燃料電池能源 (FCEL) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FuelCell Energy reports first-quarter 2015 results conference call.

(Operator Instructions).

I would now like to hand the conference over to Kurt Goddard, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to the first-quarter 2015 earnings call for FuelCell Energy. Yesterday evening, FuelCell Energy released financial results for the first quarter of 2015. The earnings release as well as a presentation that will be referenced during this earnings call is available on the Investor Relations section of the company website at www.fuelcellenergy.com. A replay of this call will be available two hours after its conclusion on the Company website.

Before proceeding with the call, I would like to remind everyone that this call is being recorded and that the discussion today will contain forward-looking statements, including the Company's plans and expectations for the continuing development and commercialization of our FuelCell technology. I would like to direct listeners to read the Company's cautionary statement on forward-looking information and other risk factors in our filings with the US Securities and Exchange Commission.

Delivering remarks today will be Chip Bottone, President and Chief Executive Officer and Mike Bishop, Senior Vice President and Chief Financial Officer. Now I would like to turn the call over to Chip Bottone. Chip?

Thank you, Kurt. Good morning, everyone, and welcome.

Please turn to slide 4, first quarter 2015 highlights. We continue to progress on our competitiveness, transition from a product to a project business and adapt to the changing project investment landscape that is now better appreciating the value of our solutions and attributes.

Project-oriented businesses can have fluctuating quarterly revenue, but the key to success is the ability to control costs, innovate and develop a strong pipeline of projects and execute on existing backlog. We continue to demonstrate strong progress and advances in all of these areas, which Mike and I will be highlighting during our call today.

Further solidifying our penetration of an attractive utility business segment, UIL Holdings awarded us with a turnkey project and long-term operating agreement for an advanced hybrid power plant we refer to as Direct FuelCell Energy Recovery Generator or DFC-ERG. The plan is being installed at one of our customers many natural gas pressure reduction stations providing a suitable financial return, increased system demand for clean natural gas and local tax revenue.

This is our third order from UIL in less than 12 months. This order exemplifies our strategy of offering an expanding range of solutions and services into growing and diversifying energy markets. We are encouraged by the recently announced combination of UIL Holdings and Iberdrola USA. The increased scale and scope of the new combination may support an expansion of our relationship into new geographies.

The recent sale of a 1.4-megawatt power plant at the University of Bridgeport to NRG Energy and its acquisition by NRG Yield marks the first time a fuel-cell power project has been dropped down into a Yieldco and highlights an attractive financing path for subsequent fuel-cell projects, as well as validating the structure and return profile of our fuel-cell projects.

During its first year of operation, the Dominion Bridgeport FuelCell Park achieved greater than 95% availability. Dominion, the third-largest utility in the country, is very pleased with the Park's performance, which ranks in the top tier of its entire power generation portfolio. Other utilities are taking notice, particularly in space constrained urban areas.

Solar availability, measured at a percentage, is typically only in the midteens in the Northeast, requiring expensive and less environmentally appealing peaking power support. Our installations team is now installing multiple power projects on both coasts of the US. Upon completion, these installations will support growth and service revenue, achieve value differentiator in our business model. We are maintaining a strong balance sheet with our cash balance increasing modestly from year end and strong total liquidity.

I will discuss our business, markets and operations in more detail after Mike Bishop, our Chief Financial Officer, reviews our financial results for the quarter. Mike?

Thank you, Chip.

Good morning, and thank you for joining our call today. Please turn to slide 5 titled quarterly financial highlights.

FuelCell Energy reported total revenues for the first quarter of 2015 of $41.7 million. This compares to $44.4 million for the prior-year period. For the first quarter of 2015, product sales totaled $33.4 million; service agreements and license revenues totaled $3.9 million; and advanced technology contract revenues totaled $4.4 million.

Gross profit for the first quarter of 2015 totaled $4 million compared to $2.2 million for the same period last year. The gross margin percentage was 9.6%, compared to 4.9% for the comparable prior-year quarter. Lower material costs, continued improvements in manufacturing efficiencies and sales mix drove the improvement in gross margin.

Total operating expenses were $9.1 million for the first quarter of 2015, compared to $9.8 million in the prior-year period. Increased project development activity resulted in an increase in administrative and selling expenses year-over-year. However, this was more than offset by the year-over-year decrease in research and development expenses as a number of initiatives related to multi-megawatt FuelCell Parks were completed in 2014.

Net loss to common shareholders for the first quarter of 2015 was $4.9 million or $0.02 per basic and diluted share. This compares to $11.4 million, or $0.06 per basic and diluted share for the first quarter of 2014.

