ANNUAL REPORT 2014
Efficient and
Environmentally
Friendly Power
for the Electric Grid
TRANSFORMING POWER GENERATION
AND ENHANCING THE RESILIENCY
OF THE ELECTRIC GRID
Affordable and
Sustainable
Micro-grid Power
Multiple 2.8 megawatt power plants
1.4 megawatt combined heat and
power installation
Distributed Power
Generation Solutions
Affordable
• High efficiency reduces fuel costs
• Combined heat & power (CHP)
further increases efficiency
Environmentally Friendly
• Virtually free of pollutants
• Low carbon profile
Easy to site
• Modest space requirements
• Quiet and vibration-free
Enhanced Grid Resiliency/
Energy Security
• Lessens/avoids reliance on
transmission
• Capable of operating independently
from electric grid
Fuel cells cleanly and efficiently convert chemical energy
from clean natural gas or renewable biogas into electrical
power and usable high quality heat in an electrochemical
process that is virtually free of pollutants.
Similar to a battery, a fuel cell is comprised
of many individual cells that are grouped
together to form a fuel cell stack. Each individual
cell contains an anode, a cathode and an
electrolyte layer. When the fuel enters
the fuel cell stack, it reacts electrochemically with oxygen
(i.e. ambient air) to produce electric current, heat and
water, without combustion. Fuel cells continuously generate
electricity as long as fuel is supplied and due to the
absence of combustion, virtually no pollutants are emitted.
Global Headquarters
Research & Development
Services
Global Locations
Sales and Project Development
Manfacturing
Global Customer Base
Connecticut, USA
Ottobrunn, Germany
Pohang, S. Korea via partner
50+ sites in 9 countries
>300 MW installed/backlog
On the cover:
(Top Photo) 15 megawatt fuel cell park in Bridgeport,
Connecticut supplying power to the electric grid
(Bottom Photo) 1.4 megawatt combined heat and power fuel
cell plant at Central Connecticut State University in New
Britain, Connecticut
NASDAQ: FCEL
Multiple 2.8 megawatt power plants
Dear Shareholders,
Modern lifestyles depend on readily available electricity that is affordable,
continuously available, and preferably, environmentally friendly. FuelCell Energy is well positioned to meet all
three of these needs with distributed generation solutions that efficiently convert natural gas or renewable
biogas into power that is clean, affordable and available around-the-clock.
We continue to reduce the cost of ownership of our plants with measurable progress achieved in 2014 and are
targeting further margin expansion from manufacturing efficiencies and increasing global production. We have
strengthened the business via strategic partnerships, and further advanced market development, particularly with
utilities and independent power producers. While we achieved a number of accomplishments in 2014, there is much
more to do and we are focused on growing and diversifying revenue.
Demand for our Solutions Increasing
MW-Class Distributed
Generation Solutions
• Grid support and on-site
CHP power generation
• 650 associates on 3
continents
• >3 billion kWh produced
Our power plants deliver solutions to a broad range of customers, applications and challenges globally. We help
our utility customers improve their networks. We help large-scale power users reduce their operating costs and
emissions profiles while increasing energy security and reliability. In all, we deliver consistent
financial returns to our project investors.
For utilities, our solutions complement the central power generation model by adding clean power
when and where needed within a utility service area, while avoiding the need for transmission
and its associated costs and permitting challenges. The end result is enhancing the resiliency of
the electric grid with localized power generation. For example, we added United Illuminating as
a new utility customer in 2014 with three projects totaling over $75 million. Each of the projects
illustrates a unique aspect of our product offerings:
• Enhancing grid resiliency by installing a power plant next to an existing electrical sub-station on
utility-owned land, avoiding the need for transmission.
• Supporting intermittent technologies at a renewable power park with
ultra-clean fuel cell power that is not dependent on the weather or time of
day. The fuel cell plant will supply about half of the project’s total power
output; utilizing about one half of an acre while the remaining power will be
generated by solar panels that require about 8.5 acres. The modest space
requirement for fuel cells is particularly valuable in urban areas.
• Creating a high efficiency solution for gas pipeline operators by harnessing the energy released in
the pressure reduction process. This installation drives demand for gas, which utilities appreciate,
utilizes the existing infrastructure and land, and supports utility sustainability initiatives.
Our on-site combined heat and power (CHP) solutions are attractive to institutions
seeking micro-grid capabilities to enhance energy security in an affordable manner while
simultaneously advancing sustainability. For example, during 2014, we added another
university and another hospital to our customer portfolio. Both customers executed
long-term power purchase agreements (PPA) to purchase power and heat generated
by the fuel cells. These projects are attractive to project investors due to consistent
financial returns and the strong credit profiles of the power purchasers. FuelCell
1
Energy will operate and maintain these installations for the term of the PPA. Our liquidity (cash and
borrowing availability) enables us to take an active project development posture, which is expected to accelerate
market adoption.
Sites in London, England and Berlin, Germany became operational during the year, helping to promote the
attributes of efficient and clean on-site CHP to the European market.
Our strategic partners are important for market development and further improving the affordability of our
solutions. During 2014, we were pleased to announce an investment in FCEL common stock by NRG Energy
(NYSE: NRG), the largest independent power producer in North America. We are jointly marketing with NRG.
To further accelerate our project development efforts, NRG also extended us a multi-year $40 million
construction/term facility for project finance.
Our South Korean partner, POSCO Energy, a subsidiary of global steel company POSCO (NYSE: PKX), remains
on schedule for adding 100 megawatts of production capacity in Asia by mid-2015. Over the next few years, we
will transition from fuel cell kits manufactured in North America for the Asian market to an Asian production
model for POSCO Energy to produce locally for Asian demand. This localization strategy will yield material cost
reductions from the shared and consolidated global supply chain as well as royalty income and support a more
favorable revenue mix leading to further margin expansion.
Affordable, Clean, Secure Energy
Capital cost (equipment)
Operating cost
Cost of capital
Fuel cost
CAPITAL COSTS
• Plant size scalability
• Purchasing leverage
• Manufacturing leverage
• Automation
• Higher output
OPERATING COSTS
• Leverage service
infrastructure
• Longer life
• Optimizing plant
performance
COST OF CAPITAL
• Minimizing construction
period
• Second source supply
• Growing installed base
• Strategic partners
FUEL COSTS
• Highest total
efficiency
• Combined heat &
power
• Hybrid applications
2
Our fuel cell power plants are extremely versatile and our Advanced
Technology team is pursuing new markets for our core products including
distributed hydrogen and carbon capture.
Distributed hydrogen configured from our standard power plants provides
multiple value streams: ultra-clean electricity, usable heat, and high purity
hydrogen for vehicle fueling or industrial purposes. We demonstrated the
capability to consistently deliver high quality hydrogen from renewable
biogas for vehicle fueling with a three year project in California. We are now
demonstrating a tri-generation solution by supplying hydrogen to our own
North American manufacturing facility.
Our fuel cell technology also represents an efficient and economical approach
for the capture of up to 90 percent of carbon produced at large central
generation coal and gas plants. We attracted funding from public entities
and private industry alike this year, suggesting the market potential for this
application is growing and attractive.
We are continuing to develop our solid oxide fuel cell technology targeting
sub-megawatt distributed generation and energy storage applications with
contracts from both public and private entities.
Affordable Energy
There are four primary cost components for our fuel cell power projects:
Capital cost of the power plants and installation/interconnection; Cost
of capital for construction and term financing; Multi-year operating and
maintenance costs; and Fuel costs.
We are addressing all of these areas to further decrease the Levelized Cost of
Energy (LCOE) from our projects, which should accelerate market adoption.
Capital cost: Recent and continued cost reductions are being achieved from
strengthening our global supply chain and reducing material costs from a
59 megawatt fuel cell park supplying ultra-clean power to the
electric grid and heat to a district heating system in Hwaseong
City, South Korea
Tri-generation fuel cell power
plant supplying ultra-clean power,
heat and hydrogen to the FuelCell
Energy manufacturing facility in
Torrington, Connecticut, USA
600
500
400
300
200
100
0
higher volume of purchasing due to increased production levels. We produced a record
70 megawatts in 2014 and as production levels increase further, including Asian
production by POSCO Energy, our materials costs will continue to decrease, leading to
expanding margins.
Cost reductions are also supported by our culture of continuous improvement, illustrated
by the manufacturing efficiencies being achieved at the North American production
facility. Without expanding the size of the building, we doubled capacity in the past
four years as the chart on this page illustrates. We accomplished this by revising and
improving the production process, supported by some selective capital expenditures.
We are preparing for additional productivity gains and growth by prudently structuring
a capacity expansion of our Torrington, Connecticut manufacturing facility in two phases.
