燃料電池能源 (FCEL) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FuelCell Energy reports second-quarter 2016 results conference call.

(Operator Instructions)

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

Sir, you may begin.

Good morning, and welcome to the second-quarter 2016 earnings call for FuelCell Energy.

Yesterday evening, FuelCell Energy released financial results for the second quarter of 2016.

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 fuel cell 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, Q2 2016 highlights.

One key aspect of our strategy is to seek relationships with the leading and largest companies in our markets, whether as strategic partners or customers.

While this may be challenging at times and requires patience, it builds credibility and is very productive in the long run.

Our May 5 joint announcement with ExxonMobil is an excellent example of this strategy.

By aligning with the global leader in sequestration, economical and efficient carbon capture using fuel cells is a potential game-changing development.

ExxonMobil possesses world-class research and development capabilities, as well as global reach and extensive resources.

We are understandably excited about the prospects for advancing our fuel cell carbon capture solution with ExxonMobil.

Our project development team has been advancing numerous multi-megawatt projects.

As a result, more than 125 megawatts of projects have been bid competitively into various RFPs.

Also, we anticipate that additional multi-megawatt projects will be bid this summer.

I will address this very active and attractive pipeline in detail later in the call.

Recently, we completed the commissioning of a high-efficiency hybrid fuel cell power plant and a natural gas pressure let-down station.

The power plant and let-down station is owned by our peak customer, United Illuminating, now a subsidiary of Avangrid.

Combining a fuel cell plant with an energy-recovery generator, this system showcases the diverse utility and efficiency of our proprietary designs, and our value proposition for gas pipeline operators.

Engineered to recover energy that would normally be lost during the gas let-down pressure reduction process, our solution provides electrical efficiencies of 60% or higher by converting unused energy into electricity.

During the second quarter, we continued to optimize our install base.

As we will discuss in more detail later in the call, we do not expect any further charges from actions like this in 2016.

As our Company grows, certain projects undertaken for sound reasons years ago may no longer make sense today.

These optimization actions address changing customer circumstances, and position us for future expected margin expansion in our services business.

We are moving forward with the first phase of our planned two-phase expansion of our North American manufacturing facility.

This prudently timed and financed capacity expansion provides near-term operating cost reductions, as well as ensures that we meet future demand forecasted to arise from RFP awards and the potential for global applications.

To support our growth, we're continuing to strengthen and diversify our capital structure.

This was illustrated by the recent announcement that we closed a long-term loan facility with Hercules Capital, a leading debt provider.

I will update you on our activity and markets in greater detail after Mike 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.

FuelCell Energy reported total revenues for the second quarter of 2016 of $28.6 million, comparable to the prior-year period.

For the second quarter of 2016, a gross loss of $200,000 was incurred, compared to a gross profit of $2 million for the same period last year.

Higher service expense recognized in the quarter and lower advanced technology activity in this period negatively impacted margins.

Financial results include two non-recurring charges totaling approximately $2 million related to service agreements for legacy projects.

One charge was related to the early termination of a sub-megawatt installation that we chose to exit.

The original waste-gap solution at this installation was no longer possible, so exiting the sub-megawatt site made sense at this time.

The other charge was also related to a legacy project involving a final extension of the service contract at the customer's option.

The customer likes this project, although the service agreement profitability profile is not consistent with our current agreement.

These actions reflected continued initiatives to optimize the service business and expand future market potential.

Operating expenses totaled $12.6 million for the second quarter of 2016 compared to $10.8 million for the prior-year period.

Expensive project development activities, combined with targeted and accelerated R&D expenditures to further enhance our product offerings, drove this year-over-year increase.

Net loss to common shareholders for the second quarter was $16.2 million or $0.56 per basic and diluted share.

This compares to $10.7 million or $0.44 per basic and diluted share in the second quarter of 2015.

The Company's cash, restricted cash and financing availability totaled $169 million at April 30, 2016.

Backlogs increased sequentially for the fourth consecutive quarter, totaling approximately $411 million.

Service backlog totaled $295 million, product backlog totaled $51 million or 24 megawatts, and advanced technology contract backlog totaled $65 million.

These numbers do not include the Beacon Falls project or other projects bid into request for proposals, or notices of awards that have been received for which we have not yet executed definitive agreements.

Turning to the inventory and project assets graph towards the right of the slide, inventory remained relatively flat from fiscal year end, while both short- and long-term project assets increased with continued construction of projects.

Long-term project assets includes two projects under construction that we anticipate financing under the PNC Energy Capital facility later this year once the power plants our operational.

As well as the UCI project, which closed financing and entered commercial operations earlier this year.

Short-term project assets primarily reflect the Pfizer project, which is under construction and expected to enter commercial operations in our fourth fiscal quarter.

With strong project asset inventory and cash balances, the total assets on our balance sheet as of April 30, 2016 exceeded $300 million.

During second quarter of 2016, we closed on an additional debt facility extended by Hercules Capital.

We now have several financing facilities highlighted on the bottom of the slide that support project development, each targeting different project ownership structures.

The Hercules facility is structured as working capital financing, supporting potential projects such as Beacon Falls, where we are selling fuel cell power plants to the project developer.

The extensive underwriting diligence performed by Hercules is an additional point of validation of our business model.

The multi-year committed NRG facility is designed for construction-period financing for projects that we are developing.

Once the plants are operational, the project can continue to be financed under this facility by energy or sold to a project investor.

The PNC Energy Capital facility, in essence, provides 100% loan-to-value financing for projects we developed and may choose to retain, and recognize high marginal electricity revenue over the life of the underlying power purchase agreement, or PPA.

And finally, we have some financial support from the State of Connecticut for the phased capacity expansion that we are undertaking.

