change in the ownership structure from a variable interest entity to a wholly owned subsidiary indirectly owned by the Company.

PPA II Upgrade of Energy Servers

Original Transaction

A wholly-owned subsidiary of Bloom and a wholly-owned subsidiary of Credit Suisse Group AG (“Mehetia”) jointly owned Diamond State Generation Holdings, LLC (“Class A Holdco”). Class A Holdco owned 100% of the membership interests in Diamond State Generation Partners, LLC ("DSGP"). Pursuant to an earlier transaction, DSGP owned and operated 30 megawatts of Energy Servers across two sites in Delaware that achieved operations in 2012 and 2013 and provided alternative energy generation for state tariff rate payers (the “Original Project”). The Original Project had been financed in part by the issuance of non-recourse promissory notes to DSGP (the “Project Debt”).

Overall Upgrade

We upgraded the existing 30 megawatts of Energy Servers used in the Original Project by replacing them with 27.5 megawatts of new Energy Servers. To effect the full upgrade we repurchased all of existing Energy Servers, the proceeds of which were used by DSGP to pay down the Project Debt and to enable Class A Holdco to buy out Mehetia’s interests. To finance the new Energy Servers used in the upgrade, DSGP raised capital from two new members: SP Diamond State Class B Holdings, LLC (“Class B Holdco”), a wholly owned subsidiary of Southern Power Company (“Southern”) and Assured Guaranty Municipal Corporation (“Class C Holdco”). The existing Energy Servers were removed after we repurchased them from DSGP, prior to selling and installing the new Energy Servers. The upgrade was done across two phases.

First Upgrade

On June 14, 2019, the Company entered into an agreement committing to repurchase 30 megawatts of existing Energy Servers. The repurchases happened over time in installments, in each case immediately prior to the installation of corresponding new Energy Servers. Mehetia’s equity interests were redeemed in part in connection with each repurchase. The Project Debt was repaid in connection with the first repurchase installment. 19 megawatts of existing Energy Servers were repurchased during the second and third quarter of 2019.

At the same time that Bloom entered into the repurchase agreement, Class B Holdco committed to acquire a majority interest in DSGP. DSGP entered into an agreement governing the engineering, procurement, construction and sale of the new Energy Servers (the “EPC Agreement”). DSGP used the funds contributed by Class B Holdco to purchase 17.7 megawatts of new Energy Servers from the Company in accordance with the EPC Agreement (the “First Upgrade”).

Second Upgrade

On December 23, 2019, we repurchased and removed the remaining 11 megawatts of the existing older generation Energy Servers from DSGP. The proceeds of the repurchase were used to redeem Mehetia’s remaining equity interest in Class A Holdco. After the repurchase, the remaining existing Energy Servers were removed.

At the same time, to finance the purchase of 9.8 megawatts of new Energy Servers, Class C Holdco was admitted to DSGP as a member of DSGP and DSGP entered into another EPC Agreement with the Company for the installation of the new Energy Servers. DSGP used the funds contributed by Class C Holdco to purchase the new Energy Servers from Bloom under the EPC Agreement (the “Second Upgrade”).

As of December 31, 2019, there are three members of DSGP: Class B Holdco which financed the First Upgrade, Class C Holdco, which financed the Second Upgrade, and Class A Holdco, an indirectly wholly owned subsidiary of the Company, which retains a de minimis contingent future equity interest in DSGP.

As of December 31, 2019, 27.5 megawatts of new Energy Servers in Delaware were commissioned.

Commercial Documents

The Company also entered into an operations and maintenance agreement for the ongoing care of all of the new Energy Servers (the “O&M Agreement”). The operations and maintenance fees under the O&M Agreement are paid on a fixed dollar per kilowatt basis.

The terms and conditions of the EPC Agreement and the O&M Agreement, including the suite of guaranties and warranties provided with respect to the performance of the Energy Servers are customary for our transactions of this type. The performance related guaranty and warranty were provided for each investor’s Energy Servers, while the efficiency guaranties and warranties were measured across the entire 27.5 megawatts of Energy Servers.

