燃料電池能源 (FCEL) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FuelCell Energy reports third-quarter 2015 results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Kurt Goddard, Vice President of Investor Relations. Sir, please begin.

Good morning, and welcome to the third-quarter 2015 earnings call for FuelCell Energy.

Yesterday evening, FuelCell Energy released financial results for the third 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 about 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 of 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, third-quarter 2015 highlights. Our team has continued to execute on key strategic initiatives and has leveraged our market position to take advantage of global opportunities.

Under the project developer model, we identify and develop projects; execute long-term power purchase agreements, or PPAs; and then construct and subsequently sell to investors operational, revenue-generating power plants.

Large scale power consumers value the many attributes of our solutions, and private capital is attracted to investor capital to own the generation assets.

Three onsite combined heat and power, or CHP projects, under this model are now in the various stages of development. Together, they represent over $50 million in future equipment and services revenue. All three have executed long-term PPAs; two are with repeat customers.

We are in discussions with numerous project investors, and anticipate selling these projects near time they become operational or soon thereafter. We expect to announce additional PPA projects beyond these over the next several months.

We are very pleased to announce in July the execution of a project development agreement with E.On Connecting Energies. This agreement introduces our utility ownership model for onsite power applications in our European served area.

E.On's parent company is the largest electric utility in the world and owns 60,000-megawatts of power generation in more than 15 countries. This is more than doubling the generating [aspect] of Dominion, the owner of the Bridgeport Fuel Cell Park.

The agreement commences with the sale of a 1.4-megawatt power plant directly to E.ON for installation in a manufacturing facility in Germany. This is our first megawatt class commercial fuel cell installation in Europe, and we believe it is the first commercial megawatt scale fuel cell plant in Europe for any manufacturer, and also the first project to be financed.

The collaborative agreement serves as a repeatable model for future projects.

Global manufacturing expansion is progressing. Expanding capacity is a key element of our strategy, as this will enable us to execute on projects we expect to close from our pipeline, increase volume of result in per-unit cost reductions, while redundancy of supply is enabling larger projects.

This contributes to our competitiveness of all of our solutions, including large utility scale installations. Commercialization of our advanced carbon capture solution reached a significant milestone, with the $23.7 million megawatt scale project we announced recently.

During the first phase of this two-phase project, we will install a DFC3000 at an existing coal-fired power plant. We are in discussions with multiple utilities and independent power producers to establish a host site for the project.

Demonstrating the scalable nature of our solutions, during the second phase, we expect to install additional multi-megawatt fuel cell power plants at the same site to capture a large percentage of the carbon dioxide emissions from the coal plant.

The US Clean Power Plan supports our various solutions as an affordable power-generation addresses the clean air compliance and low carbon aspects of our plant in a manner that is cost effective for rate payers and supports a domestic economy with American designed and manufactured clean power generation.

I will elaborate further on our results, strategy, and global activities 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 Financial Summary.

I will start with a financial overview of the quarter. FuelCell Energy reported total revenues for the third quarter of 2015 of $41.4 million, compared to $43.2 million for the prior-year period. Revenue was in line with our previously stated guidance of $38 million to $48 million per quarter, and we also expect to be in this range in the fourth quarter.

Gross profit for the third quarter of 2015 totaled $3.6 million, compared to $4 million for the same period last year. The gross margin percentage in the quarter was 8.7% compared to 9.2% in Q3 2014 on sales mix.

Total operating expenses were $10.7 million for the third quarter of 2015, compared to $10 million in the prior-year period, primarily on higher business development activity.

Net loss to common shareholders for the third quarter of 2015 was $7.3 million, or $0.02 per basic and diluted share. This compares to $7.8 million, or $0.03 per basic and diluted share, in the third 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 $6 million for the third quarter of 2015.

The Company's total liquidity at July 31, 2015 was $131 million, consisting of $93 million of cash and cash equivalents, including restricted cash, plus availability of $37 million on the project finance facility extended by our partner NRG Energy, and $1 million of availability on the JPMorgan revolver.

As illustrated by the backlog graphs on the slide, backlog totaled $338 million at July 31, 2015 compared to $350 million at the end of the prior year period and $312 million at the end of the prior quarter ended April 30.

