燃料電池能源 (FCEL) 2018 Q2 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 Second Quarter 2018 Earnings Call.

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

Thank you, Tiffany, and good morning, and welcome to the Second Quarter 2018 Earnings Call for FuelCell Energy.

This morning, FuelCell Energy released financial results for the second 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 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 plan and expectations regarding the continuing 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 labeled Highlights.

Today, we announced our second quarter 2018 results highlighted by continuing execution on a record $1.6 billion of project awards and backlog as well as execution of other key initiatives that are strengthening our financial position and leading our company to sustainable profitability.

We completed commissioning and final acceptance testing of the 8 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.

We are proud of our talented team, including our EPC contractor, Hanyang Development Company, who accomplished this milestone 2 months ahead of schedule.

While most of the revenue from the project is recognized in the past 2 quarters, the commissioning marks the completion of a critical project ahead of schedule.

It's an important mark for us in South Korea that highlights our ability to execute large utility scale projects and will be extremely helpful with other projects and tenders currently being evaluated.

South Korea is a sizable near-term market with many opportunities for multimegawatt fuel cell parks.

We continue to execute on 62 megawatts of projects awarded or in our backlog.

As we'll discuss in detail during today's call, these projects will greatly increase the size of our clean energy generation portfolio.

Our portfolio produces predictable and recurring revenue and is a key part of our strategy to attain sustainable profitability.

In April, we executed on 2 important capital structure activities.

We entered into a definitive agreement to sell a 2.8-megawatt fuel cell at a wastewater treatment plant in Tulare, California to NRG Yield.

Tulare Project, which is constructed by us, was placed into commercial operation following its sale.

The Tulare sale allows us to redeploy capital as we execute on growing our installed base while continuing our core role of operating and maintaining the plant.

The NRG Yield transaction allows us to have a balanced approach to our asset portfolio, growing generation assets over time while selectively creating near-term cash flow.

We also refined our existing credit facility with Hercules Capital.

Our amendment and refinancing of the credit facility with Hercules increased the facility amount to $25 million, extended the maturity date until 2020, provided for an extended interest-only period and made a number of other favorable provision modifications.

The availability of this increased credit facility as well as the interest-only period provide an important flexibility in our long-term financing plan as we execute on the project awards in backlog.

Last month, we applauded passage of Senate Bill 9, an act concerning Connecticut's energy future, which was signed into law as Public Act 18-50.

The provisions of the bill important to the vitality and future of the fuel cell industry in Connecticut were supported by large bipartisan group of state legislators.

FuelCell Energy led a successful campaign to incorporate our language into the passage of this important bill.

Public Act 18-50 increases the number of megawatts of clean energy available for procurement of fuel cells and digesters under Public Act 17-144, which was passed last year.

The current RFP issued by Connecticut's Department of Energy & Environmental Protection, or DEEP, is in response to Public Act 17-144.

The state statute expands the megawatts available for purchase under Public Act 17-144 from up to 4% of the state's load up to 6% of the state's load, representing an increase of roughly 75 megawatts.

The statute retains a 3% cap for offshore wind projects, which strengthens our outlook for fuel cells and digesters.

Digesters are typically small projects.

We have previously bid several projects in April under the pending RFP totaling nearly 100 megawatts.

DEEP's current schedule reflects that it expects to announce its selections this month.

Additionally, under the new statute, the Class 4 Renewable Portfolio Standard is now set to increase incrementally over the next decade from 20% to 40%, setting the stage for more megawatt-scale fuel cell demand.

FuelCell projects provide measurable in-state benefits for Connecticut, including tax revenue, job creation, enhancement of local power reliability and resiliency and redevelopment of urban brownfields.

With the signing of Public Act 18-50 and the statements made by various legislators during the process, the state has acknowledged and sent a definitive message that it values the energy, environmental and economic benefits of fuel cells.

I will discuss our focus areas in more detail after Mike Bishop, our Chief Financial Officer, reviews our financials and our generation portfolio strategy.

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 second quarter of fiscal 2018 of $20.8 million compared to $20.4 million for the second quarter of fiscal 2017.

Product sales totaled $12.2 million for the second quarter of fiscal 2018 compared to $700,000 for the second quarter of fiscal 2017.

The increase was primarily a result of the sale of the 2.8-megawatt fuel cell power plant project located in Tulare, California to NRG Yield.

The plant was sold just prior to achieving commercial operations, and it is one example of the quality of revenue-producing assets that we have in our portfolio.

This transaction also highlights our strategy of having the optionality to either retain or sell assets.