These state-extended debt facilities are up to 50% forgivable upon reaching certain job creation and retention targets.

So to summarize, access to capital supports our project development activities and positions us for near-term growth.

Please turn to slide 6, titled Financial Targets.

Previously we had forecasted FY16 revenue to be in the range of $170 million to $210 million.

(Technical difficulty) the Energy Capital of $30 million tax equity facility, which was forecasted to be fully utilized, and results in recognizing electricity revenue over the life of the project.

Due to the pace of potential bid award announcements in 2016, full-year 2016 revenue is now forecasted to be in the range of $140 million to $170 million.

We also continue to expect full utilization of the tax equity facility for projects that we currently have under construction.

Previously we had shared targeted production ranges that are expected to lead to EBITDA and net income breakeven, with the lower end of the range reflecting a sales mix oriented towards complete power plants, and the upper end of the range oriented towards a mix that includes Asian sales of fuel cell kits.

With the 120-megawatt POSCO kit order nearing conclusion at the end of the year, we are sharing updated targets which do not include Asian sales.

Our breakeven points in terms of production [volume] are now lower, given the mix of complete power plants that are installed by FuelCell Energy driving engineering procurement and construction EPC revenue and margins, lower product and service costs, and also our margins from our growing advanced technology business.

The upper end of the range is also the sale of complete power plants, though without the same degree of EPC revenue and margins, as some projects may not involve FuelCell Energy providing EPC services.

In closing, we have been optimizing our business and adding capital availability, while actively developing projects and further enhancing our product offerings.

I like how the Company is positioned today as we work hard to close new projects and drive revenue growth.

I will now turn the call back to Chip.

Chip?

Thank you, Mike.

Please turn to slide 7, Project Development Update.

Our business is the supply and recovery of energy for an increasing number of applications globally.

We create strong stakeholder value propositions with attractive financial returns for investors, using a proven common technology platform.

I will provide updates on progress in our three primary markets, which are: preferred resources for ultra-clean distributor power generation; emissions reductions with carbon capture; and distributed hydrogen for transportation.

Our team has been focused on developing projects for bidding into high-quality, clean energy RFPs.

A number of RFPs have been issued in 2016 in which we were actively participating.

I'll go through some of these key RFPs to give you an indication of what we are offering and the potential for awards, as these projects represent significant future growth opportunities for us.

As announced previously, the 63-megawatt Beacon Falls Energy Park was bid into the Tri-State RFP in January of 2016.

We feel this clean energy project is very competitively priced, and brings benefits to the Tri-State region that competing bids do not.

It provides rate payers with affordable and ultra-clean power generation in the region, enhancing the resiliency of supply.

This project also drives and pays for desirable natural gas, electrical and water infrastructure for the state and region that will help with adjacent economic development and directly benefits rate payers.

In comparison, many competing bids will require the construction of transmission lines to connect the region to distant power-generation sources.

Beacon Falls is the only fuel cell project bid into this RFP, illustrating our focus on utility-scale applications.

The Beacon Falls Energy Park also presents a superior economic development profile versus competing submissions.

Because of the unique operating characteristics, fuel cell projects like these can be installed in densely populated environments, where they provide significant benefits for regional economics.

This project will generate property and sales tax, and because it is located in the region and utilizes locally manufactured equipment, it provides income and payroll tax benefits as well.

Competing technologies manufactured overseas and installed outside the region cannot begin to provide this level of regional economic impact.

If awarded, the Beacon Falls Energy Park will generate an estimated $90 million in tax revenue, at local and state level, over the life of the project, about three times the tax revenues that will be generated by competing solar projects of similar size.

It will also generate approximately five times the amount of renewable energy credits, or RECs, as a similar-sized solar array, due to the low availability for solar in the region.

RECs assists states in reaching its renewable energy portfolio standards, and represents significant monetary value for our projects.

The potential revenue value of the Beacon Falls project at FuelCell Energy is more than $500 million, including both equipment and services revenue.

According to the wording of the Tri-State RFP, the evaluation phase of the process will be complete by the end of July.

Bidder notification and contract awards are scheduled to occur subsequent to the evaluation phase, likely in late summer or the fall of 2016.

If awarded, we expect the project will be executed in multiple phases beginning in 2016.

Project financing discussions are in progress.

Our project development government relations and sales teams have been actively engaged in developing a variety of other projects, while also working hard to ensure that fuel cell attributes are understood by utilities and regulators, and appropriately valued in RFPs.

We are witnessing more thoughtful and better-structured RFPs compared to just a few years ago.

Regulating bodies at an increasing number of utilities are seeing the competitiveness of our fuel cell parks, and now see these as an asset group, which is driving increased interest in activity.

We are pleased to see the Connecticut Department of Energy and Environmental Protection issued another RFP for clean energy projects in the range of 2 megawatts to 20 megawatts, as it seeks to procure clean and affordable distributed power to enhance group resiliency.

FuelCell Energy submitted multiple bids total in excess of 50 megawatts, and potential value to us of more than $500 million in this RFP.

These are projects that we've been developing for a period of time in which we feel are well-suited to meet the needs of the rate payers in the state.

We anticipate that decisions will be announced during the fall of 2016.

Recently, Public Enterprise Services Group, PSE&G, issued an RFP that seeks up to 40 megawatts of fuel cell projects in the range of 1 megawatts to 20 megawatts for multiple specific locations within its service area of Long Island, New York.

Like Connecticut's DEEP, Long Island's PSE&G wants to enhance group resiliency with clean and affordable distributed power generation.

By identifying specific regions on Long Island that need additional power generation, PSE&G is seeking to defer investment in new transmission infrastructure.