The State of Connecticut has shown support for our efforts with low cost loans and tax
credits based on the achievement of defined multi-year milestones.
Cost of capital: Financing includes both project construction-period and term financing.
We install our plants quickly, exemplified by the delivery of the 15 megawatt Bridgeport
fuel cell park completed on time in fiscal year 2014 and in just 12 months. Our rapid
installation capabilities help reduce the length of time needed for construction-period
financing, while the cost of term financing reduces as our growing installed base validates
our experience and expertise. Customers, including utilities on both coasts of the USA
and the utility-owned world’s largest fuel cell park in South Korea at 59 megawatts that
became fully operational in 2014, are further points of validation.
We are structuring a repeatable model for selling multi-megawatt fuel cell parks to
utilities, independent power producers (IPP), and large power users by addressing
the risk factors that utilities and project investors raise when evaluating projects. Our
expanding customer list and our strategic partners are supportive of the Company and
facilitating global market development. A second source of supply from the POSCO
Energy Asian facility provides manufacturing flexibility and risk mitigation. A growing
installed base, meeting installation commitments on time, and generating over three
billion kilowatt hours of ultra-clean power add further validation, all helping to reduce
the cost of capital.
Global Capacity
megawatts
400
300
200
100
0
FCE Capacity
FCE Production
Posco Energy Capacity
3
$30
15
0
(15)
Service Agreements and
License Revenues
Gross Profit/(Loss)
Services are a market differentiator
and an expanding aspect of revenue
diversification. The financial trends
are favorable, reflecting our initiatives
to improve profitability, and are a
stable source of recurring revenue
with service agreements up to 20
years in duration.
$180
30
25
20
15
10
5
0
-5
-10
-15
Operation and maintenance costs: Leveraging our existing service infrastructure over a growing number of
long-term service contracts is a cost reduction driver combined with continuous improvement focused on further
optimizing the operation of the power plants. We are also making technology investments to increase power
output, as well as extending the scheduled replacement period for the fuel cell modules from the current five
year cycle to seven years or longer. These product enhancements will benefit top-line revenue without any
commensurate increase in product costs.
Fuel costs: Efficiency drives fuel costs including both electrical and thermal efficiency. Our power plants have the
highest electrical efficiency for their size class for continuous power generation and we see significant increases in
electrical efficiency in the near term. If a customer is currently paying for fuel to generate heat, then the combined
heat and power capabilities of our fuel cell power plants reduces or even eliminates this expense item, with the
added benefit of decreasing or avoiding a source of pollutants and carbon emissions.
These initiatives lead to improved affordability and reduction in the levelized cost of energy (LCOE) or the all-in
customer cost per kilowatt hour of power generation. Today, our LCOE is competitive with the grid in the
markets in which we operate. Increasing production volume will further reduce material costs with approximately
210 megawatts of annual global production, whether in North America or Asia, which will reduce the LCOE
below the grid.
Services
(USD in millions)
Service Agreements and
License Revenues
Gross Profit/(Loss)
Services are a market differentiator
and an expanding aspect of revenue
diversification. The financial trends
are favorable, reflecting our initiatives
to improve profitability, and are a
stable source of recurring revenue
with service agreements up to 20
years in duration.
$30
15
0
(15)
4
4
600
500
400
300
200
100
0
megawatts
400
300
200
100
0
FCE Capacity
FCE Production
Posco Energy Capacity
$180
FuelCell Energy is playing a growing role in the transition of the global energy
markets. We are constantly working to advance technical and environmental
solutions to solve market problems and add value to a broad range of stakeholders.
Many of these new applications are unique and proprietary to FuelCell Energy and
represent significant growth opportunities.
We continue to focus on improving the affordability of our power generation solutions
and accelerating the growth of the Company. The multiple avenues for growth include
(i) expanding our footprint with multi-megawatt projects and fuel cell parks in our
current markets and with new and existing customers, particularly with utilities,
independent power producers and large industrials with on-site power; (ii) expanding
into new geographies including additional U.S. states and globally; and (iii) entering
new markets with our Advanced Technology offerings including distributed hydrogen,
carbon capture, and energy storage.
We appreciate the continued support of our shareholders. I would also like to
acknowledge the talent and commitment of our associates that are expanding the
capabilities of the organization every day with their efforts to make our solutions
more affordable, exceed the expectations of our customers, and enable continued
growth of the business.
Sincerely,
30
25
20
Arthur A. Bottone
President and Chief Executive Officer
of FuelCell Energy, Inc.
10
15
5
0
-5
-10
-15
Arthur A. Bottone
President and
Chief Executive Officer
FINANCIAL INFORMATION
Selected Financial Data
Business Overview
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Management’s Annual Report on
Internal Control Over Financial Reporting
Report of Independent Registered
Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and
Comprehensive Income (Loss)
Consolidated Statements of Changes
In Equity (Deficit)
Consolidated Statements of Cash Flows
Notes To Consolidated Financial Statements
Forward-Looking Statement Disclaimer
7
8
20
30
31
32
33
34
35
36
51
Shareholder Information
Directors and Officers
52
i.b.c.
Annual Report 2014
5
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of the end of each of the years in the five-year period ended October 31,
2014 have been derived from our audited consolidated financial statements together with the notes thereto included elsewhere in
this annual report. The data set forth below is qualified by reference to, and should be read in conjunction with our consolidated
financial statements and their notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this annual report.
Consolidated Statement of Operations Data:
(Amounts presented in thousands, except for per share amounts)
Revenues:
Product sales
Service agreements and license revenues
Advanced technology contracts
Total revenues
Costs and expenses:
Cost of product sales
Cost of service agreement and license revenues
Cost of advanced technology contracts
Total cost of revenues
Gross profit (loss)
Operating expenses:
Administrative and selling expenses
Research and development costs
Total costs and expenses
Loss from operations
Interest expense
Income (loss) from equity investments
Impairment of equity investment
License fee and royalty income
Other income (expense), net
Redeemable minority interest
Provision for income tax
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to FuelCell Energy, Inc.
Adjustment for modification of redeemable
preferred stock of subsidiary
Preferred stock dividends
Net loss to common shareholders
Net loss to common shareholders
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
2014
$136,842
25,956
17,495
180,293
126,866
23,037
16,664
166,567
13,726
22,797
18,240
41,037
(27,311)
(3,561)
—
—
—
(7,523)
—
(488)
(38,883)
758
(38,125)
Years Ended October 31,
2013
2012
2011
$145,071
28,141
14,446
187,658
$ 94,950
18,183
7,470
120,603
$103,007
12,097
7,466
122,570
136,989
29,683
13,864
180,536
7,122
21,218
15,717
36,935
(29,813)
(3,973)
46
—
—
(1,208)
—
(371)
(35,319)
961
(34,358)
93,876
19,045
7,237
120,158
445
18,220
14,354
32,574
(32,129)
(2,304)
(645)
(3,602)
1,599
1,244
—
(69)
(35,906)
411
(35,495)
96,525
30,825
7,830
135,180
(12,610)
16,299
16,768
33,067
(45,677)
(2,578)
58
—
1,718
1,047
(525)
(17)
(45,974)
261
(45,713)
2010
$ 50,192
9,034
10,551
69,777
54,433
23,627
10,370
88,430
(18,653)
17,150
18,562
35,712
(54,365)
(127)
(730)
—
1,561
(254)
(2,367)
(44)
(56,326)
663
(55,663)
—
(3,200)
$(41,325)
—
(3,200)
$ (37,558)
—
(3,201)
$ (38,696)
(8,987)
(3,200)
$ (57,900)
—
(3,201)
$(58,864)
$ (0.17)
$ (0.17)
$ (0.20)
$ (0.20)
$ (0.23)
$ (0.23)
$(0.47)
$(0.47)
245,687
245,687
186,525
186,525
165,471
165,471
124,498
124,498
$(0.63)
$(0.63)
93,926
93,926
Consolidated Balance Sheet Data:
(Amounts presented in thousands, except for per share amounts)
2014
2013
2012
2011
2010
At October 31,
Cash and cash equivalents (1)
Short-term investments (U.S. treasury securities)
Working capital
Total current assets
Long-term investments (U.S. treasury securities)
Total assets
Total current liabilities
Total non-current liabilities
Redeemable minority interest
Redeemable preferred stock
Total equity (deficit)
Book value per share (2)
$108,833
—
141,970
217,031
—
280,636
75,061
47,269
—
59,857
98,449
$ 0.34
$ 77,699
—
83,066
189,329
—
237,636
106,263
84,708
—
59,857
(13,192)
$ (0.07)
$ 57,514
—
55,729
140,626
—
191,485
84,897
32,603
—
59,857
14,128
$ 0.07
$ 51,415
12,016
18,783
132,948
—
183,630
114,165
23,983
—
59,857
(14,375)
$ (0.10)
[1] Includes short-term and long-term restricted cash and cash equivalents.