The gross loss generated in the second quarter of fiscal 2018 totaled $600,000, and the gross margin was negative 3% compared to a gross profit of $400,000 in the second quarter of fiscal 2017 and a gross margin of 1.9%.

Generation costs of sales included a write-off of $400,000 related to the cost of a development project.

Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes.

Manufacturing variances totaled $3.2 million for the 3 months ended April 30, 2018, compared to $2.5 million for the 3 months ended April 30, 2017.

For the 3 months ended April 30, 2018, the company operated at an annualized production rate of approximately 25 megawatts compared to the rate of 35 megawatts in the 3 months ended April 30, 2017.

Given the current level of backlog and awards, the company is evaluating a plan to increase production in the second half of fiscal 2018.

Operating expenses for the second quarter of 2018 totaled $12.1 million compared to $11.9 million for the second quarter of fiscal 2017.

Net loss attributable to common shareholders for the second quarter of fiscal 2018 totaled $18.2 million or $0.23 per basic and diluted share compared to $14 million or $0.33 per basic and diluted share for the second quarter of fiscal 2017.

Net loss attributable to common shareholders in the second quarter of fiscal 2018 includes a deemed dividend totaling $4.2 million on the company's Series C Preferred Stock.

Adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, which is a non-GAAP measure in the second quarter of fiscal 2018, totaled negative $9.8 million compared to negative $8 million in the second quarter of fiscal 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 $105.2 million as of April 30, 2018.

This includes $67 million of unrestricted cash and cash equivalents and $38.2 million of restricted cash.

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

Backlog sits at a record $681.9 million at the end of the second quarter of fiscal 2018.

At the end of the quarter, services backlog totaled approximately $190 million; generation backlog totaled $451 million; Advanced Technology contract backlog totaled $39 million; product sales backlog totaled $1.4 million, primarily related to the Korean utility order with KOSPO.

The remaining revenue from this order is expected to be recognized with the completion of commissioning in our third fiscal quarter.

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

Project awards not included in backlog includes the 3 LIPA projects and the service contracts of the KOSPO project.

The chart at the bottom right of the slide shows the project asset totals on the balance sheet.

As of April 30, 2018, the operating portfolio totaled approximately $31 million and was fully financed.

In addition, as of April 30, 2018, we had approximately $48 million of investment in projects in development, which represents a financing opportunity.

We are in active discussions regarding both construction financing as well as permanent tax equity financing and term financing as projects reach commercial operation.

Please turn to Slide 5 titled Building Sustainable Profitability.

The purpose of this slide is to provide a deeper insight into our generation portfolio strategy.

As of April 30, 2018, we had 11.2 megawatts of operating assets generating recurring annual revenue of approximately $7 million to $8 million.

As of April 30, 2018, our project awards included an additional 62.3 megawatts of projects in various stages of design and construction, with these projects expected to deliver another $50 million to $60 million of recurring annual revenue once they become operational.

Growing our generation portfolio is the cornerstone to building a sustainably profitable business.

The chart highlights the site development, construction and commissioning window for each project with the anticipated fiscal quarter of completion indicated by a star.

For example, we have 2 projects with a combined 5.1 megawatts, Trinity College and Triangle Street, which are exported to achieve commercial operation in the third quarter of fiscal 2018 and begin generating revenue.

Any new projects resulting from successful bid wins would be additive with a placeholder for these new projects highlighted in dark blue on the chart.

Please turn to Slide 7 titled Generation Portfolio Financing.

Now that we've discussed the projects that we have in process, I would like to further address the finance -- the project finance model for them.

With Tier 1 off-takers and predictable recurring revenue, our projects can attract cost-effective capital.

We're able to source competitively priced capital to facilitate the construction of projects and to address project capital needs, thereby minimizing the capital requirements from FuelCell Energy's balance sheet for projects in backlog.

Also, as demonstrated in the second quarter of fiscal 2018, we always have the option to sell projects out of the portfolio to recycle capital.

As we build out our portfolio, our expectation is that the capital stack will be largely comprised of tax equity and project debt with a manageable equity contribution from FuelCell Energy, which can come in the form of inventory.

The graphic on the right of the slide helps illustrate project capital flow using a generic hypothetical $40 million fuel cell power plant held as part of our generation portfolio.

During the construction phase, we would expect to attract financing covering at least 60% to 70% of the overall capital needs.

The balance, consisting of inventory and capital costs, would be financed by general working capital.

We have no construction debt outstanding today, so any near-term financing would be accretive to our cash balance.

