Sunday, October 30, 2011

Beacon Power (BCON) Bankrupt, More Federal Loan Guarantees Wasted

Uncle Sam needs to get out of the investment management business.  He just can't pick a winner.  Beacon Power Corp. (BCON) filed for bankruptcy today.  A quick look at the company's financial results shows us why this company has never been out of trouble.  SG&A spiraled wildly out of control starting in 2008.  If this was the result of a huge sales effort, nothing came of it as sales never regained the $1mm threshold the company had before SG&A exploded. 

A company that had very little debt up until 2009 was now emboldened to assume $25mm in debt in 2010 thanks to its success in getting DOE on board.  The good news is that BCON did not exercise the full amount of the loan guarantee (actually only about $3.4mm as noted on page 102 of their 2010 annual report), so the total loan loss to the taxpayer is far less than $43mm.  The bad news is that the loan guarantee came after DOE had given the company a Smart Grid Stimulus Grant of $24mm in November 2009.  This grant was supposed to fund a second flywheel energy storage facility with a 20 MW capacity.  That second plant never got past the site selection and environmental impact phase of its development.  Way to go, Beacon. 

Throwing good money after bad money isn't good enough for the federal government.  Beacon never even met the loan guarantee's covenants that were designed to safeguard recovery value for DOE.  For example, on page 22 of its 2010 annual report, Beacon states that it was obligated to "put its technology into escrow" (patents? or hard assets?) so that DOE could assume control of the 20 MW plant if Beacon couldn't make it work.  The plant is nonexistent, so there is no escrowed technology for DOE to recover.  The company contributed $26mm of its own cash and in-kind assets to the flywheel project (page 34 of the 2010 annual report), but there is no indication that those assets were escrowed specifically for DOE.  It seems likely that other general creditors will recover the remaining value of the assets pledged to support a project DOE underwrote with a loan guarantee. 

Way to go, Uncle Sam.  The federal government was so eager to prove that stimulus money was effective in building a green economy that it apparently couldn't even write a loan guarantee that would recover something if it all went kaputsky.  Read Beacon's annual reports before the corporate website disappears.  Somebody please prove me wrong. 

Full disclosure:  No position in BCON, ever.