燃料電池能源 (FCEL) 2018 Q4 法說會逐字稿

Good morning.

My name is Adam, and I'll be your conference operator today.

At this time, I'd like to welcome everyone to the FuelCell Energy Fourth Quarter Fiscal 2018 Financial Results Conference Call.

(Operator Instructions)

Thank you.

And now I'd like to turn the call over to Mr. Tom Gelston.

Please go ahead.

Thank you, Adam, and good morning.

Welcome to the fourth quarter and fiscal year 2018 earnings conference call for FuelCell Energy.

This morning, FuelCell Energy released financial results for the fourth 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 plan and expectations regarding the continued development, commercialization and financing of its fuel cell technology and its business plans.

I'd like to direct listeners to read the company's cautionary statement on the 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.

2018 marked an important year for FuelCell Energy as tireless work to develop the wind projects and drive policy initiatives have set the company up quite well to transition successful execution on our strategy and drive towards sustainable profitability.

First, I'd like to highlight that we exited fiscal year 2018 with record backlog and awards of over $2 billion, with over 83 megawatts of new projects to be built.

Generation revenue on our existing owned operating portfolio and a growing operations and service revenue stream as we continue to expand on our global leadership position and megawatts generated from our clean, reliable fuel cell plants.

During the quarter, we entered into power purchase agreements, or PPAs, with the 2 new contract awards in Connecticut comprised of 22.2 megawatts of fuel cell projects awarded by the Connecticut Department of Energy & Environmental Protection, or DEEP, in June as part of a competitive solicitation for Class I clean energy.

In December, we executed the first of 3 PPAs with LIPA.

This PPA stems from the selection of a 7.4-megawatt fuel cell project located in Yaphank, New York by PSEG Long Island under a solicitation for 40 megawatts of fuel cell-based power plant resources with FuelCell Energy winning all 40 megawatts in a competitive process.

Our team has been working diligently to complete development of these landmark projects.

Development activities up to this point have included environmental reviews, electrical interconnection studies, permitting activities under New York's SEQRA process, design engineering and planning.

We plan to commence construction on all 3 projects in 2019.

The execution of the 7.4-megawatt PPA, combined with 22.2 megawatts from the Connecticut PPAs, shifted approximately 30 megawatts from our awards classification into contracted backlog.

We entered into a new project construction facility with Generate Capital.

This new facility provides up to $100 million, potentially expandable to $300 million, that will be used to finance construction, installation and commissioning of our current and future backlog and awards.

The facility establishes a pathway for us to execute and build out our record project backlog and awards with advantages over previous construction finance facility, which is limited in size $40 million, terms and place limitations on access to capital during early phases of construction.

Generate Capital is a leader in sustainable infrastructure investing and is very enthusiastic about financing FuelCell Energy's projects.

The new relationship demonstrates that financiers are eager to finance our projects because of their clean energy profiles, predictable revenue streams, strong cash flows and the quality of our top tier energy offtakers.

We also entered into an agreement with Dominion Energy to purchase the 14.9-megawatt fuel cell park located in Bridgeport, Connecticut.

A plant that we designed, constructed and have operated since its inception.

This is a showpiece facility delivering clean and reliable energy to the grid and will deliver significant recurring revenue with strong EBITDA margins for our stockholders.

Based on the 10 years remaining on the current PPA, over $100 million in revenue will be added to our backlog with EBITDA margins in the excess of 50%.

We're on the final stages of diligence and documentation for the permanent financing for this acquisition and have received tremendous support from the Connecticut Green Bank as we move towards closing on this transaction.

Lastly, we have made meaningful progress on the deployment of our existing SureSource solutions and commercialization of our new initiatives in distributed hydrogen, carbon capture and solid oxide for power generation and long-duration storage.

I will discuss more of our business execution after Mike Bishop, our Chief Financial Officer, reviews our financials.

Mike?

Thank you, Chip.

Good morning, everyone, and thank you for joining our call today.

Please turn to Slide 5 titled Financial Overview.

FuelCell Energy reported total revenues for the fourth quarter of fiscal 2018 of $17.9 million compared to $47.9 million for the fourth quarter of fiscal 2017.