Adjusted EBITDA, which is a measure of cash flow and is based on earnings before interest, taxes, depreciation, amortization and other income and expense, totaled negative $4.1 million for the first quarter of 2015 compared to negative $6.3 million for the first quarter of 2014 on improved margins and lower spending.

Now, I will transition to slide 6, titled financial metrics. Total liquidity at January 31, 2015, was $155 million, consisting of cash and cash equivalents, including restricted cash of $111.9 million; availability on the JPMorgan revolver of $3.1 million; and availability of $40 million on the project finance facility extended by NRG Energy. In comparison, total liquidity at the end of Q1 last year was $106.1 million.

In addition, the Company is in the process of finalizing its previously announced financing agreement with the state of Connecticut related to the expansion of our Torrington manufacturing facility. This commitment from the state includes $20 million of loans and $10 million of tax credits. Total inventory of approximately $57 million at January 31, 2015, was comparable with the FY14 year-end balance.

I would like to explain a new line item titled project assets, included this quarter under the current asset section of our balance sheet. As we expand our project development activities, we expect to construct more plants once the power purchase agreement has been executed with the offtaker, but before the project is sold to a long-term investor. This is an attractive model as the PPA structure offers projects with low risk and no upfront capital to our customers and has the potential to accelerate deployment in the US and Europe.

Our fuel cell projects offer profiles which are attractive to project investors, including consistent cash flows that are not dependent on weather or time of day with strong credit off-takers. This has been demonstrated by the recently announced NRG Yield purchase of the University of Bridgeport project developed by FuelCell Energy.

Project assets on the balance sheet totaled $5.7 million at January 31, 2015, and reflects costs incurred to date for projects that FuelCell Energy is developing and installing but have not yet sold. As an example, last year, we executed a long-term power purchase agreement with the University of California Irvine Medical Center. We are now in the construction phase of this 1.4-megawatt installation and these costs are reflected in a project asset line item.

We are seeking a number of potential project investors and expect to sell the project near or shortly after the commissioning date later in 2015. Sale of the project will result in recognizing revenue for the entire project at the closing date, which contrasts from the percentage of completion method of revenue recognition used for projects that are sold prior to the start of installation.

Had this project been on percentage of completion accounting, revenues in the first quarter would have been approximately $5 million to $6 million higher than what was reported. By adding the project asset line item to the balance sheet, we are providing greater transparency to our development activities and timing of expected future revenues.

Total backlog was $337 million at January 31, 2015, compared to $334 million at the end of FY14. Backlog includes product sales orders of $109 million or 66 megawatts; service backlog increased to $208 million at January 31, 2015; and advanced technology contract backlog was $21 million at the end of the first quarter.

Before I conclude, I would like to provide additional clarification around the 2015 guidance that was provided last quarter. We expect production for the year to be in the 70-megawatt range, consistent with prior guidance and fully allocated. We are now anticipating more module sales in 2015 to POSCO Energy to support their strong local demand. This, combined with the timing of domestic revenue recognition, now has us forecasting average quarterly revenue in the range of $38 million to $48 million this fiscal year versus our prior guidance of $50 million to $60 million per quarter.

We expect to trend towards the higher end or above this range of the second half of the fiscal year as projects like the UCI One that I previously mentioned enter revenue recognition. Margins are expected to be in the high single-digits to low teens, trending higher as mix transitions to more turnkey projects in the US and Europe later in the year.

There are no other updates to the previously shared 2015 outlook. In summary, the Company delivered margin and spending improvements over the prior year, maintains a strong liquidity position and continues to execute on our strategic growth initiatives.

I will now turn the call back to Chip. Chip?

Thank you, Mike.

Please turn to slide 7, business model review. We continue to align our operating model with market opportunities and one illustration of this is the enhanced competitiveness of our offering while simultaneously improving the margins of all of our revenue streams so further growth leads to profitabilities.

We define our competitiveness or affordability of our power plants by the levelized cost of energy, or LCOE. Our LCOE fell to $0.12 per kilowatt hour on an unsubsidized basis and assuming natural gas of $4.50 per million BTU. We are better positioned, which enabled us to competitively bid and develop projects that we couldn't have targeted just 12 months ago, leading to greater scope and size of our project pipeline. However, incentives do exist in most of our geographic markets, which leads to even further competitiveness.

