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Edited Transcript of FCEL earnings conference call or presentation 11-Jan-18 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 FuelCell Energy Inc Earnings Call

DANBURY Jan 12, 2018 (Thomson StreetEvents) -- Edited Transcript of FuelCell Energy Inc earnings conference call or presentation Thursday, January 11, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur A. Bottone

FuelCell Energy, Inc. - President, CEO & Director

* Michael S. Bishop

FuelCell Energy, Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Carter William Driscoll

B. Riley FBR, Inc., Research Division - VP & Equity Analyst

* Colin William Rusch

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Craig Edward Irwin

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Jeffrey David Osborne

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the FuelCell Energy Q4 and Fiscal Year-end 2017 Earnings Conference Call. (Operator Instructions)

Michael Bishop, Chief Financial Officer, you may begin your conference.

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [2]

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Good morning, and welcome to the Fourth Quarter and Fiscal Year-end 2017 Earnings Call for FuelCell Energy.

This morning, FuelCell Energy released financial results for the fourth quarter and fiscal 2017. The earnings release as well as the presentation that will be referenced during this earnings call are available on the Investors section of the company 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 everybody that this call is being recorded and that the discussion today will contain forward-looking statements, including, without limitation, statements with respect to the company's anticipated financial results and statements regarding the company's plans and expectations regarding the 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 would like to turn the call over to Chip Bottone, President and Chief Executive Officer. Chip?

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [3]

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Thank you, Mike. Good morning, welcome and happy new year, everyone.

Please turn to Slide 4, Highlights. We concluded our 2017 fiscal year with strong revenue, tremendous backlog and a strong balance sheet. We continue to execute on projects and on sales pipeline conversions. These results firmly position us for growth in 2018 and beyond.

We completed delivery of the power plants for the 20-megawatt fuel cell park in South Korea in December. The plant is now being constructed and will begin commissioning in the spring and bring it to full power in the summer. This is the first project we closed since we began marketing to customers directly in Asia and this is a template for future opportunities.

South Korea is a large near-term market opportunity. We see sizable opportunities for multi-megawatt fuel cell parks with the country's top utilities. Our customer for this first project, Korea Southern Power Company or KOSPO, owns 9 gigawatts of generation assets alone and this is their first fuel cell project. The government's Renewable Portfolio Standard or RPS obligates the country's 18 largest power generators to achieve the RPS requirements in their generation or purchase offsetting renewable energy certificates, which is driving increased activity in our direction. Our team is actively pursuing many opportunities in this market.

The business models for our markets in South Korea and the U.S. are complementary. In Korea, the transactions tend to be outright equipment sales with short execution cycles and long-term service agreements. The KOSPO project used existing inventory and generated near-term cash flow. In the U.S., we finance projects with long-term power purchase agreements and either retain them in our generation portfolio or sell them to investors. These projects provide consistent long-term cash flows.

In the last 6 months since July, FuelCell Energy has been awarded approximately $1.2 billion worth of projects. Only a portion of this amount has been recognized as part of our backlog. The remainder, comprised of more than $1 billion worth of project awards, has not yet been recognized as backlog. We are currently working with these customers on finalizing contracts and expect them to be converted to backlog in 2018.

Two recent projects demonstrate how energy solutions designed around our common technology platform are creating value for customers in diverse markets. In October, we executed a PPA with CMEEC, a Connecticut municipal utility, enabling the utility to supply clean distributed power to the U.S. Navy Submarine Base. Projects like the 7.4-megawatt fuel cell power plant help utilities participate in distributed generation and avoid being dis-intermediated. This is a project and example of how we provide energy as a service. These types of projects can be replicated throughout our utility scale markets.

In November, we signed a hydrogen and power offtake agreement with Toyota, one of the world's largest automakers. Located at the Port of Long Beach in California, our multi-megawatt co-production power plant will produce renewable hydrogen for Toyota's fuel cell electric vehicles and its Class 8 proof-of-concept truck. The plant will simultaneously generate renewable power for the grid. The project showcases how our fuel cell technology can affordably and sustainably meet automakers' fueling needs in advanced hydrogen fueling infrastructure. Providing renewable hydrogen for transportation is a replicatable model with global market potential.

These 2 projects are in addition to the 40 megawatts of awards from Long Island Power Authority or LIPA announced in July of 2017.

On the operation side of our business, we have completed the first stage of the expansion of our North American manufacturing facility in Torrington, Connecticut as shown in the pictures at the bottom right of the slide. The expansion will generate cost reductions and has positioned us to execute on recent awards, backlog and future orders.

Please turn to Slide 5, Energy Trends Driving Demand. Some of the greatest energy and environmental challenges of our time can translate into significant opportunities for FuelCell Energy. Our strategy is to partner with global market leaders and leverage our common global technology platforms to deliver value while solving problems.