[2] Calculated as total equity (deficit) divided by common shares issued and outstanding as of the balance sheet date.
$ 20,467
25,019
48,171
102,209
9,071
150,529
54,038
12,098
16,849
59,857
7,687
$ 0.07
7
BUSINESS OVERVIEW
BUSINESS
Overview
We are an integrated fuel cell company with an expanding
global presence on three continents. We design,
manufacture, sell, install, operate and service ultra-
clean, highly efficient stationary fuel cell power plants for
distributed power generation. Our power plants provide
megawatt-class scalable on-site power and utility grid
support, helping customers solve their energy, environmental
and business challenges. Our plants are operating in
more than 50 locations in nine countries on three different
continents and have generated more than three billion
kilowatt hours (kWh) of electricity, which is equivalent to
powering more than 270,000 average size U.S. homes for
one year. Our growing installed base and backlog exceeds
300 megawatts (MW).
We provide comprehensive turn-key power generation
solutions to our customers, including power plant
installations as well as power plant operation and
maintenance under multi-year service agreements. We
target large-scale power users with our megawatt-class
installations. As reference, one megawatt is adequate to
power approximately 1,000 average sized U.S. homes. Our
customer base includes utility companies, municipalities,
universities, government entities and a variety of industrial
and commercial enterprises. Our leading geographic markets
are South Korea and the United States and we are pursuing
expanding opportunities in Asia, Europe, and Canada.
Our value proposition provides highly efficient and
environmentally friendly power generation with easy-to-
site stationary fuel cell power plants. The power plants are
located in populated areas as they are virtually pollutant
free, operate quietly and without vibrations, and have only
minimal space requirements. Locating the power generation
near the point of use provides many advantages, including
less reliance or even avoidance of the transmission grid,
leading to enhanced energy security and power reliability.
Our power plants provide electricity priced competitively to
grid-delivered electricity in certain high cost regions and our
strategy is to continue to reduce costs, which is expected to
lead to wider adoption.
Our Advanced Technologies group is leveraging our
commercial platform and expertise to develop new markets
for our core technology. Our Direct FuelCell® (DFC®) power
plants utilize carbonate fuel cell technology, which is a very
versatile type of fuel cell technology. Utilizing our core DFC
plants, we have developed and are commercializing both
a tri-generation distributed hydrogen configuration that
generates electricity, heat and hydrogen for industrial or
transportation uses, and carbon capture for coal or gas-
fired power plants. We also are developing and are working
towards commercializing solid oxide fuel cells (SOFC) for
adjacent sub-megawatt applications to the markets for our
megawatt-class DFC power plants as well as energy storage
applications. These applications could potentially establish
large markets and are complementary to our core products,
leverage our existing customer base, project development,
sales and service expertise.
8
FuelCell Energy
FuelCell Energy was founded in Connecticut in 1969 as an
applied research organization, providing contract research
and development. The Company went public in 1992,
raising capital to develop and commercialize fuel cells,
and reincorporated in Delaware in 1999. We began selling
stationary fuel cell power plants commercially in 2003.
Today we develop turn-key distributed generation combined
heat and power solutions for our customers and provide
comprehensive service for the life of the asset.
BUSINESS STRATEGY
Our Company vision is to provide ultra-clean, highly efficient,
reliable distributed generation power at a cost per kilowatt
hour that is less than the cost of grid-delivered electricity
in our target markets. We have a clear path to attaining this
vision through increased market adoption and continued
reduction in the Levelized Cost of Energy (LCOE) for our fuel
cell projects. We believe our vision can be achieved more
broadly and without incentives, at a global production volume
of approximately 210 megawatts annually. This capacity is
either already available or nearing completion.
Market Adoption
We target vertical markets and geographic regions that
value clean distributed generation, are located where there
is a premium to the cost of grid-delivered electricity, and
are aligned with regulatory frameworks that harmonize
energy, economic and environmental policies. Our business
model addresses all three of these policy areas with
highly efficient and affordable distributed generation that
offers local job creation potential and delivers power in a
low-carbon, virtually pollutant-free manner. Geographic
markets that meet these criteria and where we are already
well established include South Korea, California and the
Northeast USA. We have also installed and are operating
plants in the U.K. and Germany and are pursuing further
opportunities in Western Europe and certain other states
in the USA. We selectively partner with some of the leading
power generation companies in our target markets to
facilitate demand and deploy our projects.
While the Company has made significant progress
with reducing costs and creating markets since the
commercialization of our products in 2003, we face two
primary challenges in growing the adoption of our distributed
power generation solutions, which are (1) the need to further
reduce the total cost of ownership, and (2) the continued
education and acknowledgment of the value that our solutions
can provide to utilities and large multinational companies.
The business model for the generation and delivery of
electricity for over a century has been central generation,
which is large scale power generation in distant locations
away from urban areas with transmission and distribution to
the end users. While distributed generation has the potential
to disrupt existing utility models, it is being embraced in an
increasing number of markets to improve grid operations.
We work with utilities and independent power producers
to demonstrate how our solutions complement central
generation by incrementally adding clean power generation
when and where needed. It takes time to build awareness
with prospective customers and develop an operating
history. We believe that we have a strong business model and
strategy, demonstrated project development execution and
plant operating performance and committed partners which
will enable the Company to overcome these challenges and
grow into a sustainable business.
Levelized Cost of Energy
Our fuel cell projects are delivering power at a rate
comparable to, or lower than, pricing from the grid in our
targeted markets when including incentives such as the U.S.
Federal Investment Tax Credit. We calculate the Levelized
Cost of Energy (LCOE) over the life of the project. In order
to broaden the appeal of our products, we need to further
reduce our LCOE to be below the grid without incentives.
The Company is integrated across substantially the entire
value chain for our projects. We design and own our
proprietary fuel cell technology, we sell direct and through
partners, we develop turn-key projects, and manufacture,
install, operate and service our plants for periods up to
twenty years. Given this level of integration, there are
multiple areas and opportunities for cost reductions. There
are four primary elements to LCOE for our fuel cell projects,
including 1) Capital Cost, 2) Operations and Maintenance,
3) Fuel, and 4) Cost of Capital. We have a clear strategy to
reduce or manage costs in all four areas as follows:
• Capital Cost - Capital costs of our projects include
cost to manufacture, install, interconnect and any on-
site application requirements such as configuring for a
micro-grid and/or heating and cooling applications. We
have reduced the product cost of our megawatt-class
power plants by more than 60 percent from the first
commercial installation in 2003 through our ongoing
product cost reduction program, which involves every
aspect of our business including engineering, procurement
and manufacturing. Given the strong demand in Asia,
our partner POSCO Energy has built balance of plant and
stack module final assembly facilities in Pohang, South
Korea, and it is now completing a cell manufacturing
facility in the same location. Once the cell manufacturing
facility is operational, increased levels of purchasing from
the integrated global supply chain will benefit our LCOE
by obtaining lower pricing tiers from suppliers from the
greater combined purchasing volume. On-site, our
experienced Engineering, Procurement and Construction
(“EPC”) team has substantial experience in working with
contractors and local utilities to safely and efficiently
execute our projects and we expect continued cost
reduction is this area with experience and continued
transition to multi-MW fuel cell parks. In addition to these
cost reduction efforts, our technology roadmap includes
plans to increase the output of our power plants which will
add further value for our customers and reduce LCOE.
• Operations and Maintenance - We provide services to
remotely monitor, operate, and maintain customer power
plants to meet specified performance levels. Operations
and maintenance (O&M) is a key driver for power plants
to deliver on projected electrical output and revenues for
our customers. Many of our service agreements include
guarantees for system performance levels including
electrical output. While the electrical and mechanical
BOP in our DFC power plants is designed to last over 25
years, the fuel cell modules are currently scheduled for
replacement every five years, the price of which is
included in our service agreements. Customers benefit
from predictable savings and financial returns over the life
of the contract and minimal risk. Our goal is to optimize
our customers’ power plants to meet expected operating
parameters throughout the plant’s operational life. We expect
to continually drive down the cost of O&M with an expanding
fleet which will leverage our investments in this area.
Additionally, we have plans to increase our scheduled module
replacement period to seven years.
• Fuel - Our fuel cells directly convert chemical energy (fuel)
into electricity, heat and water. Because fuel cells generate
power electrochemically rather than by combusting (burning)
fuels, they are more efficient in extracting energy from
fuels and produce less carbon dioxide (CO2) and only trace
levels of pollutants compared to combustion-type power
generation. Our power plants operate on a variety of existing
and readily available fuels including natural gas, renewable
biogas, directed biogas and propane. Our core DFC power
plants deliver electrical efficiencies of 47 percent and hybrid
applications and advanced configurations are capable
of delivering electrical efficiencies of up to 60 percent.