Backlog includes product sales orders of $98 million, or 44-megawatts. Service backlog totaled $225 million and advanced technology contract backlog was $15 million at the end of the third quarter. We recently announced four different projects with the US Department of Energy, which are expected to add approximately $24 million to backlog during the fourth quarter of 2015 once contracts are finalized.

Now I would like to discuss our balance sheet, specifically the project asset line item that relates to the Company's project development model.

First, let me start with an overview of three types of ownership models for fuel cell power plants. One structure is the outright purchase of the fuel cell plant by the end user such as an industrial company.

The second is the direct purchase by a utility, and the fuel cell plant becomes part of the utility's rate base, achieving a return similar to other forms of power generation they own.

The third ownership structure is a power purchase agreement, or PPA model, that seeks to structure the ownership in a way that maximizes the benefits most important to the end user of the power.

As discussed last quarter, more and more customers are attracted to this PPA model where they don't own the fuel cell power plant; instead, paying for power and thermal energy as it is generated. A project investor attracted to long-term stable returns owns the power plant.

Under this PPA model, FuelCell Energy is identifying sites and off-takers of the power and developing the project. Once a long-term power purchase agreement is executed, installation of the fuel cell plant begins.

Costs incurred during the construction period are reflected on the balance sheet and the project asset account, which totaled $11.6 million at the end of the third quarter of 2015, compared to $800,000 at the end of last fiscal year, indicative of increasing PPA activity.

And to reiterate, this represents costs incurred to date; there is no margin included in this line item.

The projects named on this slide are intended to be sold, although we may choose to retain ownership of one or more of these projects after they become operational, if we determine it would be of economic and strategic benefit.

Project investors prefer investing in assets that have a revenue stream at the time of investment. Once the fuel cell plants are commissioned and ready to produce power, they are more attractive as construction period risk is eliminated.

A future sale of these projects will result in recognizing product revenue for the entire project at the commercial operation date of the plant, which contrasts to the percentage of completion method of revenue recognition utilized for projects where the customer is buying the power plant from us during the construction period.

The total product plus service revenue for the three projects currently being developed exceeds $50 million, and none of this revenue has yet been recognized.

This project development approach helps to accelerate order flow and expands the margin potential for projects. We are self-financing during the construction period, utilizing our cash and inventory, as well as the NRG project finance facility from which we borrowed $3.3 million in the quarter.

Our FuelCell projects offer attractive returns and financial profiles to project investors, including strong credit profiles of the purchaser of the power, consistent cash flows that are not dependent upon weather or time of day, and high availability that drives power output and associated revenue.

The chart at the bottom of the slide shows combined project assets and inventory. As we position the business for expected order flow from our project pipeline, we have also purposefully increased completed power plant inventory to ensure flexibility and customer responsiveness.

Inventory and project assets will be a source of cash to the Company in future quarters, as we execute on our business plan.

In summary, financial performance improved sequentially, our liquidity is strong, and the Company is well positioned to execute on multi-megawatt project opportunities and continue to drive top-line revenue growth with increasing margins.

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

Thank you, Mike. Please turn to slide 6, Project Activity.

Under the project development agreement with E.On Connected (sic) Energies, we will offer distributed CHP solutions with our megawatt and multi-megawatt DFC power plants to E.On's existing and prospective customer base in Europe.

E.On will own the plants and sell power and heat under a PPA financing or leasing structure. With power generation in more than 15 countries, E.On has a very large geographic footprint and approximately 33 million customers.

We see very strong potential from this relationship, as we target E.On's customer base with an initial focus in Germany, the United Kingdom, and Italy.

The 1.4-megawatt power plant comprising our first order from E.On will be configured for CHP operation and will be installed at a German headquarters and production facility of FRIATEC AG, a manufacturing company.

E.On will own the plant, and FuelCell Energy Solutions, our European-based entity, will install, operate, and maintain the plant under a long-term service agreement. An outright sale to E.On, this transaction illustrates our direct utility sales model.

The historic utility model in Germany is under pressure due to the increasing solar and wind capacity and nuclear plants being shuttered in the coming years.

Intermittency is a challenge to the German electric grid from the significant solar adoption that causes challenges to grid operators with changes in the weather.

Germany has extensive wind resources in the north, though the power needs are in the south, and there is -- and the public opposition to proposed transmission grid connecting these distant areas due to the cost and aesthetics.