Upon project completion, we would expect that permanent project financing would cover between 80% to 90% of the overall cost, leaving FuelCell Energy's net investment in this project example between $4 million and $8 million.

As to how this hypothetical project would impact our consolidated income statement, we would expect roughly $10 million per year in revenue to be generated from such a project, delivering approximately $4 million in annual EBITDA profitability, representing a 40% EBITDA margin.

Depending on debt sizing and terms, free cash flow to FuelCell Energy would also be expected to be between $1 million to $2 million per year.

As this example is applied to the whole portfolio, we would expect the execution of our backlog and awards would drive increasingly positive financial results for our company.

Now I would like to turn the call back to Chip who will dive deeper into our focus areas of the company.

Chip?

Thank you, Mike.

Please turn to Slide 8, Focus Areas.

I would like to outline the 4 focus areas that are key to driving our future success: first, execute on the 62.3 megawatts of projects under construction in our $1.6 billion backlog; second, grow our generation portfolio, driving further recurring revenue profitability; third, compete for and win new projects around the globe; and fourth, commercialize the big ideas that are being developed by our Advanced Technology team.

First, execution.

As Mike explained, we're on track to deliver on our commitments for 62.3 megawatts of new installations in Connecticut, New York and California as well as service our existing global installed base over our plants' contractual lives.

Our factory expansion in Torrington is complete and are prepared for the volume increases these projects will drive.

This particular group of projects displays key segments of our business, including utility grid support, clean and reliable on-site generation for commercial and municipal customers and distributed hydrogen for a leading global automaker.

Among these 62 megawatts are 3 projects totaling 39.8 megawatts for New's York's Long Island Power Authority or LIPA.

We are making great progress on individual sites and are proceeding on schedule.

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

Second, our generation portfolio.

We will continue to grow our clean power generation portfolio, driving additional recurring revenue profitability.

We have line of sight to a number of new projects that would substantially enhance our portfolio.

As discussed by Mike, we have a path to finance the portfolio's growth.

Third, new business.

We are successfully competing for and winning new projects globally.

We are building on our recent accomplishments and the growing momentum in our industry.

In addition to our energy as a service model, we are seeing acceleration of the global adoption of distributed generation fuel cells owned or financed by utilities in both the U.S. and South Korea.

In Connecticut, the state's 2 utility providers have been granted the authority to procure 30 megawatts of fuel cells.

This will allow the utility companies to directly own additional clean energy generation capacity to help with the grid modernization and distribution reliability.

As an example for this model, we recently completed a 2.8-megawatt micro grid project, which is owned by United Illuminating in Woodbridge, Connecticut.

We have multiple projects under development in the state and look forward to this process.

Also, as I mentioned earlier, the goal for Class 1 resources in the state has doubled to 40%, and we are uniquely positioned to help the stakeholders meet the goals with clean, affordable solutions.

In South Korea, utilities have a strong demand for fuel cell projects as the country has an RPS to promote clean energy and reduce carbon emissions.

The RPS is designed to increase new and renewable power generation to 10% of total power generation by 2023.

We see 2 approaches to projects: first, through direct ownership of energy generation assets with KOSPO being a perfect example; or through special-purpose entities financed by banks, with utilities owning equity in the projects.

We are ready now with our megawatt-scale projects, expertise, installed base, proven technology as well as new solutions to serve this significant market opportunity.

And finally, the fourth focus area is commercialization of the big ideas.

With solutions to help with grid and infrastructure modernization and emissions reductions, we are focused on carbon capture, distributed hydrogen and long-duration energy storage.

These are big ideas because they tap into adjacent and underserved markets looking for innovation in order to solve problems and because we have unique and innovative solutions that are ready to deployment now.

These market opportunities have the potential to produce significant revenue, and we are collaborating with some of the largest companies in the world to further our strategy.

Our carbon capture technology is a potential game-changer for the following reasons.

First, our affordable solution is unique in its ability to reduce up to 90% of CO2 emissions and 70% of NOx from gas and coal-fired power plants while generating additional power for the grid.

Second, our modular approach is less capital-intensive than other solutions and is based on the same commercial fuel cells that we are manufacturing in our factory today.

Third, by combining power generation and industrial applications, carbon capture can address 2/3 of the world's sources of CO2.

Industrial applications include oil and gas, steel and cement manufacturing.

Then finally, ExxonMobil is committed to advancing this technology cooperatively with us as reiterated just last week by its Chairman and CEO, Darren Woods, at its Annual Shareholder Meeting.