As summarized on this slide, our innovative solutions address 4 specific portions of the global energy market, which are: distributed generation increases grid resiliency and reliability; emissions reduction and decarbonization for power generation; distributed hydrogen to reduce transmission emissions; and long-duration energy storage to support the increased penetration of intermittent renewables. These adjacent markets allow us to broaden our offerings to existing and potential customers and increase our share of their investment in clean, efficient and affordable energy solutions. We estimate the sum total of the global market opportunity is north of $50 billion.

Starting on the left side of this slide, grid investments by global utilities are increasingly focused on higher levels of service and public concerns. Recent FuelCell Energy awards from LIPA of 39.8 megawatts, KOSPO of 20 megawatts and CMEEC of 7.4 megawatts highlight dedicated tenders or solicitations for fuel cells in order to solve the issues facing utilities.

Distributed generation, once seen as a threat to utilities, is now being embraced. Our utility side solutions enable utility customers to affordably install clean and efficient power generation into the grid where it's needed most, enhancing resiliency and reliability while avoiding siting issues and costly investments in transmission infrastructure.

As the power generation transition continues, we expect increasing demand for our versatile solutions. Near-term opportunities for 2018 include RFPs in Connecticut with the potential procurement of over 100 megawatts as well as RFPs and projects in Korea and California totaling tens of megawatts.

Global demand for emissions reductions and decarbonization solutions is growing. The power generation sector produces 29% and 25% of the U.S. and global greenhouse gas emissions, respectively, and harmful emissions such as NOx are also produced.

Emissions from existing power plants must be reduced and a key to unlocking the potential for emissions reduction is finding an affordable and scalable solution for carbon capture. Working with ExxonMobil, we have developed a scalable, innovative carbon capture solution for gas and coal-fired power plant applications as well as oil sands applications.

Concentrating carbon dioxide is a normal side reaction for our proprietary fuel cell's electrochemical generation process. Because it simultaneously captures carbon dioxide and generates power, ours is a truly affordable capture solution and a potential game-changer in the industry. Our system can capture 90% of the CO2 and destroy 70% of NOx from our plants -- from a plant's emission stream. ExxonMobil, our technology partner, is enthusiastic about our technology and is featuring it in the recent media campaign with an objective of describing today's emissions challenges and how fuel cells can lead to a solution.

We are well down the path of beginning deployment with ExxonMobil. Our first pilot plant will be built and tested at a 2.7-gigawatt dual fuel mixed-use coal and gas-fired electric generating station in Alabama and operations are expected in 2018 and 2019. Beyond this pilot plant, we see successfully larger megawatt plants being designed and developed, ultimately leading to a standard plant size of 100 to 300 megawatts per site depending on the fuel source. We would expect fuel cell carbon capture plants to be selling equipment to utilities combined with long-term operating and service agreements.

The global transportation sector is responsible for nearly 1/3 of all emissions if you include greenhouse gases and harmful emissions such as NOx. The future to reduce emissions will be a portfolio of several motive technologies and industry analysts think hydrogen-powered vehicles are a significant market opportunity. We agree and believe the key to development is affordable and readily available sources of distributed hydrogen.

To address this, we developed our SureSource Hydrogen tri-generation solution, which generates high-purity hydrogen that is both clean and affordable. We define affordable as the equivalent price of gasoline or petrol, by units in dollars per kilogram for hydrogen to the consumer.

Through our normal operation, fuels such as natural gas and biogas are reformed in our power plants into hydrogen. Our tri-generation technology produces additional hydrogen beyond what is necessary for power production, generating a stream of hydrogen for transportation and industrial applications. The emissions rate in pounds per hundred miles for vehicles using hydrogen produced by our system is significantly lower than that of gasoline passenger vehicles. Compared to electric vehicles using biogas as an input, emissions are lower than electric vehicles and equivalent or better when using natural gas-derived hydrogen.

Our multi-megawatt SureSource Hydrogen solution will be supplying Toyota with affordable renewable hydrogen and is a template for future projects. The road map for mass deployment of these tri-generation systems in the hub-and-spoke fueling infrastructure is gaining global interest from utility companies and others. Spending for these systems will accelerate to match the demand for fuel cell electric vehicles.

Finally, as described in the far right box on the slide, utilities are recognizing the fast-growing need for cost-effective, financeable, long-duration energy storage, which is becoming increasingly urgent as more and more intermittent sources are placed into the electric grid. Building on our expertise in solid oxide fuel cell technology, we have developed innovative long-term storage solutions that address this large potential market.

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 our hydrogen on-site for long periods of time and then uses this as a fuel source to generate clean power when needed during times of high power demand. This megawatt scalable solution provides a long-duration storage option with high rapture proficiency, which compares very favorably against other technologies.

So in summary, big challenges can be addressed with our innovative and unique solutions. We approach this partnered with industry leaders.

Now, I'd like to turn the call over to Mike Bishop, our Chief Financial Officer, who will review our financial results for the quarter. Mike?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [4]

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Thank you, Chip.