In a Combined Heat and Power (CHP) configuration, our
plants can deliver up to 90 percent total system efficiency,
depending on the application. Increasing electrical efficiency
and reducing fuel costs is a key element of our operating
cost reduction efforts.
• Cost of Capital - Virtually all of our MW scale projects are
financed either by the off-taker that owns the asset or
a project investor that owns the asset and sells energy
to the off-taker. Our projects create predictable recurring
revenue that is not dependent on weather or time of the
day, investment tax credits, accelerated tax depreciation
and other incentives. Credit risk is mitigated by contracting
with strong credit off-takers. In addition, we offer
meaningful system-level performance guarantees over
the life of our projects. As a result, cost of capital for
our projects has declined over time given our operating
experience. With POSCO Energy completing a second
manufacturing facility for our core technology, we are able
to further mitigate risk with a secondary source of supply.
With continued execution, we expect our bankability and
financial credibility to continue to improve which will lead
to lower cost financing.
Today, on an unsubsidized basis, our LCOE in the U.S. is
approximately $0.13/kWh with natural gas at $7/MMBtu or
$0.12/kWh at $5/MMBtu; each $2/MMBtu change equates
to about $0.01/kWh. When combined with incentives, this
price is competitive in our target markets and creates a value
proposition for our customers. The LCOE is approximately
1/3 fuel costs, 1/3 for both cost of capital and capital costs,
and 1/3 for operations and maintenance. As a result of our
cost reduction and growth strategies, we are attempting to
reduce our LCOE without incentives to $0.09-$0.11/kWh when
the combined global production volume reaches 210 MW
annually, assuming natural gas prices of $6.00 to $8.00 per
million Btu. We expect LCOE reductions to be similar on a
percentage basis in Europe and Asia. A LCOE in the range of
$0.09-$0.11/kWh will enable pricing below the electric
grid without incentives, accelerating adoption and broadening
potential target markets.
Annual Report 2014
9
OFFERINGS AND CAPABILITIES
Our distributed generation solutions generate power, thermal
energy and, in some applications, hydrogen in two ways:
1) “on-site” for a variety of customers including industrial
and commercial enterprises, municipalities and government
entities, where the power plant is installed and the electricity
and heat used at the customer’s own facilities, and 2) for
utility companies in a grid-support role, where the power
plant or multiple plants supply power to the electric grid or a
utility substation. Our fuel cell projects can support micro-
grid applications with their ability to operate independently
of the electric grid. We can provide a complete turn-key fuel
cell project that includes project development, engineering
procurement and construction (EPC) services, operations
and maintenance services (O&M), and project finance.
On-Site Power (Behind the Meter): Customers benefit from
improved power reliability and energy security from on-site
power that reduces reliance on the electric grid. Utilization of
the high quality heat produced by the fuel cell in a combined
heat and power (CHP) configuration supports economics and
sustainability goals by lessening or even avoiding the need for
combustion-based boilers for heat and their associated cost,
pollutants and carbon emissions. On-site DFC power plants also
help solve waste disposal problems for customer operations
that generate biogas, a greenhouse gas, as the waste biogas is
a fuel source for the DFC plant. This capability to utilize on-site
biogas allows wastewater treatment facilities and food and
beverage processors to avoid the release of this greenhouse
gas into the atmosphere or eliminate gas flaring, which emits
pollutants and wastes a potential revenue source.
Utility Grid Support: Our plants are scalable, which we
believe make fuel cell parks practical and economical.
Examples of this include a five plant, 14.9 MW fuel cell park
in Bridgeport, Connecticut that is supplying the electric grid,
and multiple fuel cell parks in South Korea that supply power
to the electric grid and high quality heat to district heating
systems, such as a 59 MW installation consisting of 21 power
plants, the world’s largest. Fuel cell parks enable utilities to
add clean and continuous power generation when and where
needed. A 10 MW fuel cell park only requires about one acre
of land whereas an equivalent size solar array requires up
to ten times as much land, illustrating how fuel cell parks
are easy to site in high density areas with constrained land
resources, adjacent to the demand source thereby avoiding
costly transmission construction.
Fuel cell parks enhance the resiliency of the electric grid
by reducing reliance on large central generation plants
and the associated transmission grid. By producing power
near the point of use, our fuel cells help to ease congestion
of the electric grid and can also enable the smart grid
via distributed generation combined with the continuous
monitoring and operation by our service organization. Thus,
our solutions can avoid or reduce investment in new central
generation and transmission infrastructure which is costly,
difficult to site and expensive to maintain. Deploying our DFC
power plants throughout a utility service territory can also
help utilities comply with government-mandated clean energy
regulations and meet air quality standards.
As renewable technologies such as wind and solar power
are deployed more widely, the need for a clean, flexible
continuous power generation that complements these
10
FuelCell Energy
intermittent sources becomes greater. Our installed base
includes a number of locations where our customers use
DFC plants for meeting power needs that complements their
intermittent wind and/or solar power generation.
MARKETS
Vertical Markets
Access to clean, affordable, continuous and reliable power
defines modern lifestyles. The ability to provide power cleanly
and efficiently is taking on greater importance and urgency
in many regions of the world. Central generation and its
associated transmission and distribution grid is difficult to site,
costly, and generally takes many years to permit and build.
Some types of power generation that were widely adopted in
the past, such as nuclear power or coal-fired power plants,
are no longer welcome in certain regions. The cost and
impact to public health and the environment of pollutants and
greenhouse gas emissions impacts the siting of new power
generation. The attributes of DFC power plants address these
challenges by providing virtually emission-free power and heat
at the point of use in a highly efficient process.
We have two primary markets for our products. The first is
Ultra-Clean Power consisting of our products operating on
clean natural gas or directed biogas across seven distinct and
diversified vertical markets. The second primary market is
Renewable Power with our products operating on renewable
biogas across four distinct and diversified vertical markets.
These are summarized as follows:
Ultra-Clean Power markets: Renewable Power markets:
1) Wastewater
2) Food and Beverage
3) Agriculture
4) Landfill Gas
1) Utilities and Independent
Power Producers (IPP)
2) Education and Healthcare
3) Gas Transmission
4) Industrial and Data Centers
5) Commercial and Hospitality
6) Oil Production and Refining
7) Government
The utilities and Independent Power Producers (IPPs)
segment is currently our largest vertical market with
customers that include utilities on both the East and West
coast of the USA such as Dominion (NYSE: D), one of the
largest utilities in the USA, UIL Holdings (NYSE: UIL) and
NRG Energy (NYSE: NRG), the largest IPP in the USA. The
majority of the DFC installed base is in South Korea primarily
supplying that nation’s electric grid, with the fuel cells’
heat typically used in district heating systems to heat and
cool nearby facilities. Our partner in South Korea is POSCO
Energy Co., LTD. (POSCO Energy), a subsidiary of South
Korean-based POSCO (NYSE: PKX), one of the world’s largest
steel manufacturers. To date, POSCO Energy has ordered
more than 260 megawatts of DFC power plants, modules
and components.
Our DFC power plants are producing power for a variety
of industrial, commercial, municipal and government
customers including manufacturing, food processing plants,
universities, healthcare facilities and military installations.
These institutions desire efficient, ultra-clean baseload
power to reduce operating expenses, reduce greenhouse
gas emissions to meet their sustainability goals, and achieve
secure and reliable on-site power. Our products can utilize
either renewable biogas generated by the customer on-
site or directed biogas, generated at a distant location and
transported via the existing gas network.
Wastewater treatment facilities, food and beverage
processors, and agricultural operations produce biogas as a
byproduct of their operations. Disposing of this greenhouse
gas can be harmful to the environment if released into the
atmosphere or flared. Our DFC power plants convert this
biogas into electricity and heat efficiently and economically.
By doing so, DFC plants transform waste disposal challenges
into clean energy solutions. The wastewater vertical market
is the largest biogas market for DFC power plants. Since
our fuel cells operate on the renewable biogas produced by
the wastewater treatment process and their heat is used to
support daily operations at the wastewater treatment facility,
the overall thermal efficiency of these installations is very
attractive, supporting economics and sustainability. A 2.8
MW DFC3000 power plant operating on renewable biogas at
a water treatment facility in California is the world’s largest
fuel cell plant utilizing on-site renewable biogas.
We estimate that the distributed generation market in which
we compete is approximately $15 billion, composed of $6
billion of power plant sales and $9 billion of associated
service agreements. For the power plant sales, approximately
$4 billion is utility grid support and on-site power using
natural gas as the fuel source and approximately $2 billion
for renewable biogas opportunities.