In July, PSE&G will be publishing additional information to identify the specific locations for which they are seeking fuel cell power plants, and will state the amount of power needed for each location.

Respondents can begin submitting proposals on August 1. FuelCell Energy has been developing projects on Long Island in anticipation of this opportunity, and will submit several projects into this RFP.

The PSE&G solicitation is a good example of the improvement we are seeing in the quality of RFPs being issued.

In this case, we are pleased to see a fuel-cell-only RFP, one that values the unique attributes of clean fuel cell power generation as part of LIFO's portfolio.

With their compact footprint and quiet operation, fuel cell power plants are easy to cite in high population density areas like Long Island, because they do not require large amounts of land, and can be sited where power is needed.

Long Island power generation with fuel cells will help PSE&G to generate environmentally responsible distributed power, while avoiding the high cost permitting challenges and efficiency of power transmission.

And avoiding the peaking power needed to support intermittent power generation.

Land-scarce regions like Long Island drive up the cost of intermittent generation, as so much land is needed to generate the annual megawatt hours and power needed at the utility scale.

We also have bids into other RFPs beyond those just mentioned.

I would also like to briefly comment on the expected extension of the investment tax credit for fuel cells, and other so-called Section 48 technologies.

The Senior Leadership of both parties of both the US House and Senate publicly committed to correct what they described as an oversight in error within the ITC regulation, promising to address this year, and we are confident this will occur.

Our recently announced partnership on deploying affordable carbon capture system further strengthens the attractiveness of this extension, based on our ability to affordably reduce emissions from power generation plants, and the opportunity to scale for export.

Our current business is global, so activities in Europe and Asia are not impacted by the ITC.

Additionally, all of the projects in our backlog will be completed in 2016 within the window of the existing legislation.

We continue to focus on operational cost reductions and different configurations of our power plants, such as a 3.7-megawatt configuration that increases electrical efficiency, which allows us to retain our competitiveness.

Under our agreement with EON, we are installing a 1.4-megawatt power plant at FRIATEC AG's German headquarters and production in [Hyme].

This customer side of the meter project is on schedule for a September ceremony that will be attended by several EON executives, dignitaries and potential customers.

We are working with EON on a number of additional prospective projects, both in Germany as well as other European countries where EON operates.

We recently announced that our South Korean partner, POSCO, has started construction on a new 20-megawatt fuel cell park in Seoul, South Korea, for a repeat utility customer.

POSCO's customer, the largest utility in South Korea, will buy the power.

The largest district heating system in South Korea will buy the heat.

With their continuous power output, and strong credit profiles of their power and heat off-takers, fuel cell parks attract private capital.

POSCO's project pipeline is now in excess of 400 megawatts.

This figure includes a number of multi-megawatt fuel cell parks, as well as some large on-site applications that POSCO is pursuing.

Please turn to slide 8, ExxonMobil CCS.

In response to the growing global demand for technologies to reduce carbon dioxide emissions, we have been developing innovative carbon capture solutions for coal and gas-fired power plants.

These are large global markets with significant potential.

The power sector alone represents the greatest global greenhouse gas reduction opportunity.

The challenge has been the lack of carbon capture technologies that are both efficient and affordable.

Our carbon capture solution solves this problem in a novel way.

Because carbon capture is a side reaction of a normal electrochemical power generation process occurring within [power] carbon and fuel cells, our carbon capture system efficiently concentrates the carbon dioxide to generate power at the same time.

Because these systems generate a revenue stream of electricity, they provide power plant operators a way to meet their compliance obligations while receiving a return on their investment, as compared to simply an increase in operating expenses.

As our company continues to develop our innovative carbon capture solution, we could not have found a stronger partner than ExxonMobil.

The company's extensive research capabilities and vast global resources will accelerate deployment, and are expected to lead to faster adoption, and help to grow the market for our systems.

Recognized as the global leader in sequestration, ExxonMobil has been seeking a capture technology that is both affordable and efficient.

As we indicated in our joint announcement, ExxonMobil's top leadership believes that utilizing carbon fuel cells for carbon capture has the potential to substantially reduce the cost that could lead to a more economic pathway towards large-scale applications globally.

Another important attribute of carbon capture using fuel cells is that they eliminate about 70% of the smog-producing nitrogen oxide in the flue gas of a coal or gas-fired power plant.

Conventional carbon capture methods cannot do this.

With approximately $260 billion in annual revenue and 75,000 employees, ExxonMobil is the largest public producer of natural gas, and possesses world-class, industry-leading research facilities that are backed by an extensive global resource.

ExxonMobil is measuring the size of this global market in gigawatts, bearing in mind that a single gigawatt is equal to 1,000 megawatts.

1,000 megawatts of projects would translate into multi-billion dollars of revenue for FuelCell Energy.

ExxonMobil is deeply committed to achieving measurable reductions in carbon emissions globally, and has been working in this field for some time.

With this agreement in place, activities have begun that will have meaningful favorable financial impact on us short term, and much larger and sustainable impact longer term.

Our next step is to announce the location of our megawatt-scale pilot plant project.

We are in discussions with several potential site hosts, and expect to make our selection and announcement within the third quarter.

Our joint announcement with ExxonMobil immediately generated considerable interest around the world.

Each party has different drivers or use for the carbon capture solution.

For example, beyond the emissions reductions needed for power generation, the European Union is searching for ways to reduce carbon dioxide emissions without inhibiting economic growth, particularly for industries such as steel and cement production.

This situation underscores the flexibility, ease of deployment and our value proposition.

Because we've reduced carbon dioxide emissions while simultaneously generating revenue streams of ultra-clean power, our carbon capture solution can help European cement and steel producers reduce their carbon emissions economically, without sacrificing competitiveness or jobs.