Please turn to Slide 6 titled Financial Overview. FuelCell Energy reported total revenues for the fourth quarter of 2017 of $47.9 million compared to $24.5 million for the fourth quarter of 2016. This increase in revenue compared to third quarter of 2017 and year-over-year reflects partial deliveries under a 20-megawatt order to a South Korean construction company for a utility project to be owned by Korea Southern Power Company.

Gross profit for the fourth quarter of 2017 totaled $3.2 million compared to a gross loss of $500,000 for the fourth quarter of 2016. Gross margin in the fourth quarter was impacted by reduced production levels which resulted in lower overhead absorption.

In October, the production rate returned to 25 megawatts on an annualized basis following the reductions to 15 megawatts which was implemented in June. We are evaluating a further increase in 2018 to meet demands from recent project awards.

Operating expenses totaled $11.3 million for the fourth quarter of 2017, unchanged from the fourth quarter of 2016. Administrative and selling expenses increased year-over-year, reflecting a higher level of business development activity and professional fees offset by lower research and development expenses in the quarter.

Net loss to common shareholders for the fourth quarter was $10.8 million or $0.17 per basic and diluted share compared to a net loss of $13.7 million or $0.41 per basic and diluted share in the fourth quarter of 2016. Adjusted EBITDA loss in the fourth quarter of 2017 totaled $5 million compared to $9.5 million in the fourth quarter of 2016.

Cash, cash equivalents and restricted cash totaled $87.4 million as of October 31, 2017. This total includes $49.3 million of unrestricted cash and cash equivalents and $38.1 million of restricted cash. We also have $40 million of borrowing availability under the NRG Energy revolving project financing facility.

I would like to discuss changes in working capital that occurred in the quarter primarily related to the Korean utility project. We began shipping and billing to our customer equipment procured from POSCO Energy in the fourth quarter of 2017. As a result, accounts receivable and accounts payable increased from the third quarter to the fourth quarter. We began to receive payments under this contract during the first quarter of fiscal 2018.

The inventory position at October 31, 2017 reflected a number of modules for this project which were subsequently shipped in the first quarter of fiscal 2018. Shipments for this project are now complete and the plant is currently under construction. We will commence commissioning activities in the spring and we expect the plant to be operational in late summer 2018. This project highlights our ability to rapidly respond and execute on projects of scale for utility markets on a global basis.

Backlog totaled $554.2 million at the end of the fourth quarter of 2017 as illustrated on the chart on the top right of the slide. At the end of the quarter, service backlog totaled $182 million, generation backlog totaled $296 million, Advanced Technology contract backlog totaled $44 million.

Product sales backlog totaled approximately $31 million, primarily related to the Korean utility order. Revenue from this order will be recognized as we ship the remaining equipment in the first quarter of fiscal 2018 and commission the project later in the fiscal year.

We expect backlog to substantially increase during 2018, assuming that contacts are finalized and the existing project awards are converted to backlog. This is illustrated on the chart which reflects $1 billion of project awards at the end of Q4.

Project awards that are not included in backlog for fiscal 2017 include the 2.2-megawatt Toyota agreement which was signed subsequent to fiscal year-end; the 3 LIPA projects, assuming that they are retained in the generation portfolio; and the service contract for the Korean utility project.

The total $1.6 billion of backlog and project awards positions the company to improve EBITDA results in the future as these projects become revenue-producing assets. The chart in the middle of the slide breaks down our project activity by category.

We remain confident regarding access to project capital, both for selling projects outright as well as financing projects in which we may retain ownership as we are seeing a high level of interest from project investors. Projects that we develop have off-takers with strong credit profiles and are sizable, which is attractive to project investors. The predictable power generation profile of our solutions is also attractive as project returns are not dependent on weather or time of day.

As we enter 2018, we are continuing our practice of not providing revenue or EPS guidance. As project activity expands, projects may be retained in the generation portfolio or sold. Whether projects are retained or sold leads to different revenue profiles near-term and long-term.

I would like to comment on expectations for operating expenses and capital spending. Operating expenses are expected to remain in the recent range of $11 million to $12 million quarterly and can support expected growth in the business at these levels. On the capital expenditure side, while our facility expansion is complete, we are investing and transitioning our fuel cell module conditioning activities from Danbury to Torrington, Connecticut, which will result in lower manufacturing costs. As a result, we expect to see capital spending in the $11 million to $13 million range for fiscal 2018.

In conclusion, the financial results delivered in the fourth quarter of 2017 highlight our ability to quickly execute on market opportunities. Korea product sales activity is expected to provide near-term revenue and cash flows which support investment in our growing U.S. generation portfolio. Strong backlog and project award totals demonstrate the growing adoption of our solution and provides a path to positive EBITDA over time. We are well-positioned to execute on our growth plans.

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

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [5]

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Thank you, Mike.

