燃料電池能源 (FCEL) 2018 Q1 法說會逐字稿

Good morning.

My name is Tiffany, and I will be your conference operator today.

At this time, I would like to welcome everyone to the FuelCell Energy Q1 2018 Earnings Conference Call.

(Operator Instructions) Tom Gelston, VP of Investor Relations, you may begin your conference.

Thank you, Tiffany.

And good morning and welcome to the First Quarter 2018 Earnings Call for FuelCell Energy.

This morning, FuelCell Energy released financial results for the first quarter of 2018.

The earnings release as well as a presentation that will be referenced during this earnings call are available on the Investor Relations section of the company's website at www.fuelcellenergy.com.

A replay of this call will be available approximately 2 hours after its conclusion on the company's 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, without limitation, statements with respect to the company's anticipated financial results and statements regarding the company's plans and expectations regarding the continued development, commercialization and financing of its fuel cell technology and its business plans.

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 U.S. Securities and Exchange Commission.

Now I'd like to turn the call over to Chip Bottone, President and Chief Executive Officer.

Chip?

Thank you, Tom.

Good morning, everyone, and welcome.

Please turn to Slide 4, highlights.

Today we announced our first quarter 2018 results highlighted by increased sales and margins and excellent cash flow for the business.

The key to our first quarter performance was delivery of the power plants for the 20-megawatt fuel cell park for Korea Southern Power Company or KOSPO, our newest utility customer who owns 9 gigawatts of power generation assets.

Revenue from the project and cash from payments for inventory that we delivered was recognized in our first quarter financial statements, enhancing our financial position, further demonstrating our ability to execute on large global projects.

This project, KOSPO's first fuel cell park, is now under construction and work is progressing on schedule.

We'll begin commissioning in the spring of this year and bring it to full power during the summer.

KOSPO was a showcase installation and a model for future large projects.

South Korea is a large market for industry-leading fuel cell solutions and includes other large high-profile projects like the 59-megawatt fuel cell park for GGE, which is majority owned by Korea Hydro & Power Company (sic) [Korea Hydro & Nuclear Power Company] or KHNP.

South Korea is a large near-term market, and we see sizable opportunities for multi-megawatt fuel cell parks with the country's top utilities.

We are making major progress in expanding this market, and our team is actively developing and bidding on numerous projects.

We're also seeing good progress in the United States.

Last week, we announced that we executed a 20-year power purchase agreement or PPA with Bolthouse Farms, a subsidiary of our existing customer, Campbell Soup Company, which also owns Pepperidge Farm, a long-term user of our solutions.

We will install 2 SureSource 3000 power plants at Bolthouse Farms' food processing plant in Bakersfield, California.

This highly efficient onsite combined heat and power or CHP system will generate 5 megawatts of reliable, low-carbon electricity and steam.

This project highlights multiple benefits of our innovative fuel cell solutions.

With no upfront capital investment, our customer benefits immediately from operating savings, power reliability and emissions reductions.

In addition, our customer benefits from our ability to offer industry-leading comprehensive turnkey solutions that include EPC long-term operating and maintenance services.

Illustrating our PPA-based generation strategy, we'll be retaining this project in our growing generation portfolio.

These generation assets are producing consistent long-term revenues and contributing to future profitability.

Our onsite 2.2-megawatt CHP power plant powering a state-of-the-art micro-grid in the town of Woodbridge in Connecticut was recently certified and placed in independent mode, meaning that it will automatically take over, powering key facilities in case of grid outage.

Owned by AVANGRID, the regional utility, and installed at the town's high school, our fuel cell plant is the sole power source for 7 of the town's key facilities during power outages, making this a true micro-grid of scale.

We are pleased to have reached this important milestone because this project is an ideal showcase for micro-grid solutions for a wide range of applications and customers.

The Bolthouse Farms and Woodbridge projects highlight multiple elements of our strategy, and like other fuel cell energy projects, underscore growing momentum in the energy as a service market, which I will address later in the call.

Recent federal legislation developments which will stimulate capital investment in fuel cells is also contributing to momentum.

On February 9, the U.S. Congress reinstated the investment tax credit for fuel cells and extends and significantly expands the existing carbon oxide sequestration credit.

The long-awaited reinstatement of the investment tax credit or ITC for fuel cells, levels the playing field for the U.S. fuel cell manufacturers and is good public policy that supports American economy.