Lastly, let me touch on an activity for on-site production of clean, affordable high-purity hydrogen.

Interest continues to gain traction, including interest from ExxonMobil, as well as a variety of parties that are involved in fuel cell electric vehicles and the needed hydrogen-fueling infrastructure.

We continue to advance our strategy of siting fuel cell power plants using renewable bio-gas that generate power, heat, and affordable carbon-negative hydrogen for fuel cell electric vehicles.

We expect to have project announcements near term to share.

Please turn to slide 9 for the summary.

More than 125 megawatts of projects utilizing our ultra-clean and efficient fuel cell solutions have been bidded to RFPs in 2016.

We expect additional submittals will be made this summer.

Decisions on most awards are expected over the next several months.

We continue to advance multiple project installations, expanding our customers and service base globally.

We have begun the first of a two-phase expansion of our North American manufacturing facility, providing near-term operating efficiencies, decreasing our breakeven, and additional capacity needed to meet future forecasted demand.

We strive to partner with the world's leading companies.

Our recent affiliation with ExxonMobil, one of the world's largest and most prestigious energy companies, has the potential to dramatically accelerate the development and deployment of our carbon capture systems, a global opportunity measuring gigawatts, or thousands of megawatts.

Because they economically capture CO2 and generate ultra-clean power simultaneously, these solutions are a potential game-changer.

ExxonMobil is bringing its world-class R&D, global reach and vast resources to the table, helping to generate enthusiasm and interest for our technology in global markets.

Finally, we expanded access to financing through Hercules Capital, giving our Company additional financial strength for growth.

This is an exciting time for our Company, partners, customers and shareholders.

We appreciate your support, and look forward to updating you as events unfold.

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

(Operator Instructions)

Eric Stine, Craig-Hallum.

Good morning, guys.

My first question just is related to the guidance.

Maybe you can just provide a little more color there.

So is this a case of, those RFPs are out there, and the timing of awards is slower than you anticipated and it will have less of an impact on 2016?

And then also as part of that, you mentioned that you think Pfizer -- that project is up and running in fourth quarter.

Is the guidance -- the new guidance -- does that have to do with the timing of monetizing that and selling that project?

Or how should we think about that?

Sure, Eric.

Good morning, this is Mike.

Yes, I think you characterized that correctly, Eric.

As we put out this guidance at the end of last year, and as we were thinking about the timing of the bids that we knew we were participating in, in 2016, thought those would come along a little bit sooner than they have.

Our bid activity, as Chip mentioned, has been very strong.

We do expect awards to come out of multiple RFPs.

And certainly that will begin to impact the fourth quarter and then going into 2017.

So that's the change in the guidance.

As you mentioned, Pfizer -- we are completing commercial operations in the fourth quarter.

Construction of that site is going very well, and we would expect that to come through revenue recognition in the fourth quarter as that project is completed.

Okay, got it, that's helpful.

Just wanted to turn to E.ON -- you gave an update on that first project.

Just curious what you think it means to have a reference site there?

And maybe just talk about how you see E.ON's pipeline once that first project is up and running?

Yes, Eric, good morning, this is Chip.

Thanks for joining.

I mean, look, we have other activity megawatt-scale things going on with them.

But certainly having the first megawatt installation of a fuel cell in Europe is a pretty big deal, particularly where it is.

Manheim is an industrial-type area, and we see other opportunities for these and larger projects in Germany.

So I think -- I would say also they have a pretty broad reach across Europe, and they're helping us with -- both sides of E.ON, I should say.

There's the E.ON side which is the commercial business, and then there's the Uniper side as well, which is the ones that retain the assets.

So I'm pleased with what we're doing there and the recognition of how we fit into the future of their business.

Okay, got it.

Maybe last one for me -- I know you put out the ASE update -- I believe it was last week.

One thing that caught my eye there -- just talking about distributed hydrogen and carbon capture.

So maybe you could talk about what the pipeline looks like for those two applications in Asia?

And then just to clarify, that is outside the POSCO license agreement.

Is that right?

Eric, this is Chip.

Yes, you're correct on that.

Relative to the activity, there is activity in Europe as well.

You asked about Asia, but this carbon capture subject is a global one, particularly if you think about China and India.

And I mentioned in my remarks that one of the great things about working with Exxon is they're a global company.

But this represents a huge opportunity for export for us, and we are uniquely positioned to get that.

But on the hydrogen side, similar story, a little more targeted.

In Europe, there's a lot of interest; we're working specific projects -- more to follow on that.

And then the biggest driver on hydrogen would be Japan and Korea at the moment, in Asia.

So we have discussions going on, on those topics as well.

Okay, thanks a lot.

Sven Eenmaa, Stifel.

Yes, thanks for taking my question.

I first wanted to ask about your -- actually your energy generation cost, to see whether there are any updates in terms of where you currently stand in terms of cents per kilowatt hour at cost to generate from your fuel cell plants?

And then, what is the road map here?

Sven, good morning, this is Chip.

Let me take that.

Obviously, the way we bid these projects is on a turnkey basis, and what really matters is the cents per kilowatt hour.

So I am not really at liberty to divulge those things from a pure public perspective.

But I would say this, that when I said in my comments here that we've competitively bid these projects, we obviously know what the market bears, we know what other technologies can deliver power for, and we are right there with everybody else, if not better.

And when you throw in the attributes, as I tried to kind of explain a little bit of how these people are evaluating the other things that we provide, we have very attractive offerings.

And I would say that, in a nutshell, over the last several years, that attractiveness has probably improved by about a third.

And then, there's still more to go, Sven.