And finally, adoption of distributed generation is growing. As a forward-thinking industry leader, E.On wants to be involved in distributed generation, both to maintain its customers and generate financial return.

Our FuelCell solution addresses the needs of E.On, as well as the customers and German society as a whole. This agreement with E.On is consistent with our strategy of collaborating with world-class organizations, with strong resources and with a replicable business model of utility financing for utility customers.

In our recent discussions with US-based utilities, they are taking notice of this announcement, as it provides us another point of validation.

We are growing our pipeline and working on closing a broad range of projects in various sizes. These preferred resource projects comprise both onsite and utility scale opportunities.

The financial returns in our onsite projects deliver attractive savings and other measurable benefits to site owners, while providing attractive returns or an expanding pool of investors interested in reliable asset class that provides diversity and consistent and strong cash flows.

The Beacon Falls Energy Park, depicted in the middle of the slide, is continuing to achieve development milestones. The project was submitted to the Connecticut Siting council at the end of August. The very detailed application reflects the extensive planning activity undertaken to date, and addresses project elements like grid interconnection, gas supply, acoustic and emissions profiles, and landscaping.

Continuing investment in the project development demonstrates that it makes sense for the region economically, environmentally, and supports energy policy.

There are several other utility and state-level RFPs either in process or expected in the coming weeks and months for both the northeast and the West Coast of the US that we are targeting with projects already under development.

Activity for large FuelCell projects in Asia by our partner POSCO Energy continues, with negotiations underway for several projects, as demonstrated by module sales to POSCO Energy that are in addition to the existing multi-year order.

The utility ownership model is illustrated by three projects with United Illuminating, or UI. The utility's grid support 2.8-megawatt application in the port area of New Haven, Connecticut was recently commissioned.

Located on utility-owned land near an existing substation, our distributed solution provides power to the grid through the substation, enhancing the resiliency of the grid while avoiding the need for transmission.

The host municipality enjoys clean, quiet power generated locally and receives property tax revenue from formerly vacant land, and the state receives sales tax.

We are also installing another 2.8-megawatt power plant for UI at a renewable energy park in Bridgeport, Connecticut, and a 3.4-megawatt DFC/ERG hybrid plant at a natural gas pressure reducing station in Glastonbury, Connecticut.

Please turn to slide 7, global manufacturing capacity. Manufacturing expansion issues in Asia and North America are progressing on schedule. The FuelCell component manufacturing building in Pohang, South Korea is complete, and POSCO Energy is concluding preproduction testing with commercial production expected in October.

As POSCO owns the facility and funded construction, we gain the benefits of expanded global capacity without dispersing our capital. The global integrated supply chain serves POSCO's new manufacturing facility, in addition to the existing North America and European facilities.

Production at the new facility in Asia will lead to higher purchasing volumes, resulting in more favorable supplier pricing.

Our partners' new facility also provides both flexibility and redundancy of supply that supports future growth, project financing, and global customer relationships, such as an American-based customer evaluating a fuel cell installation for a facility he has in Asia -- or they have in Asia, or vice versa for one of POSCO Energy's Asian customers, evaluating installation in North America or Europe.

At our North American manufacturing plant in Torrington, Connecticut, we anticipate ground breaking of Phase I of the expansion in the fall of 2015.

The first phase will generate cost savings from logistics, (inaudible) consolidation, and from additional manufacturing efficiencies. These global expansion initiatives are strategically vital. They support the adoption of our solutions worldwide and drive production volume to further reduce costs, enhancing our overall competitiveness.

Please turn to slide 8, advancing carbon capture. FuelCell Energy's advanced technology group has been working to leverage the versatility of our core DFC technology, developing innovative solutions for distributed hydrogen generation and coal and natural gas-based carbon capture.

There is a broad interest in carbon capture from both utility and energy companies. This is due to the fact that our carbon capture technology can be applied to both coal and natural gas-fired power plants with the same results and benefits.

For today's discussion, we will focus on recent developments in coal-based carbon capture, although we are working on both applications.

Instead of ambient air, flue gas from the coal plant will be directed into the fuel cells and combined with natural gas. Carbon dioxide and the flue gas will be concentrated and captured within the fuel cells, while about 70% of the smog-producing nitric oxide will be destroyed, further supporting clean air initiatives.