Please turn to Slide 7, Summary. FuelCell Energy has backlog and project awards totaling over $1.6 billion, which gives us visibility to positive EBITDA results over time as we execute on these opportunities. The combination of domestic and international contracts provide complementary revenue and cash flow models.

Execution on the South Korean utility project strengthen our financial position while providing a template for future opportunities. We are confident in bringing project financing to backlog and recent awards in the U.S. and growing our portfolio of generation assets.

We continue to think and act strategically, leveraging a common proprietary platform to address adjacent energy markets. We have an innovative and versatile solutions portfolio with the necessary manufacturing footprint. Our talented team and I appreciate your continued support as we execute on growing deployment of our solutions on a global basis.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jeff Osborne from Cowen and Company.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [2]

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I had 3 questions so you can keep your answers brief with that as a caveat, but one is understanding you're not giving guidance for the year, Mike, but I just wanted to understand the $31 million of backlog that's remaining for Korea and the comment about shipments having concluded in December. Can you just give us a sense of perspective of how much of that $31 million would have been recorded in the month of December versus how much comes in during the commissioning phase over the spring and summer months as the facility ramps up?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [3]

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So as I mentioned in my remarks, in product backlog at the end of December, we had about $31 million of product backlog that's primarily made up of the Korean product -- project. We did conclude shipments of that project in December. As I said in my remarks, a number of modules came out of inventory, reducing inventory and that was subsequently billed for the customer. So you'll see a meaningful amount of that revenue recognized in the first quarter. As we mentioned, we're doing commissioning activities in the middle of this year in the spring and the plant will be complete in the summer. We do recognize revenue as we complete those activities. Commissioning is typically in the 10% to 15% range of a total order, but beyond that, we're not providing any specific revenue guidance for the year.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [4]

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Got it. And just 2 other quick ones. Can you give us a sense of perspective at the Alabama facility with Exxon? Is any equipment in place today either being installed or commissioned? And if not, when do you expect that facility to be -- start shipping to it?

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [5]

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Jeff, this is Chip. I'll take that one. So the activity that's going on in total right now is in the engineering phase and, as I mentioned in my remarks, the deployment of the equipment will take place in '18. There's minimal amount of work going on physically at the site because of all the activity in engineering, but we expect the operation and tests to take place over the 2018, 2019 period of time.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [6]

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And then, any future orders in the 100- to 300-megawatt range? Would that need the data validated from that facility? Or could you see other things pop up around carbon capture before the end of 2019 when this facility is operational and fully tested?

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [7]

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The plant I was referring to is the pilot plant, so that's roughly 2.5 megawatts. And then, what we -- what I said in my remarks is we would expect other -- we would get other projects that would be equivalent or larger in size. The -- what I was trying to do is just paint a picture for everybody of what the endgame is. And the endgame, which would be a little farther out, is per project anywhere from 100 to 300 megawatts per site. And you can imagine that doesn't include the service agreements, so we're talking about projects that are very sizable and the market penetration of that is very, very small from a potential perspective.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [8]

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Very good. And the last one I had for Mike is just the way you worded the backlog. You included the LIPA facilities and the retained bucket. In the past, the narrative on those was you have a lot of flexibility. And you highlighted that there certainly could be differing ways that those are structured and the interest from investors in them, but is it a safe assumption to say that maybe, versus 3 months ago, your bias is to -- leaning towards retaining those facilities versus an outright sale?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [9]

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Jeff, as I did say in my remarks, we have included the -- as we did last quarter, we've included the LIPA projects and project awards calculating the value that would go into our generation portfolio and that number is basically the total revenue value of those contracts so the PPA times the number of years times the power rate on the contracts. The company does have optionality in whether we retain or sell these projects, the financial profile of the projects are very strong with good long-term cash flows. It's obviously been an objective of the company to retain -- selectively retain projects on balance sheet to have those long-term cash flows. We have not made any definitive decisions on whether or not to retain some or all of these projects at this time.

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [10]

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Jeff, this is Chip. Let me just add. What Mike said is from a timing perspective. So for those projects, which is 40 megawatts made up of 3 sites, we expect that the permitting process and the necessary approvals and things get done in 2018 and the actual construction and, if you will, and I'm simplifying this of course, but construction and operation in the '19 or '20 time frame. So I would say, yes, the profitability of those projects being as it is, there is -- and the financing and, frankly, debt available for -- to do those projects, they're going well as far as an execution perspective. And I think we're going to leave our options are open, but I would say that as we've represented financially, bias is probably to put them on our balance sheet if we can and have the capital and debt to do that, which seems pretty likely at this point.