Stationary distributed generation fuel cells are the cleanest and lowest emission high availability power sources on the market today and complement the intermittent wind and solar sources being placed into power grids.

The ITC will facilitate continuing market expansion and product deployment by enhancing our competitiveness on projects in our pipeline and help with project financing leverage and interest.

The so-called carbon oxide sequestration credit, known as the 45Q bill, includes 3 key provisions.

First, the bill increases the dollar value of carbon capture credits.

It provides a credit of up to $50 per ton for CO2 that is sequestered and up to $35 a ton for CO2 that is reutilized.

Second, it eliminates the previous cap on the amount of available credits.

Businesses would have 12 years to take advantage of the credits with no limit on the amount of CO2 that can be sequestered or reused.

Third, the new legislation extends the tax credit by reducing the tonnage threshold of captured CO2, which will broaden the reach and attractiveness of the carbon capture implementation.

Financial incentives like these are instrumental in establishing a value for captured carbon.

By encouraging additional investment in carbon capture technology by energy producers in the U.S., this credit could accelerate deployment of our innovative and revolutionary capture solutions.

Working very closely with our technology partner ExxonMobil, a global sequestration leader, we have developed a scalable, innovative carbon capture solution of coal and gas-fired power plant applications as well as oil sands applications and are making excellent progress.

Both companies are happy with our progress and looking to accelerate deployment.

ExxonMobil executives recently referred to our work in their 2018 energy and carbon summary, providing perspective and goals for a lower carbon future.

Our first pilot plant will be built and tested at a 2.7-gigawatts dual-fuel, mixed-used coal and gas-fired electric generating station in Alabama and operations are expected in 2019.

The coal-fired power plants, we continue to make progress with our partnership with the U.S. Department of Energy.

I will discuss our company's energy as a service value proposition 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 overview.

FuelCell Energy reported total revenues for the first quarter of 2018 of $38.6 million compared to $17 million for the first quarter of 2017.

This increase in revenue reflects completion of the deliveries under a 20-megawatt order to a South Korean construction company for a utility project to be owned by Korea's Southern Power Company or KOSPO.

As the picture on the bottom right of the slide indicates, we have made tremendous progress on this project in a short period of time.

This contract was executed on August 2017, and we completed deliveries in the first quarter of 2018.

Commissioning is expected to commence in the spring, and the plant is expected to be fully operational in late summer.

The KOSPO project highlights our ability to rapidly respond and execute on projects of scale for the utility markets on a global basis.

Gross profit for the first quarter of 2018 totaled $4.6 million, and the gross margin percentage was 12%.

This compares to a gross profit of $1.8 million for the first quarter of 2017 and a gross margin percentage of 10.7%.

Higher gross profit in the quarter was driven primarily by the Korean product sales.

Operating expenses for the first quarter of 2018 totaled $10.2 million compared to $12.7 million for the first quarter of 2017.

This decrease was primarily due to lack of restructuring expenses in 2018 and lower research and development expenses following the introduction of the 3.7-megawatt SureSource 4000.

Net loss attributable to common shareholders for the first quarter of 2018 totaled $8.4 million or $0.12 per basic and diluted share.

This compares to a net loss of $14.5 million or $0.39 per basic and diluted share for the first quarter of 2017.

Net loss attributable to common shareholders for the first quarter of fiscal 2018 includes 2 new items in this period.

First, a noncash deemed dividend was incurred totaling $3.5 million related to the company's Series C preferred stock, which had conversion activity in the period.

Conversions and redemptions which occur when the conversion price is less than $1.84 per share results in deemed dividend.

The company has been making periodic installment payments on the Series C preferred stocks and shares of common stock.

The final installment payment is expected to occur in March of 2019.

Separately, the company recorded an income tax benefit totaling $3 million for the 3 months ended January 31, 2018, related to the Tax Cuts & Jobs Act that was enacted on December 22, 2017.

The act reduced the U.S. federal tax credit from 34% to 21% effective January 1, 2018, and also established an unlimited carryforward period for net operating losses generated in 2018 and beyond.

As a result of these changes to the tax code, the company's deferred tax liability related to in-process research and development was reduced by $3 million.

Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA, which is a non-GAAP measure, in the first quarter of 2018 totaled negative $2.8 million compared to negative $6.5 million for the first quarter of 2017.

