DANBURY Sep 9, 2015 (Thomson StreetEvents) -- Edited Transcript of FuelCell Energy Inc earnings conference call or presentation Wednesday, September 9, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kurt Goddard FuelCell Energy, Inc. - VP of IR * Chip Bottone FuelCell Energy, Inc. - President and CEO * Mike Bishop FuelCell Energy, Inc. - SVP and CFO ================================================================================ Conference Call Participants ================================================================================ * Jeff Osborne Cowen and Company - Analyst * Sven Eenmaa Stifel Nicolaus - Analyst * Carter Driscoll FBR Capital Markets - Analyst * JinMing Liu Ardour Capital Investments - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the FuelCell Energy reports third-quarter 2015 results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. Kurt Goddard, Vice President of Investor Relations. Sir, please begin. -------------------------------------------------------------------------------- Kurt Goddard, FuelCell Energy, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Good morning, and welcome to the third-quarter 2015 earnings call for FuelCell Energy. Yesterday evening, FuelCell Energy released financial results for the third quarter of 2015. The earnings release, as well as a presentation that will be referenced during this earnings call, is available on the Investor Relations section of the Company website at www.fuelCellEnergy.com. A replay of this call will be available about two hours after its conclusion on the Company website. Before proceeding with the call, I would like to remind everyone that this call is being recorded and that the discussion today will contain forward-looking statements, including the Company's plans and expectations for the continuing development and commercialization of our FuelCell technology. I would like to direct listeners to read the Company's cautionary statement of forward-looking information and other risk factors in our filings with the US Securities and Exchange Commission. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer; and Mike Bishop, Senior Vice President and Chief Financial Officer. Now, I would like to turn the call over to Chip Bottone. Chip? -------------------------------------------------------------------------------- Chip Bottone, FuelCell Energy, Inc. - President and CEO [3] -------------------------------------------------------------------------------- Thank you, Kurt. Good morning, everyone, and welcome. Please turn to slide 4, third-quarter 2015 highlights. Our team has continued to execute on key strategic initiatives and has leveraged our market position to take advantage of global opportunities. Under the project developer model, we identify and develop projects; execute long-term power purchase agreements, or PPAs; and then construct and subsequently sell to investors operational, revenue-generating power plants. Large scale power consumers value the many attributes of our solutions, and private capital is attracted to investor capital to own the generation assets. Three onsite combined heat and power, or CHP projects, under this model are now in the various stages of development. Together, they represent over $50 million in future equipment and services revenue. All three have executed long-term PPAs; two are with repeat customers. We are in discussions with numerous project investors, and anticipate selling these projects near time they become operational or soon thereafter. We expect to announce additional PPA projects beyond these over the next several months. We are very pleased to announce in July the execution of a project development agreement with E.On Connecting Energies. This agreement introduces our utility ownership model for onsite power applications in our European served area. E.On's parent company is the largest electric utility in the world and owns 60,000-megawatts of power generation in more than 15 countries. This is more than doubling the generating [aspect] of Dominion, the owner of the Bridgeport Fuel Cell Park. The agreement commences with the sale of a 1.4-megawatt power plant directly to E.On for installation in a manufactured facility in Germany. This is our first megawatt class commercial FuelCell installation in Europe, and we believe it is the first commercial megawatt scale FuelCell plant in Europe for any manufacturer, and also the first project to be financed. The collaborative agreement serves as a repeatable model for future projects. Global manufacturing expansion is progressing. Expanding capacity is a key element of our strategy, as this will enable us to execute on projects we expect to close from our pipeline, increase volume of result in per-unit cost reductions, while redundancy of supply is enabling larger projects. This contributes to our competitiveness of all of our solutions, including larger utility scale installations. Commercialization of our advanced carbon capture solution reached a significant milestone, with the $23.7 million megawatt scale project we announced recently. During the first phase of this two-phase project, we will install a DFC3000 at an existing coal-fired power plant. We are in discussions with multiple utilities and independent power producers to establish a host site for the project. Demonstrating the scalable nature of our solutions, during the second phase, we expect to install additional multi-megawatt FuelCell power plants at the same site to capture a large percentage of the carbon dioxide emissions from the coal plant. The US clean power plant supports our various solutions as an affordable power-generation addresses the clean air compliance and low carbon aspects of our plant in a manner