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Operator [11]

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Your next question comes from Colin Rusch from Oppenheimer.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [12]

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Can we just follow-up on that last comment around the project financing available? Obviously, you've got the NRG relationship, but can you talk about, I mean, what are you seeing in terms of number of potential vendors for project financing and any sort of details on potential terms if you were -- to able to close something in the next 6 to 9 months?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [13]

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Colin, this is Mike. As you mentioned, we've got a long relationship with NRG. We have a committed project financing facility that we've worked with NRG on in the past. We would expect to utilize that in 2018 for construction financing for projects that we currently are building. We are starting a syndication process around the LIPA projects and other projects that we have under award and under contract. And we have seen strong investor interest in those projects, both in terms of construction financing and takeout financing at COD. So we have strong confidence that we will bring project financing to the LIPA projects and others.

We also have a track record at this. We have -- today, we have 11 megawatts of operating assets on our balance sheet that we financed through financial institutions. We have good familiarity with the folks in the marketplace, a good understanding of terms. And, again, we expect to bring financing to these when appropriate.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [14]

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Great. And then, just a more detailed question around inventory levels. Can you just break out what's finished goods and what's raw materials in the inventory? And how should we be thinking about what's the right inventory level on a go-forward basis? And, I guess, the last piece of this is just the cadence of reducing the higher cost inventory, finished goods inventory on the balance sheet.

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [15]

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Sure. So as we think about inventory, inventory is higher than our normal operating rate. We did build up inventory last year in anticipation of some of these project awards, which have subsequently come into backlog. So today, at the end of the fiscal year, we had about $75 million of total inventory. Of that inventory, about $54 million is work in process. And of that work in process amount, about $46 million is complete plant so either balance of plant or module. So those can turn very quickly. And as we mentioned in our remarks, we shipped a number of modules to Korea in the first quarter of 2018 to satisfy the KOSPO order. So you will see inventory come down in the first quarter of 2018 reflecting delivery of those modules. And I would say, after that time, inventory will be at a more normalized level.

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Operator [16]

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Your next question comes from Craig Irwin from Roth Capital Partners.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [17]

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First thing I wanted to ask about is the Korean order you served in the December quarter. Can you give us a little bit of color? Previously, you'd said that a portion of the material used on that project would come from material built at POSCO that was sitting in POSCO's inventory. What portion of the material used on the project came from fuel cell versus POSCO?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [18]

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Craig, this is Mike. As far as an exact percentage, we're not going to provide exact percentage, but POSCO's inventory played a meaningful part of this project. We've collaborated with POSCO on this project. As I mentioned in our remarks or in my remarks, accounts receivable and accounts payable both increased in the fourth quarter. The increase in accounts payable is primarily related to procurement of equipment from POSCO for this order. As I just said, we are shipping our -- we shipped our inventory now in the first quarter of 2018. You'll see our inventory balance come down in the first quarter of 2018.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [19]

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Great. So if I could change subjects, the Investment Tax Credit, there's been some discussion that this could potentially be slipped into -- the remediation of the tax credit could potentially be slipped into something in the short-term, right? So there are other things in the renewable sector that will be remediated in the next small number of weeks. And some people believe that it could be included, some people don't. If we were to see the Investment Tax Credit remediated, can you comment about the impact on your LIPA projects and the impact on your existing portfolio that you commissioned in '17 for both clients and for your own account? How does this change the ability to finance these projects that you're looking at booking in '18? And how does it change the profitability on projects that you executed in '17?

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [20]

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Craig, happy new year. This is Chip. Let me start off and maybe Mike can help me with that answer.

Relative to the Investment Tax Credit, you're right. The current thinking is that in an omnibus bill relative to approving the budget, there's several provisions, one of which is the Investment Tax Credit. There's also other provisions that will be helpful to the industry in that as well. All the feedback we have is that it's going to happen. We'll see.

All of our financials that we've done, both the ones in '17 as you relate to as well as the ones going forward, most notably perhaps LIPA, we do not have the Investment Tax Credit figured into that. And even without that Investment Tax Credit, these projects have attracted exceptional interest from both debt and equity financers of those potential projects.

If we do get it, that's great. Where it would help would be obviously, going forward, the margins perhaps on those projects going forward would be enhanced or the cost of the capital perhaps lower based on the margins. And then, as far as any other things, we can always do some sort of arrangements based on margins on these other past projects.

But again, it's perhaps premature, but the short answer is that anything we get from here is upside and we don't have the Investment Tax Credit at this point factored into any of these projects or, frankly, projects that we bid. So it would just make us that much more competitive or more profitable or easier to get lower cost of capital.

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [21]

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And then a follow-up...

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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Great. And one -- sorry, Mike.

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [23]

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I'd just give my 2 cents on this one. I agree with what Chip just said. It brings in another type of project investor, right? So bringing your tax equity investors into these projects, push up the loan-to-value ratio perhaps, so it just broadens the financing opportunities for the company.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [24]

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Great. And then, just one point of clarification maybe. Do you have clawbacks written into any of the agreements that were commissioned in '17 where you could see a catch-up on a benefit that was retroactively allocated into any of these projects?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [25]

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As far -- no, we've recognized the tax benefits for everything that we installed obviously through 2016. The activity that we have been building in 2017 is actually not quite commissioned yet. We have a couple of projects that are ready to be COD in the January time frame. So they would certainly qualify for ITC if that were to be reenacted.