Product sales totaled $9.4 million for the fourth quarter of fiscal 2018 compared to $39.9 million for the fourth quarter of fiscal 2017.

2017 product sales included revenue associated with the construction of the 20-megawatt plant for KOSPO in South Korea, which was completed in 2018 and has now been operating for over 6 months.

2018 product sales included the sale of the 1.4-megawatt fuel cell power plant project located at Trinity College to AEP OnSite Partners.

This plant was sold just prior to achieving commercial operation in August and is another example of the quality of the 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 as we manage the business to deliver on our strategy to grow our generation portfolio.

The gross profit generated in the fourth quarter of fiscal 2018 was $1.1 million and the gross margin was 6.4% compared to a gross profit of $3.2 million and a gross margin of 6.6% last year.

Both periods were impacted by the underabsorption of fixed overhead costs due to underleveraged production volumes.

Manufacturing variances totaled approximately $2.7 million for the 3 months ended October 31, 2018, compared to $3.4 million in the prior year period.

At the end of the fiscal year, the company began to increase its annualized production rate from approximately 25 megawatts and today, we are at a run rate of approximately 35 megawatts on an annualized basis.

Operating expenses for the fourth quarter of fiscal 2018 totaled $13 million compared to $11.3 million for the fourth quarter of 2017.

This increase primarily related to the timing of professional-related expenditures due to business activities in the fourth quarter.

Net loss attributable to common stockholders for the fourth quarter of fiscal 2018 totaled $17.9 million or $0.19 per basic and diluted share compared to $10.8 million or $0.17 per basic and diluted share for the fourth quarter of fiscal 2017.

Net loss attributable to common stockholders in the fourth quarter of fiscal 2018 includes noncash charges related to the company's Series C and D preferred stock of $3.1 million.

Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA, which is a noncash measure, in the fourth quarter of 2018 totaled negative $8.8 million compared to negative $5 million in the fourth 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 $80.2 million as of October 31, 2018.

This total includes $39.3 million of unrestricted cash and cash equivalents and $40.9 million of restricted cash and cash equivalents.

As Chip mentioned, today we also have $90 million of borrowing availability under the new construction financing facility with Generate Lending, a subsidiary of Generate Capital.

Backlog reached a record level of approximately $1.2 billion at the end of the fourth quarter of fiscal 2018.

At the end of the quarter, services backlog totaled approximately $316 million, generation backlog totaled $840 million and Advanced Technology contract backlog totaled $32 million.

As illustrated by the chart on the bottom left of the slide, backlog and project awards combined totaled approximately $2 billion at the end of the fourth quarter.

Project awards not included in backlog as of October 31, 2018, were the 3 LIPA projects.

Subsequent to the end of the quarter, we executed the first LIPA PPA related to the 7.4-megawatt project in Yaphank, New York, which is now in backlog.

The chart in the middle of the slide shows the project asset totals on balance sheet.

As of October 31, 2018, the operating portfolio totaled approximately 11.2 megawatts and was fully financed.

In addition, we have 83.1 megawatts of projects in various stages of development.

A significant milestone for our company is that we entered into a new construction facility in December that provides us with a financing solution for our backlog.

The facility provides an initial $100 million, which may be expandable up to $300 million over time and provides a path for project finance for the capital-intensive construction period of our backlog.

The facility provides a number of key advantages such as lending against project cost early in development and manufacturing cycles.

We are very happy to be working with the Generate Capital team.

The first project drawn at the Generate facility was $10 million related to the Bolthouse Farms project, and we expect to make additional draws to finance the LIPA and Connecticut projects as well as other projects in our pipeline.

Subsequent to the end of the quarter, we also borrowed approximately $5.8 million on our existing NRG Energy construction line of credit to support the construction of the Tulare project that is anticipated to enter commercial operation in the spring.

This was the last draw under the NRG facility.

Separately, the company continues to work with the Connecticut Green Bank to source financing for the 7.4-megawatt plant for Connecticut Municipal Electric Energy Cooperative, or CMEEC, located on the U.S. Navy Submarine Base in Groton, the 3.7-megawatt Triangle Street project here in Danbury, Connecticut, as well as the reacquisition of the 14.9-megawatt Bridgeport fuel cell park from Dominion Energy.