that is cost effective for rate payers and supports a domestic economy with American designed and manufactured clean power generation. I will elaborate further on our results, strategy, and global activities after Mike Bishop, our Chief Financial Officer, reviews our financial results for the quarter. Mike? -------------------------------------------------------------------------------- Mike Bishop, FuelCell Energy, Inc. - SVP and CFO [4] -------------------------------------------------------------------------------- Thank you, Chip. Good morning, and thank you for joining our call today. Please turn to slide 5, titled Financial Summary. I will start with a financial overview of the quarter. FuelCell Energy reported total revenues for the third quarter of 2015 of $41.4 million, compared to $43.2 million for the prior-year period. Revenue was in line with our previously stated guidance of $38 million to $48 million per quarter, and we also expect to be in this range in the fourth quarter. Gross profit for the third quarter of 2015 totaled $3.6 million, compared to $4 million for the same period last year. The gross margin percentage in the quarter was 8.7% compared to 9.2% in Q3 2014 on sales mix. Total operating expenses were $10.7 million for the third quarter of 2015, compared to $10 million in the prior-year period, primarily on higher business development activity. Net loss to common shareholders for the third quarter of 2015 was $7.3 million, or $0.02 per basic and diluted share. This compares to $7.8 million, or $0.03 per basic and diluted share, in the third quarter of 2014. Adjusted EBITDA, which is a measure of cash flow and is based on earnings before interest, taxes, depreciation, amortization, and other income and expense, totaled negative $6 million for the third quarter of 2015. The Company's total liquidity at July 31, 2015 was $131 million, consisting of $93 million of cash and cash equivalents, including restricted cash, plus availability of $37 million on the project finance facility extended by our partner NRG Energy, and $1 million of availability on the JPMorgan revolver. As illustrated by the backlog graph on the slide, backlog totaled $338 million at July 31, 2015 compared to $350 million at the end of the prior year period and $312 million at the end of the prior quarter ended April 30. Backlog includes product sales orders of $98 million, or 44-megawatts. Service backlog totaled $225 million and advanced technology contract backlog was $15 million at the end of the third quarter. We recently announced four different projects with the US Department of Energy, which are expected to add approximately $24 million to backlog during the fourth quarter of 2015 once contracts are finalized. Now I would like to discuss our balance sheet, specifically the project asset line item that relates to the Company's project development model. First, let me start with an overview of three types of ownership models for FuelCell power plants. One structure is the outright purchase of the FuelCell plant by the end user such as an industrial company. The second is the direct purchase by a utility, and the FuelCell plant becomes part of the utility's rate base, achieving a return similar to other forms of power generation they own. The third ownership structure is a power purchase agreement, or PPA model, that seeks to structure the ownership in a way that maximizes the benefits most important to the end user of the power. As discussed last quarter, more and more customers are attracted to this PPA model where they don't own the FuelCell power plant; instead, paying for power and thermal energy as it is generated. A project investor attracted to long-term stable returns owns the power plant. Under this PPA model, FuelCell Energy is identifying sites and off-takers of the power and developing the project. Once a long-term power purchase agreement is executed, installation of the FuelCell plant begins. Costs incurred during the construction period are reflected on the balance sheet and the project asset account, which totaled $11.6 million at the end of the third quarter of 2015, compared to $800,000 at the end of last fiscal year, indicative of increasing PPA activity. And to reiterate, this represents costs incurred to date; there is no margin included in this line item. The projects named on this slide are intended to be sold, although we may choose to retain ownership of one or more of these projects after they become operational, if we determine it would be of economic and strategic benefit. Project investors prefer investing in assets that have a revenue stream at the time of investment. Once the FuelCell plants are commissioned and ready to produce power, they are more attractive as construction period risk is eliminated. A future sale of these projects will result in recognizing product revenue for the entire project at the commercial operation date of the plant, which contrasts to the percentage of completion method of revenue recognition utilized for projects where the customer is buying the power plant from us during the construction period. The total product plus service revenue for the three projects currently being developed exceeds $50 million, and none of this revenue has yet been recognized. This project development approach helps to accelerate order flow and expands the margin potential for projects. We are self-financing during the construction period, utilizing our cash and inventory, as well as the NRG project finance facility from which we borrowed $3.3 million in the quarter. Our FuelCell projects offer attractive returns and financial profiles to project investors, including strong credit profiles of the purchaser of the power, consistent cash