So we are on a good track to make sure that we can be competitive with anything else that's out there.

Got it, that's very helpful.

Second, I wanted to ask about the POSCO relationship, and you mentioned also their pipeline of projects in Korea.

What are your expectations of that conversion of that pipeline?

And what are the expectations in terms of fuel cell kit sales into Asian markets beyond 2016?

So let me start, and maybe Mike has something to add to that.

Let me just explain a little bit about the market.

So the market and what drives the market in Korea is quite different than here and other places in the world.

What they have done is, they have a policy in place that says they want so much new and renewable energy -- fuel cells are the major driver of that -- over a period of time.

They then -- the power companies, which are primarily government-owned there -- then go out and submit license requests to the government, Sven, to say: Can you build these plants?

And long story short is, there's hundreds of megawatts of licenses out there.

And basically, now it's up to POSCO, primarily, to go out and find those sites or execute contracts with those utility companies.

There's a handful of them.

You might also know that POSCO Energy itself is the largest independent power producer in the country.

So between POSCO themselves and the other power companies, those are our customers.

An example is -- again, we don't announce these things until they are finalized agreements, as Mike made reference to, but the project that we just -- that they announced, that we knew a lot about and were involved in some of the contract details, was a 20-megawatt project for the largest utility company there.

So things, again, aren't just linear there.

But what is nice about there is the potential.

And frankly, the road map there is a lot more visible than it is in some of the other markets that we have.

So we're bullish on that particular market and their position.

Got it.

And --

Sven, this is Mike.

Just to be complete on your question, I'll take the question about the Asia sales beyond 2016.

As we've talked about in the past, POSCO has been building their manufacturing facility.

That is complete and online now, and producing cells.

We had been planning with POSCO for this time.

Our current order of kits ends at the end of 2016.

As you know, that's pretty low-margin business for us.

So we will be replacing our manufacturing capacity in the US with higher-margin EPC orders from the US and Europe, and that led to the reduced break-even targets that we shared today.

We now expect EBITDA breakeven in the range of 50 to 60 megawatts, with that kit volume coming out.

So POSCO is certainly capable of producing the equipment they need to satisfy their market in Asia.

As they produce and deliver equipment, we get a royalty on what comes out of their manufacturing facility, at 3% of their sales pricing.

Very helpful.

And the last question -- I wanted to just clarify.

The $2 million of non-recurring charges you referred to, was that all-in costs -- I mean, cost of goods sold?

And finally, what are the expectations in terms of OpEx spending in the coming quarters?

Yes, sure.

That was included in service costs of goods sold, as I mentioned in my remarks.

As far as operating expenses, we did say in my remarks that we did increase OpEx a little bit in the second quarter, as we had all of this bid and proposal activity, as well as some product enhancements that we are working on, on the R&D line, notably the high-efficiency fuel cell, which will go into production next year.

So I'd say from just a quarterly basis, this is kind of the high point that we would expect this year.

And OpEx will be either at this level or slightly below as we continue through the fiscal year.

Got it, thank you.

Thank you, Sven.

Carter Driscoll, FBR Bank.

Good morning, guys.

Good morning, Carter.

The first question is just getting back to kind of the guidance and the award timing.

I think previously you talked about expectations, at least in FY16, that you would get some revenue from Beacon Falls.

It sounds like the timing of that is towards the latter part of your initial expectations.

Do you still expect some revenue contribution from Beacon Falls in this fiscal year?

And then maybe just any color or nuance you can give as to why you think some of these awards have been pushed out?

Is it the normal bureaucracy because a lot of these are from the state and municipal level -- any color you can provide.

And I have a couple of follow-ups.

Thank you.

Sure, Carter.

I'll start, and I'll let Chip jump in towards the end.

So, yes, as you mentioned, we did update guidance, and it is taking into account expected timing from bid awards.

We would expect revenue recognition later in FY16 from new awards, whether it be Beacon Falls or other projects.

We do have inventory on-hand that can be rapidly deployed late in the third quarter and the fourth quarter, as we begin to get project awards.

As we take contracts, our contracts are always shovel-ready, so we're able to execute pretty quickly after contract signing.

As far as timing, the awards that we were bidding into had public notification dates that had a range anywhere from April to July.

That range, certainly for the bigger projects, is trailing towards the later part of it.

So that's really the answer to that part of the question, Carter.

Okay.

Can you talk about your quoting activity outside of state and municipal RFPs?

I mean, obviously you've addressed Pfizer, but maybe more on the commercial side.

Can you talk about what you are bidding into, or maybe how that pipeline is comprised for what you just updated today?

Yes, Carter, this is Chip.

Let me take that one here.

Yes, I highlighted primarily the utility side.

Remember, there's two sides of our Business.

There's utility scale, which are generally RFPs-generated.

And then there is the -- what we call on-site opportunities.

There's a whole laundry list of projects there that we're working on as well, that don't have those same timetables, that could be, in fact, shorter than that.

So we have two different teams of people focusing on different opportunities.

That process on the on-site power thing has a more diversified portfolio of customers, both geographically and across markets.

But yes, there will be some of those that come in as well.

And you talked recently about the average project size increasing, in particular for on-site.

Has there been any noticeable uptick and/or flattening in the average size for what you are currently addressing?

No, I mean, even -- it's a different scale, right?

The smallest project we will do on the on-site is 1.4 megawatts, but those are ticking up to be 2.8 megawatts or more.

And on the utility side, yes, they're definitely going higher.

We don't bid anything below about 4 megawatts or 5 megawatts now, and then they go up to 20 megawatts.

And we have projects, as you know, in Beacon Falls that are 60 megawatts.

So the idea of 100-megawatt projects is not out of the question for us today, with the economics that we can deliver.