As shown in the graph, the LCOE of our power plants compares favorably with other forms of power generation when considering geography, transmission and cost of intermittency. For example, large-scale solar and wind are not well-suited for urban areas in the Northeast US due to the amount of expensive land they need; addition of costly and difficult to site transmission and expensive peaking power for when the sun isn't shining or the wind isn't blowing, which does impact availability.

It is important to note that virtually all of our projects are financed today and at this level of LCOE, these projects deliver attractive returns to investors or rapidly emerging Yieldcos by lowering cost of capital. The point is that all the pieces are coming together and that will allow us to deliver the next level of growth. What this LCOE chart does not monetize is the value to society of a virtually emissions-free power generation. When this does become monetized, and it will, our offering becomes even more appealing.

Margin expansion continues to be an area of intense focus for the entire team and the chart on the top right illustrates this reversal of losses from four years ago to consistent gross profit generation. While our business, by its nature, can see uneven order flow and subsequent revenue fluctuation from quarter to quarter, the continued increase in gross profit reflects measurable progress on our route to profitability.

Our growing services business is a core component of our business model. Continued focus on this vital aspect of our business combined with the growing install base has allowed us to grow the significant loss from a significant loss of 2010 to gross profit in 2014 and over the last 12 months.

We have transitioned away from early generation, small-size installations for demonstration projects that offer little or negative financial return. Our team is focused on growing services to approximately one-third of our revenue with the expected potential of margins in the mid- 20% range, over time.

With the increased competitiveness in margin improvements in all business segments, key to our growth and overall profitability is our ability to develop a significant pipeline of projects and execute in-line with our production plan our multistage project development process and financing or delivering projects upon completion, which optimizes margin and minimizes risks. This of a model used by many companies in the solar industry, for example.

We provide ultra-clean distributed generation solutions to two primary markets: Utility grid support and on-site combined power and we offer turnkey project development services in all of our markets globally. We sell directly to our customers. Our company is unique in that regard with our offerings. By helping us remain close to our customers as we address their complex and diverse energy challenges, we believe this direct sales model is best suited for our business of multi-megawatt projects with long-term service opportunities.

Giving the increasing multi-megawatt size of our projects, just a few projects can deliver higher revenues and margins. Utility scale projects are sold directly to utilities using a rate-based model or to investor owners using a purchasing agreement with the power consumer. On-site CHP projects are sold directly to customers or to project investors using a PPA. Our strong balance sheet and access to lower cost capital allows us to rapidly develop projects that can be sold and project investors near commissioning.

As Mike discussed, the University of California Irvine Medical Center project is an example of project development on our balance sheet that we will then sell and recognize revenue in full on project sale or completion. This, of course, is a change for us and leads to fluctuations in quarterly revenue, but has the potential to accelerate adoption and enhances margin as we manage a rapid installation to minimize construction period financing.

Please turn to slide 8, market updates. We'd like to highlight our development progress and capabilities for the multi-megawatt portion of our overall project pipeline. We are in the development and bidding stages for several hundred megawatts of projects in different markets and geographies. The table on the right highlights some of these projects that are in excess of 10 megawatts.

Let me stress this is not a complete list of our pipeline, but an area of increased focus, which I can explain in more detail. We are pursuing a number of opportunities below 10 megawatts for utility, on-site and micro-grid applications, as well. The table illustrates our trend towards developing larger projects in the emergence of a merchant model option to execute without the prerequisite of utility RFP.

Economics improve with scale; customer acquisition costs as a percentage of product values decrease measurably; we leverage our service infrastructure leading to expanding service margins; and we have a strong project investor interest in these types of projects. Project investor interest is a result of larger project values, consisting cash flows and attractive yields. There is adequate private funding to expand aging power infrastructure in the US and beyond and with our projects have the correct attributes.

The recent project sale to NRG Yield illustrates these points. All of the projects shown meet our multistage development process. Sites and power off-takers have been identified, project economics are attractive, and potential investors view these projects favorably. Compared to solar, a 14-megawatt fuel cell project can deliver nearly three times the electricity revenue and require only one-tenth the amount of land.

The development of many of these projects will allow us to bid into the growing number of state or utility RFPs that are either soon to be issued or out now. We also have the option to develop some of these as a merchant project, or, in some cases, respond to large customer needs.

We are actively exploring multiple sites to build 11- to 14-megawatt projects using a merchant-model approach. We have found a strong value proposition in certain states where a FuelCell project would sell the clean power to the grid, while monetizing the other project value streams including sale of capacity, heat and renewable energy credits or RECs. We see strong investor appetite for these types of projects and would partner with existing utility customers, energy investors and strategic partners. We have the capability as a Company today to develop an increasing number of opportunities for our pipeline like never before.