These financings are expected to close in early 2019.

The Bridgeport project will be incremental to our generation portfolio once the acquisition closes.

We expect to close on term debt financing and will fund the balance of the $36.6 million purchase with $15 million of unrestricted cash on hand that is tied to the project and would be released at closing.

The chart on the bottom right of the slide, which is also in the appendix, illustrates the current build-out schedule of our generation portfolio.

We will be financing the projects through construction and into ownership with debt, while minimizing corporate equity and driving recurring profitability benefit for our stockholders.

As we enter 2019, I would like to comment on expectations for operating expenses and capital spending.

Management is committed to tightly managing spending throughout the business and operating expenses are expected to remain or be below current levels in 2019.

On the capital expenditure side, our facility expansion is complete and we have almost completed the transition of our fuel cell module conditioning activities from the Danbury to Torrington, Connecticut, which lowers our manufacturing costs.

As a result, we expect to see capital spending in the $4 million to $2 million -- in the $2 million to $4 million range for fiscal 2019 compared to $10 million in 2018.

The company will continue to invest in project assets and the build-out of our generation portfolio, which we expect to be largely offset by project level debt.

Growing our generation portfolio is the cornerstone to our plan for building a sustainably profitable business and we continue to make meaningful progress as highlighted by our recent announcement.

With that, I would like to turn the call back to Chip, who will dive deeper into our operational areas of focus.

Chip?

Thank you, Mike.

Please turn to Slide 6, Activity.

First, we felt it would be helpful to discuss the overall marketplace.

In general, the quantity of our opportunities have never been greater, the breadth of our solutions have never been broader and the performance of our fleet has never been better.

Starting in the U.S., we continue to see strong interest and support from the states with existing exposure to the benefits of stationary fuel cells deliver and from others interested in taking advantage of fuel cell products and solutions.

Our offerings provide energy security, sustainability benefits and operating savings to our customers.

Other stakeholders in our projects share benefits from financing returns and economic development.

Our focus is on identifying the market segments that can derive maximum sustainable value and then applying our execution expertise.

Customers look to us for a broad range of solutions, including non-wires alternatives in true utility scale micro-grids.

Over the past number of months, we've seen states undertake comprehensive energy policy reviews, with stationary fuel cells now getting a primary seat at the table in the discussion on long-term policy alongside solar and wind.

As an example of the recognition for our industry, our Jennifer Arasimowicz was asked to serve on the Connecticut Governor-elect's Transition Team for energy policy.

With regard to South Korea, we continue to have the leading presence, solution and reputation in the market.

South Korea remains one of the most supportive markets in the world for stationary fuel cell technology.

Our technological solution is preferred technology for utility scale power, especially for combining power utility scale projects.

With over 160 megawatts of our carbon fuel cell plants currently operating, customers have expressed a strong preference for our technology and its ability to deliver solutions that meet their exacting needs.

During 2018, we delivered on a 20-megawatt facility with KOSPO, meeting their expedited timeline for delivery and operation, and the plant is performing extremely well since commissioning.

We will continue to benefit from this relationship for years to come as we operate and maintain the facility.

This operation and maintenance agreement adds well over $100 million to our services backlog in 2018.

Designed around our core carbon and technology platform, we have continued to make forward strides with distributed hydrogen.

We have focused our strategy to add supply to satisfy the growing demand for renewable power and hydrogen.

Our deployment plan has started in California but has global appeal and activity.

We have spoken extensively about our innovative multimegawatt tri-generation fuel cell plant for Toyota at the Port of Long Beach in California.

This application, which is unique to our carbon and fuel cell technology, will simultaneously produce power, heat and hydrogen.

The project is scheduled to commence construction in late 2019 after certain permitting is completed and site design is finalized by Toyota.

The project is 100% renewable, being fueled with directed biogas sourced from California's agricultural waste and represents a key step in advancing the hydrogen economy, while also providing Toyota with a major step forward in its environmental goals.

On Tuesday, we announced that we'd entered in an exclusive development rights agreement with Orange County, California for plant development in the Coyote Canyon landfill site.