Maybe next question -- just talking about -- you obviously gave a lot of detail about the recent announcement with ExxonMobil.

Can you update us on site selection for the DOE project timing there?

Have you narrowed it down?

Any particular sites as to final site selection?

Maybe timing, and whether you expect potentially any revenue from that first phase this year?

And then, I think there was obviously noticeable wildfires in the Alberta region.

Does that have any effect on potential opportunity with [some of this] that you talked about earlier?

Yes, so let me -- so that's a great question.

Thank you for bringing that up.

So here are the facts.

So we obviously had been doing work with Exxon before this recent announcement, but we weren't at liberty to talk about it.

And we actually -- this project that we have to build this pilot plant, we actually had in hand before the Exxon announcement.

And what's really happened is, we kind of waited on that, because we knew we were going to get this agreement with Exxon.

And now that we have Exxon, they're actually going to be involved in that particular project, Carter, as a partner with us, and the site host.

So we kind of put that on hold until we got them in the fold here, and now we're fully engaged with multiple site hosts.

In fact, we've got people on the road with the Exxon folks meeting those subject things.

So more to follow on that.

That's going to pick up pace, and that will happen quickly.

Relative to the revenue recognition in this year, yes, there will be significant revenue recognition from, not just that project, but from our Advanced Technologies business in general.

As you saw, the backlog went up pretty sizably; it's over $60 million now.

But as we're going through that route, as I mentioned in my note, in my comments, all of a sudden people started calling us about -- hey, what about doing carbon capture, oil sands, steel industry, or whatever.

And we can pursue those opportunities as well, in parallel.

So I would say, more to follow on that.

But that's a good thing that we have a broader base of interest than we had before.

It sounds as though it's -- in general, it was mostly an RFP award push-out timing, in general, that caused your guidance to be lowered, at least for FY16.

Does that have any effect on phase 2 of expansion in Torrington, or how do you think about executing on that next leg?

So relative to -- all these things kind of come in -- the things got pushed out.

As Mike talked about earlier, we had to get project financing in line.

We did some more of that.

As far as the expansion, that's moving ahead because the first phase of that is as much a cost-reduction exercise for us to lower our run rate, as we talked about, or break-even rate, as well as making the facility bigger, where we consolidate things and plan for future growth.

So that's moving ahead just as previously planned.

Some of that is funded by the State of Connecticut -- which we have received those funds.

So that's moving forward, Carter.

Appreciate your time.

I'll get back in the queue, gentlemen.

Okay.

Jeff Osborne, Cowen and Company.

Yes, good morning, and thanks for all the detail so far.

I was just hoping, Chip, that you could address -- I think it was the Korea Herald that had a report about POSCO, and some job cuts and delays in some of their projects.

It doesn't seem to reconcile well with what your analysis of the Asian backlog that you reported a few weeks ago.

A, did you see that report?

And B, what were your thoughts?

Well, first of all, Jeff, thank you for asking the question.

And, yes, I've seen the report.

We obviously know what's going on around the world.

But to your point, let me just be clear on the record on that.

There were some comments made that, I think from an industry source, or I forget how they characterized themselves, that -- POSCO Energy is the largest independent power producer in Korea.

A small portion of their business is from the fuel cell business -- they're a multi-billion-dollar total business.

But I think the article was trying to focus in on some of the challenges they were having, which was primarily a result of overbuilding in some of these different core baseload power plants.

Remember, the fuel cell business is focusing on this new and renewable energy piece of that, which is going forward anyway, Jeff.

So somehow, some of the comments about retirement got mixed up with all that.

But in fact, POSCO just received this 20-megawatt order.

We've been working on that for a while, and there's more to come in the pipeline.

So this idea that they're not accepting orders -- I don't know where that came from.

But let me address the retirement issue.

Look, we know what they do.

We're talking to these guys every day.

In fact, we have people over there, or whatever.

And their relationship with us is actually closer than ever, by their own desire and, frankly, ours as well.

And what we were working with them on is a way to optimize their business from multiple ways.

But one of them was obviously people -- operating expenses.

So, yes, there is an effort to reduce some of the people, the headcount, in the fuel cell business specifically.

There are broader things that they're doing in the business relative to fuel cell, but that's a coordinated effort with us.

Because, frankly, they're going to a different place.

They had a lot of buildup, as they brought manufacturing there fairly quickly, that we now can optimize, with us doing some things equally in engineering.

They had some things they were doing because they were trying to localize so many things.

So, Jeff, I would say this is more of a natural, business-related activity than anything other than it would be portrayed.

Got it.

That's great to hear.

A couple other just random questions here -- Mike, on the OpEx trajectory, I think in response to Sven's question or somebody else -- consistent OpEx over the remainder of this fiscal year.

But given you've got this super cycle of bids that you are participating in, do you anticipate next year that OpEx would stay at this level, or potentially be lower?

I'm just trying to look at the puts and takes of the timing of all of these awards that you are participating in.

Yes, hi, Jeff.

Good morning, and thank for the questions.

Yes, as I said, we see this quarter OpEx kind of at the high point.

We would expect this fiscal year, and certainly going into next year, we want to get leverage out of this business.

We are staffed up well right now.

We are executing well on our product enhancements.

Those will come into production into next year.

So, don't expect any major changes in OpEx going forward.

Good to hear.

Just a couple other quick ones here -- on the optimization of the two plants that you mentioned, are there any other facilities from five, seven years ago that this type of issue might pop up over the coming quarters?

Or you feel like you've scrubbed the issue with other plants?

Yes, Jeff, I'll take that, and I'll let Mike add to it.

But I said in my comments that we are done with that.

We had some of that in the first quarter as well.