At this time, our effort moving -- our effort is moving forward nicely, and our carbon capture pilot project with Exxon and Southern Company in Alabama is being constructed in '18 -- 2018 and will be operational in 2019.

We are now looking at near-term opportunities in the industrial market with a similar design that we are deploying with Southern Company in Alabama.

We're also working hard to implement our strategy for affordable distributed hydrogen and infrastructure to reduce emissions from the transportation sector, a significant source of CO2 and NOx globally.

The same proprietary common technology platform that is the building block of our power generation and carbon capture products also generates excess hydrogen that can be used for transportation or industrial purposes.

Automakers, truck and bus manufacturers and industrial lift manufacturers have all indicated that fuel cells will have a role in cleaning up the transportation emissions issue we face globally.

Our solution addresses the challenge of getting hydrogen to the end user at a price point that is competitive with gasoline.

Our first generation project with Toyota in Long Beach, California is moving forward on schedule.

It demonstrates the benefits of having different off-takers of our value streams, the local utility or industrial customer for power and an industrial company or a fuel entity for hydrogen.

We expect this project to lead to additional deployment opportunities in California, U.S. East Coast and some international markets.

Lastly, we are making good progress advancing our long-duration energy storage offering.

Based on reversible solid oxide fuel cell technology, our solution converts excess power during periods of low power demand into hydrogen, an energy carrier, stores hydrogen on-site for long periods and then uses this as a fuel source to generate clean power when needed during times of high power demand.

This solution could simultaneously be the source of hydrogen that ties to our distributed hydrogen strategy.

We have recently been awarded several projects totaling nearly $6 million to advance this technology.

Utilities are recognizing the need for more affordable and flexible storage solution, which has driven interest and proposals.

The common thread with all these applications is the ability to add value in the form of increased revenue, cost avoidance or compliance for our customers while solving issues in underserved markets.

Please turn to Slide 9, Summary.

We are continuing our focused strategy on executing on our backlog, growing our portfolio, winning new business and commercializing game-changing big ideas.

These focus areas are mutually reinforcing and create a solid foundation for sustainable profitability and long-term success.

Our record $1.6 billion backlog in project awards represents an unprecedented opportunity.

It provides more than 62 megawatts of projects with which we will grow our portfolio and generate predictable recurring revenue that will lead to profitability.

We have a high level of confidence in our experienced team and their track record of successful execution like the 20-megawatt KOSPO project, which went fully operational 2 months ahead of schedule.

Our proven solutions and capabilities are more competitive than ever in the global energy markets.

Recent favorable legislation developments are strengthening our ability to compete for and win new business in Connecticut and elsewhere.

Today, FuelCell Energy is executing on a strong plan backed by favorable energy and policy trends.

We have significant momentum heading into the second half of 2018 and beyond.

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

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

First one I have is maybe talk about -- you had a very quick turnaround for the first project in Korea with KOSPO.

Maybe talk about some of the other projects you're bidding on.

I would expect maybe a longer installation time in that project initially.

Maybe talk about the competitive environment, any changes there.

I mean, it seems like a very ripe market for your solutions.

Just trying to get a sense of what else is in the pipeline in the near term.

Sure, Carter, this is Chip.

Relative to the Korean market, there is a sizable pipeline that we have, both direct procurement by utilities like this KOSPO project as well as special-purpose entities, as I mentioned, that are set up in collaboration with the banks and the other generation companies.

Not every project will be 2 months ahead of schedule, I grant you that.

But we understand very carefully the models that they use to make selections in Korea.

We understand very carefully our competitive position.

And I think as this project demonstrated, we do what we say we're going to do, which adds great value in markets like Korea.

So on this first project, not only did we comply with all the different testing and approval things that you have to go through, but we also executed with local people, EPC companies and satisfied the utility as you saw.

So that goes a long way to helping your competitive position.

Relative to the opportunity, as I mentioned, the goal in the country is to have 10% of their power generation, which in total, I think they have about something like 110 gigawatts of demand.

So that's a pretty sizable market opportunity.

Obviously, not all are going to get used with fuel cells.

They can do wind, they can do some solar and things like that.

But I would say that in general, relative to fuel cells, which are typically what these projects are, we will fare very well.

We have a lot of other things in our pipeline that we're working on.

And the opportunity, if you continue to execute on those properly, I think is pretty substantial.

Shifting gears, so you're expecting a notification from DEEP sometime this month.

Can you talk about the number of projects?

You gave a collective megawatt number, both yourself and your partner.

I'm assuming the partner is your partner, Beacon Falls, correct me if I'm wrong.

And then maybe just talk about the range in size of number of projects you've bid into for that RFP.