The site is an important element of our overall strategy to provide renewable power and hydrogen to support California's efforts to decarbonize its transportation sector.

FuelCell Energy expects to install operating fuel cell systems on the landfill site that will produce both renewable electricity and renewable hydrogen.

We've targeted output of up to 2,400 kilograms per day of hydrogen.

This plant will supply renewable hydrogen to the largest fuel cell market, Los Angeles, in late 2020.

On Wednesday, we announced the South Coast Air Quality Management District awarded $3.7 million towards another distributed hydrogen fuel cell project.

More information will be released on this specific project as we finalize development and project agreements.

Let's turn now to carbon capture.

In 2018, we saw a clear increase in interest in our decarbonizing solution from the power generation market.

We also saw the development of the industrial market segment, which had been getting little interest and has limited solutions for decarbonization.

Taken together, these 2 markets produce 2/3 of the world's carbon emissions.

Our joint agreement with ExxonMobil has progressed in an accelerated pace, and we expect this collaboration to expand.

Our respective teams work very well together and through this collaboration are making great strides in a commercial solution to decarbonizing the power generation in industrial sectors.

This collaboration is supported by recent tweets issued by ExxonMobil.

The company completed the first phase design and engineering of the first carbon capture configured SureSource 4000 power plant, planned to be located at a mixed coal gas-fired power station owned by a subsidiary of Southern Company.

The project is partially funded by the U.S. Department of Energy and ExxonMobil.

The company is working to secure the funding to move to the next phase of this project, which includes construction of the carbon capture fuel cell plant.

While not often discussed, we had been hard at work developing solid oxide fuel cell solution that would allow us to answer 2 specific market needs with one common design: smaller scales of megawatt power generation and long-duration energy storage.

Operated and reported through our Advanced Technology business segment, our team has developed a 200-kilowatt unit that provides high-power density with its core technology being a flexible solid oxide stack platform.

As pictured, our first operating unit has been stalled at the Clearway Energy building in Pittsburgh, Pennsylvania.

We expect the unit to complete commissioning shortly and begin generating power for the site.

Why is this important?

We have developed a solid oxide solution that will position FuelCell Energy to compete in the sub-megawatt class market segment with superior performance and cost profile.

Add this to the ability to answer the need for long-duration storage of energy to help integrate intermittent resources of power into the grid more seamlessly with the exact same core stack design.

More to follow on this exciting development.

Please turn to Slide 7, Summary.

I'd like to reiterate a couple of key takeaways from our remarks.

Our new construction financing facility provides the company with construction debt financing that provides not only line of sight to funds but also the cooperative framework to fund projects in early stage of development and enhance FuelCell Energy's ability to manage our capital needs going forward in a stockholder-friendly manner.

This financing facility is a much needed solution to address how we will fund the construction and operation of a record backlog.

Adding up all the revenue streams, much of which were at 50% EBITDA margins, we sit here today with over $2 billion backlog and awards.

We firmly believe that FuelCell Energy and our fuel cell products and solutions are underappreciated by the market which is, unfortunately, reflected in our current stock price.

With $2 billion in backlog and awards, Tier 1 offtakers and business partners, a verifiable business plan to get to EBITDA positive results through the increase in the generation portfolio, operational improvements and leverage and forward strides in Advanced Technologies in hydrogen production, carbon capture and storage, we think the market has not recognized the value of the company and our offerings.

We recognize the need to deliver results and we certainly understand the need to execute on our strategic plan and operational goals.

Make no mistake, management is focused on delivering those things that will drive the long-term success of the company and its stockholders' interests.

We had quite a busy 2018 with much commercial and legislative success.

We will be celebrating our 50th year as a company on March 19, 2019.

As a team, we are focused on building on this momentum to take the next steps towards a significantly brighter tomorrow.

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

(Operator Instructions) And our first question does come from Colin Rusch of Oppenheimer.

Could you talk a little bit about your decision-making process in terms of keeping assets on the balance sheet, potentially selling the rights to some projects at NTP and then potentially liquidating projects on the balance sheet to support cash flow for the company going forward?

This is Mike.

