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Wednesday, November 13, 2019 8:39pm

FuelCell Energy: Bankruptcy Off The Table After Strategic Transactions – FuelCell Energy, Inc. (NASDAQ:FCEL)


I have covered FuelCell Energy (NASDAQ:FCEL) previously, so investors should view this as an update to my earlier articles on the company.

On Wednesday morning, ailing molten carbonate fuel cell power plant developer FuelCell Energy pleased investors with two, major announcements:

  1. A new, two-year expanded joint-development agreement with ExxonMobil (XOM) for further development of carbon capture technology, worth up to $60 million.
  2. The company secured a new, eight-year $200 million strategic corporate loan facility with Orion Energy Partners.

1. ExxonMobil Agreement

FuelCell Energy will provide exclusive research and development work for ExxonMobil to advance the company’s carbon capture technology over a two-year period.

The company will be entitled to:

  1. A $5 million upfront exclusivity and technology access fee of $5 million
  2. Research cost reimbursement of up to $45 million
  3. A maximum of $10 million in milestone payments

In addition, ExxonMobil will make an initial advance payment for future research costs of $3.75 million.

While the new agreement will provide a substantial top-line boost and some much-needed cash flow, it actually downgrades FuelCell Energy’s role to a mere contract research and development services provider as ExxonMobil will be the sole owner of all information and intellectual property resulting from the agreement.

2. $200 Million Corporate Loan Facility

FuelCell Energy has already drawn down $14.5 million to repay outstanding construction loans with NRG Energy (NRG) and Generate Capital LLC as well as to fund outstanding dividends under the company’s 5% Series B Cumulative Convertible Perpetual Preferred Stock (OTCPK:FCELB) due next week.

Subject to the satisfaction of certain closing conditions, a second tranche of $65.5 million will be made available to the company on November 22, 2019 to fully repay outstanding third party debt as well as to fund construction costs and anticipated capital expenditures relating to the following projects:

  • Groton Naval Submarine Base (under construction)
  • Central Connecticut State University (in service)
  • Tulare BioMAT (under construction)
  • Bolthouse Farms (under construction)
  • LIPA Yaphank Solid Waste Management (construction not yet started)

The company may draw the remaining $120 million over the next 18 months to fund:

  1. Construction costs, inventory and other capital expenditures of additional fuel cell projects with contracted cash flows (under power purchase agreements with creditworthy counterparties) that meet or exceed a mutually agreed coverage ratio.
  2. Inventory, working capital, and other costs that may be required to be delivered by the company on purchase orders, service agreements, or other binding customer agreements with creditworthy counterparties.

FuelCell Energy also granted the lender a right of first offer with regard to construction financing for potential new projects. This does not apply to the company’s right to consummate take-out financings, including tax equity financings.

Outstanding principal on the facility will be amortized over a seven year term in quarterly payments beginning one year after the closing.

While the new credit facility finally puts the company in a position to deliver on its $1.2 billion in project backlog, the terms are just ugly:

  • cash interest of 9.9% p.a. plus PIK interest of 2.05%, payable on a quarterly basis
  • an additional 2.5% discount on every tranche drawn under the facility
  • prepayment premiums ranging from 20-30%

In addition, the company had to issue warrants to the lenders to purchase up to 6 million shares at an exercise price of $0.31 per share. At the funding date of the second tranche, lenders will receive additional warrants to purchase up to another 14 million shares (8 million shares at an exercise price of $0.242 and 6 million shares at an exercise price of $0.62).

For example:

The 2.5% debt discount will reduce the amount to be funded under the $65.5 million second tranche to approximately $63.9 million. Initial annual cash interest calculates to roughly $6.5 million with another $1.3 million in PIK interest being added to the principal balance over the next four quarters.

Even worse, the massive prepayment premium requirements will make a refinancing of the expensive facility rather difficult.

Once fully drawn, the new term loan will burden the company with almost $20 million in annual cash interest payments and another $4.1 million in PIK interest.

Also keep in mind that FuelCell Energy will be required to repay existing, considerable less expensive debt with proceeds from the new facility.

At least the company will be permitted to reinvest potential project sales or take-out financing proceeds back into the business, provided certain minimum “payoff amounts” are met. Should the funds have not been redeployed after twelve months, the lenders might require FuelCell Energy to make a prepayment including a prepayment premium of 20%. The premium will be reduced by all previously accrued interest (both cash and PIK interest) and a portion of the loan discount.

Other prepayments will trigger a 30% prepayment premium, again subject to the above discussed reductions.

At this point, FuelCell Energy appears to be caught in Orion Energy Partners’ carefully crafted cobweb for the time being but beggars obviously can’t be choosers.

Also keep in mind that the company just recently reduced output by 90% and will now be required to ramp production back up which will likely include rehiring of terminated employees as well as some additional capex.

Lastly, the company provided an update to its “at-market issuance sales agreement” (“ATM”) with B. Riley FBR (RILY). Due to the requirement to issue the above discussed warrants for the purchase of up to 20 million shares to lenders, the number of shares still available for sale under the ATM has been reduced from 27.9 million to 7.9 million.

Bottom Line:

Finally, bankruptcy appears to be off the table for FuelCell Energy. The company will now have to prove the economics of its large, 1.2 billion project backlog to investors and particularly lenders as otherwise the onerous terms of the credit facility will soon cause new problems.

And while the new, expanded carbon capture technology development agreement with ExxonMobil is certainly reassuring for investors, FuelCell Energy has lost its pari passu status and will mostly act as a service provider going forward with the entire results from the new agreement becoming the sole property of ExxonMobil.

Suffice to say, I was wrong in my expectations for FuelCell Energy to either end up in bankruptcy or dilute investors into oblivion as the company is now in the position to deliver on its backlog without selling further shares into the open market.

Investors considering a bet on the recapitalized company should take a close look at FuelCell Energy’s 5% Series B Preferred Stock, currently trading at roughly 22% of its $1,000 liquidation preference. Remember the company stopped paying dividends in May but intends to catch up on the missed payments next week and also honor its obligations going forward.

As an example:

Purchase of 100 shares (liquidation preference: $100,000) FCELB at a price of $22,000. The holder is entitled to a 5% annual dividend or $5,000 payable quarterly ($1,250 each quarter). With the company now catching up on two missed dividend payments and also making the regular November payment, FCELB owners will receive $3,750 in cash next week, an almost 17% return on investment within just seven days. On a go forward basis, the annual yield calculates to 22.7% at current prices.

In addition, the preferred stock is shielded from potential additional dilution going forward.

That said, it will likely take a couple of quarters until investors will be able to assess the progress of the revamped company.

Expect the shares to remain volatile for the next couple of sessions as market participants digest Wednesday’s major developments.

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.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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