Geographic Markets
We target geographic markets that value clean distributed
generation. Our target markets currently have regulatory
and legislative policy support such as clean air requirements
and economic incentives to support the adoption of clean and
renewable distributed power generation. Renewable Portfolio
Standards (RPS) is a mechanism designed to promote the
adoption of renewable power generation and is one market
enabler for demand of our power generation solutions. Fuel
cells can play a role in meeting RPS clean power mandates by
generating highly efficient, clean electricity continuously and
near the point of use.
United States: Individual states in the USA seeking to secure
cleaner energy sources, higher efficiency and greater energy
independence have RPS’s that require utilities to provide a
certain amount of their electricity from renewable sources,
including fuel cells.
We have active business development activities in the
Northeast and on the West Coast where population density,
higher energy costs, the need for distributed generation
solutions with a small footprint, and public policy that value
our product offerings. Most of our installed base in the USA
is located in California and Connecticut, both of which have
enacted RPS programs. The clean energy requirement in
California is 33 percent and the State is undertaking an
initiative to deploy 12,000 megawatts of clean distributed
generation by 2020. In addition to their RPS program,
California extends Self Generation Incentive Program (SGIP)
which provides capital cost rebates for on-site fuel cell
projects. Connecticut’s RPS requires utilities to purchase
27 percent of their peak electricity needs, or about 1,000
megawatts, from clean power sources by 2020. At least 20
percent of that must be from Class I renewable resources,
which in Connecticut and a number of other states includes
fuel cells. As states look to meet their RPS requirements
and utilities further deploy distributed generation to meet
consumer demand and improve the resiliency of their
service network, we see significant opportunities to grow
our U.S. footprint. Trends away from central generation to
a distributed generation model are supportive of demand
and our initiatives to continue to improve affordability are
expected to lead to increased adoption.
South Korea and the Broader Asia Market: The RPS in
South Korea took effect at the beginning of 2012, requiring
an increase of new and renewable power generation to
10 percent by 2022 from 2 percent in 2012. The program
mandates the addition of 0.5 percent of renewable power
generation per year through 2016, which equates to
approximately 350 megawatts, increasing to 1 percent per
year through 2022 or approximately 700 megawatts per year.
Fuel cells operating on natural gas and biogas qualify under
the mandates of the program.
High efficiency fuel cells are well-suited for South Korea
due to the need to import fuel for power generation, ease of
siting in populated areas, and high urban density that makes
siting transmission more difficult. Intermittent renewable
technologies are not as well suited due to the geography (high
urban densities limit available land for power generation)
and climate. The South Korean government has made clean
distributed generation power sources a priority to support its
growing power needs while minimizing additional investment
and congestion of the transmission grid. Fuel cells address
these needs and have been designated a key economic driver
for the country due to their ultra-clean emissions, high
efficiency and reliable distributed generation capabilities
that will help South Korea achieve its RPS and electricity
generation goals.
Japan, with its high urban densities, lack of domestic fuel
sources and desire to move away from nuclear power,
represents a near-term opportunity for DFC power plants.
Indonesia is also a near-term opportunity with a growing
urban population and robust natural gas distribution system
that is well suited for distributed generation by avoiding the
cost and maintenance of electrical transmission lines.
Europe: The European power generation market values
distributed generation, efficiency and low emissions and
represents opportunity for stationary fuel cell power plants,
particularly Germany, as it transitions away from nuclear
power generation and struggles to integrate a significant
amount of intermittent power generation capacity, the United
Kingdom, as it works to achieve aggressive carbon reduction
goals, and other West European countries including Italy
and Spain. FuelCell Energy Solutions, GmbH (FCES) is a
German-based joint venture that is 86 percent owned by
FuelCell Energy and 14 percent owned by German-based
Fraunhofer Institute for Ceramic Technologies and Systems
IKTS (Fraunhofer IKTS). Fraunhofer IKTS focuses on the
development of new energy supply systems using ceramic
system components, including fuel cells. As discussed in
greater detail in the following section, Fraunhofer IKTS has
expertise in fuel cell technology and is assisting with the
development of the European market for our products.
Annual Report 2014
11
STRATEGIC ALLIANCES
We leverage our core capabilities by forging strategic
alliances with carefully selected business partners that bring
power generation experience, financial resources, and market
access. Our partners typically have extensive experience in
developing, selling and servicing power generation products. We
believe our strength in the development of fuel cell products;
coupled with our partners’ understanding of broad range of
markets and customers, products and services, enhances
the sales, service and development of our products, as well
as providing endorsement of our power generation solutions.
Our global business partners include:
NRG Energy: We entered into a teaming and co-marketing
agreement with NRG Energy (NYSE: NRG) in September 2013.
In July 2014, the relationship expanded with NRG purchasing
14.6 million shares of our common stock and extending a
$40 million revolving construction and term financing facility
to FuelCell Finance, our wholly-owned subsiary. NRG owns
6 percent of our common stock and a senior NRG executive
is a member of the FuelCell Energy Board of Directors. NRG
is the largest Independent Power Producer (IPP) in the U.S.
with approximately 53,000 megawatts of generation capacity
and almost three million retail and commercial customers.
The teaming and co-marketing agreement encompasses both
direct sales to NRG Energy customers in North America as
well as sales to NRG Energy, who will own the fuel cell power
plants and sell the power and heat to the end user under
power purchase agreements. We are actively marketing with
NRG Energy to their existing customer base.
POSCO Energy: We partner with POSCO Energy, an IPP with
2013 annual revenues of approximately $2.6 billion and a
subsidiary of South Korean-based POSCO, one of the world’s
largest steel manufacturers (NYSE: PKX), with 2013 annual
revenue of approximately $56 billion. POSCO Energy owns
30.8 million of our common shares or approximately 11
percent of our outstanding shares. POSCO Energy has
extensive experience in power plant project development,
owning and operating power plants in multiple countries and
is the largest independent power producer in South Korea.
Our relationship with POSCO Energy has expanded to support
growing market demand for clean distributed generation. The
relationship began in 2003 with the sale of a sub-megawatt
demonstration plant and South Korea is now our largest
market, including a 59 megawatt facility, the world’s largest
fuel cell park consisting of 21 DFC3000 power plants. POSCO
Energy is a licensed manufacturer for Asia of our products
and collaborates with the Company on many market and
product development initiatives.
Fraunhofer IKTS: The Fraunhofer Institute for Ceramic
Technologies and Systems IKTS is the minority shareholder
in FCES. Fraunhofer IKTS, with its staff of approximately
400 engineers, scientists and technicians, is a world leading
institute in the field of advanced ceramics for high tech
applications, including fuel cells. The parent organization,
Fraunhofer, was founded in 1949 and is Europe’s largest
application-oriented research organization with an annual
research budget of €2 billion (approximately $2.4 billion) and
more than 23,000 staff, primarily scientists and engineers.
Fraunhofer maintains 67 research centers and representative
offices in Europe, USA, Asia and the Middle East.
12
FuelCell Energy
Fraunhofer IKTS contributed proprietary carbonate fuel cell
technology and patents to FCES. In addition, Fraunhofer
IKTS is contributing their expertise and extensive research
and development capabilities with fuel cells and materials
science as well as sharing their industry and government
relationships.
PRODUCTS
Our core fuel cell products (Direct FuelCell® or DFC® power
plants) offer ultra-clean, highly efficient power generation
for customers including the 2.8 MW DFC3000®, the 1.4 MW
DFC1500® and the 300 kW DFC300®. The plants are
scalable for multi-megawatt utility scale applications or
on-site combined heat and power generation for a broad
range of applications. Multi-megawatt fuel cell parks enable
consolidation of balance of plant and site components
combined with transaction and installation cost efficiencies
that result in a lower LCOE compared to smaller installations.
Examples include the 14.9 megawatt Bridgeport Fuel Cell
Park that consists of five DFC3000 power plants, or the 59
megawatt fuel cell park in Hwasung City, South Korea that
consists of 21 DFC3000 power plants.
We also market higher efficiency solutions to meet specific
market needs as follows:
• DFC-ERG® (Direct FuelCell Energy Recovery GenerationTM)
(DFC-ERG). The DFC-ERG power plants are for use in
natural gas pipeline applications, harnessing energy that
is otherwise lost during the station’s natural gas pressure-
reduction (“letdown”) process. Also, thermal energy
produced as a byproduct of the fuel cell’s operation
supports the letdown process, improving the station’s
carbon footprint and enhancing the project’s economics.