flows that are not dependent on weather or time of day, and high availability that drives power output and associated revenue. The chart at the bottom of the slide shows combined project assets and inventory. As we position the business for expected order flow from our project pipeline, we have also purposefully increased completed power plant inventory to ensure flexibility and customer responsiveness. Inventory and project assets will be a source of cash to the Company in future quarters, as we execute on our business plan. In summary, financial performance improved sequentially, our liquidity is strong, and the Company is well positioned to execute on multi-megawatt project opportunities and continue to drive top-line revenue growth with increasing margins. I will now turn the call back to Chip. Chip? -------------------------------------------------------------------------------- Chip Bottone, FuelCell Energy, Inc. - President and CEO [5] -------------------------------------------------------------------------------- Thank you, Mike. Please turn to slide 6, Project Activity. Under the project development agreement with E.On Connected Energies, we will offer distributed CHP solutions with our megawatt and multi-megawatt DFC power plants to E.On's existing and prospective customer base in Europe. E.On will own the plants and sell power and heat under a PPA financing or leasing structure. With power generation in more than 15 countries, E.On has a very large geographic footprint and approximately 33 million customers. We see very strong potential from this relationship, as we target E.On's customer base with an initial focus in Germany, the United Kingdom, and Italy. The 1.4-megawatt power plant comprising our first order from E.On will be configured for CHP operation and will be installed at a German headquarters and production facility of FRIATEC AG, a manufacturing company. E.On will own the plant, and FuelCell Energy solutions, our European-based entity, will install, operate, and maintain the plant under a long-term service agreement. An outright sale to E.On, this transaction illustrates our direct utility sales model. The historic utility model in Germany is under pressure due to the increasing solar and wind capacity and nuclear plants being shuttered in the coming years. Intermittency is a challenge to the German electric grid from the significant solar adoption that causes challenges to grid operators with changes in the weather. Germany has extensive wind resources in the north, though the power needs are in the south, and there is -- and the public opposition to proposed transmission grid connecting these distant areas due to the cost and aesthetics. And finally, adoption of distributed generation is growing. As a forward-thinking industry leader, E.On wants to be involved in distributed generation, both to maintain its customers and generate financial return. Our FuelCell solution addresses the needs of E.On, as well as the customers and German society as a whole. This agreement with E.On is consistent with our strategy of collaborating with world-class organizations, with strong resources and with a replicable business model of utility financing for utility customers. In our recent discussions with US-based utilities, they are taking notice of this announcement, as it provides us another point of validation. We are growing our pipeline and working on closing a broad range of projects in various sizes. These preferred resource projects comprise both onsite and utility scale opportunities. The financial returns in our onsite projects deliver attractive savings and other measurable benefits to site owners, while providing attractive returns or an expanding pool of investors interested in reliable asset class that provides diversity and consistent and strong cash flows. The Beacon Falls Energy Park, depicted in the middle of the slide, is continuing to achieve development milestones. The project was submitted to the Connecticut Siting council at the end of August. The very detailed application reflects the extensive planning activity undertaken to date, and addresses project elements like grid interconnection, gas supply, acoustic and emissions profiles, and landscaping. Continuing investment in the project development demonstrates that it makes sense for the region economically, environmentally, and supports energy policy. There are several other utility and state-level RFPs either in process or expected in the coming weeks and months for both the northeast and the West Coast of the US that we are targeting with projects already under development. Activity for large FuelCell projects in Asia by our partner POSCO Energy continues, with negotiations underway for several projects, as demonstrated by module sales to POSCO Energy that are in addition to the existing multi-year order. The utility ownership model is illustrated by three projects with United Illuminating, or UI. The utility's grid support 2.8-megawatt application in the port area of New Haven, Connecticut was recently commissioned. Located on utility-owned land near an existing substation, our distributed solution provides power to the grid through the substation, enhancing the resiliency of the grid while avoiding the need for transmission. The host municipality enjoys clean, quiet power generated locally and receives property tax revenue from formerly vacant land, and the state receives sales tax. We are also installing another 2.8-megawatt power plant for UI at a renewable energy park in Bridgeport, Connecticut, and a 3.4-megawatt DFC/ERG hybrid plant at a natural gas pressure reducing station in Glastonbury, Connecticut. Please turn to slide 7, global manufacturing capacity. Manufacturing