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Operator [26]

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Your next question comes from Carter Driscoll from B. Riley FBR.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [27]

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First of all, congratulations on the very strong backlog and the progress in reducing your costs and building your portfolio.

First question is the opportunities in Korea. Are the other utilities looking at the KOSPO install to see how that goes before maybe deepening their engagements? And is that realistic? Or could you talk about maybe where you stand with some of the other utilities, whether in timing? Has the size of the magnitude of potential opportunities changed at all directionally? And then, I have a few follow-ups.

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [28]

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Yes, Carter. I'll take that one. So bear in mind that even prior to the POSCO -- or sorry, the KOSPO contract, it's a little confusing, but KOSPO is the utility company. POSCO themselves had 200 megawatts of assets running with many, many of the -- of those 18 utilities that I mentioned, okay? Those are some utilities and some independent power producers. So, I mean, we have a very strong lead in terms of reputation and things like that.

What perhaps is a little bit different about the KOSPO project was it was, in fact, a, KOSPO's first fuel cell project; and secondly, was our first project directly in Korea with a Korean customer, okay? So I would say that they were watching not so much another fuel cell project, but they were watching perhaps how we handled it.

And what I would say is that our folks, in dealing directly with KOSPO's people, did a tremendous job. The project's going great. It's ahead of schedule. We shipped everything when we said. All the technical matters and things are resolved, working both with the folks here as well as resources that we have in Korea. So I would say that we've done nothing other than enhance our reputation in the marketplace as the way we've executed that project.

And these people will have more projects, many more projects because the amount of opportunity, if you think about it, in the marketplace is in the gigawatts. So we're going to do what we say and then we'll go to the next one and so far, so good.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [29]

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Okay. Just turning back to LIPA for a second. It sounds as though financing is the primary rationale whether you retain or sell. I mean, is that realistic? I mean, the profitability characteristics outside of financing seem very attractive at first blush. Is it -- are there other considerations other than retaining versus selling in the ROI inherent in either choice to what you would -- what would trigger trying to pursue them as a retained asset?

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [30]

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Let me start and Mike can finish. So just to be clear, so these are large projects, right, and there's interconnection and various approvals and things like that. So for 2018, what we are doing on those projects is the normal permitting, interconnection, et cetera, et cetera. So in that -- in 2018, we don't see a need for capital. It's all paperwork and meetings and things like that, okay?

Where you would get into building these would be in '19 and '20. And they would be built in series, if you will. We're going to build the first one then take the same crew and go to the next one and so on and so forth. So it's kind of sequentially. So the amount of capital that you need, a, is going to vary by time. And you're exactly right. I mean, we have to look at that, but what Mike said and I'll allow him to finish this is that financing this, we have -- in the past, we had -- or currently we have this instrument from NRG, but we've actually seen people even at this point come and say, "Look, we're interested in financing the construction." And then you say, "Okay, well, what about the long term?" And the long term is going to be made up of, we believe, debt and equity because there's people who've shown interest in both of those aspects, minimizing any kind of capital requirements that we would have to do even if we kept them on our balance sheet and put it in our generation portfolio.

So I don't know if Mike wants to add anything to that, but I just want to kind of dimensionalize when and how much. And, of course, if you could get the ITC, as Craig brought up, that does multiple things for you. It gives you a bigger audience of people wanting to do these, perhaps more competitive, therefore, lower cost of capital or even in that case you get 100% loan-to-value, okay?

So I don't know, Mike, if you want to add to that, but...

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [31]

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Sure. And, Carter, what I would say is obviously the goal of the company is to get to EBITDA positive and generate long-term meaningful cash flows. These types of projects are 20-year projects which generate very strong cash flows. We certainly recognize the capital required to build the projects, but as we said, there is strong financing interest.

But what I'd also say is the market opportunities in Korea and elsewhere complement this activity. As you've seen with this first Korean project, we're able to generate near-term cash flows by doing product sales and shipping inventory which generate cash for the business overall. And then, with those projects, you have the long-term service agreement. While it doesn't provide the same cash flow that a PPA does, it's, again, meaningful long-term revenue for the company.

So we will look at market rates for these projects and others and make the right decisions for the company to bring the company to EBITDA positive, but more importantly, long-term recurring cash flows so that when we get there, we stay there.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [32]

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Okay. Just a couple more for me. I know you're not providing top or bottom line official guidance for fiscal '18, but I think you had mentioned in the past a goal, obviously given various considerations, of 30 -- if I have it correctly -- 30 megawatts of operating assets. Is that still a goal that you have for fiscal '18? And then, anything that could -- any wiggle room that could move that directionally? Any color there would be appreciated.