Please see our earnings release for a reconciliation of adjusted EBITDA to the most comparable GAAP measure.

Cash, cash equivalents and restricted cash totaled $115.4 million as of January 31, 2018.

This includes $76.8 million of unrestricted cash and cash equivalents and $38.6 million of restricted cash.

We also have $40 million of borrowing availability under the NRG Energy revolving project financing facility.

We are pleased with the increase in net cash of approximately $28 million in the first quarter.

The primary drivers were a reduction of accounts receivable and inventory related to the KOSPO project.

Backlog sits at a record level of $638.5 million at the end of the first quarter of 2018.

At the end of the quarter, service backlog totaled approximately $179 million, generation backlog totaled $414 million and advanced technology contracts backlog totaled $43 million.

Product sales backlog totaled approximately $2.2 million related to the Korean utility order.

The remaining revenue from this order will be recognized when commissioning the project later in the fiscal year.

As illustrated by the chart on the top right of the slide, backlog and project awards combined total approximately $1.6 billion at the end of the first quarter.

Project awards not included in backlog include the 3 LIPA projects and the service contracts, the Korea utility project.

Backlog and project awards do not include the 5-megawatt Bolthouse Farms project executed subsequent to quarter end.

The chart at the bottom left of the slide breakdown our project activity by category.

As we have discussed in prior calls, we are prudently building our generation portfolio given the long-term cash flow profile of these projects.

Upon completion of the LIPA projects and the other projects currently under development, if ownership of these projects is retained by the company, the company would have a generation portfolio of over 70 megawatts in the U.S. market, with a revenue backlog in excess of $1 billion, producing revenue for periods of up to 20 years, leading to what we believe would be strong sustainable cash flows for the company.

As Chip mentioned, we are pleased with the ITC extension for fuel cells.

This broadens the financing options for our projects by opening up tax equity opportunities.

We have seen good project finance interest for the projects that we have under development.

In conclusion, we are pleased with the revenue and cash generated in the quarter.

Backlog and project awards stand at approximately $1.6 billion and we believe the company is well positioned to execute on these and other market opportunities in front of us on our pathway to sustainable profitability.

I will now turn the call back to Chip.

Chip?

Thank you, Mike.

Please turn to Slide 6, energy as a service.

We are building on last year's transformational accomplishments and the growing momentum in our company and industry with multiple catalysts contributing to growth in our key energy markets.

These catalysts include the accelerating global adoption of distributed generation fuel cells for utilities, as demonstrated by recent activity in the U.S. and South Korea, and the rapidly emerging energy as a service marketplace, that is contributing to the growth of our generation portfolio, enhancing margins and revenue.

The unique pairing of our versatile fuel cell technology and flexible business model allows us to provide comprehensive innovative solutions that solve customer's business, energy and environmental problems in unique ways.

Recent projects demonstrated how FuelCell Energy is providing affordable, clean and reliable distributed generation for utilities, municipalities and industrial customers as a service rather than a mere commodity.

We are executing on 3 projects awarded by New York State's Long Island Power Authority or LIPA under the utility 40-megawatt program.

Our approach of working collaboratively with LIPA, PSEG authorities and the public is very welcome and going well.

This also positions us nicely for future opportunities.

These grid support installations highlight our ability to deliver energy as a service to utilities, helping them resolve daunting energy and environmental challenges, especially in densely populated regions.

LIPA needed an on-island generation to supply the densely populated areas with clean power and wanted to avoid costly transmission infrastructure.

The utility had to have affordable, clean, quiet and easy site generation.

Our fuel cell solutions, which are converting unused industrial land into income generating property, fulfilled the utility's critical requirements.

Due to the success of projects like these, distributed generation, once perceived as a threat to the central generation utility model, is now being actively implemented by utilities and other stakeholders who value its unique problem-solving ability.

The LIPA project is making great progress and the individual sites are proceeding on schedule.

These 3 projects have attractive margin and cash flow profiles that could represent nearly $800 million of revenue over a 20-year period if we retain them in our generation portfolio as planned.

Referenced in the center of this slide, our power plant serving the town of Woodbridge's micro-grid is now operational.

The plant supplies 2.2 megawatts of continuous power to the grid under normal operation.