And I would say that all of these things were done in a very amicable way.

And these contracts go back 5 to 10 years ago.

And at the time, it was a good idea, but circumstances change.

So that's taken care of, and we're moving forward with happy customers here.

Good to hear.

And then, Mike, what was the interest rate?

It might be in the 10-Q when that comes out.

But on the Hercules facility, what's the rate on that?

And is there any notable covenants that we need to be aware of, either in terms of working capital or minimum cash balances -- that type of thing?

Sure, Jeff.

The cash interest rate on the Hercules note is 9.5%.

The note is interest-only for at least the first 12 months, and we have the opportunity, if we hit certain milestones, for that interest-only period to expand up to two years, which is really helpful from a working capital financing perspective, which was the goal of the note.

And what was the second part of your question?

I'm sorry, Jeff.

Is there any kind of minimum working capital or cash balances that we just need to monitor to make sure you're in compliance (multiple speakers)?

Yes, the only financial covenant is maintaining an unrestricted cash balance of 75% of whatever we have outstanding on that note.

Okay, got it.

And the last question, strategically, how do you think about not looking for the price on the PPAs, but as you bid in these auctions and RFPs, as it relates to the tax credit?

If, for example, it doesn't get on the July 15 FAA extension bill, you're then moving into the timing of the primaries, and then you've got the election in November.

So you're probably looking, at least in my view, more of a retroactive extension some point early next year.

But looking at the timing of the PSE&G bid, in particular, you need to put in your price somewhere before that period in the fall.

So I guess just strategically, how do you go about approaching these RFPs?

I assume -- is the game plan, if we move beyond July 15 and you do not have an extension, that you just make the assumption that it is?

And perhaps if you're awarded it, you can drag your feet and move slowly and wait for it?

I guess I just don't know how, logistically, that would work.

So Jeff, again, I'm in this pretty deeply with some of the highest levels of the government.

So I'm very confident it will get done.

And like I said, it doesn't have any impact on our Business this year.

And when you kind of look at shipments and revenue next year, if we get to [safe haven] it's the end of the year or beginning of next year, we'll still be fine.

And if all else fails, we're in a position now -- which is kind of a nice thing, given the nature of the products and costs and things like that -- that if we had to, we could absorb it.

It's not ideal.

But the primary thing is, it's going to happen.

It's going to happen.

Got it.

Thank you.

Washington works in strange ways.

Isn't that the truth?

Definitely.

Yes.

All right, good stuff.

Thanks, guys.

Thanks, Jeff.

Craig Irwin, ROTH Capital Partners.

Hi.

Good morning, and thank you for taking my questions.

So first thing I wanted to ask for a little bit more color on, is the changes that you made to get to the lower megawatt production targets for EBITDA net income breakeven?

If you could share any detail there, that would be helpful.

Good morning, Craig, this is Mike.

Sure.

As we are modeling the Business now, it's really -- the biggest driver is removing the POSCO kit sales.

As we've talked about multiple times, the sales of those kits are very low margin.

So pulling those out of the model and then bringing in much higher-margin EPC turnkey projects that we're doing in the US and Europe.

And we target margins on those projects at low- to mid-teens.

And then, of course, service is additive to that, which we target in the low- to mid-20%s.

So those are the major changes.

Some kind of additional changes that we also think about as we're thinking about breakeven is contributions from other parts of the Business.

So as Chip mentioned, advanced technology backlogs -- that is increasing.

We expect that to run at a higher rate, at a more profitable rate than it has run in the past, which also contributes to the lower break-even level.

I would just add, Craig, and we're always looking for operating expense reduction, product cost reduction, et cetera, et cetera.

And we've been working really hard on that and have good results.

I mean, even though we don't make money per se on the kit sales, what that does do is that allows us volume through the supply chain, which does help with the overall product cost.

So as POSCO comes online with their own production, the supply chain will continue to deliver.

And yet we don't have the burden of the no-margin on the volume going through our plant.

So it kind of unwinds itself in a very positive way.

Okay.

So then, if we look at this, if I'm going to sort of step back a little bit, we all knew that POSCO was going to roll off at the end of the year.

We've all known that it's very low margin.

So it sounds like we can simplify and say the EPC stuff is possibly higher profitability, and the technology contracts that you booked were not in the original guidance.

So how long do you expect the technology contracts to remain a key part of the uplift for profitability for the Company?

And on the EPC side, are the margins that you expect to book for this year similar to what's in your pipeline?

Well, there's about three questions there.

I forget the first one, Craig, but the second one was advanced technologies, I think.

That business -- as this Company started as an R&D business, that was kind of what we did.

And then a few years ago, we were doing a lot of work there on new applications, which ultimately turned into commercial products.

But we didn't -- it was a cost center, not a profit center.

The big change is, that's becoming a profit center for us.

And I can tell you that while the backlog has increased, the pipeline of activity is immense.

So that model will -- as Mike said, part of that is a transformation of the Business.

That's another one that sometimes is overlooked, that will generate some very positive margins for us for a sustainable period of time.

I can't remember the other question.

I'll take it.

So, Craig, as far as profitability of the pipeline, as I mentioned, we see EPC -- we target EPC profitability in the low- to mid-teens, and then service above that.

Certainly over time, we're going to push those numbers up.

As I mentioned, we do have new products that will be coming into production in late 2017.

The biggest example of that is the high-efficiency fuel cell.

That can deliver 60% electrical efficiency, so that reduces the overall fuel costs of a project over a long period of time, pushing down the LCOE.

So, value should accrue back to FuelCell Energy for that product being out in the marketplace.

And then, of course, we're also working hard to extend the life and the power output of the core technology.