Depending on the specific gas flows and application, the
DFC-ERG configuration is capable of achieving electrical
efficiencies up to 70 percent. UIL Holdings purchased
a 3.4 megawatt DFC-ERG system in November 2014 for
installation in Connecticut.
• HEFC™ (High Efficiency Fuel Cell) (HEFC). The HEFC system
is configured with a series of fuel cell modules that operate
in sequence, yielding a higher electrical efficiency than
the standard DFC configuration by utilizing heat energy to
generate additional electricity. The HEFC configuration is
designed to extract more electrical power from each unit
of fuel with electrical efficiency of approximately 60%. The
HEFC system is targeted at applications with large load
requirements and limited waste heat utilization such as
utility/grid support or data centers.
The DFC product line is a global platform based on carbonate
fuel cell technology. Utilizing a standard design globally
enables volume-based cost reduction and optimal resource
utilization. Our power plants utilize a variety of available fuels
to produce electricity electrochemically, in a process that is
highly efficient, quiet, and due to the avoidance of combustion,
produces virtually no pollutants. Thus, our plants generate
more power and fewer emissions for a given unit of fuel than
combustion-based power generation of a similar size, making
them economical and environmentally responsible power
generation solutions. In addition to electricity, our products
produce high quality heat, suitable for making steam or hot
water for facility use as well as absorption cooling. System
efficiencies can reach up to 90 percent, depending on the
application, when configured for CHP.
Our products can be part of a total on-site power generation
solution with our high efficiency products providing continuous
power and can be combined with intermittent power generation,
such as solar or wind, or less efficient combustion-based
equipment that provides peaking or load following power. Our
products output can be adjusted on a pre-determined schedule
to accommodate periods of lower power demand and they can
also provide reactive power avoiding the need for separate
static or dynamic VAR compensation systems.
In summary, our solutions offer many advantages:
• Distributed generation: Generating power near the point
of use improves power reliability and energy security and
lessens the need for costly and difficult-to-site generation
and transmission infrastructure, enhancing the resiliency
of the grid.
• Ultra-clean: Our DFC power plants produce electricity
electrochemically − without combustion − directly from
readily available fuels such as natural gas and renewable
biogas in a highly efficient process. The virtual absence
of pollutants facilitates siting the power plants in regions
with clean air permitting regulations and is an important
public health benefit.
• High efficiency: Fuel cells are the most efficient power
generation option in their size class, providing the most
power from a given unit of fuel, reducing fuel costs. This
high efficiency also reduces carbon emissions compared
to less efficient combustion-based power generation.
• Combined heat and power: Our power plants provide both
electricity and usable high quality heat/steam from the
same unit of fuel. The heat can be used for facility heating
and cooling or further enhancing the electrical efficiency
of the power plant in a combined cycle configuration. When
used in Combined Heat and Power (CHP) configurations,
system efficiencies can reach up to 90 percent, depending
on the application.
• Reliability/continuous operation: Our DFC power plants
improve power reliability and energy security by lessening
reliance on transmission and distribution infrastructure of
the electric grid. Unlike solar and wind power, fuel cells are
able to operate continuously regardless of weather or time
of day.
• Fuel flexibility: Our DFC power plants operate on a variety
of existing and readily available fuels including natural gas,
renewable biogas, directed biogas and propane.
• Scalability: Our DFC power plants are scalable, providing
a cost-effective solution to adding power incrementally as
demand grows, such as multi-megawatt fuel cell parks
supporting the electric grid.
• Quiet operation: Because they produce power without
combustion and contain very few moving parts, our DFC
power plants operate quietly and without vibrations.
• Easy to site: Our DFC power plants are relatively easy
to site by virtue of their ultra-clean emissions profile,
modest space requirements and quiet operation. Space
requirements are about one tenth of the land required
for a solar array offering a similar rated output. These
characteristics facilitate the installation of the power
plants in urban locations.
DFC Emissions Profile
Fuel cells are devices that directly convert chemical energy (fuel) into electricity, heat and water. Because fuel cells generate power
electrochemically rather than by combusting (burning) fuels, they are more efficient in extracting energy from fuels and produce
less carbon dioxide (CO2) and only trace levels of pollutants compared to combustion-type power generation. The following table
illustrates the favorable emission profile of our DFC and high efficiency power plants:
Average U.S. Fossil Fuel Plant
Microturbine (60 kW)
Small Gas Turbine
DFC® Power Plant
HEFCTM High Efficiency Fuel Cell Plant
For power plants operating on natural gas, higher fuel
efficiency results in lower CO2, and also results in less fuel
needed per kWh of electricity generated and Btu of heat
produced. The high efficiency of our products results in
significantly less CO2 per unit of power production compared
to the average U.S. fossil fuel power plant, and the carbon
emissions are reduced even further when configured for
combined heat and power.
Emissions (Lbs. Per MWh)
SO 2
11.6
0.008
0.008
PM10
0.27
0.09
0.08
0.0001
0.00002
0.0001
0.00002
CO 2
CO2 with CHP
2,031
1,596
1,494
940
740
NA
520 - 680
520 - 680
520 - 680
520 - 680
NOX
5.06
0.44
1.15
0.01
0.01
When operating on renewable biogas, many government
agencies and regulatory bodies classify our power plants
as carbon neutral due to the renewable nature of the fuel
source. Greater efficiency reduces customers’ exposure to
volatile fuel costs, minimizes operating costs, and provides
maximum electrical output from a finite fuel source. Our
power plants achieve electrical efficiencies of 47 percent to
60 percent or higher depending on configuration, location,
and application, and up to 90 percent total efficiency in a CHP
configuration, depending on the application. The electric grid
in the United States is approximately 36 percent electrically
efficient and does not support CHP configurations.
Annual Report 2014
13
Direct FuelCell Technology
Our proprietary DFC technology generates electricity directly
from a fuel, such as natural gas or renewable biogas, by
reforming the fuel inside the fuel cell to produce hydrogen,
which is why it is called a Direct FuelCell. This “one-step”
reforming process results in a simpler, more efficient, and
cost-effective energy conversion system compared with
external reforming fuel cells. Additionally, natural gas has
an established infrastructure and is readily available in our
existing and target markets. The Direct FuelCell operates
at approximately 1,200° Fahrenheit. An advantage of high
temperature fuel cells is that they do not require the use of
precious metal electrodes required by lower temperature
fuel cells, such as proton exchange membrane (PEM)
and phosphoric acid. As a result, we are able to use less
expensive catalysts and readily available industrial metals
for our power plants. In addition, our DFC fuel cell produces
high quality byproduct heat (700°F) that can be utilized for
CHP applications using hot water, steam or chiller water for
facility heating and cooling.
MANUFACTURING
We design and manufacture the core DFC fuel cell
components that are stacked on top of each other to build a
fuel cell stack. For our multi-megawatt power plants, four
fuel cell stacks are combined to build a fuel cell module.
To complete the power plant, the fuel cell module or
modules are combined with the balance of plant (BOP). The
mechanical BOP processes the incoming fuel such as natural
gas or renewable biogas and includes various fuel handling
and processing equipment such as pipes and blowers. The
electrical BOP processes the power generated for use by the
customer and includes electrical interface equipment such
as inverters. The BOP components are either purchased
directly from suppliers or the manufacturing is outsourced
based on our designs and specifications. This strategy allows
us to leverage our manufacturing capacity, focusing on the
critical aspects of the power plant where we have specialized
knowledge and expertise. BOP components are shipped
directly to a customer’s site and are assembled with the fuel
cell module into a complete power plant.
Cell Manufacturing
Our vision is to produce power for prices that are below
typical grid prices. Without incentives, annual global
production of approximately 210 MW of DFC plants will
provide the needed cost reductions to support this vision.
This level of production capacity is either in place in North
America and Europe or under construction by our partner,
POSCO Energy in South Korea. Our global cell manufacturing
capabilities are described below:
North America: We operate a 65,000 square-foot
manufacturing facility in Torrington, Connecticut where we
produce the DFC cell packages and assemble the fuel cell
modules. The completed modules are then conditioned at
our facility in Danbury, Connecticut for the final step in the
manufacturing process and then shipped to customer sites.
For the South Korean marketplace, the DFC components are
currently manufactured in the USA and then shipped to South
Korea for local stacking and conditioning.
During 2014, the Company attained ISO 9001:2008
certification for the Torrington Facility, the Danbury Facilities
and Field Service, reinforcing the tenets of the FuelCell
Energy Quality Management System and our core values
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FuelCell Energy
of continual improvement and commitment to quality.
ISO 9001:2008 certification is a world-recognized standard
that defines adherence to quality-oriented processes
and procedures.
South Korea: Given the strong demand in Asia, POSCO Energy
has built a cell manufacturing facility in Pohang, Korea.