All these projects will get done, however, but we only need to close a few to absorb our available capacity and deliver revenue growth. Further competitiveness improvement should accelerate the rate at which we can increase this pipeline.

Please turn to slide 9, operational execution. We have nearly 12 megawatts of projects currently undergoing installation, illustrating the diversity of our end markets. Utility projects now in process include a 2.8 megawatt power plant at a substation that will help to enhance grid resiliency. Sold directly to utility customers, this application is a good market, easy to site on utility on property and requiring no new transmission infrastructure, utilities can add ultra-clean continuous distributed power to the portfolios quickly and affordably.

The 3.4-megawatt gas letdown station project is another utility project. Like substations, natural gas letdown stations are utility- owned locations where gas utilities can add clean power to their portfolios while avoiding siting issues. Our 2.8 megawatt FuelCell power plant at a renewable energy park will generate continuous power, helping utility owner balance intermittency of a solar array.

On-site CHP projects now in process will serve the power critical requirements of a hospital and university micro-grid, producing ultra-clean and reliable power around-the-clock. Our 1.4-megawatt power plants will enable the energy security of these institutions, which tend to have higher power consumers, as well. Adding to their overall value, our power plants are a good complement to intermittent renewable energy sources these institutions like and may wish to install.

The Company's manufacturing expansion initiatives are moving forward. In my previous discussion of pipeline projects, I illustrate why we are pursuing this two-stage expansion at this time. The Connecticut Bond Commission has approved the financing for the previously announced expansion of our Torrington facility. We expect to break ground on this project later this year.

Our South Korean partner, POSCO Energy's new manufacturing building is complete and production equipment is being added now. Local production of complete FuelCell power plants is expected to begin in mid-2015. We're working closely with POSCO to support their market demand as the new facility comes online. FuelCell Energy experts are actively engaged in all aspects of this project to ensure its alignment and success.

Several FCE associates and I just completed a visit to Korea for meetings with POSCO executives and team members. We held discussions on strategic and operational topics and are aligned on our goals for growth, operational excellence, innovation and customer collaboration.

We are on track to deliver our high-efficiency FuelCell hybrid power plant designed for applications with significant power needs with minimal thermal energy demand. An innovative adaption of our core technology, this targeted solution provides attractive economics for the global data center market and gives us greater access to utility grid support market.

Please turn to slide 10, carbon capture. We recently issued a press release providing both an update on the progress of our carbon capture solution and sizable market potential. This update was very timely and favorably received. This solution, which is uniquely offered by FuelCell Energy, appeals to a broad range of stakeholders and for that reason creates a very large market opportunity, which is incremental to what we have previously estimated for our core megawatt-scale distributed power generation business.

Carbon capture is a fairly complex topic, but the short answer is that we believe we have an effective, economical, scalable and financeable solution based on our field-proven core technology. We leverage public and private finance funding to preserve capital, but are making increasing use of private funds which help to confirm the viability of newer solutions and have the potential to accelerate commercialization.

As shown in this schematic, our advanced carbon capture solution captures CO2 emissions from existing coal and gas-fired power plants while destroying pollutants, and does this far more efficiently and affordably than conventional methods. Our solution is designed using the same core fuel cell component as our commercial power plants, but uses a specialized balance of plant. Rather than feeding ambient air into the fuel cell, our balance of plant feeds flue gas from coal or gas-fired power into the fuel cell, which then captures the CO2 in electrochemical side reaction. As a result, no unique inventory is required.

One distinct competitive advantage of our solution is it can increase the electrical output of the power plant, unlike conventional aiming-based technologies which reduce output, by generating electricity while simultaneously capturing CO2 and eliminating pollutants, it provides a revenue stream that can attract private capital.

Because it can convert an expensive compliance obligation into a revenue-generating project with a measurable return on investment, the solution is attracting the interest of government officials, utilities, independent power producers with whom we are now in active discussions. It is expected to generate interest in our European-served areas, as well.

The potential market for coal-based plants is a function of the market penetration and present carbon capture. Installing our solution in only 1% of the existing coal-fired power plants in the US alone, represents approximately a $1 billion near-term market opportunity. We are speaking with numerous parties about a megawatt-class plant.

Additionally, and using the same core technology platform, we have achieved several milestones under an existing contract with a global energy company for gas-fired power plant applications for carbon capture technology. We are in discussions now regarding the next project phase with this private sector customer.