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [33]

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Yes, sure. So we actually, on the chart in the middle of the deck in the financial overview, today, we have 11.2 megawatts of operating assets. We currently have 19.5 megawatts under construction in various stages of construction. As I mentioned, we have a couple that, and we shared the picture of the SureSource 4000 in Danbury, that's very close to being commissioned. That's our first 60% efficient fuel cell right down the street from here. So that's close to being done. We have a project in California, Tulare, which is close to being done, and then other projects in various stages of construction. So yes, if you add up the 11.2 and the 19.5, that's in the 30 range that you mentioned.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [34]

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All right. So that means that, that's a fairly realistic target, assuming there's no major construction slippage?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [35]

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Yes. I'd say that is what we're working on now. It's not all going to be done at the same time. It's -- we will bring projects to COD periodically throughout 2018 and 2019.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [36]

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Okay. And then, maybe 2 of the opportunities that don't get as much airtime. Certainly, distributed hydrogen, obviously some of the OEMs, particularly the Japanese, are making a bigger push to put out fuel cell electric vehicles. Can you talk about whether, not necessarily just domestically, but maybe the opportunity in Japan? A lot of discussions that, ahead of the Olympics, they're going to be commissioning a lot more infrastructure projects. If you could talk about the opportunity there. And timing and individual project size if you were to do a fueling station for Toyota or one of the other OEMs?

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [37]

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Carter, this is Chip. Yes, we spent a fair bit of time in my -- in our prepared notes here to talk about this opportunity. And it is, a, global, that's true. In different countries or even different states for that matter, we're kind of different pace. And Toyota's setting that pace. There's other people within the fuel cell electric vehicle business clearly supporting it such as Honda and Hyundai, but the true leader in this is clearly Toyota. Having closed the first project with Toyota, I think it's safe to say that we are working closely with them on a global deployment strategy here. And I don't want to say anything more than that.

The Olympics in Japan, yes, they're going to make some investments to -- for that, but there's a much bigger and deeper play here. The plant that we're building in Long Beach right now is 2.5 megawatts of power approximately and 1,200 kilograms a day of fuel. An average car takes about 4 kilograms a day of fuel so you can figure out just on that particular one how many cars you can fuel. But if you throw in the truck ID and all that kind of stuff, you're talking about tens of thousands of -- or hundreds of thousands of kilograms a day necessary in just Los Angeles alone. So there's a lot going on behind the scenes here. And just what I was trying to get across here is that this market opportunity for fuel cell electric vehicles is real, it's near-term and it's going to be big and more to follow. But we're right in the middle of it, I can assure you of that, with governments around the world, with governments at state level, departments of transportation, et cetera, et cetera. And I don't want to divulge any more of our strategy, but we're at the center of this and we feel really good about it.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [38]

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And then, just lastly maybe for me. Storage, what do you think needs to take place from a, at least domestically, from a structural perspective in terms of remuneration, getting the different parties to agree on really paying for multiple services. It seems to be a big roadblock. Obviously, you had in the FERC not even a quorum and a lot of the changes in the utilities finally starting to accept that, but give me your take, a high level, of long-duration storage versus what traditionally have been a short duration marketplace and how it transitions over time and where solid oxide sits in that, the opportunity set versus other competitive technologies.

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [39]

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Yes, another great question, Carter. I probably need -- I'll try to do my best to give you a succinct as possible answer. But, I mean, just it varies -- the answer I would give you would vary by state or even by country, right? But the short answer is that the -- Carter, sorry. The department of whatever energies in the state or the commissioners are really mandating things in some regard, which is not always a good thing to do, right, because what they're doing is they're mandating things now rather than telling -- asking the utility companies, "What do you need?" So we -- though that process is going on, but we're actually talking to utility companies not about today, but about really what are you trying to achieve here. And if you listen to what they have to say, okay, what they really want to achieve is they need more security and confidence that when they put these storage solutions in, they're actually going to be able to deliver what people expect of them. And the short answer on that technically is they need longer duration because this duck curve, if you will, is moving around; and secondly, the steepness of it varies from place to place, but the -- but if you have longer duration and you only need shorter, that's fine, but if you have short-duration storage and you need longer, you've got a problem. So what we're trying to say is, look, we have the solution that covers all your bets, #1.

Number 2, storage, generally speaking, today is not financeable. There's not a business model and, therefore, the utilities are forced to put it on their balance sheet. We're also working on a way to come up with a financeable long-term storage model that would be very helpful to accelerate deployment, okay?

And then, the third part of that stool is as we're developing these things with people who talk about electricity generation storage, given the fact that we use hydrogen as a medium for storage, we're saying to them, "You realize that on the other side here, you got this transportation sector that's going to a hydrogen-based deployment. And if you can make all this power here efficiently, why not maybe use it over in the transportation sector, which effectively lowers the cost of storage and lowers the cost of hydrogen for the transportation sector?"