It automatically switches to micro-grid mode in the event of an outage, supplying power to 7 critical municipal facilities.

The project illustrates how our energy as a service model allows municipalities and utilities to cooperate to enhance critical power infrastructure with clean and affordable distributed generation.

This true win-win micro-grid insulation benefits the utility with clean and reliable distributed generation installed where it is needed in the grid.

The municipality enjoys affordable and environmentally friendly power that protects critical town buildings from possible grid interruptions.

We anticipate helping other municipalities and utilities benefit from micro-grid installations like this one.

Finally, as depicted on the right side of the slide, we are excited to be executing on the new hydrogen co-production plant for Toyota's Port of Long Beach facility in California.

We have produced a new transportation model focusing on intersection of electrification and hydrogen.

We have matched this with our project execution and financing model, which are keys to global deployment.

Our multi-megawatt SureSource hydrogen installation will display our unique and innovative tri-generation technology and is a template for future projects.

It demonstrates how our energy as a service model can contribute to the development of the hydrogen fueling infrastructure that will support the emerging market for fuel cell electric vehicles.

The unique co-production plant will supply the global automaker with affordable renewable hydrogen for its Port facility fueling needs and it will simultaneously generate renewable power for the grid under California's BioMAT program.

Reducing global transportation emissions will require portfolio of several mode of technologies and analysts believe hydrogen-powered automobiles are a significant market opportunity.

Mass deployment of these tri-generation systems and the associated hub-and-spoke fueling infrastructure is gaining global interest from automakers, utility, energy companies and others.

We executed a hydrogen and power offtake agreement with Toyota in November, which is now in our backlog and we'll retain the project in our growing generation portfolio.

We are making great progress and the project is proceeding on schedule.

I recently visited with Toyota's leadership in Japan.

They're excited about the market potential for fuel cell vehicles and the opportunity to reduce the carbon footprint of transportation.

Toyota and the industry are committed to having fuel cell electric vehicles play an important role in their future global product portfolio.

We have looked at the demand for hydrogen supply and infrastructure by country and regions globally.

We see solving current hydrogen infrastructure challenges with solutions like those provided by fuel cell energy as critical to global success and are in the process of confirming a detailed plan and partners.

We are revolutionizing how people think about making power cleaner and more resilient, offering a growth opportunity to utilities and offering a step change in reducing transportation emissions globally.

Please turn to Slide 7, summary.

We started our fiscal year with a strong first quarter in terms of revenue and cash generation.

We continue to execute very well on our record backlog and continue the growth of our diversified portfolio of clean energy solutions.

Favorable policies for fuel cells have made our strong value proposition even more attractive for all of our target markets.

Looking forward, I'm steadfast of the vast opportunity and our ability with our partners to revolutionize several portions of our energy markets globally.

Execution on existing projects, continued success in attracting new opportunities, flexible service-oriented solutions for our customers and favorable legislative developments will continue to be the foundation on which our pathway to profitability is built.

Operator, I'd be happy to take questions at this time.

(Operator Instructions) Your first question comes from the line of Carter Driscoll with B. Riley.

So maybe we just start with the ITC.

Obviously, you've been waiting a long time, a very favorable development.

And you just talked about maybe the tenor of some of the conversations you had since its passage.

I would expect just given the long-dated nature, probably a greater impact in fiscal '19.

But maybe just characterize some of those conversations?

Are they opening up new opportunities with customers, existing customers and maybe the scope?

Carter, thanks for your question.

This is Chip.

I'll start and answer the first thing about the market and the customers.

Maybe Mike could talk about the financing, how ITC is helping the financing or project financing aspect.

But relative to the project side and creating opportunities, it certainly has a positive impact.

I mean, a 30% tax credit, even though it reduces down to 22%, but that takes us all the way to the end of 2023 in service days.

So there's no question that it basically creates more projects that will go forward with that.

It obviously for projects that we have, enhances the financial results or the margins obviously.

But no -- we've seen people call us just because they've heard about it, but frankly applying it to our pipeline has been very, very helpful to try to expedite and accelerate closure of projects.

We also have a vast number -- hundreds of megawatts of projects that we're bidding in the upcoming RFPs.

So the timeliness of it is really critical to allow us to compete on a level playing field with other things.

So that should help us as well there.

And Mike, you want to comment about...

This is Mike.