expansion issues in Asia and North America are progressing on schedule. The FuelCell component manufacturing building in Pohang, South Korea is complete, and POSCO Energy is concluding preproduction testing with commercial production expected in October. As POSCO owns the facility and funded construction, we gain the benefits of expanded global capacity without dispersing our capital. The global integrated supply chain serves POSCO's new manufacturing facility, in addition to the existing North American and European facilities. Production at the new facility in Asia will lead to higher purchasing volumes, resulting in more favorable supplier pricing. Our partners' new facility also provides both flexibility and redundancy of supply that supports future growth, project financing, and global customer relationships, such as an American-based customer evaluating a FuelCell installation for a facility he has in Asia -- or they have in Asia, or vice versa for one of POSCO Energy's Asian customers, evaluate installation in North America or Europe. At our North American manufacturing plant in Torrington, Connecticut, we anticipate ground breaking of Phase I of the expansion in the fall of 2015. The first phase will generate cost savings from logistics, (inaudible) consolidation, and from additional manufacturing efficiencies. These global expansion initiatives are strategically vital. They support the adoption of our solutions worldwide and drive production volume to further reduce costs, enhancing our overall competitiveness. Please turn to slide 8, advancing carbon capture. FuelCell Energy's advanced technology group has been working to leverage the versatility of our core DFC technology, developing innovative solutions for distributed hydrogen generation and coal and natural gas-based carbon capture. There is a broad interest in carbon capture for both utility and energy companies. This is due to the fact that our carbon capture technology can be applied to both coal and natural gas-fired power plants with the same results and benefits. For today's discussion, we will focus on recent developments in coal-based carbon capture, although we are working on both applications. Instead of ambient air, flu gas from the coal plant will be directed into the FuelCells and combined with natural gas. Carbon dioxide and the flu gas will be concentrated and captured within the fuel cells, while about 70% of the smog-producing nitrous oxide will be destroyed, further supporting clean air initiatives. In addition to efficiently capturing carbon dioxide and destroying additional harmful emissions, the fuel cells will generate clean, continuous power, whereas other technologies significantly reduce the power output in the coal plant. The plant operator or project investor receives a return on their investment from the sale of electricity, making this an affordable solution for rate payers. In contrast, conventional (inaudible) scrubbers use about 20% of the coal plant's electrical output, consuming rather than producing power. Due to the scalable nature, carbon capture systems can be installed incrementally, helping plant operators affordably achieve emissions reductions over time to meet prescribed reductions that enable the coal fire plants to remain operating and retain jobs. Projects in the area of carbon capture will provide revenue to us, and significant near-term opportunity as interest accelerates. We have recently been awarded by the Department of Energy a $23.7 million coal-based carbon capture project that will be a catalyst to larger projects. The current DOE award supports the first of the two-phase project. Under Phase I, we will install one of our DSC3000 power plants to concentrate CO2 from the coal-based flue gas. We are now finalizing a project site selection with a number of interested parties. Under Phase II, following successful performance during the first phase, we anticipate installing 11 additional FuelCell plants. Due to the compact footprint of our DFC solution, the entire 12-unit project will require only three acres of land. This full system will remove 700 tons of carbon dioxide per day, while generating 27-megawatts of clean electricity. Phase I includes one-time engineering services, so per plant costs in the second phase are much less than the first and the 11 additional units represent approximately $125 million project that is additive to the announced $23.7-million project. Subsequent service revenue is additive as well. In full scale, DFC carbon capture installation comprises of 420-megawatts of FuelCells would capture 90% of the carbon dioxide emitted from a 550-megawatt coal or gas-fired power plant. It would remove 4.9 million tons of carbon dioxide annually, while simultaneously generating 3.2 gigawatt hours of electricity. This is a very affordable solution for meeting compliance obligations, with the cost to rate payers of less than $0.02 per kilowatt. We are already in discussions with several of the top US facilities regarding carbon capture. These discussions form a natural extension of our relationships that represent a broadening of our product offering to this customer base. Carbon capture has a sizable market potential that we are working to develop and implement quickly with industry commitments. We envision future carbon capture projects in the 25- to 50-megawatt scale or larger, generating revenue from both equipment and services. Please turn to slide 9, Reinforcing the Business Model. Leveraging our flexible business model is helping FuelCell Energy to capitalize on multiple opportunities and expand across key global markets. With E.On, we are expanding our utility model in our European-served area. Our relationship with this leading European