Okay.

This is Chip again.

So yes, we bid 8 projects, Carter.

In total, it's about 100 megawatts.

They ranged in size between -- the smallest one was like 7 megawatts and then all the other ones were -- the most they could be roughly is 19 because the RFP was things -- for fuel cells, maybe below 20.

There's a minimum of 2, I think, and a maximum of 20.

So they're all in that range.

In general, our projects were on the higher end of that.

Beacon Falls was one of the projects and it was not 60 megawatts like it was before, but it was in line with the -- about 19 megawatts that we have.

So yes, we'll -- we have some optionality in things as well so -- but roughly, that's the landscape for us.

And there's -- like I said in my remarks, there's capacity for them to pick a significant amount of projects even if they choose to pick wind.

And we'll know sometime in the month of June if things happen according to their plan.

Yes.

It's a much more favorable environment, I think, than the last time they were bid in just from some of the legislative developments.

Could we maybe walk through on Slide 7 where you gave the hypothetical example.

I'm assuming that example would be something like roughly a 12-megawatt installation.

Is that a reasonable assumption based on kind of just shy of $1 million in revenue per megawatt?

And, a, I guess, that's my first question.

Is that a reasonable assumption?

And is this the kind of typical profile under the ITC and the terms that you're facing today?

Are you seeing any upward pressure on the rising yield curve in terms of the required returns?

Or is that kind of baked into this hypothetical?

Good morning, Carter, it's Mike.

And I appreciate you joining the call and the questions.

So we didn't give an exact number of megawatts, but I think the number you quoted there, Carter, is fair.

This example would include fuel in it.

And as far as the financing terms, this is what we're seeing today.

We're not seeing any pressure.

Our projects have higher yield than solar and wind projects, which are -- which have obviously more capacity out there.

So we're already kind of in a different band than those are, so not seeing any pressure there.

And as I said in my remarks, really strong interest.

We have an opportunity here.

We haven't financed the assets that we have under construction today, which are north of $40 million.

Some of those are pretty close to COD.

So as we bring in financing for those, that's obviously accretive to our cash balance.

And do you think about kind of the decision to hold in your generation portfolio versus sale?

Is there any qualification or timing considerations from commercial operation versus NTP?

Or is it you more thinking along an asset sale once it hits COD?

Yes, I don't think you'd see any asset sales at notice to proceed.

I think that for what we do, given that we're the owner, the developer, the OEM, we would typically sell assets closer to COD.

If we were to do that, we would certainly bring in construction financing earlier in the process.

We do go through a syndication process and we will get bids on both sides, either tax equity debt financing or if we can efficiently sell it and get the appropriate value for the tax equity in the project, we'll do that.

We -- obviously, the strategy of the company is to retain a meaningful percentage of these so that we can benefit from the future cash flows.

And as I said in my remarks, with the portfolio that we have today, generates $7 million to $8 million of revenue with an EBITDA profile north of 40%.

If you add another $50 million to $60 million of revenue with same or better EBITDA profile, that dramatically changes the EBITDA profiles of the business as a whole and puts us in a positive position.

So clearly, our strategy is to continue to grow this.

But as opportunities present themselves, we'll consider spinning certain assets off as well.

Okay.

And just last one for me.

Can you talk about -- have you learned anything different from the carbon capture you've been doing right now?

Or is it really the learning curve going to accelerate once the plant is up and running?

And then concurrent to that, in terms of distributed hydrogen, certainly, the ACT Conference has a lot of discussion about fuel cells powered with batteries certainly on the commercial trucking side.

I realize this is more for your partnership with Toyota on the light duty side.

But economically, with rising gas, it almost seems like the cost of the fuel, at least on an energy equivalent basis, is going to be less challenging.

Can you talk about maybe the economics of distributed hydrogen, particularly from the fuel side and how one of your -- the project with Toyota could be economical or have a positive ROI?

Because I think the cost of fuel is one of the biggest hurdles right now to making those projects viable.

Carter, it's Chip.

I'll take that first with the carbon capture.

So the facility we're building in Alabama is using current technology.

And the real purpose of that plant is that we're going to run that unit on both coal -- emissions from the coal plant as well as the gas plant.

And the not-so-subtle differences there are the amount of CO2 in the incoming gas varies dramatically, being higher on carbon -- from the coal plant and lower from the gas plant.

So we don't expect any of the hardware if we apply that technology in bigger plants or different applications to change.

It's really just kind of the how do you run a dual fuel application where you have such a wide range in gas concentration on the inlet side.