In addition to efficiently capturing carbon dioxide and destroying additional harmful emissions, the fuel cells will generate clean, continuous power, whereas other technologies significantly reduce the power output of the coal plant.

The plant operator or project investor receives a return on their investor from the sale of electricity, making this an affordable solution for rate payers.

In contrast, conventional amine scrubbers use about 20% of the coal plant's electrical output, consuming rather than producing power.

Due to the scalable nature, carbon capture systems can be installed incrementally, helping plant operators affordably achieve emissions reductions over time to meet prescribed reductions that enable the coal fired plants to remain operating and retain jobs.

Projects in the area of carbon capture will provide revenue to us, and significant near-term opportunity as interest accelerates. We have recently been awarded by the Department of Energy a $23.7 million coal-based carbon capture project that will be a catalyst to larger projects.

The current DOE award supports the first of the two-phase project. Under Phase I, we will install one of our DSC3000 power plants to concentrate CO2 from the coal-based flue gas. We are now finalizing a project site selection with a number of interested parties.

Under Phase II, following successful performance during the first phase, we anticipate installing 11 additional FuelCell plants. Due to the compact footprint of our DFC solution, the entire 12-unit project will require only three acres of land.

This full system will remove 700 tons in carbon dioxide per day, while generating 27-megawatts of clean electricity.

Phase I includes one-time engineering services, so per plant costs in the second phase are much less than the first and the 11 additional units represent approximately $125 million project that is additive to the announced $23.7-million project. Subsequent service revenue is additive as well.

A full scale DFC carbon capture installation comprises of 420-megawatts of fuel cells would capture 90% of the carbon dioxide emitted from a 550-megawatt coal or gas-fired power plant. It would remove 4.9 million tons of carbon dioxide annually, while simultaneously generating 3.2 gigawatt hours of electricity.

This is a very affordable solution for meeting compliance obligations, with the cost to rate payers of less than $0.02 per kilowatt.

We are already in discussions with several of the top US utilities regarding carbon capture. These discussions form a natural extension of our relationships that represent a broadening of our product offering to this customer base.

Carbon capture has a sizable market potential that we are working to develop and implement quickly with industry commitments. We envision future carbon capture projects in the 25- to 50-megawatt scale or larger, generating revenue from both equipment and services.

Please turn to slide 9, Reinforcing the Business Model. Leveraging our flexible business model is helping FuelCell Energy to capitalize on multiple opportunities and expand across key global markets.

With E.On, we are expanding our utility model in our European-served area. Our relationship with this leading European utility is a model that we can replicate.

Utility relationships like this validate our Company and solutions to prospective utility customers worldwide. We are pleased with the momentum this is creating in our global utility markets.

We are executing on installations with United Illuminating, which will add to future service revenue as these plants become operational. As mentioned, we are working to broaden our share of wallet with utilities to include both clean and affordable distributed generation, fuel cell parks, and carbon capture to retrofit their existing coal plants and serve new gas-fired plants.

The FuelCell manufacturing footprint is being expanded on two continents. This drives our cost-reduction strategy with volume purchasing through our integrated global supply chain. It also provides flexibility and redundancy of supply, which supports growth by enabling larger projects.

Lastly, we are witnessing a confluence of events and catalysts that are supporting adoption of clean distributed power generation, such as

fuel cells including greater emphasis on emissions, challenges with sighting, cost of transmission, lack of welcome for some traditional power generation technologies, and challenges of intermittency from certain forms of renewable power.

The FuelCell Energy team continues to show leadership in innovation, with focus on affordability and execution that positions the Company for further success. I thank them for their dedication and I thank all of you, our shareholders, for your continued support.

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

(Operator Instructions)

Our first question comes from the line of Jeff Osborne with Cowen and Company. Your line is now open. Please go ahead.

Great. Good morning, and thank you for the details. A couple questions.

One, I was wondering, Chip, if you can give us an update on the Long Island and New York in general, what you're seeing on the RFP activity there would be helpful.

Jeff, good morning. Thanks for calling in today.

So, LIPA, there is actually -- let me take New York in general, because there's more opportunity than just specifically with LIPA. But in essence, New York in total is developing multiple RFPs for fuel cells and other equivalent-type products to satisfy both in certain places just demand for power, as well as some of the renewable objectives that they are trying to meet.