And just to follow on to that, yes, the ITC obviously very helpful when it comes to projects financing.

It opens up additional opportunities with tax equity, financing and improves the potential loan-to-value financing for our projects.

So it has increased interest level in our projects and will be helpful as we get long-term financing on the projects that we're building in our portfolio.

And this is on top of that?

Does this change your potential decision on the LIPA projects?

I mean -- yes, I think you were leaning towards retaining them on balance sheet.

I mean, does this make it even more favorable?

But then, again, you would potentially want a financing partner just because you might not be able to monetize them as easily as someone else.

Just trying to get a sense of particularly how the LIPA projects might be changed by the ITC application.

Sure.

And good question, fair question.

We are profiling the LIPA projects in our project awards category as generation projects, meaning that we would -- we currently plan on retaining those on the balance sheet and would obviously want to fully monetize the tax equity so that brings in those types of financing partners.

And I'd say it just broadens the types of financing interest that we would get.

For every project that the company does, we prudently evaluate it.

And for those projects where it makes sense to monetize it through a product sale and recycle capital, we will do that.

And for projects where it makes sense to retain and receive the long-term cash flow benefit, we'll do that as well.

But every project gets carefully analyzed and the same will happen with the LIPA projects.

Maybe shifting gears a little bit over to Korea.

So obviously you executed very rapidly on the 20-megawatt project.

Can you talk about maybe just the -- characterize the kind of push versus pull, I mean, your opportunities visibly within Korea?

You knocking on doors versus people coming to you directly.

And then maybe is the project scope still of a similar size, kind of 15-plus megawatts?

Maybe give us an update of range and/or maybe the number of projects you're bidding on, if you can identify them specifically?

Carter, this is Chip.

I'll comment on the Korea thing.

So the -- 2 things about it.

Number one is the -- there's a RPS objective in Korea which makes the market opportunity very large, I mean second only to probably the United States in terms of overall capability.

And KOSPO had installed 200 megawatts of project.

So we have a lot of people coming directly to us because of that because they know it's our technology and/or being referred to us from them.

Secondly, it's a fairly concentrated marketplace, so I would say that the amount of volume and things we see it all.

The range of projects we're dealing with there, as we mentioned before, are generally large.

I mean, we're working on projects anywhere from 10 megawatts to 60 megawatts.

And so that's right in our wheelhouse as well.

So I won't -- I don't want to comment exactly, but I think it's safe to say that it's a very, very large market.

We compete very well there.

We are very well represented there.

And our team has done a good job of closing some projects and I would expect some others near term as well.

Okay.

And maybe just a last one from me, an update on the Alabama Power sequestration project, just next steps.

So you talked about being operational in '19.

And then the tax credit.

Does that potentially accelerate either what you're demoing with the DOE and/or potential, I don't know, pull forward with ExxonMobil or you still have to wait for the results from the pilot plant to be able to go forward with other opportunities?

So the pilot plant in Alabama, when we say operational, it will be built out this year, '18.

And then the testing and such, which is in our definition operational for that pilot project, in early '19.

And then there's -- we're going to run different tests and things both on coal and gas.

But that's going very well.

We're very close to the Exxon people.

And I would say because of the success of that and some other things we're doing, we're very keen to accelerate whatever other things we're working on.

So that's all going very well.

And they've made public reference to that project as well and our relationship, as I alluded to.

But the answer is that, yes, carbon capture will accelerate because of that and people's interest in it.

But I noted in my comments that in addition to the ITC, which carbon capture projects would be eligible for the investment tax credit of 30% in this country, the Carbon Sequestration Act is very beneficial to accelerating deployment of carbon capture projects as well.

And to give you just a data point, give or take per unit that we would do, like we're doing a pilot plant in Alabama -- given that credit and only looking at the $35 per ton level for enhanced oil recovery in industrial use, we're talking about $1 million a year for a 12-year period in revenue.

So that combination of the ITC and this carbon tax credit dramatically improves the value proposition of carbon capture.

So as we have this momentum here of interest, the economics of that interest are going to kind of push this forward faster.

So we're pretty happy about that as well.

I don't think people recognize the advantage that your modular technology has and the fact that it's a net producer of electricity rather than a consumer.

Appreciate answering all my questions.

I'll take the rest offline.

Your next questions comes from the line of Colin Rusch with Oppenheimer.

