FuelCell Energy: What Next?

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About: FuelCell Energy, Inc. (FCEL), FCELB
by: Wayne Olson, CFA
Summary

Time is of the essence. FCEL needs to be split into two entities. An "infrastructure company" and an "R&D company."

Triangle Street and FCEL's equity stubs in other operating assets should be auctioned off to raise cash to satisfy Hercules. Hercules must be satisfied and gotten rid of ASAP.

What would be left would be an R&D company and project developer that in most cases would only own projects that are in the construction phase.

FCEL would need to become a creditworthy entity that can provide equity contributions during construction. A strategic investor may be needed to make this work.

Investors should do their own due diligence when considering investments in FCEL and FCELB.

Mea culpa. I missed the forest for the trees on this one. I did a series of Seeking Alpha articles on SolarCity circa 2015-2016 where I explored SolarCity's business model (which didn't seem to be a good one in the long run) and I recognized that FuelCell Energy, Inc.'s (NASDAQ:FCEL) business model also had big problems, with them needing to invest in long-term assets despite lacking deep pockets. I didn't invest in SolarCity, but I did invest in OTCPK:FCELB and later in FCEL: my bad.

FuelCell Energy has, over the past several years, tried to transition to a commercial products manufacturer, services provider, and developer in the utility-scale fuel cell sector, while also continuing its R&D work.

FCELB is a preferred stock with a 5% indicated dividend, trading at about 5% of face value.

RESTRUCTURING

FCEL needs to:

  1. Separate out its "R&D operations" from its "infrastructure assets."
  2. Sell the infrastructure assets to the highest bidder ASAP and get rid of Hercules ASAP.
  3. Keep going on the R&D business and the development of new fuel cells. Commons would need to be willing to accept the equity dilution necessary so that FCEL can raise new equity capital to support its development program where it already has a signed PPA, which would include the possibility that FCEL might need to retain the equity stub in the project even after the plant achieves commercial operation. Either that or FCELC and FCELD may need to write off their investments in FCEL to date and let them go out of business.
  4. Abide by the terms of the FCELB prospectus.

It appears that the senior stack is as follows at the corporate level:

  1. Hercules. $21 million or so.
  2. FCELB. Senior to FCELC and FCELD. $64 million in redemption value. [Option to pay dividends in cash or stock.]
  3. FCELC (about $7.5 million) and FCELD (about $26.9 million). Convertible to common.
  4. Series 1 (Enbridge) subsidiary preferred ($16.2 million). Convertible to common. [Option to pay dividends in cash or stock.]
  5. Common stock.

I'm ignoring, for now, the debt at the project level.

Absent bankruptcy, my assumption is that the commons would remain in place. However, if the existing commons do remain in place, I have a hard time seeing how FCEL can raise the capital needed to pursue its existing projects.

With bankruptcy, my expectation is that there would be enough to satisfy Hercules and partially satisfy FCELB, with nothing left for FCELC, FCELD, Series 1, and the common.

My hope is that FCEL can quickly be restructured outside of the bankruptcy process. Hercules, FCELC, and FCELD will need to quickly figure out what to do. FCELB will need to take the steps necessary to protects its interests.

ASSET INFRASTRUCTURE BUSINESS

FCEL's operating portfolio includes: (1) existing portfolio (11.2 MW), Bridgeport (14.9 MW), and Triangle Street (3.7). Triangle Street has been or soon will be completed and can be sold or recapitalized on a project finance basis.

It is possible that these projects could be auctioned off with the proceeds used to pay off Hercules. If not, Hercules may be forced to own and operate these assets in the near term.

The electric utilities in CT are allowed to own 30 MW of fuel cells, so they could be a potential buyer of FCEL's operating fuel cells in CT.

Another way to think about this is that the utilities that signed the PPAs might want to get out from under their commitments to buy electricity from FCEL's operating fuel cell plants and might be willing to pay something to do so.

I suspect that auctioning off the operating portfolio may raise enough cash to satisfy Hercules.

NEWCO: R&D AND PROJECT DEVELOPMENT BUSINESS

FCEL has signed PPAs for: (1) Tulare BioMAT (2.8 MW), Bolthouse Farms (5.0 MW), Groton (7.4 MW), LIPA # 1 (7.4 MW), CT RFP Derby (14.8 MW), Toyota (2.2 MW), and CT RFP Hartford (7.4 MW), totaling 47.0 MW. Plus, LIPA # 2 and 3 (18.5 MW + 13.9 MW = 32.4) are potential projects, although PPAs have not yet been signed. There is also revenues for DOE-sponsored research projects. FCEL may need to have sufficient cash to complete these projects through the construction cycle and may need to be able to retain ownership of them even after these plants are completed and achieve commercial operation.

It is highly likely that more common equity capital will be needed, which will dilute the existing commons. In a bankruptcy scenario, it would seem that FCELB will survive, but FCELC, FCELD, and the commons might get nothing.

My best guess is that once the existing operating project assets are auctioned off, then the remaining company (NEWCO) should be auctioned off. The proceeds would flow first to Hercules, with the remainder to FCELB.

Disclosure: I am/we are long FCELB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.