Credit Support

In the First Upgrade, in addition to standard indemnifications, we agreed to indemnify Class B Holdco for (i) losses incurred in the event of certain regulatory, legal, or legislative developments in connection with the Tariff capped at an aggregate amount of $97.2 million, which cap steps down each year until it is an amount equal to zero after June 30, 2025 and (ii) for the loss of certain federal tax benefits, up to $7.5 million. We posted letters of credit as credit support for both indemnities (“Class B Credit Support”).

In the Second Upgrade, in addition to standard indemnifications, we agreed to indemnify Class C Holdco for (i) losses incurred in the event of certain regulatory, legal, or legislative developments in connection with the Tariff capped at an aggregate amount of $45 million, which cap steps down each year until it is an amount equal to zero after December, 2025. We also indemnified Class C Holdco for the loss of certain federal tax benefits, losses incurred as a result of certain environmental risks and certain failures under the O&M Agreement with respect to the Energy Servers it financed. We amended the initial Class B Credit Support letter of credits and reissued a single letter of credit for the benefit of DSGP (“DSGP Credit Support”) in an amount of $108.7 million which amount will decrease over time. The DSGP Credit Support partially collateralizes our indemnity obligations to Class B Holdco and Class C Holdco. We expect the DSGP Credit Support to be extinguished by 2025.

At the time of the First Upgrade and the Second Upgrade, and as of December 31, 2019, we believe the events giving rise to these indemnifications to be remote and, therefore, no liability has been recorded in our consolidated financial statements with respect thereto.

Impact of First Upgrade and Second Upgrade of Energy Servers on Consolidated Financial Statements

As a result of the First Upgrade, we reconsidered whether we should continue to consolidate DSGP. We use a qualitative approach in assessing the consolidation requirement for each of our PPA Entities. This approach focuses on determining whether we have the power to direct those activities of the PPA Entities that most significantly affect their economic performance and whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the PPA Entities. We determined that we no longer retain a controlling interest in DSGP and therefore it will no longer be consolidated as a variable interest entity into our consolidated financial statements as of June 30, 2019. The First Upgrade and Second Upgrade resulted in the following impacts on our consolidated balance sheet as of December 31, 2019: (i) cash, cash equivalents and restricted cash increased by $113.9 million, of which $108.7 million is included in restricted cash. The increase is comprised of approximately $253.9 million cash receipts for the sale of 27.5 megawatts new systems to DSGP, offset by $83.5 million used for the repayment of project debt including $77.6 million of outstanding principal and interest, as well as a make-whole payment fee of $5.9 million, and $56.5 million distribution to Mehetia related to the redemption of noncontrolling interest; (ii) property, plant and equipment, net decreased by $75.1 million due to the depreciation and write-off of 30 megawatts of existing Energy Servers; (iii) noncontrolling interest in Mehetia went down by $56.5 million related to the First Upgrade and Second Upgrade.

Impacts on our consolidated statement of operations for the year ended December 31, 2019 are summarized as follows: (i) net product and installation revenue recognized of $223.9 million, as the result of selling 27.5 megawatts of new Energy Servers to DSGP; (ii) cost of revenue of $153.5 million including both the write-off of decommissioned Energy Systems $52.5 million, accelerated depreciation of $22.6 million of the Energy Servers prior to decommissioning, and the cost of new Energy Servers of $78.4 million; (iii) $5.9 million of administrative costs due to debt payoff make-whole expense; and (iv) $1.2 million of interest expense due to write-off of debt issuance cost.

Impacts on our consolidated statements of cash flows for the year ended December 31, 2019 are summarized as follows: net cash used by financing activities increased $139.2 million due to the repayment of debt of $76.8 million, a debt make-whole payment of $5.9 million, and payments to noncontrolling and redeemable noncontrolling interests of $56.5 million.

PPA IIIb Upgrade of Energy Servers

Transaction Overview

As part of the PPA IIIb project established in 2013, the Company, through a special purpose subsidiary (the “Project Company”), had previously entered into certain agreements for the purpose of developing, financing, owning, operating, maintaining and managing a portfolio of 5.4 megawatts of Energy Servers.

On November 27, 2019, the Company entered into certain agreements through a wholly-owned subsidiary to (i) buy out the existing debt and equity investors in Project Company such that Project Company became indirectly wholly-owned by the Company, and (ii) upgrade 5.4 megawatts of the existing Energy Servers owned and managed by Project Company by selling and installing new Energy Servers.