Can you give us a sense of the trajectory in the inventory as we go through the next quarter or 2 and how much you'll be able to work that down here over the next quarter or 2?

Colin, this is Mike.

I will take that one.

So when -- obviously, in the first quarter really happy with the reduction of inventory that was deployed primarily to the project in Korea.

So we brought that down nicely from Q4.

As I think I talked about on the last call, would like to have inventory levels in the $50 million range, so a little bit above that.

Some of the inventory -- we talked about the -- we just press released the Bolthouse Farms project.

That's an example of inventory that we do have that can be deployed to that project during the year.

So I think you'll see inventory continue to rotate out to project assets as we execute on that.

As Chip mentioned when he was talking about Korea, and as we just demonstrated with this KOSCO project, we do want to maintain some balance so that we can execute on those types of opportunities pretty quickly.

So I wouldn't expect dramatic reductions from where we sit today during the course of this year, but again we'll prudently manage it between deploying to project assets and having some safety stock to be able to take advantage of new opportunities.

And then could you talk a little bit about the change in composition and pacing for a late-stage sales pipeline?

I mean, are you seeing more equipment sales kind of come into that late-stage opportunity set?

Is it more on the generation side?

And if you could talk a little bit about any changes in the pace of the sale cycle?

Colin, this is Chip.

I'll take that one.

So you asked a couple of questions there.

So in the U.S., it's primarily turned in to be energy as a service model, i.e., PPAs, whether it's purely electric and thermal, or in the case of Toyota, it's hydrogen and electricity.

And I don't see that changing.

I mean, with the ITC, that allows us to apply some more competitive price points obviously which would accelerate the deployment of projects.

Internationally, it's primarily in Korea and that doesn't apply there.

There's already a strong demand and a rather large pipeline for that.

So that's just about -- we're going to execute those as fast as we can execute them prudently.

As Mike said, those are -- tend to be short cycle projects.

The bids come out in a month or 2, you get something, and then you [use your] award and then you move on.

So those are pretty short cycle, shorter than the ones in the U.S., because it's more of a development model than the U.S. But as far as the overall pipeline, the overall pipeline is growing both internationally and domestically.

Some of that is because of interest in ITC, but some of that was just naturally what we were doing as our team of people has expanded and gotten more traction in different customers and national accounts and utilities.

So we're pleased with all that.

So now it's a question of closing what we can to meet deadlines and schedules that are out there to -- for these individual projects.

And then just one final housekeeping question.

How should we think about share count going forward?

Is there a specific number that you guys would guide us to or are we going to see that adjust a little bit as we go through the balance of the year?

Colin, this is Mike.

I'll take that one.

So when we think about share count, the shares outstanding that we reported with our 10-Q filings is based on 80.6 million shares outstanding.

As I mentioned today on the Series C preferred, we are making those installment payments in shares of common stock depending on the stock price that over the next year -- and that instrument matures in March of 2019 -- could be in the range of 10 million shares.

But again, really dependent on stock price.

So you will see share count, assuming that we continue to pay in shares of common stock, increase as a result of that instrument.

But again, that fully matures in March of 2019.

Your next question comes from the line of Jeff Osborne with Cowen and Company.

Just maybe following up on Colin's question.

How should we think about the interest expense associated with that preferred?

Does that trickle down as you pay that off and then go to 0 beyond March?

Good question.

This is Mike.

So on the Series C preferred, there is no interest expense on it.

It's really just an amortizing preferred instrument, so paying it down in series of shares.

On the P&L this quarter there's a deemed dividend and there's essentially a fixed conversion price in the instrument of $1.84.

Any time the shares are issued below that, it creates a deemed dividend.

So the calculation this quarter was about 3.5 million.

Again, depending on stock price, there will be variability in that line.

And then maybe it's just my interpretation of Chip's comments, but the LIPA projects -- so you refer to the $800 million of generation revenue and I think you used the word "as planned".

I thought on prior calls we had talked about kind of a combination of either retaining some and selling some, retaining stubs of portfolios.

Has something changed that you want to now retain all 40 megawatts on the balance sheet?

No, nothing has changed in that, Jeff.

The way we're characterizing this in project awards is -- and if we had to pick one, we think it's more likely than not that we retain some or all these projects and doing project financing around that.

So these LIPA projects would go into our generation backlog once the PPAs are executed.