Please turn to slide 11 summary. During the first quarter, we opened up the new market with our innovative DFC-ERG while pursuing advanced technology opportunities with large potential. We delivered the first project to drop down into a Yieldco, showcasing the attractive economics and repeatable structure of our projects.

The operating performance of the Bridgeport FuelCell Park was recognized by Dominion and captured the attention of other utilities. We continue enhancing our business model, leveraging elements that strongly differentiate us in our sector. We have significantly reduced the elusivity of our solutions, our balance sheet is strong, and our services business is profitable. Gross profit is expanding.

We are executing on a diverse portfolio of projects in multiple markets. Our project pipeline is big and getting bigger. We are now developing our bidding on more desirable, large-scale projects more quickly, enhancing the scope and size of our project pipeline and better positioning us for future growth and profitability.

Closure of new projects is our focus. While much work remains to be done, we are making progress on strengthening our business. I thank our talented associates for their hard work and I thank you for your continued support.

Operator, we'll be happy to take questions at this time.

(Operator Instructions)

Les Sulewski from Sidoti & Company.

Mike, you know, I would like to start off with you, actually. Can you give us a little more color on the accounting procedure around the project asset? Is this only projects that are development prior to sale? Does it flow into revenue once complete? Just a little more color on that, please.

This quarter, with the activity that we're seeing in what we are developing in the pipeline, and I use the example of the UCI Medical Center where we're out constructing a project, thought it was prudent to break it out on the balance sheet either out of inventory and cost side as project assets. As I said in my remarks, that will come into revenue recognition once we complete a sale to a permanent investor.

So we have a long-term power purchase agreement in place already with UCI, actively marketing the project and following the COD date, we'll recognize the revenue on that. This accounting follows what a lot of the larger solar developers do, as well.

Okay. Is this essentially why the lower guidance?

That's part of the reason for the lower guidance, Les. The timing of domestic revenue recognition later in the year factors into our lower guidance, as well as allocating some additional modules to POSCO Energy during the fiscal year to support their strong local demand.

So as a result of shipping modules to POSCO, we don't have all the other revenue that comes with a turnkey project, such as balance of plant and EPC services. That will come later in the year and into 2016 as we execute on some of these larger projects that Chip talked about in his remarks.

Okay. As far as SG&A, I know you've developed a little bit more cost in the last quarter. How can we look at it from a more normalized run rate?

I think what we're seeing in the first quarter, Les, is a normalized run rate, plus or minus a small percentage for SG&A. As we mentioned in the remarks, we have invested more in project development and that's coming through the SG&A line item.

Okay. Last one and I will jump back in the queue. In your most recent proxy, there was a proposal regarding a share reverse split. What's the likelihood of that taking place if passed? Perhaps, maybe a little bit more reasoning behind it. And some typical likely ratios involved?

Sure, Les. I certainly refer folks to the proxy statement, which has a detailed description around the Board's reasoning for that proposal. This is a request to give the Board authorization at a future date to potentially enact a reverse stock split.

It would not happen after shareholder approval. It's a one-year window. If it doesn't occur in the one year, we would go back to shareholders, potentially, in the future.

It gives the Board that option. What we've been told by institutional shareholders is that the stock becomes more attractive with -- potentially with a higher price on it. So certainly wouldn't have any impact to market cap or liquidity. But feel like it's a prudent tool to have out there for the Board to potentially use in the future.

Okay. Thank you.

Jeff Osborne from Cowen and Company.

Thanks for all the detail on the call so far and the pipeline information. That's very helpful. Mike, I was wondering, the $5.7 million on the project assets that Les was asking about, it seems a bit higher relative in my mind to just the 1.4-megawatt project.

First of all, can you give us a rule of thumb of how that balance sheet line should trend on a per-megawatt basis? Then, if there's any other projects behind that, other than the UC Irvine piece that you called out?

Sure. Good morning, Jeff. The majority of that balance on the balance sheet is related to UCI. Thank you for the question. I would like to give a little bit of color around the cost per megawatt for a project.

So when you think about cost coming out of our factory, we've talked about $3,000 a kilowatt, somewhere in that range and lower, depending on the size of the project. In addition to that, for turnkey projects, we provide more than just the product outside of the factory.

So, for this particular project, it's a complete turnkey solution where we're doing all of the installation work. Additionally, a lot of these projects can have heat recovery. I believe this one has a chiller on it, as well.

And then you look at some projects which have micro-grid application. So all of that can add to the project cost and, therefore, the turnkey EPC, that will show up on our balance sheet. So certainly can be a variable cost depending on the customers and application.