And my other not-so-subtle comment, I guess, in the script was, I talked about opening up the opportunity for using the same technology in its current form for industrial applications.

And power generation is roughly 1/3 of the CO2 emissions in the world, industrial is about 1/3 and transportation is the other 1/3.

So that is another way for us to really expand the marketability or the market deployment of that.

Now those applications in industrial, we don't need that testing relative to the lower concentration because the concentration from those particular projects being post, usually boilers or things, are higher.

So we're ready to go with those.

And in fact, we have made proposals out there to deploy that carbon capture system for industrial applications.

Relative the hydrogen strategy, the hydrogen strategy is -- the key to it is that you have to have affordable fuel to the consumer base with the equivalent of gasoline today.

And you're exactly right, the price of gasoline has gone up.

It doesn't necessarily reflect what's happened to the price of natural gas or biogas, they are kind of independent things.

But yes, you would think that, that -- the thought that the price of gas goes up more would make our job easier, I would say that's fine.

But as I maybe -- as we've shared with people before, the economics on this kind of work at kind of current prices as well.

So we have a whole strategy around this.

And the fundamental premise is that we can produce power and hydrogen, basically doubling the revenue from this device with pretty much the same capital base.

And that's how the math works.

So the strategy is the same.

The economics could get better as you said, given the environment.

But we'd win even if they didn't change, so we're pretty positive about deploying many more of these hydrogen things not just in the U.S. but for a couple of key markets in the rest of the world.

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

It's Aaron Spychalla on for Eric.

Maybe first on the generation bucket this quarter.

Can you just talk about the impairment charge, kind of what happened there?

Are there any other costs, that are going to be kind of recurring next quarter going forward?

And then even excluding that, the gross margin for that bucket looks like it was kind of low double digits, somewhat below your target going forward.

Can you just talk about what's going on there and that target going forward?

Sure.

I'll take that one, Aaron.

This is Mike.

So on the write-off that we've talked about, it was about $400,000 write-off.

It's a small project that we had some investment in.

And really the conditions at the site had changed and we decided to end that project, those are all the costs associated with it.

You won't see any trailing costs.

As far as the overall margin in the quarter, I would acknowledge it ticked down a little bit from last quarter.

We did have some maintenance activities in the quarter.

I think the more important metric in the generation portfolio is to look at the overall EBITDA percentage of that portfolio.

There's a meaningful amount of depreciation that's in cost of sales north of $1 million.

I think it's $1.1 million in that range.

So you add that back in, and you're still looking at a very strong EBITDA percentage for that portfolio.

Okay.

And then maybe secondly on the TriGen portfolio.

You touched on it a little bit, but what are the next milestones to look for there?

And any more color you can share on how the pipeline is shaping up?

Chip, you mentioned U.S. and abroad and some opportunities on the East Coast that obviously seems to be one of the more exciting parts of your business.

Yes.

So the first milestone is to execute on the current project with Toyota, and there's -- that's an early 2020 thing is what our contractual requirements are.

And we're working with some other people, including Shell and some others that manage all the different aspects of that.

So we're going to learn some things process-wise as we build that plant but that's all going fine.

We -- there's a demand.

There's a -- we've looked at the demand for vehicles in California, then we've looked at the East Coast, then we've looked at a couple other countries including Japan.

And when you kind of do the calculation and you kind of look at things by 2025 frankly, which means you got to have the infrastructure in place for whatever how many cars you want to have by like 2023, 2024, you look at there's a sizable number of these plants that have to be built to supply that.

So we've kind of done that calculation, and we're pursuing many different things in terms of building more plants within California, within the East Coast and then within these other markets.

So I would say that stay tuned, but we would expect that in the next several months, we would have more projects to announce here.

Your next question comes from the line of Craig Irwin with Roth Capital Partners.

Chip, first thing I wanted to ask is a bigger picture question.

So how should we think about the transition as you move to pursue more traditional construction financing for your generation portfolio and then levering up the projects once they're completed?

Is this something where we should look for small incremental steps over the next couple of years?

Or are we likely to see individual projects executed with more traditional financing mechanisms in a nearer time frame?

Craig, good morning.

We'll always take your calls, just for the record, and all your questions.

So don't worry about that.

But I'll start, and maybe Mike can finish it off.

But we -- for clarity, we've put together that slide that actually laid out all the different projects when they would go COD, if you will.

And they're not all lined up and they're not all going to happen at one time.

So the way we kind of see this here, and if you include maybe even selling some assets like we just did recently, this is going to be -- and when things come online, they're obviously producing cash.