So as all those roll out, we do expect margins to grow to the Business over time.

Great.

And then, last subject I wanted to hit on was the investment tax credit.

So can you maybe give us color on how much of the updated guidance for 2016 you would associate with delays in fixing the investment tax credit?

I know there has been public discussion about ITC creating complications, a little for LIPA.

I would assume it is elsewhere.

And, Chip, we'd heard that you were in DC last week with Exxon, walking around, visiting our good legislators.

What we're hearing is, this gets attached to the Puerto Rico debt relief bill.

If you have any color there, or if you would maybe point us in another direction, that would be helpful.

Thank you.

I guess you're tracking my every move here, Craig.

(laughter) But anyway, no problem.

So first of all, the ITC question has zero impact on our 2016 numbers, because of everything I said that we are going to get done.

The current tax credit is that everything has to be operational by the end of 2016, which is December -- and our year ends in end of October -- and everything we can get done by that period of time.

Relative to what's happening, just maybe to educate the audience here.

This is a tax bill.

Therefore, it has to -- it would be on a major bill that has tax implications.

And there are several of those potential tax bills that the Congress is working on.

One is the FAA bill.

One is, as you said, is the Puerto Rico bill.

There's some others, Craig.

So, yes, we are working to get that amendment, as we call it, put on any number of those tax kind of bills.

I don't know if it will be specifically Puerto Rico.

There is a number of them.

And then at the end of the year, there's always a wrap-up, kind of an omnibus thing that happens every year to do these things that it doesn't get done.

Which is why, as I said to Jeff, I'm very confident that it will get done, because nobody is against it.

I mean, all the leaders, House and Senate, are in favor of it.

And it's just a question of finding the right bill, frankly, to put it on, that gets done.

Because it's not about our amendment; it's about the other bills that might have some things in there that people might be debating -- like Puerto Rico and some other things.

Yes.

And just if I could share, from our DC contacts we hear your message of -- hey, we compete against solar, this isn't exactly fair.

And these are US jobs -- don't make them go away.

That those two messages are really resonating.

So we look forward to the positive outcome there.

Yes, and you know, you mentioned Exxon.

Just to be clear, the new news there -- the reason for the tax credit was -- right, fairness and all the things you said.

The mistake that was made by Congress was an omission, and it needed to be fixed.

But the new news when you show up with Exxon is, you realize that this carbon capture thing does a lot for coal, does a lot for clean energy, does a lot for gas.

Well, all of a sudden, you have an opportunity not just to solve some of the domestic problems in an affordable way, but all of a sudden this thing is a tremendous tool to solve some of the bigger challenges of the two biggest polluting nations in the world right now, which is China and India.

So that's export.

So this is all jobs.

It's kind of the reverse of the solar panels, where somebody else is shipping it in.

We want to be the ones shipping it out.

So there's bipartisan support when you start to throw that in there as well, so it just kind of strengthens our story.

Thanks again for taking my questions.

Great question, thank you.

Anne Crow, Edison.

Good morning.

Thank you for taking my question.

I had originally wanted to ask about expansion in Europe, but that's been very thoroughly covered in other responses.

But I'd like to take the opportunity to ask about the technology.

I mean, clearly, you're no longer an early-stage company, where technology is all you have to talk about.

But I was wondering, are you doing any improvements on the carbonate technology at the moment?

And if so, in what areas?

And secondly, when do you think you're going to have the solid oxide fuel cell technology commercially available?

Good afternoon, Anne, this is Chip.

Let me take that, and if I miss anything, Mike can fill in.

But your first question was what are improvements or things to the current carbonate fuel cell?

And the answer to that is, there's many.

We've made public discussions of -- obviously, we're looking to extend the life of the cells, which we are actively pursuing, and that's going fine.

We put together some new versions that now have the electrical efficiency growing from 47% to 60%.

I can go on and on, but basically, we continue to make that apply to more applications, in a more affordable way, around the world.

Many of those things that we are looking to improve would apply to Europe as well.

Relative to solid oxide, we do have a solid oxide technology, a company that we acquired several years ago called Versa Power.

And there's really two parts of that business, Anne.

One is small-scale products for distributed generation -- and the technology is different than carbonate.

It does lend itself to scaling down, and it has some higher -- it has about 60% electrical efficiency, et cetera.

But really, the other piece of that is that product lends itself to a storage application, by way of the fact that you can run that to produce either hydrogen, or use the hydrogen and produce electricity.

So there's more to follow on that topic.

That's an exciting market today.

Probably on one of the future analyst calls or earnings calls we'll bring that up.

But we are pursuing, primarily at this point early commercial or R&D projects with the solid oxide technology that will eventually be a global offering for us.

Thank you.

I look forward to the analyst call where you're talking about that in more depth.

Okay, thank you.

Thank you.

And at this time I would like to turn the call over to Mr. Chip Bottone, Chief Executive Officer, for any closing remarks.

Thank you very much, everybody, for joining today.

Hopefully, what you took away from the call is that we've got a lot of activities that will both happen in the near term, as well as have a tremendous impact on the Company.

Our strategy, as I mentioned in my comments, was to work with the biggest companies in the world -- not just Exxon.

But if you think about E.ON and the others, that's what we've done.

We can't always control time, but we only have one way to do things, and that's the right way.

The fundamentals of this Company have never been stronger.

We've got great people doing great things.

We get compliments every day from some of these biggest companies or governments in the world.

So I think, as Mike said, we are well positioned for the future here.

So we thank you for your good comments, and we look forward to talking to you here on the next earnings call.

Have a great day, everybody.

Ladies and gentlemen, thank you for your participation on today's conference.

This concludes your program.

You may now disconnect.

Everyone, have a great day.