We would expect to add more into that -- this other question -- you would see more of that in this year.

Sure. The follow on to that, Jeff, is we have been actively talking to other folks about power purchase agreements. We've won some LREC awards. We are in conversations with folks about putting PPAs in place and would expect to start construction on those this year, as well.

Got you. You made some parallels to the solar industry. I think the solar industry players have talked about kind of a 20 to 40 basis points higher IRRs by keeping projects on the balance sheet and then selling them off upon completion. Obviously, Yieldcos need something producing power right away as opposed to 9 to 12 months from now.

Is there any type of return on investment analysis that you've done that you could share with us about the impact of this change in the business model that you've articulated?

I think you summarized it really well there, Jeff. Certainly, construction period financing can be the most expensive type of financing and long-term investors would prefer to buy a project at COD. So it certainly helps the project level of return to the investors as well as FuelCell Energy's margin opportunity and being able to derisk those projects and deliver on that COD.

Okay. Just had a couple other quick ones. One, is there any discussion at the Board or Management level about how much cash would be tied up in this line item? Obviously, you've got a lot of working capital, the $40 million from NRG, et cetera. But comparing that relative to the 300-megawatt pipeline that I imagine the bulk of that would want to be done prior to the end of 2016 with the tax credit expiration.

If you're successful at even one-quarter of that, obviously, that's a lot of use of capital. How do we think about the impact of this business model and how reflective it would be on the10-megawatt and up units versus some of the smaller ones like UCI?

Sure. So, as you mentioned, Jeff, we do have the credit line with NRG Energy and these are the types of projects that we can draw down on, so that provides liquidity for those types of projects. Certainly, strong liquidity position for the Company around $155 million at the end of this quarter.

So certainly comfortable with our ability to execute on these types of projects and the project financing market right now is very strong. We would expect, as larger projects come into construction, that there is adequate capital to finance these projects.

Got you. Two other quick ones. One, any comments about the urgency of the pipeline and relative to the tax credit expiration? Lastly, can you just update us on the Long Island re-tendering process, given the disappointing outcome in December? Any update there?

Jeff, good morning. This is Chip. I will take those three and try to remember all the three.

The first one was the urgency, I think. Anything we've got on that list, as I think you probably know from experience, these large projects we can execute if we have them properly or adequately developed, meaning site control and things like that, which is what we have in our process. We can execute those in 12 months or so.

We align all these projects, as well, before we sign these contracts with the production capacity we have and all that. So we don't need to do a lot of them, but we do have adequate production capabilities and people to execute those in advance of the end of 2016, which we are talking about for investment tax credit.

I would say one thing on the investment tax credit. We are still, as other people are, pursuing that extension for that tax credit. So we are planning for the worst and hoping for the best.

You may remember that the President did put that in his budget. There's a lot of discussion to be [going on]. But particularly when we talked about carbon capture and some of these other big projects opportunities or infrastructure investments.

We are starting to draw in a lot more support for an extension of the investment tax credits. You can imagine people in coal states kind of like the idea that you can use coal cleanly.

So, yes, we can execute in the timeframe necessary. But we're still pushing forward and I would say that the support for investment tax credit for fuel cells is gaining support.

Relative to the LIPA outcome, I would say this, we had 100 megawatts, just to refresh everyone's memory, that were in the final level of discussions with LIPA and in the middle of December of last year, the Board decided, at the last minute, to not award those projects, our projects, or some others. The reason given was that they didn't like the fact that fuel risk, which, frankly, between us, we told them, A, there's ways to mitigate that, you do it in your own business. This is fairly small, given your overall portfolio of projects you're managing as LIPA.

So we've had follow-up discussions with them, number one, Jeff, on just the current projects. There's been some receptivity to look at those things.

They will be having another RFP come out, which might be what you were referring to, in 2015 about midyear, which we'll obviously be right there. But between the groundswell of support for these five different projects, frankly, and NRG support, and our support, we were having direct dialogues with that, so I wouldn't necessarily write those off.

The other thing you probably or maybe haven't seen is that there was recently an RFP issued in New England, which combined the resource needs for Connecticut, Massachusetts and Rhode Island. The RFP on the street for that, I think, is about 170 megawatts for Connecticut, roughly about 90 megawatts for Massachusetts. I don't recall exactly what Rhode Island had.