And that's expected here in the first half of this year.

But as I said earlier -- and particularly with tax equity coming back into play, the company is going to prudently syndicate these projects.

We will get bids for financing them and keeping them on balance sheet and also selling them outright.

And it could wind up being a hybrid.

But the way we're currently thinking about it today and at least accounting for it in project awards is generation projects.

And then maybe just 2 quick follow-ups on that.

So with that thought process in play, what are the cash needs as it relates to constructing the projects once the PPAs are signed?

And then maybe on the same vein, solar went through this a few years ago, but can you just talk about what the premium would be if you were to sell the projects upon commissioning or interconnection versus finding buyers pre-commissioning and even pre-construction?

Is there a premium that you would get if you were to carry these on the balance sheet and then over time once they are operational sell off parts or all of them?

Yes, Jeff, this is Mike again.

So second part of that first.

I completely agree with that analysis, the further down in the development and construction cycle the projects are, the more the premium that you can derive because you've eliminated risk.

And folks generally when they're purchasing these assets, want an operating asset that's generating cash flows.

That said, there is strong interest out there in providing construction, financing for these types of projects.

As far as cash needs specific to LIPA, there's no near-term cash needs related to LIPA today.

As we've talked about, we're going through a development cycle right now.

There is some modest cash as part of that.

We will begin construction late in 2018 or going into 2019 and then operational in the 2020, 2021 range.

So it's really next fiscal year where there's more of a cash need.

But again, already talking to financiers about different ways to bring capital to these projects.

We've obviously demonstrated in the past strong project financing interest in small projects and large projects is even greater.

And you can use also the 40-megawatt revolver with NRG as well for construction if needed?

$40 million revolver with NRG...

The $40 million -- sorry.

That's correct.

We will put that to use as necessary.

Perfect.

And the last one I had is, can you just go over kind of the cadence of the generation portfolio under construction?

So I think you have 21.7 megawatts.

I forget the Triangle Street is operational.

I think that's probably the nearer term one, if it's not already done.

But can you just walk through how we should think about both the generation revenue line item for the next 3 or 4 quarters and then also the kind of roll off of that 21.7 megawatts in general?

Sure.

And your math is correct.

We do have -- and just to kind of start at the beginning, generation portfolio today that's operating is 11.2 megawatts and that's comprised of -- the biggest project in there is the Pfizer project, the 5.6 megawatts.

And then we have 4 other -- 1.4 megawatt projects at universities and municipal locations.

In the 21.7 megawatts that's under construction, you're right, the Triangle Street, which is our first SureSource 4000, is in the commissioning phase right now.

And given that that's our first SureSource 4000 -- there's a series of additional certifications and other operation testing that we want to go through, but that will come online and begin generating power in the first half of this year.

Right alongside of that and probably a little bit ahead of that is the Tulare wastewater treatment project that we announced probably a little over a year ago.

That's close to coming online.

And then other projects that we've announced and these are all public.

I'll just go down the list.

There's Trinity College, 1.4-megawatt project.

The CMEEC Groton sub-based project is 7.4 megawatt.

That will be built later this year, operational next year.

We have a 1.4-megawatt project in Long Island.

We have a second 2.8-megawatt project with Tulare and a 2.2-megawatt project that obviously we just announced with Toyota.

So Jeff, these will come online between first half of this year and end of next year, with obviously Toyota probably being the furthest one out there, and given that that's a different application, there's some additional design work that goes into that.

Your next question comes from the line of Eric Stine with Craig-Hallum.

It's Aaron Spychalla for Eric Stine.

First, maybe on the Toyota project.

Chip, it sounds like your putting together a detailed plan.

But can you maybe just talk a little bit more about the interest level and how the pipeline has shaped up since you announced that project and just somewhat characterize the opportunity, whether it's number of OEM partners or potential sites or anything along

(technical difficulty)

This is Chip.

So it's pretty clear.

It may not be -- you don't hear about it as much, but it's very clear that fuel cell vehicles -- and I said vehicles because that's trucks and passenger vehicles -- are going to be part of our future.

The economics of a fuel cell vehicle are superior to that of batteries, even with massive cost reductions they're talking about, there are obviously performance things like that and the emissions are as good, if not better.

So all those reasons point to you're going to have fuel cell electric vehicles.