So what we're seeing from LIPA specifically, Jeff, is actually an expansion. What was originally one RFP going to be come out here. We've seen one come out already for the -- for eastern Long Island. There's another one coming out similarly, and then of course, the larger of them will be coming out later this year.

But we also have opportunities with Con Ed and some others. In general, I think people are starting to appreciate the kind of things we can do and the uniqueness of both the problem and the solutions we can offer specifically in New York.

That's goof to hear. Just two other questions. One is, I was wondering if you can just go through the siting council process. Obviously, Beacon Falls is going through that. Is the [killing] fleet project as well in that queue, or is that kind of to be determined in the future?

Yes, so let me start with Beacon Falls. So there's a fairly defined process to get projects fully done and executable. A number of them have been done. The latest development is going to the siting council, which we're expecting a positive response for that.

So then, once you get past that, Jeff, you continue to work on obviously the interconnection stuff that's been put out there both for gas and electricity already. And then it continues down the path where we would basically find a contract path for that in financing. All of those things are kind of moving down the path as necessary.

We're looking at several other sites. There's actually -- specifically in Connecticut, there's two specific RFPs that have come out or will be coming out.

One is one that's been out for comment, which is a large RFP, basically 20 megawatts and above. And then the second one that is out now for comment is 2 to 20 megawatts.

So we're developing sites, Jeff, as big as Beacon Falls, 63 megawatts, that would obviously fit into both the large one. But if you did it in pieces, could fit into the small one as well.

But you mentioned Willimantic is another site and we have others that would work and which are in that 20 megawatt and below bucket along similar lines.

And where those are, I'll generalize, but the first thing you'd have to do is secure the sites themselves, which we've been in the process of doing that by different means.

Then secondly, you'd have to talk to, obviously, the towns about tax treatment and siting council issues and things like that. So all I would say is that we're developing multiple projects to fit into multiple RFPs going forward.

And frankly, at the same time, we are developing interest from investors that would actually own those projects as well. So there's a lot going on to get those things over the goal line.

Thank you for that. Is there an expected completion time from the siting council when you would hear either affirmative or need for additional information, whatever the outcome is as it relates to Beacon Falls? Is there a 60- to 90-day confirmed process for that or is it kind of TBD?

I think it's more TBD, Jeff. It's on the shorter end of that. I don't want to -- I don't know if it's 30 or 60 days, but obviously there's a queue there.

But I think the folks that are doing this project, obviously and ourselves have experience doing this. We have a pretty good track record, so we're expecting that it will be done in the most expedient way as possible.

Great. The last question I had was for Mike. With the three projects that are on the balance sheet representing $50 million in future revenue, just can you give us an update on those three and when you expect completion and how you're going to articulate that as it relates to guidance and margins, would be helpful.

Sure, Jeff. Good morning.

As you mentioned, we do have three projects in the project asset category. The one that's further along -- that's the furthest along is the UCI Irvine Medical Center. That fuel cell is completely installed. We're going through the interconnection process right now.

As we said in prior quarters, we expect that to be completed the end of this calendar year. That would likely fall into our first fiscal quarter of 2016. So that's when I would target completion of permanent financing revenue recognition for that project.

The other two projects, Pepperidge and Riverside, those are later in fiscal 2016. I would say in the spring, summer timeframe for those two.

And how would the margin treatment be as that revenue comes in, relative to what you've been experiencing to date? Is it similar or better? How should we think about that?

When we think about margin for US assets and when we do turnkey projects in the US, we target margins in the 15% range for those projects. And then service margins as the project becomes operational is incremental to that and we target margins north of that number in the 20% range.

Excellent. Thank you, much, guys. I appreciate it.

Thank you.

Our next question comes from the line of Sven Eenmaa with Stifel. Your line is open.

Yes. Thank you for taking my questions. First, I wanted to ask about the DOE project on carbon capture side. I understand it is -- you're in a site location process, but in terms of the time, when would you expect to see that project moving into revenue levels? And what would be a margin profile on something like this?

Sven, this is Chip. Good morning. Thanks for joining. I'll take a good bit of that and have Mike -- ask Mike to follow me up on that, if I don't answer your question completely.