And then there's numerous RFPs out in the West from utilities, as well as micro-grid-type opportunities. So all of these things or some aspect of on that sheet that we gave you, we're just trying to give you some color of what we are focused on. As I said in my comments, we don't need a lot of those things to close; a couple of them will be more than adequate to get us the revenue growth we need.

That's great. I appreciate all the detail. Just one point real quick for clarification, the $0.12 you have for LCOE in the deck, that is without the 30% tax credit, correct?

Yes, that's unsubsidized, Jeff. That kind of comes down to $0.09 or $0.10, depending on where you're at with the incentives that are available in different markets.

Great. Thanks much, guys.

Sven Eenmaa from Stifel.

A couple follow-ups on the page 8 table, here. In terms of the pipeline you disclosed, how much of that you would classify as late stage, which means 50%, 60%, or a higher probability of receiving an order in 2015 or 2016?

This is Chip. I'll answer that. Again, this is not the complete list. So there's a lot of other elements of this. But, when you look at that, I would say you've got 50% of that is pretty late-stage stuff.

When I say late stuff, it's late stage, that may either -- we're talking to people specifically after all of the project development process is done, meaning we've talked about site control and things like that, or there's active RFPs on the street. So it's at least 50% of that list.

In terms of the current amount of PPAs you have signed, could you give us an overview like how many megawatts are you going to have signed up?

Well, so, PPAs are typically signed by our sales or whoever the owner of the facility might be. So for example, in the case of the Bridgeport FuelCell Park, we set up a separate LLC that we ultimately sold to Dominion. That was a PPA that was signed that obviously turned into a project.

So I'm not quite sure how to answer the questions on number of PPAs. How many we have out there, I don't know. It's really -- I probably know more than megawatts than number of PPAs.

The way this typically works, as Mike said, with the UCI Medical, that was another PPA and that particular one has not been sold to an investor at this point. Typically, today, these things start with a lease or a PPA. That's kind of the structure in which you see there on that list, kind of represents most of that.

That's helpful. In terms of NRG, you've not dropped down one project there. Are you at the stage now where you have like a complete set of standardized documentation which would allow you to kind of streamline the process going forward? Or was that more of a one-off transaction here?

We've had this relationship with NRG, now, going on 1.5 years. Have been actively working with their sales and marketing team. They develop pipeline with their customers, as well as work with us in developing a pipeline with customers.

We have developed standard terms and conditions both between FuelCell Energy and NRG, as well as what the PPA looks like with an end customer. So, the recently announced University of Bridgeport deal, 1.4-megawatt dropped into a Yieldco, we would expect project documents to follow a similar format going forward.

All right. Great. The last question I just wanted to ask, in terms of -- if you look at the percentage of completion revenue recognition, how many megawatts did you recognize in the current quarter? What is the cadence there through the year?

I'll take that one, Sven. The number of megawatts recognized in the first quarter, how about if I try to answer it this way and give you a little bit of color around the revenue makeup in the first quarter -- and let me just make sure I'm on that slide. If you break down the product revenue that we reported in the first quarter of $33 million, about $9 million of that is power plant revenue and about $6.3 million of that is related to EPC and component sales.

So, those two line items together are more or less what we're doing for project development activities in the US and some Europe. The other half of the revenue, about $18 million, is related to kits and modules.

That's very helpful and (multiple speakers). Yes, well understood. I've seen a little bit of volatility here in terms of the margins around the advanced solutions and also services side from quarter to quarter. How should the investors think about the sequential trending on those margins?

Let me start with Advanced Technology. Advanced Technology, certainly nice margin percentage this quarter, in the14% range. As Chip mentioned, we are viewing Advanced Technology contracts now with private industry.

Those have margins versus, working on government contracts, typically come with a cost-chare component. Depending on the level of effort, quarter to quarter, and mix versus government versus private industry, that will impact the advanced tech margins.

Certainly expect positive margins in Advanced Tech and obviously, like this margin percentage, I would say that will be variable in future quarters, as the mix related to government-type work can be a little bit higher. Certainly, targeting double-digit margins in Advanced Tech.

As far as service and license margins, it came in around 8% this quarter. The variability there, we have very steady service business when it comes to maintenance-type activity.

That's recognized pretty ratably over the term of the service agreement. As we've talked about in prior calls, when we do module exchanges at the end of useful life for a module, that does drive revenue recognition and margin.

So you look at this quarter's service revenue, that's down a little bit from where we have been in prior quarters and that's a result of really having no module exchanges in the period. That will come up in future quarters, along with the timing of module exchanges at customer sites.