utility is a model that we can replicate. Utility relationships like this validate our Company and solutions to prospective utility customers worldwide. We are pleased with the momentum this is creating in our global utility markets. We are executing on installations with United Illuminating, which will add to future service revenue as these plants become operational. As mentioned, we are working to broaden our share of [wallet] with utilities to include both clean and affordable distributed generation, FuelCell parks, and carbon capture to retrofit in existing coal plants and serve new gas-fired plants. The FuelCell manufacturing footprint is being expanded on two continents. This drives our cost-reduction strategy with volume purchasing through our integrated global supply chain. It also provides flexibility and redundancy of supply, which supports growth by enabling larger projects. Lastly, we are witnessing a confluence of events and catalysts that are supporting adoption of clean distributed power generation, such as FuelCell's including greater emphasis on emissions, challenges with sighting, cost of transmission, lack of welcome for some traditional power generation technologies, and challenges of intermittency from certain forms of renewable power. The FuelCell Energy team continues to show leadership and innovation, with focus on affordability and execution that positions the Company for further success. I thank them for the dedication and I thank all of you, our shareholders, for your continued support. Operator, we'll be happy to take questions at this time. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Jeff Osborne with Cowen and Company. Your line is now open. Please go ahead. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [2] -------------------------------------------------------------------------------- Great. Good morning, and thank you for the details. A couple questions. One, I was wondering, Chip, if you can give us an update on the Long Island and New York in general, what you're seeing on the RFP activity there would be helpful. -------------------------------------------------------------------------------- Chip Bottone, FuelCell Energy, Inc. - President and CEO [3] -------------------------------------------------------------------------------- Jeff, good morning. Thank you for calling in today. So, LIPA, there is actually -- let me take New York in general, because there's more opportunity than just specifically with LIPA. But in essence, New York in total is developing multiple RFPs for FuelCells and other equivalent-type products to satisfy both in certain places just demand for power, as well as some of the renewable objectives that they are trying to meet. So what we're seeing from LIPA specifically, Jeff, is actually an expansion. What was originally one RFP going to become out here. We've seen one come out already for the -- for eastern Long Island. There's another one coming out similarly, and then of course, the larger of them will be coming out later this year. But we also have opportunities with Con Ed and some others. In general, I think people are starting to appreciate the kind of things we can do and the uniqueness of both the problem and the solutions we can offer specifically in New York. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [4] -------------------------------------------------------------------------------- That's great to hear. Two other questions. One is wondering if you can just go through the siting council process. Obviously, Beacon Falls is going through that. Is the [killing] fleet project as well in that queue, or is that kind of to be determined in the future? -------------------------------------------------------------------------------- Chip Bottone, FuelCell Energy, Inc. - President and CEO [5] -------------------------------------------------------------------------------- Yes, so let me start with Beacon Falls. So there's a fairly defined process to get projects fully done and executable. A number of them have been done. The latest development is going to the siting council, which we're expecting a positive response for that. So then, once you get past that, Jeff, you continue to work on obviously the interconnection stuff that's been put out there both for gas and electricity already. And then it continues down the path where we would basically find a contract path for that in financing. All of those things are kind of moving down the path as necessary. We're looking at several other sites. There's actually -- specifically in Connecticut, there's two specific RFPs that have come out or will be coming out. One is one that's been out for comment, which is a large RFP, basically 20 megawatts and above. And then the second one that is out now for comment is 2 to 20 megawatts. So we're developing sites, Jeff, as big as Beacon Falls, 63 megawatts, that would, obviously fit into both the large one. But if you did it in pieces, could fit into the small one as well. But you mentioned Willimantic is another site and we have others that would work and which are in that 20 megawatt and below bucket along similar lines. And where those are, I'll generalize, but the first thing you'd have to do is secure the sites themselves, which we've been in the process of doing that by different means. Then secondly, you'd have to talk to, obviously, the towns about tax treatment and siting council issues and things like that. So all I would say is that we're developing multiple projects to fit into multiple RFPs going forward. And frankly, at the same time, we are developing interest from investors that would actually own those projects as well. So there's a lot going on to get those things over the goal line. |