So as I said in the remarks there, Sven, it's kind of a two-phase project here. The way we're looking at this is the first phase, if you will, is a couple of megawatts, and that's that $23.7 million. And the way we've done that is we would expect to find a site that's capable of putting in the full 27 megawatts, or utility customer of some sort or IPP.

And so we would develop that over the next 18 months, that particular piece of revenue, but we wouldn't necessarily stop and we do things in parallel. We do the second part in parallel. We might do another project in parallel, as well.

But specifically to that one, I would say that would roll out after the next 18 months. But I would expect additional projects in that period. We wouldn't do this thing in series.

As for the margin, as I think we said in our public announcement about this, the $23.7 million project comes with a $15-million grant from the Department of Energy, one of the highest they have given out during that RFP, by the way. It kind of show you the importance of what we're doing here.

But we would expect to obviously have some costs associated with that as we do some one-time engineering on that that's scalable. But we would also expect whoever the project site might be or the investor to kick in some of that differential as well.

So it's to be determined on the margin yet, Sven. But safe to say we're going to try to maximize whatever we can there.

Got it. And second question I wanted to ask in terms of the shipments here in this quarter and the upcoming quarter, is do you expect you have any system revenue or full project revenue recognition in the next quarter from the E.On side? Or is it all going to be kits and modules?

And also, what was the kits and modules breakdown in the current quarter?

Sure, Sven. This is Mike. I'll take that one, and good morning, by the way.

As we look at next quarter, and you mentioned the E.On project, that is in backlog. As we execute on that project, that will come through revenue recognition on a percentage of completion basis. You could see some of that coming in, in the fourth quarter, as that project's now in backlog.

We will have continued revenue recognition from kits and modules, with POSCO coming through as well. As we look at total backlog today, megawatt backlog, it's about 44 megawatts, of which about 39 megawatts is made up of kits and modules to POSCO. The balance is made up of E.On project you mentioned, as well as these project assets that I discussed on the balance sheet.

And as I mentioned in my remarks earlier, those projects will continue to come into revenue recognition in 2016.

Got it. And what was the breakdown in kits and modules in the current quarter?

So in the current quarter, as far as total shipments and title transfers, it was a heavy quarter as we completed title transfer of the UI projects that Chip mentioned.

So when you look at modules that came through in the quarter to POSCO, that was 5.6-megawatts. We had 8.4 megawatts of kits, which were shipped to POSCO, and then also 5.6 megawatts of the UI project.

Got it. That's very helpful. And last question, in terms of we saw your service margin expand nicely in the current quarter. What are the expectations on service margins here in the upcoming quarters?

As we look at service margins, we expect continued increase in both service revenue, as these projects that we've talked about come online and we grow our install base over time.

Margins, as I mentioned, we target project margins for service, or service margins north of 20%. And obviously, the financial statements will have a blended rate, consisting of legacy projects and new projects, and the margin will be variable quarter to quarter.

There's a component of revenue that comes through when we do module exchanges for specific sites, which will drive revenue and have a different margin profile quarter to quarter, depending on when that particular agreement was signed and the overall profile of that agreement.

But I would say in general, margins will continue to trend up over time.

Great. Thanks very much.

Thank you, Sven.

Our next question comes from the line of Carter Driscoll with FBR. Your line is now open.

Good morning. Thank you for taking my question.

I just came back to the coal opportunity. You talk about maybe just the number of utilities that are interested in your solution, the engagement process early on. I realize it's still very early, and maybe geographically does it fit the profile of what you're targeting domestically? And are some of the discussions based on potential of a carbon tax being implemented some time in the future, or really just response to the recent EPA power changes?

And then I have a couple follow-ups, if I may.

Sure, Carter. I'll take that. Good morning. This is Chip.

Yes, so relative to the -- the overall strategy we have is you want to go after the biggest utilities first, right, because obviously, they have the biggest opportunities.

So what we've done so far on that regard, in general, is obviously, we've got in Korea, we've got all the utilities as customers for the most part, including IPPs.

In Europe, we just mentioned E.On, which we started with the biggest in the world actually, but certainly the biggest in Europe as well.

Then in the US, we have multiple utilities that are already current customers. So on the West Coast, you have PG&E and SCE, which are the two biggest. On the East Coast, you have Dominion, United Illuminating. I forget -- I don't know if I caught everybody, but if I didn't, I apologize to them.