So the combination of managing thoughtfully the cash here and the debt from these projects, we -- it's our expectation that it's a smooth transition, Craig.

I'll use the word cashless.

But as Mike said, there's some equity.

But a lot of that equity, we can probably produce from working capital that we've built over time included in our balance sheet at the moment.

So I don't know Mike if you want to add anything to that answer.

Good morning, Craig.

Yes, I'd agree with what Chip said.

And you'll see project financing coming in here the next several quarters.

I think it will be prudent as we grow these projects.

Obviously, the LIPA projects are sizable and we will use construction financing for those.

We self-financed the smaller projects that are on balance sheet that were close to COD on, for instance, the Tulare project we just sold and the Triangle Street.

We felt going out and doing construction financing for smaller projects didn't make a lot of sense given the working capital that we had.

But as these bigger projects start to get billed, you will see that get added to the balance sheet.

And Craig, I would also say that we've seen increased interest from more companies for this -- these kind of projects.

So particularly in this environment we're in the U.S., where tax equity could serve these things here.

But we've used a couple different firms, but there's other folks that we've talked to as well.

But -- so I think the pool of interest is expanding actually.

That's really good to hear.

So the next question I wanted to ask really is specifically about Tulare.

Can you maybe discuss the factors that contributed to your decision to sell Tulare?

Maybe anything you can say about why this specific plant and why now?

Sure.

So we've had a great relationship with NRG Yield.

They own an asset in Connecticut.

They've been actively looking at assets in our portfolio.

They bid on this project.

We were also looking at potentially doing other sources of financing, but found the offer attractive.

It was around the time of commercial operations, and it's an entity that we know very well.

And it was a very smooth transaction and brought capital back into the company.

So for all those reasons, we chose to do that.

But as you know, with these projects, FuelCell Energy continues to have a major role.

There's a 20-year service agreement that we have with NRG Yield now.

Basically, we operate and service the plant for them.

They're an investor in the project and own the project, but we will continue to have an active role in this.

We're also in the process of building another project at Tulare.

It's a great long-term customer for the company.

Great.

And then another high-level question.

The Investment Tax Credit having that reinstated at the -- back in February, it was a pretty nice thing.

Can you maybe share with us anything you can say about how this is impacting specific conversations with those customers you're getting line of sight on potentially executing projects that might not have without the ITC renewal?

Okay.

So I'll maybe start again, Craig, and then Mike can finish it off.

But -- clearly, that ITC, that helped us and I think you have to -- everybody is a little different in that regard.

But what helped us really was the -- with this generation portfolio strategy, it's helped us increase the amount of debt the projects would attract.

So that's great.

So did it accelerate anything?

Not necessarily.

But it's certainly helpful going from a cash perspective going forward here to execute these.

There are some projects that were not generation assets or PPAs that the ITC would have a positive impact as well, not to minimize that.

But I mean, in general, it's more, for us, some new projects that are going to be bought.

But the ability to attract more debt to get this generation portfolio is increasing.

Mike?

Yes, I agree with that.

And again, on the financing side, it just broadens the number of firms that would bid because you now have the tax equity component.

Your next question comes from the line of Colin Rusch with Oppenheimer & Co.

With this use of inventory for projects, can you talk about what the working capital needs are going to be going forward and how we should see that trend over the next few quarters?

Good morning, Colin, this is Mike.

I will take that.

So when you look at our inventory balance today, as of the end of the second quarter, we had about $55 million of inventory on the balance sheet.

Of that, about $36 million is work in process, so these are pretty close to finished goods, can be applied to projects and turned very quickly.

I would say we're always going to keep some level of that, but I'd say there's still opportunity to squeeze cash out of inventory.

And as I also said in my remarks, when you look at project assets, north of $40 million of project assets had not been financed yet.

We look at that as a near-term opportunity as well to bring cash into the company.

So going back to the example that I talked about in my remarks, there will be some equity required in projects.

But we are able to use our working capital.

We have a very strong balance, as I just mentioned, in inventory, in project assets that we can pull cash out of right now to recycle that into other projects and obviously, a good cash balance on top of that.

And Colin, I'll just add one more thing to that.

We -- perhaps our portfolio that we talked about is somewhat modest at the moment in terms of 11 megawatts or so generating about $8 million.

But we are very confident in the ability of those projects on an EBITDA basis to generate very attractive margins.

So there's 2 things: one is to get the project going; and second is once it gets going, it's generating cash.

So we just -- we're very comfortable in that model and we have experience to support that enthusiasm in that model.

Okay.