Sure, I'll take that question.

So as you saw in the quarter, we sold an asset and recognized revenue and margins related to the Trinity College project, 1.4-megawatt project.

The project was sold to AEP.

Great relationship with AEP and look to continue to further that relationship in the future.

As we said in the past and as I included in our deck, the company is really targeting building out at least 60 megawatts of projects on balance sheet, given that the cash flow profile to those projects will lead the company to EBITDA positive.

So as you look at the build-out that we have in the deck and in the appendix, you'll see that we're getting to that 60-megawatt range next year.

As we look at -- but we have more than that, that we have under construction right now.

We have 83 megawatts and then we're also bringing the Bridgeport project back into the fold, so you have close to 100 megawatts right there.

So the company wants to manage the amount of capital being deployed into new project development as well as managing the corporate balance sheet.

So we will recycle cash here and there for strategic reasons to partner with folks like AEP and bring cash back onto the balance sheet.

But the overall goal, as I stated, is to get to that 60-megawatt level to lead to the sustainable cash flows.

Okay.

That's super helpful.

So it's just about opportunistically maintaining the flexibility of the balance sheet and what you guys are up to.

That's fantastic.

That's right.

And then can you give us some -- an update on what's going on in Asia in terms of the product sales?

Certainly, it seems like there's some robust opportunities there but would love to see what you're expecting as you go into the calendar '19 here in terms of being able to monetize some of those relationships that you've had in place for a while.

Yes, Colin.

This is Chip, I'll take that question.

As I said in my remarks, we continue to be connected to that marketplace through the activities and the good work we're doing with certain customers.

And it is a marketplace that is -- got a lot of potential, that's true, given I think the proper approach and being able to consistently deliver and have your plants perform, which we have done.

Beyond that, what I would say is that, at this point, all options for us to deal with that are on the table and kind of more to follow on that more specific things that we're going to do there.

Our next question comes from Carter Driscoll of B. Riley FBR.

So strategically, I mean, I understand the conversion, the monetization and bringing as many economical projects on balance sheet to reach EBITDA breakeven and then, obviously, net profitability over time.

Are you deemphasizing project sales simply because of the lumpy nature of the execution, the timeframe to do so and really the poor economics although you get the revenue upfront?

Or is it a bit of a subtle strategy shift to do so while you still have the capabilities to provide equipment sales?

Is that a fair characterization or am I overemphasizing one aspect of the portfolio versus the other?

So let me -- I'll start and Mike can fill in here as well.

I think if you really kind of do a deep dive on our business model, there's a little bit of the answer there.

But I mean, at the end of the day, what we're really looking for is, whether it's a product sale or whether we put it in our generation portfolio, it is a transaction with a customer that makes real sense, right?

And that's what we're really after.

If we needed -- if we put it in our portfolio and build it and then sell it, for us -- or we don't sell it and we finance it, it doesn't really make a difference.

We do that -- frankly, the investment world out there at the utility level is also changing where there is a lot of interest in, certainly, utility companies to own these assets as well.

So we're kind of looking at what's the best thing to do.

And I mean, some people have an approach of one way, but if you look at our business model which, yes, you can look at the margins are best when we put these things on our balance sheet, frankly, we kind of, as Mike said, are pretty thoughtful about doing this.

But I wouldn't -- we're going after all the different potential people in the market as if -- if there's real opportunity then there's real value in what we do, whether it's operating, saving, sustainability goals or whatever, we go do that.

The model that we utilize to secure those awards varies based on the circumstances and then we deal with how do we actually execute that, again, in a thoughtful kind of a way.

So we're dealing with a lot of different inputs here in making what we think is an optimal decision.

But no, we're aggressively in the marketplace, our pipeline is as big as it's ever been, as I mentioned in my remarks, and it's all about repeat customers and being able to deliver on what you say.

So that's what we're really going after.

Okay.

Could you -- maybe with a bit more specificity compare and contrast the instrument you had with NRG and Generate?

One thing to note with Generate is they do have kind of a guaranteed return upfront.

Could you talk about -- was that a partial tradeoff for the size and the flexibility aspect that you've gotten from Generate?