Immediately following the buyout, Project Company repaid all outstanding loans and indebtedness to Project Company’s lenders in the approximate amount of $24.2 million plus swap breakage costs estimated at approximately $0.2 million, and terminated its agreements, including related liens on Project Company assets, with such lenders. Project Company subsequently entered into a sale-leaseback transaction under our Managed Services Program with Key Equipment Finance, a division of KeyBank National Association, a national banking association (“KeyBank”), to finance the upgrade of the PPA IIIb project Energy Servers, pursuant to which KeyBank will own the assets and Bloom will service them. The sale-leaseback transaction is subject to Bloom’s standard warranties and guaranties.

Previously, the Company had financed multiple Energy Servers with KeyBank by entering into sale-leaseback transactions. As of December 31, 2019, KeyBank has financed approximately 39.9 megawatts of Energy Servers. $20.0 million of the proceeds from the current upgrade financing has been pledged for a seven-year period to secure the Company's operations and maintenance obligations with respect to the totality of the Company's obligations to KeyBank. All or a portion of such funds would be released if we meets certain credit rating and/or market capitalization milestones prior to the end of the pledge period. If the Company does not meet the required criteria within a five-year period, the funds would be released over the following two years as long as the Energy Servers continue to perform in compliance with their warranties.

As of December 31, 2019, 5 megawatts of the PPA IIIb project have been decommissioned and written-off by us, with the remaining 0.4 megawatts located at one site decommissioned during the first quarter of 2020. As of December 31, 2019, we have sold and deployed 5 megawatts of new Energy Servers to the PPA IIIb project, bought out the original PPA IIIb investor, and have paid off the outstanding debt related to the original PPA IIIb project.

Obligations to the PPA IIIb Financiers

We have restricted cash of $20.0 million of the proceeds from the phase two upgrade financing which has been pledged for a seven-year period to secure our operations and maintenance obligations with respect to the totality of our obligations to KeyBank. All or a portion of such funds would be released if we meet certain credit rating and/or market capitalization milestones prior to the end of the pledge period. If we do not meet the required criteria within a five-year period, the funds would be released to us over the following two years as long as the Energy Servers continue to perform in compliance with their warranties.

Impact of PPA IIIb Upgrade of Energy Servers on Consolidated Financial Statements

The PPA IIIb upgrade was executed and mostly completed during December 2019, resulting in the following summarized impacts on our consolidated balance sheet as of December 31, 2019: (i) cash, cash equivalents and restricted cash increased by $25.2 million, mainly due to $52.0 million received from the financing of new Energy Servers, offset by debt and interest settlement of $24.4 million, and equity buyout of $2.4 million; (ii) other assets decreased $14.6 million primarily due to customer financing lease receivable write-off of $11.3 million associated with 1.6 megawatts of old Energy Servers and decommissioning and write-off costs of $18.0 million associated with 3.4 megawatts of old Energy Servers, offset by $14.7 million increase in property, plant and equipment due to 5 megawatts of new Energy Servers; (iii) liabilities increased by $28 million due to $51.9 million lease liability for new Energy Servers of the Managed Services Program, offset by $23.9 million decrease due to the settlement of all outstanding debt; and (iv) the payment of a deemed dividend to the investor of $2.4 million.

Impacts on our consolidated statement of operations for the year ended December 31, 2019 are summarized as follows: (i) $11.3 million decrease in revenue due to the write-off of the customer financing lease receivable; (ii) an increase in cost of revenue of $19.7 million primarily due to the write-off of decommissioned operating lease Energy Servers of $18.0 million and accelerated depreciation of $1.7 million; and (iii) administrative costs of $1.8 million primarily due to the write-off of production insurance expense on the decommissioned Energy Servers.

Impacts on our consolidated statement of cash flows for the year ended December 31, 2019 are summarized as follows: net cash used by financing activities increased $26.3 million due to the repayment of debt principal of $23.9 million and the payment of a deemed dividend to the investor of $2.4 million.