The other element I'd point out is royalty revenue from POSCO Energy. As they do installations, we get royalty revenue. They tend to do chunks of installations, which can create some variability in that line item, as well.

Great. Thank you.

Aditya Satghare from FBR Capital Markets.

This question was asked before. Could you sort of help me understand, what are some of the key criterias when you decide between percentage of completion and recognition on sale? I just want to make share I'm clear about that.

It's Mike. Really, the key criteria is the sale of the project to a permanent owner. So when we look at a power purchase agreement with an end customer like UCI Medical Center, there is a firm power purchase agreement in place where you will recognize revenue, ultimately, from power sale. But our plan is to ultimately sell that project to a permanent owner.

So, again, I correlate this to what some of the larger solar developments do. They'll keep it on balance sheet until the COD date, negotiate terms during the construction period with a permanent owner and then sell it at the COD date.

So that's what we're doing here for this particular project. And as I mentioned, we expect additional PPAs like this during the year, where we'll build them during the construction period and then recognize revenue at sale at COD.

If I then look at the slide number 8, here, is it right to say that when you classify something as direct sale, you already identified an owner and when you classify as a PPA you still have to identify the end buyer?

Yes. I would qualify that a little bit, in saying that on slide 8, the PPAs that we are talking about there can be with utilities. So Chip talked about the likely example and the Connecticut example, where there is an RFP on the street where the utilities are looking to enter into a long-term power-purchase agreement.

Those projects will ultimately be owned by a power project investor. Could be a utility. Could be an independent power producer. Could be an infrastructure fund. Those projects will obviously get developed, get constructed and there will be a piece of construction-period financing involved in those as well.

One last question here. So when Chip already mentioned the 309 megawatts of pipeline is not the total pipeline, right? If we had to think about the total [CL cell] pipeline, also if you could touch about what's happening on the sub-megawatt scale? How large would the sales of pipeline be?

There is currently like three buckets here. This is the first time we've actually showed something here because we knew there would be a lot of discussion around the Yieldco emergence and things like that.

But the other three buckets, just North America, if I stick with this for a minute -- you've got these large plants. You've got sub-megawatts. Then, you've got within the -- sorry, within the sub megawatts, which would be anything, say, five megawatts and down, give or take, you have a broad number of projects like micro-grids. And Jeff brought it up, how do you figure out the price of the project because it's not a function of the megawatts when you start adding on a lot of different things.

That's North America. Then you've got Europe. I don't have the numbers right in front of me here. But you are in excess of 500 megawatts of projects, if I threw in all those other buckets here.

All right; thank you. Thanks for the update.

Jin Ming Lu from Ardour Capital.

First, just to clarify that $5.7 million project, is that number at cost or are you are just at [EFS] revenue?

Good morning, this is Mike. That's a cost number. When we ultimately recognize revenue, it will have margin on it, as well. That's a cost in the middle of constructing a project, so it's not the complete value.

Okay. On your project pipeline, I noticed a couple of those projects are under lease. So does that mean that in the future you will put -- you will be an owner of those two projects or you will ultimately sell it to some investor?

This is Mike, again. I will take that. No, we wouldn't be the owner of those. We're working with financial institutions that would ultimately write the lease back to the end customer for those types of projects.

Okay. So it really doesn't matter whether it's leased as PPA or lease, but you will look for and (inaudible) for that allocatement project, but for a short period of time, you have to put it on your balance sheet?

For certain projects, which we're developing, and we have not sold yet, we will put them on our balance sheet for a period of time, yes.

Okay. Got it. One last question. Your accounts receivable increased to $6 billion. It has been increasing over the past two quarters. Any reason behind that?

No reason behind that. It's related to just terms that we have with our end customers. The accounts receivable is current and collectible.

Okay. Got that. Thanks.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to Chip Bottone, Chief Executive Officer, for closing comments.

Thank you. Thank you, everybody, for your time and the good questions. I'd like to close this call on kind of three points, here. As you can tell from the different dialogue and the conversation, we are actively developing large-scale projects that have investor interest enabled by the improvement in affordability of our solutions.

Number two, I'd highlight that the service business turnaround is contributing to our profitability. And, as a significant growth in the backlog -- and it is a key differentiator in our space. Finally, in discussion of some things like carbon capture, you can see that we have a lot of embedded optionality in our business using our core technology with funding from, as Mike said, from other partners and governments that are very, very sizable opportunities.

So we tried to share, as much as possible, with everybody today. Hopefully, that was helpful. But I would just like to, again, thank everybody for their interest and have a great day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.