Maybe just if you could highlight the 2 and the advantages that you cited earlier with a little more detail would be helpful.

Sure.

This is Mike, and I'll take that one.

First and foremost, the company is really excited to be working with Generate Capital.

Generate has deep roots in the renewable sector.

Obviously, great financing partnerships that they have.

We're very strategically aligned with Generate.

So the ability to work with them was quite important for us.

They see things very similar -- similarly to how we do.

As far as the facility, certainly, the size of the facility was important to us.

As you look out at the build-out of our portfolio, we will certainly be able to use up to the $100 million and then potentially more depending on the timing of when we need capital for our projects.

So the sizing was important compared to what we had in the past.

There's flexibility in the timing of lending into the projects.

Obviously, we're completely vertically integrated.

We're the manufacturer, the developer and the EPC still having flexibility and access to capital during off days of the project is really important to us.

And then to your point, Carter, what -- Generate and FuelCell want to participate in these projects for a long period of time.

So there is a -- there's a fixed interest rate, which Generate earns as part of the construction facility, and then there's optionality where they can participate in our projects for a long period of time and earn a guaranteed return through 10% participation in our projects.

So we thought that was important as well.

It aligns interest as we're out in the marketplace sourcing permanent capital for our projects and again, want to leverage their relationships but bring in low-cost debt financing as well as tax equity financing for our projects.

So we think interests are completely aligned in this facility and looking forward to working with their team.

All right.

So that sounds very positive.

So just let me understand, so they have the optionality in any projects for which they provide the construction financing, participate up to 10% if there are option at some predetermined level?

Is that -- I mean, I guess...

It's really a FuelCell's option.

We have the option at COD to sell a project or bring in permanent financing with Generate's assistance for -- to keep the project on balance sheet for a long period of time and they will have a sponsor equity interest in that project.

Okay.

So that could actually provide somewhat of an anchor investor from COD financing and beyond.

Is that...

Absolutely.

Absolutely, yes.

All right.

Maybe just a couple of quick ones for me.

But this facility would not be used for an operating facility like health and finance and Bridgeport acquisition, correct?

This facility in and of itself is geared towards construction financing.

I would say we're, again, want to grow the relationship with Generate.

As far as the Bridgeport financing specifically, we're working with the Connecticut Green Bank and sourcing term debt for that project and expect that project to close here in the near term in early 2019.

Okay.

All right.

Maybe you could just talk at a high-level about the rates you are seeing with, obviously, the term structure of the yield curves shifting or at least moving around a whole lot.

Could you kind of bracket what we're seeing at least of that type of facility?

Yes.

So obviously, for operating facilities, operating assets, we're getting good bids for projects in kind of the mid-single digits, I'm not going to quote exactly, but you'll certainly see the rates come down compared to what we're seeing for construction and development level financing.

Has the NRG facility been officially terminated?

No.

So the NRG facility was -- always had a maturity in 2019.

We have high debt maturity date now to the COD of the project that we have that they've lent into, which is in the spring, in March.

So once that project is at COD, we will bring in permanent financing, pay off that loan and then that facility essentially expires.

Again, good relationship with NRG.

This facility worked over the course of the relationship.

But given the size of the projects that we are doing now and the relationship with Generate, it made sense to put this new facility in place.

Best-case scenario, how many operating assets would you have by year-end, calendar year-end?

So...

Under -- in construction financing or on the operating generation portfolio?

Generating actual electricity revenue.

Yes.

If you look at the chart that we've included in the deck, Carter, certainly, as the Bridgeport project closes, that will bring another 14 megawatts on and we have 11.2 today so you're at 26.

And then on top of that, there's another 20 or so that are in various stages of development and construction that could be operating on balance sheet.

So you're in the 40-plus range by the end of the calendar year.

Got it.

Okay.

And maybe just last one for me, Chip.

Maybe a little bit more detail on ExxonMobil.

I mean, it's just such a potentially big call option on the shares.

I mean, I realize the time frame's been wrong a lot, but I would have thought that you would at least have constructed the first full demo plant by this period of time.

Correct me if I'm getting my timeframe too aggressively there.