But my point is that these are all people who have pretty good bandwidth, and obviously have the -- both the need and the desire to put in distributed generation.

The carbon capture thing builds on some of those, like Dominion, but expands beyond some of those. So you could think about the people that have coal assets, you can think about people in the Midwest, AEP. You could think about people in the south, like Duke and Southern Company.

So I won't comment specifically on what we're doing with whom, but I can just tell you that this carbon capture opportunity is playing well with the interest from whole, some existing people, but also other people have been brought to us for not just carbon capture, but when we get talking about carbon capture, by the way, a lot of them are involved with distributed generation strategies as well.

It's kind of a natural fit for us to expand our footprint with utilities. So we're having discussion with, I would say, all of the major players in the US or if not all of them, most of them, that could really deploy what we do. So I'm pleased with the progress we're making there.

Yes, it sounds like an excellent natural fit. Thanks for the color.

Shifting gears over to Europe, obviously a nice win with, as you obviously talked about, the largest utility in the world.

If you could talk about there are a lot of power needs in the south and most of the generation in the north, is the opportunity as much a constraint on the land, as well as the fact that building a transmission line is going to face a lot of opposition from people not wanting it in their backyard; and then obviously, the clean emission profile is an aspect to it?

If you could talk about which of those three is the more important or put it in a priority list as to how you think about where those projects might be sited, I think that would helpful.

Yes, Sven -- or Carter, rather. So I would say overall, and I'll talk to Germany, because I think it's different if you go to the UK and you go to Italy. But we are talking to E.On as a pretty broad span there and we are talking about projects in different countries.

But specifically to Germany, there's kind of like two major things going on, right? One is there's this huge portfolio shift of power generation assets going on, primarily driven by the increase in wind and solar. And that's causing a lot of stress, financial and technical, on what has traditionally been their base load power.

To deal with that, frankly, E.On is splitting themselves off into two companies that I think will actually happen in 2016. All the generating assets are going to a new company, and what they call renewable and distributed generation are going to the people that we're dealing with right now, which is called Connecting Energies, right.

So that's a completely different business model, in short, that's driving what we're doing.

So the example of this customer that we have, or E.On has here in Germany, which is in the Heidelberg area, more north -- south than north, is really not even an existing customer of E.On. So they are really seeing this as a growth opportunity for themselves.

The other thing is when they deregulated things, not just -- specifically in Germany, it creates that opportunity I just talked about.

So I think what we're seeing is that as they go strategically into more clean energy, that there's consequences that need to be dealt with when you have intermittency and things like that, and that's that rebuilding of the customer base.

And by the way, the old way to do it was the utility would own the assets and put in big plants. That ain't going to happen. I think the way they're going to do that, is they're going to put distributed generation, sizable quantities, megawatt and up, at different site locations to deal with that issue and the deregulation opportunity creates opportunities for E.On to grow their business.

So I think it's a pretty brilliant strategy, which is frankly why we wanted to team up with them.

It's going to be a great partner for you. And then just lastly, I think you made a comment earlier talking about certain projects that you might keep for yourself rather than selling them.

What types of characteristics would cause you to keep a project on your books rather than getting rid of it, for lack of a better term?

Sure, Carter. This is Mike. We certainly would never characterize getting rid of a project, because all of our projects come with long-term service agreements. So, it's a long-term venture with the customer and the end investor.

When we look at ownership models for these assets that we're currently building on our balance sheet, there's obviously strong demand out in the marketplace you could envision selling to a yieldco or an infrastructure fund.

You could also envision tax equity-type solutions, which may or may not entail keeping the asset on balance sheet. What we're trying to do is certainly maximize return to the Company, long-term cash flows to the Company, and the project investor, and are looking at a variety of different structures to enable that.

Fair enough. I'll get back in the queue. I appreciate you answering all of my questions.

Thanks, Carter.

Our next question comes from the line of JinMing Liu with Ardour Capital. Your line is now open.

Good morning. Thanks for taking my questions.

Good morning, JinMing.

I have a couple questions just about the carbon capture project. So first of all, how much will your cost share obligation will be?

JinMing, sorry, this is specifically that first project, is that what your first question was?