So I've said 3 significant things and that's our story. So right now, we see people tactically putting in storage because people said, "Hey, you need storage." But we're taking the education approach and we're getting some real traction here and more to follow here, I think, in the short term where you're going to see people saying, "We like this idea. We're going to do it." And that's kind of the short version of what's going on, I think, in the world. It's the same everywhere through a different degree, but California is obviously the one leading the market in terms of urgency of deploying it because they have the highest percentage of renewables in their grid at the moment.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [40]

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Maybe just -- I'm sorry. I'll squeeze one last in. Mike, have you seen any changes at all in the appetite for tax equity given the federal tax legislation changes and obviously the caveat being if the ITC or the extent of maybe that would change the ballgame? But have you seen any material decline in the appetite for tax equity?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [41]

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So just to be clear, we're really not in the tax equity market right now, given that our projects up to this point have not qualified. We certainly speak to those folks. And if the ITC is extended, we would expect to bring tax equity financing to our projects, but no, I haven't seen any changes in appetite. There's obviously large pools of capital out there chasing projects.

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Operator [42]

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(Operator Instructions) Your next question comes from Eric Stine from Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [43]

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You covered a lot here, but I'll sneak in a few short ones. Just wondering, on the product margin side, you talked about low utilization in the quarter is limiting it. It was great to see it positive, but clearly it's not at the levels that you want longer term. I mean, any way to give some details as to how much of an impact the fact that some of that was from POSCO, at least for this first project? And then, maybe how do you think about -- as you look at that $1 billion-plus, and I know it will depend on is it retained or not, but what you think kind of a normalized product margin profile should be going forward?

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [44]

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Sure, Eric, and happy new year as well. So when you think about -- so the way we think about product margins is on the sales projects that we're doing today, we target margins in the low- to mid-teens. Not every project is the same and that will be different. What's impacted our product margins over the past year, and I think we've talked in prior quarters about and I mentioned this in my prepared remarks, that we are seeing overhead variances come through given the low factory production. We're at 15 megawatts in -- over the summer. We just ramped back to 25 megawatts. So that will collapse here or those negative variances become positive as we begin -- as we get back to the 25-megawatt and above level, but that's really what has been the drag on product margins for the past year. It really doesn't relate to the -- to our dealings with POSCO Energy on this Korea order. This Korea order is a good margin project for us.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [45]

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Okay. And so just as it relates to the fact that -- I mean, I know you've been gearing up for this. You can respond quickly and a lot of this is -- has been in inventory so you're not producing it and that, I mean, obviously that should change it sounds like pretty meaningfully here near-term.

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Michael S. Bishop, FuelCell Energy, Inc. - Senior VP, CFO & Treasurer [46]

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Yes. Again, we brought the factory production level up so it will mitigate the negative variances and as we continue to -- as that continues to go up, you'll see us get back to a more traditional product margin in the range that I mentioned.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [47]

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Okay. Last one for me, just the Connecticut RFP. I know it's 100 megawatts-plus. Just thoughts on what you expect to bid in to that. I mean, I know LIPA, you were far -- you've been in far more than 40 megawatts and ended up winning all of it, but just thoughts on that RFP as we look for that to progress.

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [48]

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Eric, this is Chip. I'll take that. Obviously, I can't comment too much in an open RFP, but I think it's suffice to say that we'll go with that very competitively with a large number of projects. It's kind of interesting that when you build a reputation, it says that when you decide to do a project, you actually get it done. People start reaching out to you and say, "Hey, I've got land or whatever." So we'll have more than an ample number of projects to bid in to that RFP and others. There are others in Connecticut specifically as well to -- and we'll -- we feel good about it.

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Operator [49]

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At this time, I will turn the call over to the presenters.

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Arthur A. Bottone, FuelCell Energy, Inc. - President, CEO & Director [50]

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Okay. Thank you very much everybody for joining today and the thoughtful questions. Everybody had a slightly different topic or angle, but I think it would be helpful, frankly, for the other people listening as well as ourselves and, hopefully, we answered those.

But, I guess, in just in closing, what I hope everybody saw was that we've amassed a pretty significant number of projects from an award perspective, which I think speaks to our competitiveness. The ITC withstanding would be nice, but we continue to move forward without it. Our business model, as we've been talking about for the last couple of years, is, I think, exactly the right thing for the right time. And we will do -- we will make the appropriate decisions on the allocation of capital against those and we feel really good about it.

The new opportunities emerging in carbon capture, in hydrogen are very, very large. If you refer back to prior presentations we did, these markets themselves will be larger than the distributed generation margin. And, we're uniquely positioned to take advantage of those. So there'd be more to follow on that and we feel really good about it.

So yes, it was a good quarter. Had some challenges in the year, but I think we ended up on a very good note and we feel good about the future.

So thank you very much for your questions and we hope you'll have a great day and we'll talk to you in the next quarter call. Thank you.

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Operator [51]

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This concludes today's conference call. You may now disconnect.