Great.

And then just going back to the current customers.

Can you talk a little bit about the effective levers that you're seeing and accelerating in the sales cycle?

What's really working right now with these folks?

Well, I mean, at the end of the day, the ability to be competitive, whether it be a PPA price or however you used to add value, we've been focusing on our value proposition primarily.

There's a bunch of noise out there, people have other ideas.

We're just kind of putting our head down.

And we know that -- we know the costs, what we can do, what we -- what the future will be, we know the competitive landscape.

And the other levers in the project are typically, can you get them financed and have the capital to do that?

We have the model, so it's yes.

Things like a track record of doing the right thing, that's not a minor detail even with public bids.

That reputation kind of serves you well.

So what we've said for a long time, there's no shortcuts in the energy space.

And that, I think, is one of those things that served us well.

So from a lever perspective, I think doing what you say is one; second is that having a model that is financeable, which we've proven we have; and then third, we've got the cost structure to compete with anybody in the world.

(Operator Instructions) Your next question comes from the line of Jeff Osborne with Cowen and Company.

Most of them have been answered so far.

On the DEEP awards in Connecticut, let's just, for argument's sake, say you win 10 to 20 megawatts this month.

In the RFP, when would the construction be?

And I guess, when would the interconnection be if we were to sort of plot this on that helpful chart that you have of the projects you already have under contract?

Jeff, this is Chip.

Good morning.

Yes, so as I mentioned, there's 8 different projects, and most of those have pretty good line of sight to substations, Jeff.

So just physically, we did -- that was -- part of our strategy was to minimize well, one, the expensive interconnection; but secondly, the effort there.

And we've already run all of these sites by the utility company.

So this -- we have a good -- they've supported us in the past, they know our folks and we don't see any issue with that.

So I would also say that Connecticut is a lot quicker in a lot of these permitting issues and stuff like that than others like the Siting Council and stuff.

So in the RFP, I won't maybe get this 100% right, but I think any projects that are selected, I think have to be done by like 2023 or something, which is more driven by the wind industry than any -- than us.

But we would expect to build these projects, depending on interconnection, of course, but in the 12- to 18-month time frame, I would guess.

Got it.

That's helpful.

Two other quick ones.

Can you remind us on the solid oxide win that you had with NRG in Pennsylvania, when that would be delivered and any just update on that program in general?

And then the last one I had was for Mike.

Just as you look at the next, call it, 2 to 3 quarters, is there anything in the line of sight that you have as it relates to your service revenue stream in terms of stack replacements just as we think about the cadence of that?

It's been a lumpy line item in the past, and I just wasn't sure over the next few quarters, if you had 1 or 2 quarters where there's a little bit of a surge there just from a stack replacement run rate or if the current level should be consistent over the next few quarters.

So I'll take the solid oxide question, and then I'll give it to Mike to answer your last question there, Jeff.

So yes, we have a solid oxide project that we're going to be installing at the NRG Yield facility in Pittsburgh.

The site has already been prepped for this, and we expect to ship the hardware here in June, I think the latter part of June, if I'm correct on that.

And that startup should be fairly simple here.

Everything has pretty much been done.

So I would expect third quarter of the calendar year that the unit would be running that facility in Pittsburgh.

And Jeff, just to finish off, this is Mike.

On the service revenue line, just to go through the accounting for folks on the call.

There's 2 components of accounting for service revenue.

It's the day-to-day operations and maintenance and that's pretty ratable and that's what you've seen come through our financial statements over the last couple of quarters.

And then as we do module replacements, we've deferred revenue and costs related to those.

And when they get deployed, that will drive higher revenue and cost of sales go along with it.

We haven't put out specific revenue guidance, so I can't comment too much on that other than say that the range that the operating expenses and the operating revenues we've been in we expect to continue to be in this range.

As you think about kind of what's out in the fleet, the bigger project, the Dominion 15-megawatt project you probably expect to see module replacements for that as we go into next year since that will have been online for 5 years at that point.

There are no further questions in queue at this time.

I will turn the call back to Chip Bottone.

Thank you very much, Tiffany.

And thank you everybody for joining the call today.

Hopefully, what the takeaway was that we're very focused on what we have to do to reach profitability and continue to build on that foundation, and critical to that is that obviously the execution of these different projects.

You can probably tell from the comments and the voice that we're also very keen on the other things we're working on.

And I think that people should be on the lookout for further results of those efforts as well.

So I look forward to talking to you on the next earnings call and hope everybody has a great day.

Thank you very much.

This concludes today's conference call.

You may now disconnect.