And then just remind us again what amount of time you expect would have to be operational to get the data you think you could actually turn it into a bigger commercial relationship.

Yes.

So first of all, no I -- the expectation of building a plant is still consistent with what we had give or take a quarter or so, but that's not changed.

But what I would say is that, that's really not what we're trying to showcase here.

And what I mean by that is that these are capital-intensive plants, right?

And the reason we're teaming up with somebody that has the skills and bandwidth that Exxon has is that people make decisions not necessarily in this business on seeing the thing running, but do they believe that it can affordably and reliably deliver what they want, which is to see a [true] reduction and then you have to do something with the CO2.

So it's not at all, Carter, diminished.

We have all those -- we have all that data and we've been doing testing in different forms, in different sizes.

So no, it's not at all diminished the opportunity.

And frankly, for us, the revenue that we get from those projects even under those studies and things is really, really good.

So I'm not at all -- I wanted to kind of pull back my -- there's a tremendous amount of enthusiasm out there and the opportunity in the marketplace and to work with Exxon is very real.

And I think that they've been pretty public about their interest in what we're doing and the size of the opportunity is immense.

And we're just doing the right things with the right people, I think, in the right order.

And your next question comes from Jeff Osborne of Cowen and Company.

A couple of questions on my end.

I was wondering, you mentioned OpEx for the year would be flat to potentially down.

Is there a way that we can reflect on 2018 and think about what the additional professional costs and development costs were due to the litany of LIPA and DEEP projects that you were doing?

Is that a couple of million dollars that wouldn't repeat itself?

I'm just trying to get a sense of what the moving pieces are as you ramp up your production capacity and staffing to execute on all the commercial success that you've had relative to the historical expense profile that we saw over the past 12 to 18 months.

This is Mike.

I'll take that.

And yes, as I said in my remarks, we fully expect to operate at or below those levels in fiscal 2019 and we'll certainly push towards that.

I think the way you characterized that is correct.

There was spending on the SG&A side around that activity.

And some of it was structural, whereby working on policy initiatives at the different states and internationally as well to put certain programs in place that you're now seeing the benefits for.

So I'd characterize some of that as onetime.

And additionally, on the R&D side, a fair amount of activity in the finalizing the SureSource 4000 and our 7-year design stacks that came to fruition in the year, so would expect some of that to tail off as well.

Got it.

That's helpful.

And speaking of the 4000, I think the Triangle Street project was the first that you've got.

Is that operational now?

I know you flagged that as one that would be hitting the books here, but from my memory I thought that was supposed to be up and running by now.

It sounds like there might have been some delays there?

Jeff, this is Chip.

Yes, so the Triangle Street project was both a, frankly, the first one we built as well as -- these are hard assets so we can actually finance them and so on and so forth.

So the unit is -- we took the opportunity.

We ran the unit and it produced the efficiency and everything else that we expected.

But we took the opportunity to make some improvements/adjusted to this since we can.

It's right in our backyard here.

But currently, it's under heat up and everything else.

And after we made some of those adjustments to the overall system, and it should be running here shortly, yes.

Good to hear.

Two other questions.

I think one will be quick and one may be a bit more detailed.

On the quicker one, can you just, in broad strokes, Mike, talk about the service revenue profile for what we saw in '18 versus '19 in particular with replacement units?

I know Bridgeport probably would have been a big chunk of replacements in '19.

And now that you're about to own it, you won't see that revenue stream for that asset.

But is it safe to say that service should be flat this year or down or up?

I'm just trying to get a sense of the level of activity relative to what you folks installed several years ago that would be up for replacement over the next 4 quarters.

Yes.

Really good and insightful question, Jeff.

And with bringing Bridgeport on to our balance sheet, you're correct.

You will not see service revenue related to module replacements that's essentially a capital cost now on balance sheet.

That gets replaced by the generation revenues that we'll recognize.

And assuming Bridgeport closes, say, at the end of January, you'd see about $4 million a quarter of generation revenues being generated by that asset alone, so you will see increase in generation revenues.

And with the modules coming out of the service line, I think flattish compared to this year is fair.

But you will see some increases, obviously, as projects come online.

We do have the KOSPO project now.