Manufacturing equipment is currently being installed with
production expected by mid-2015. This facility will have initial
capacity of 100 MW but is sized to accommodate up to 200 MW
of annual production as the Asian market continues to grow.
Europe: We have a 20,000 square-foot manufacturing facility in
Ottobrunn, Germany that has the capability to produce up to 20
megawatts per year. The facility produced its first fuel cell stack
in 2013 for an installation in Berlin, Germany and will continue to
produce power plants as European demand supports.
Capacity and Production Level
Our overall DFC manufacturing process in North America
(module manufacturing, final assembly, testing and
conditioning) has a production capacity of 100 MW per year,
with full utilization under its current configuration.
We are undertaking a multi-year project to reduce costs and
position ourselves for future growth in two phases. The first
phase will commence in 2015 and involve a 90,000 square foot
addition of our North American manufacturing facility. The
building expansion will allow for consolidation of warehousing
and service facilities enabling manufacturing efficiencies
by providing the needed space to re-configure production.
The fuel cell module conditioning process will be moved to
Torrington from Danbury, for example. As demand supports,
the second phase will involve the addition of manufacturing
equipment to increase annual capacity to at least 200
megawatts. The State of Connecticut is extending two low
interest and long-term loans to us for each of the two phases
and up to $10 million of tax credits. Each loan is $10 million,
with an interest rate of 2.0 percent and a term of 15 years. Up
to 50% of the principal is forgivable if certain job creation and
retention targets are met.
Raw Materials and Supplier Relationships
We use various commercially available raw materials and
components to construct a fuel cell module, including
nickel and stainless steel, which are key inputs to our
manufacturing process. Our fuel cell stack raw materials
are sourced from multiple vendors and are not considered
precious metals. We have a global integrated supply chain
that serves North American, European, and Asian production
facilities. In addition to manufacturing the fuel cell module
in our Torrington facility, the electrical and mechanical BOP
are assembled by and procured from several suppliers.
All of our suppliers must undergo a qualification process.
We continually evaluate new suppliers and are currently
qualifying several new suppliers. We purchase fuel and
electrical balance of plant componentry from third-party
vendors, based on our own proprietary designs.
Product Cost Reduction
Our overall cost reduction strategy is based on the
assumption that continued increases in production will result
in further economies of scale. In addition, our cost reduction
strategy relies on implementation of further advancements
in our manufacturing process, global competitive sourcing,
engineering design and technology improvements (including
longer scheduled module replacement periods and increased
module power output). We have a broad range of initiatives to
reduce costs and improve our overall project affordability.
Improvements in affordability, driven by product cost
reductions, are critical for us to accelerate market adoption
of our fuel cell products and attain company profitability.
Cost reductions will also reduce or eliminate the need for
incentive funding programs which currently allow us to price
our products to compete with grid-delivered power and other
distributed generation technologies.
We have reduced the product cost of our megawatt-
class power plants by more than 60 percent from the
first commercial installation in 2003 through engineering
redesign, sourcing, and improved power output and fuel cell
stack life. Growing purchasing volume has reduced costs and
strengthened the supply chain by enabling direct purchasing
rather than through distributors and the ability to access
stronger national and international suppliers rather than
small local or regional fabricators. Once POSCO’s Asian
manufacturing facility is operational, increased levels of
purchasing from the integrated global supply chain, whether
by POSCO Energy or the Company, will benefit both parties by
obtaining lower pricing tiers from suppliers from the greater
combined purchasing volume.
Engineering, Procurement and Construction
We provide customers with complete turn-key solutions
including the development, engineering, procurement,
construction, operations and interconnection for our fuel
cell projects. From an Engineering, Procurement and
Construction (EPC) standpoint, FCE has an extensive
history of safe and timely delivery of turnkey projects. We
have developed relationships with many design firms and
licensed general contractors and have a repeatable, safe,
and efficient execution philosophy that has been successfully
demonstrated multiple times in many different U.S. states
and some European countries with an exemplary safety
record. The ability to rapidly and safely execute installations
minimizes high cost construction period financing and can
assist customers in certain situations when the commercial
operating date is time sensitive.
As an example, in 2013 we completed a 14.9 MW fuel cell
park in Bridgeport, Connecticut that was constructed and
made operational in less than a year from groundbreaking
in December 2012 without a single lost man hour. FCE
manufactured the fuel cells and provided complete EPC
services contract for the project owner, Dominion Resources
(NYSE: D). The project was built on a remediated urban
brownfield site and was constructed on schedule and within
budget. Included in the project was a three-mile underground
utility interconnect with the local utility, United Illuminating.
SERVICES AND WARRANTY AGREEMENTS
We offer a comprehensive portfolio of services including:
engineering, project management, installation, performance
contracts, long-term operating and maintenance programs,
including trained technicians that remotely monitor and
operate the plants around the world 24 hours a day and 365
days a year. We employ field technicians to service the power
plants and maintain service centers near our customers to
ensure high availability of our plants. All of our customers
purchase service agreements ranging from one to 20 years.
Pricing for service contracts is based upon the markets in
which we compete and includes all future maintenance and
scheduled fuel cell module exchanges. While the electrical
and mechanical BOP in our DFC power plants is designed
to last over 25 years, the current fuel cell modules must be
replaced approximately every five years.
Under the typical provisions of the service agreements, we
provide services to monitor, operate and maintain customer
power plants to meet specified performance levels.
Operations and maintenance is a key driver for power plants
to deliver their projected revenue and cash flows. Many of
our service agreements include guarantees for system
performance, including electrical output and heat rate.
Should the power plant not meet the minimum performance
levels, we may be required to replace the fuel cell module
with a new or used replacement and/or pay performance
penalties. The service aspects of our business model provide
a recurring and predictable revenue stream for the Company.
We have committed production for scheduled fuel cell module
exchanges under service agreements through the year 2034.
The pricing structure of the service agreements incorporates
these scheduled fuel cell module exchanges and the
committed nature of this production facilitates our production
planning. Customers benefit from predictable expenses over
the life of the contract and reduced risk. Our goal is to optimize
our customers’ power plants to meet expected operating
parameters throughout their contracted project term.
In addition to our service agreements, we provide for a
warranty for our products for a specific period of time against
manufacturing or performance defects. Our warranty is
limited to a term generally 15 months after shipment or 12
months after acceptance of our products, except for fuel cell
kits. We warranty fuel cell kits and components for 21 months
from the date of shipment due to the additional shipping and
customer manufacture time required. We accrue for estimated
future warranty costs based on historical experience.
LICENSE AGREEMENTS AND ROYALTY INCOME
We receive license fees and royalty income from POSCO
Energy as a result of manufacturing and technology transfer
agreements entered into in 2007, 2009 and 2012. On October 31,
2012, we entered into a Cell Technology Transfer Agreement
(“CTTA”) with POSCO Energy. The CTTA provides POSCO
Energy with the technology to manufacture Direct FuelCell
power plants in South Korea and the market access to sell
power plants throughout Asia for an initial term of 15 years
with two renewal options of five years each. Under the CTTA,
the Company is providing consulting and procurement
expertise in the design and construction of a manufacturing
facility in South Korea that is financed and owned by POSCO
Energy. In conjunction with the CTTA, the Company receives
a 3.0 percent royalty on POSCO Energy net product sales
as well as a royalty on each scheduled fuel cell module
replacement under service agreements for modules that were
built by POSCO Energy and installed at any plant in Asia under
terms of our Master Service Agreement.
We expect this to be a growing revenue and margin stream
for the Company as POSCO Energy continues to develop
the market in Asia and deploy our technology. As we expand
into other vertical or geographic markets, we may pursue
additional licensing and royalty opportunities to expand
our revenues.
Annual Report 2014
15
ADVANCED TECHNOLOGY PROGRAMS (THIRD-PARTY
FUNDED RESEARCH AND DEVELOPMENT)
We perform both public and privately-funded research and
development to expand the markets for our DFC power plants,
reduce costs, and expand our technology portfolio in
complementary high-temperature fuel cell systems. This
research builds on the versatility of our fuel cell power plants
and contributes to the development of potentially new end
markets. Our power plants provide various value streams
including clean electricity, high quality usable heat, hydrogen
suitable for vehicle fueling or industrial purposes as well
as use of DFC power plants to concentrate carbon dioxide
from coal and natural gas fired power plants. Our Advanced
Technology Programs are focused on three strategic areas for
commercialization within a reasonable timeframe: (1) Distributed
hydrogen production, compression, and recovery, (2) Carbon
capture for emissions reduction and power generation and
(3) Solid oxide fuel cells (SOFC) for stationary power generation
and energy storage. The revenue and associated costs from
government and third-party sponsored research and
development is classified as “Advanced technologies contract
revenues” and “Cost of advanced technologies contract
revenues,” respectively, in our consolidated financial statements.