Right. Related to the 3.7, yes.

Yes, yes. So the first project, and the reason I wanted to differentiate that is because as we -- let's say the first project is 2 megawatts and it's 23.7 megawatts; we were given an award of $15 million from the Department of Energy to do this project. They are very excited about it, as we are as well. It's a pretty sizable award.

But we would expect that it's a cost share, meaning that industrial partners need to pay the difference of whatever it is or absorb those costs.

Our strategy is that as we talk to these other places to put this, perhaps, this first one that can be expandable to much bigger ones, of 27 megawatts in total site, that we would seek to have other people contribute to that.

So it wouldn't necessarily be all to us to do that, but that's just kind of the way the process starts. It starts with a project we developed, we got an award, and then we continue to work it, JinMing, to that.

But subsequent to that first initial chunk of $23.7 million, we would get back to what Mike was talking about before, which is the expected margins we would want to make. So, when you look at that one, no matter how it comes out, it would have a fairly minor impact in the overall margin of the business.

Okay. Got it. And also -- yes.

Go ahead.

Okay. About the $0.02 per kilowatt hour cost for the carbon capture, is that a number net of the potential electricity revenue or is just before that?

So that number, all that, those numbers I was talking about there, came out of the work that we did with the Department of Energy, which kind of created the buzz around what we -- this whole affordability thing.

But the $0.02 per kilowatt is if you took that example that I gave you of a 550-megawatt plant and you installed 420-megawatts of fuel cells and reduced the CO2 emissions 90%.

The fact is that $0.02 a kilowatt would be the total impact without monetizing any of the CO2. So if you monetize the CO2, then it would, it could really [mitigate that all]-- so it takes into account all of that.

Having said that, the reality is that what the EPA is looking for is only a 30% reduction in emissions levels from coal-fired power plants. So you would never probably actually get to that 90% number.

So the financial impact would be even smaller than what I just said, because if you look at the Clean Energy Plan that the EPA has put out, they basically have a 30% reduction over about a 10-year period of time.

So we would build plants in this 27-megawatt chunk, if you will, that would really not have much impact at all, JinMing. So that was just the broad -- if you took this thing to a 90% reduction, which nobody is forecasting, but that was what the project was asked to do, which is frankly an amazingly low statistic.

So we would see the rate payer impact even less of that, when you put this in incrementally to meet what the Clean Energy Plan is really describing.

Okay. I see. Actually, that leaded to another question. So you are -- your technology will take care of the carbon capture part. Are you looking at, or are you working with some partners for the carbon storage or just monetize the sale too?

Just for the audience here, yes, what we're focused on is efficiently capturing the CO2, and of course with our technology, reducing the other emissions like harmful emissions as well. But that's just part of the process. And it ends up in the distributing the CO2.

But anyway, the CO2, you can deal with it three ways: you can put it in the ground and sequester it; you can use it for enhanced oil recovery, which we have that in this country in various places; or you can sell it for more industrial application.

But for the most part, I think the answer is you have to find a way to sequester it in the ground. And yes, there are people that are working on that. I can't say -- it's premature for me to say anything more than that, but there are people well versed in that that are working on that, a way to cost effectively capture -- not capture, but sequester the CO2 that we capture.

Okay. Got that. Thank you.

Thank you.

I'm showing no further questions on the phone lines at this time. I would like to turn the call back to Chip Bottone for closing remarks.

Okay. I would like to just thank everybody for the broad range of questions that were posed today.

Just kind of summarizing in a couple ways, we've been talking about our business models, development model for quite some time, and I think we're seeing the evidence of that is working and attracting more business, which is what we wanted.

We had surface in the past things like carbon capture, and frankly, it's gaining a lot of traction. As we said, these are big projects and we're going to build on how do we produce the products and how do we operate the plants in the same model that we produced in the developer model.

So from our perspective here, some of the stuff takes a little bit of time, but it's basically just validation of what we said we were going to do. And I think things like the support of the Department of Energy, the EPA, and some of the things that we're doing other than carbon capture and just our normal core business is certainly encouraging to us, that this is gaining momentum and we'll have the production and then we'll have obviously the revenue to follow with that.

So again, thank you very much for participating today. We look forward to seeing you on the next call for the fourth quarter. Have a great day, everybody. Thank you.

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