And as we've always said, there's variability in the service line depending on timing of module replacements because that's a revenue driver.

Got it.

Now that's helpful.

And then my last question, hopefully, you can simplify this.

But in broad strokes, if you look at your business, it looks like you sell units between $6 million to $7 million a megawatt.

Your cost is somewhere in the $5 million to $6 million a megawatt.

You've got construction in the 12 to 18 months timeframe.

I'm trying to get a sense of how should we model the interest expense for Generate?

Is it safe to say that if my numbers are right, you would use construction financing for, call it, 80% of the $5 million to $6 million over the course of 12 to 18 months in my illustrated example?

Is there any kind of guidance that you can give on how you'll utilize that facility for the DEEP and the LIPA projects?

And then more importantly, as it relates to the income statement, how we should model interest expense associated with it.

Yes.

Sure.

So the rate in the agreement is fixed.

So the question that you're asking is a good one, what is the total percentage of the capital during construction that will be borrowed, and that's all based on underlying cash flows for the individual projects.

But as we said in the past, we expect to borrow between 70% to 80% of the project value as we're building these.

From an overall corporate cash perspective, as I mentioned in my remarks, we've already invested significantly into projects that are in construction.

So you'll see in 2019, and we've already started this, us recycling capital as we tap construction financing.

So I guess, to quick answer, Jeff, somewhere in the 70% to 80% that you mentioned, I think, is a fair estimate.

When you looked at those bars on your appendix, do -- does the Generate facility come in and call it the middle 80% of the bar where, at the start, you're not going to use it in the first 10%, you wouldn't use it in the last 10%?

I'm just trying to get a sense of timing and I think you would leverage that.

Yes.

I think that's fair.

I mean, we're trying to manage, obviously, corporate cash balance and not be overly leveraged here as well.

Again, we've invested ahead of pulling down construction financing for essentially the projects -- the first 4 projects here: Triangle Street, Tulare, Bolthouse and Groton on the chart.

So as we borrow against those, we're recycling capital.

And then going forward, you would expect to see us borrow 70% to 80% of the project value.

And then when would -- the last question I have is a follow-up.

When would the tax equity under other fixed investor come in?

Is that at COD at the end of that bar or potentially tax equity comes in earlier?

I'm just trying to get a sense of the timing of those events.

Yes.

No, tax equity would always come in at COD.

And to kind of follow on to some of Carter's questions, what the company is doing as -- we obviously have these projects under contract, we're in various stages of development and construction and we're running a process and now partnered, obviously, with Generate to solicit permanent debt and tax equity financing, which will get -- and you'll get term sheets and commitment letters in advance of COD but essentially have line of sight to your take-out financing at COD, which would essentially close at COD.

And then, again, the company does retain the optionality to sell assets at COD.

We demonstrated that, obviously, during 2018 with selling the Trinity project to AEP, selling our Tulare project to Clearway.

So that optionality is there but that would also happen at commercial operation.

So again, soliciting, financing and permanent take-out proposals during the course of the build-out of these assets.

And that was the final question.

And with that, I'll turn the call back over to Chip Bottone for any last comments.

Thank you, everybody, for following this and certainly the folks answering (sic) [asking] the questions.

They were good thoughtful questions.

Just kind of in summary, I think we've answered a lot of questions in 2018 relative to our ability to compete.

I think we've done a very nice job of that, financing these projects both in the construction and obviously in the long term.

As Mike commented, we expect to get the take-out financing in reasonable terms and things like that.

So tremendous amount of work and questions answered.

I think it also validates our business model, and we'll probably have more dialogue with people on that, but we do have a business model that gives us sustainable profitability and a lot of optionality, which in this changing world is a good thing.

And then last, we did a lot of things on the execution front, everything from executing on some of those contracts or securing new customer commitments or working on carbon capture and hydrogen and securing a pipeline of things to deploy hydrogen throughout California and the broader world.

So it's difficult, but I think accomplished a lot.

So we appreciate all the questions and the people following us and the interest in the company, and I want to wish everybody a Happy New Year and look forward to talking to you on our Q1 call later in 2019.

Have a great day.

And this does conclude today's conference call.

You may now disconnect.