The question has always been the infrastructure to support the rate of deployment of vehicles.

So for example, this pilot plant that we're building is one way of producing affordable hydrogen and feeding it into the infrastructure for hydrogen vehicles.

So the 3 things that have to happen other than the vehicles themselves, which I have every confidence that, that is available, is: a, you have to have sources of hydrogen; b, you need to get that hydrogen to dispensing stations; and c, you need to have dispensing stations.

And we're not giving away too much of our strategy.

What you can sense from that is that the way you want to do this: you don't have to have 50 different people and it doesn't really require -- from a partner perspective.

And in our view, it doesn't require massive investments from states or countries to make this happen.

You can either utilize existing programs, like, for example, we're using the BioMAT tariff in California for this.

But there's others.

There has been tax credit, et cetera, et cetera.

And then if you go country-to-country, Japan, Korea and China, places in Europe, you would find a similar story with similar things.

So we're working on a global plan to do this because the car companies one way or the other have their eye on the global markets.

And within a country or within a continent, there's obviously some countries that are more focused on this than others.

But to give you some sense, I mean we're talking about a vast number of tri-generation systems to even meet 50% of the projected volume of hydrogen needed for vehicle by 2025.

So this is both a near-term thing as well as a very, very large thing.

And working with people like Toyota, the largest car company in the world, which also we'll do trucks and things like that, is very helpful to, a, get an insight of what the demand is, and b, work alongside of them and then perhaps their subsidiaries to figure out how we actually get this deployed and financed.

So I don't want to say any more than that, but we do have a plan.

And it's a bigger opportunity and it will be done, the big opportunity hopefully by 2025.

The starting point is now.

Maybe a second on the carbon capture.

You already talked about it a bit.

Good to hear the impact that that credit can have.

Can you just touch on the competitive environment there?

I know in the past Exxon has said that FuelCell was the only company that can do this.

Can you just talk about that from a competitive standpoint?

Yes, so when you look at carbon capture, there are primarily 2 ways to do carbon capture.

You can obviously do with a carbonate fuel cell, which we're going to display down in Alabama with Southern Company.

And then there's something called amine system.

It's basically a chemical process to do it.

So physically there's multiple ways to do it, but really what it comes down to is the math has to work.

So therefore, what you're looking for is the most affordable way to do it and that falls back to us, meaning FuelCell Energy.

And I think it was Carter that mentioned that the uniqueness of what we do is not just the amount of CO2 we can capture, but the fact that we can produce power while we are doing it, which has a significant improvement on the economic.

So the leader in the clubhouse is FuelCell Energy and nobody else does what we do relative to the fuel cells.

Second thing is this carbon tax issue in the United States will be helpful to kind of move some of these things as well along and it actually expands the carbon capture story to industrial markets.

In the past that carbon tax that we're talking about did not apply to industrial applications because the tonnage per year was below the threshold.

But now they've lowered the threshold so we can do industrial, we can do enhanced oil recovery and you can do large-scale power generation.

So it's going to really help out not just in accelerating people looking at this for power generation, but it's actually going to accelerate it and expand the market for EOR and for industrial customers.

And then maybe the last for me, just on the service gross margin line, good number there this quarter.

Was there any module replacements or anything that drove that or structurally just can you talk about your expectations there going forward?

So this is Mike.

I'll take that one.

No.

I mean, from a module replacement perspective, relatively this quarter not a lot of scheduled replacements.

We continue to -- as the fleet gets a little bit bigger here, we continue to work to drive down overall service cost.

Absolutely pleased with the service margin in the quarter.

Long term, we target that margin to be north of 20%, so a little bit of work to do there.

And given the levels that we're at today, you will see variability in that line quarter-to-quarter.

But again, pleased with the continued progress.

At this time, there are no further questions.

So I'm turning the call back over to Chip for closing remarks.

Thank you very much, everybody, for the questions.

And I think hopefully you saw from here, there's a lot of momentum in what we are doing and we're very pleased with it, in all aspects of the different areas: power generation, carbon capture and hydrogen.

So more to follow.

But our expectation is that we continue to build this backlog of ours with good quality projects and good off-takers and execute on the backlog that we currently have.

So we look forward to talking to you on the second quarter call.

Everybody have a great day.

Thank you very much.

This concludes today's conference call.

You may now disconnect.