PPA Entities' Activities Summary

The table below shows the details of the five Investment Companies' VIEs that were active during 2019 and their cumulative activities from inception to the periods indicated (dollars in thousands):



	PPA II		PPA IIIa		PPA IIIb		PPA IV		PPA V
Overview:
Maximum size of installation (in megawatts)	30		10		6		21		40
Installed size (in megawatts) ¹	—		10		—		19		37
Term of power purchase agreements (in 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
Variable Investment Entity termination	June 2019		N/A		November 2019		N/A		N/A
Equity Investor ²	N/A		US Bank		N/A		Exelon Corporation		Exelon Corporation
Put option date ³	N/A		1st anniversary of flip point		N/A		N/A		N/A
Company cash contributions	$	22,442	$	32,223	$	22,658	$	11,669	$	27,932
Company non-cash contributions ⁴	$	—	$	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
Activity as of December 31, 2019:
Distributions to Equity Investor	$	176,364	$	4,803	$	4,462	$	6,692	$	70,591
Debt repayment—principal	$	144,813	$	6,631	$	28,676	$	18,012	$	9,453
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
Activity as of December 31, 2017:
Distributions to Equity Investor	$	111,296	$	3,324	$	1,404	$	2,565	$	60,286
Debt repayment—principal	$	53,726	$	3,041	$	3,077	$	13,697	$	2,834

¹Installed base decreased from December 31, 2018 due to the repurchase of 36 megawatts of our Energy Servers during 2019 under the PPA II and PPA IIIb upgrade of Energy Servers. See disclosures above.
² Investor name represents ultimate parent of subsidiary financing the project.
³ 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.
⁴Non-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 IIIa are redeemable as a result of the put option held by the Equity Investors as of December 31, 2019. The noncontrolling interests in PPA II, IIIa and PPA IIIb were redeemable as a result of the put option held by the Equity Investors as of December 31, 2018. The redemption value is the put amount. At December 31, 2019, and 2018, the carrying value of redeemable noncontrolling interests of $0.4 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 our VIEs for their assets and liabilities in our consolidated balance sheets, after eliminations of intercompany transactions and balances, were as follows (in thousands):



	December 31,
	2019¹		2018²

Assets
Current assets:
Cash and cash equivalents	$	1,894	$	5,295
Restricted cash	2,244		2,917
Accounts receivable	4,194		7,516
Customer financing receivable	5,108		5,594
Prepaid expenses and other current assets	3,587		4,909
Total current assets	17,027		26,231
Property and equipment, net	275,481		399,060
Customer financing receivable, non-current	50,747		67,082
Restricted cash	15,045		27,854
Other long-term assets	607		2,692
Total assets	$	358,907	$	522,919
Liabilities
Current liabilities:
Accounts payable	$	—	$	724
Accrued expenses and other current liabilities	1,391		1,442
Deferred revenue and customer deposits	662		786
Current portion of debt	12,155		21,162
Total current liabilities	14,208		24,114
Derivative liabilities	8,459		3,626
Deferred revenue	6,735		8,696
Long-term portion of debt	223,267		323,360
Other long-term liabilities	2,355		1,798
Total liabilities	$	255,024	$	361,594

¹ These amounts include our VIEs: PPA IIIa, PPA IV and PPA V.

² These amounts include our VIEs: PPA II, PPA IIIa, PPA IIIb, PPA IV and PPA V.

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 our 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 December 31, 2019, and December 31, 2018 (in thousands):



	December 31, 2019						December 31, 2018
	Bloom Energy		PPA Entities		Consolidated		Bloom Energy		PPA Entities		Consolidated
							As Restated				As Restated
Assets
Current assets	$	455,680	$	17,027	$	472,707	$	637,703	$	26,231	$	663,934
Long-term assets	508,004		341,880		849,884		361,172		496,688		857,860
Total assets	$	963,684	$	358,907	$	1,322,591	$	998,875	$	522,919	$	1,521,794
Liabilities
Current liabilities	$	234,328	$	2,053	$	236,381	$	224,503	$	2,952	$	227,455
Current portion of debt	325,428		12,155		337,583		8,686		21,162		29,848
Long-term liabilities	599,709		17,549		617,258		499,177		14,120		513,297
Long-term portion of debt	75,962		223,267		299,229		388,073		323,360		711,433
Total liabilities	$	1,235,427	$	255,024	$	1,490,451	$	1,120,439	$	361,594	$	1,482,033