We have worked on technology development with various
U.S. government departments and agencies, including the
Department of Energy (DOE), the Department of Defense
(DOD), the Environmental Protection Agency (EPA), the
Defense Advanced Research Projects Agency (DARPA),
Office of Naval Research (ONR), and the National Aeronautics
and Space Administration (NASA). Government funding,
principally from the DOE, provided 6 percent, 5 percent,
and 6 percent of our revenue for the fiscal years ended 2014,
2013, and 2012, respectively.
Significant research and development programs on which we
are currently working include:
Distributed hydrogen production, compression, and
recovery - On-site or distributed hydrogen generation
represents an attractive market for the DFC technology.
Our high temperature DFC power plant generates electricity
directly from a fuel by reforming the fuel inside the fuel cell
to supply hydrogen for the electrical generation process. Gas
separation technology can be added to capture hydrogen that
is not used by the electrical generation process, and we term
this configuration DFC-H2. This value-added proposition may
be compelling for industrial users of hydrogen or for vehicle
fueling further summarized as follows:
Industrial Applications: We are currently operating a
tri-generation DFC300-H2 power plant at our Torrington
manufacturing facility, utilizing natural gas to supply 1)
electricity for the facility, 2) heat for the building, and
3) hydrogen for the manufacturing process, replacing
hydrogen that was delivered by diesel truck. The
installation is a showcase for industrial users of hydrogen
to visit. The project is supported by the DOE and the State
of Connecticut.
Vehicle Fueling Applications: A tri-generation DFC300-H2
power plant completed a three-year demonstration in mid-
2014 at the Orange County Wastewater Treatment Facility
in Irvine, California, utilizing renewable biogas to supply
hydrogen for use in fuel cell vehicle fueling and clean
renewable electricity. The demonstration was performed
under sub-contract to Air Products (NYSE: APD) with
16
FuelCell Energy
funding provided by the DOE, California Air Resources
Board, South Coast Air Quality Management District, the
Orange County Sanitation District, and Southern California
Gas Company.
Carbon Capture - Coal and natural gas are abundant, low
cost, domestic resources that are widely used to generate
electricity, but with a significant carbon footprint. Cost
effective and efficient carbon capture from coal-fired and
gas-fired power plants potentially represents a large global
market because it could enable clean use of these domestic
fuels. Our carbonate fuel cell technology separates and
concentrates carbon dioxide (CO2) as a side reaction during
the power generation process. DFC carbon capture research
conducted by us has demonstrated that this is a viable
technology for the efficient separation of CO2 from coal or
natural gas powerplant exhaust streams. Capturing CO2 as
a side reaction while generating additional valuable power
is an approach that could be more cost effective than other
systems which are being considered for carbon capture.
Research funding has been received from both government
and private industry for a variety of applications including:
1. U.S. EPA provided funding in 2011 for evaluating carbon
capture from industrial applications;
2. The U.S. DOE has funded three phases of carbon
capture research to evaluate the use of Direct FuelCell
technology to efficiently and cost effectively separate CO2
from the emissions of existing coal-fired power plants
with the most recent funding received in September 2014;
3. A global energy company provided funding in October
2014 for carbon capture research with gas-fired central
generation power plants.
Solid oxide fuel cell (SOFC) development and
commercialization - We are working towards
commercialization of solid oxide fuel cell technology to
target sub-megawatt commercial applications including
high-rise residential buildings, office buildings, and smaller
wastewater treatment facilities that do not have enough
gas production to support a multi-megawatt solution. The
potential market opportunity for sub-megawatt applications
is for customers that need on-site power generation in either
combined heat and power or electric-only configurations.
SOFC technology is complementary to our carbonate
technology-based MW scale DFC product line and affords
us the opportunity to leverage our field operating history,
existing expertise in power plant design, fuel processing and
high volume manufacturing and will leverage our existing
installation and service infrastructure.
We have been a prime contractor in the DOE’s Solid State
Energy Conversion Alliance (SECA) since 2003 and are
currently working on an award that commenced in September
2014 to demonstrate a sub-megawatt solid oxide fuel cell
power plant configured for CHP output and connected to
the electric grid at our Danbury, Connecticut facility. SOFC
research facilities are also maintained in Littleton, Colorado,
USA and Calgary, Canada.
In addition to the SECA program, we participate in various
other contracts to advance the technology. The largest is with
The Boeing Company for the development of a storage and
propulsion system under a U.S. Defense Advanced Research
Projects Agency (DARPA) program for a very long endurance
unmanned aircraft with the SOFC system paired with
solar equipment. This program involves controlled technical
information that is subject to the International Traffic in
Arms Regulations (ITAR).
We see significant market opportunities for Distributed
Hydrogen Production, Carbon Capture and Solid Oxide Fuel
Cells solutions. The demonstration projects described above
are steps on the commercialization road map as we prudently
leverage third-party resources and funding to accelerate the
commercialization and realize the market potential for each
of these solutions.
RESEARCH AND DEVELOPMENT (COMPANY-FUNDED
RESEARCH AND DEVELOPMENT)
In addition to research and development performed under
research contracts, we also fund our own research and
development projects including extending module life,
increasing the power output of our modules and reducing the
cost of our products. Initiatives include increasing the net
power output of the fuel cell stacks to 375 kW from 350 kW
currently, and extending the stack life to seven years from
five years currently. Greater power output and improved
longevity will lead to improved gross margin profitability on
a per unit basis for each power plant sold and improved
profitability of service contracts, which will support expanding
gross margins for the Company.
In addition to output and life enhancements, we also invest in
cost reduction and improving the performance, quality and
serviceability of our plants. We are also developing designs
for lower cost multi-megawatt fuel cell parks. These efforts
continually improve our value proposition and affordability.
Company-funded research and development is included in
Research and development expenses (operating expenses)
in our consolidated financial statements. The total research
and development expenditures in the consolidated statement
of operations, including third party and Company-funded,
are as follows:
(dollars in thousands)
2014
2013
2012
Years Ended October 31,
Cost of advanced technologies
contract revenues
Research and development
expenses
$16,664
$13,864
$ 7,237
18,240
15,717
14,354
Total research and
development
$34,904
$29,581
$21,591
COMPETITION
The electric generation market is competitive with continually
evolving participants. Our DFC power plants compete in
the marketplace for stationary distributed generation. In
addition to different types of stationary fuel cells, some other
technologies that compete in this marketplace include
micro-turbines and reciprocating gas engines.
Fuel cell technologies are classified according to the electrolyte
used by each fuel cell type. Our DFC technology utilizes a
carbonate electrolyte. Carbonate-based fuel cells offer a
number of advantages over other types of fuel cells designed
for megawatt-class commercial applications. These advantages
include carbonate fuel cells’ ability to generate electricity
directly from readily available fuels such as natural gas or
renewable biogas, lower raw material costs as the high
temperature of the fuel cell allows for the use of commodity
metals rather than precious metals, and high-quality heat
suitable for CHP applications. We are also actively developing
solid oxide fuel cell (SOFC) technology, as discussed in the prior
Advanced Technology section. Other fuel cell types that may
be used for commercial applications include phosphoric acid
(PAFC) and proton exchange membrane (PEM).
The following table illustrates industry estimates of the electrical efficiency, expected capacity range and byproduct heat use
of the four principal types of fuel cells as well as highlights of typical market applications:
MW-Class
Sub-MW-Class
Micro CHP
Technology
Carbonate (CFC)
Phosphoric Acid
(PAFC)
Solid Oxide (SOFC)
PEM/SOFC
Mobile
Polymer
Electrolyte
Membrane (PEM)
Plant Size
300kW - 2.8 MW or
higher
400kW
up to 240 kW
< 10 kW
5 - 100 kW
Typical Application
Utilities,
universities,
industrial - baseload
Commercial
buildings -
baseload
Commercial
buildings -
baseload
Residential and
small commerical
Transportation
Fuel
Advantages
Natural gas,
biogas, others
Natural gas
Natural gas
Natural gas
Hydrogen
Efficiency, lowest cost,
fuel flexible & CHP
CHP
Efficiency
Load following &
CHP
Load following
Electrical Efficiency
CHP
43% - 47% (or higher
w/hybrid or HEFC
configuration)
Steam, hot water,
chilling &
hybrid electrical
applications
40% - 42%
50% - 60%
25% - 35%
25% - 35%
Hot water,
chilling
Depends on
technology used
Suitable for
facility heating
n/a
Annual Report 2014
17
Several companies in the U.S. are engaged in fuel
cell development, although we believe we are the only
domestic company engaged in significant manufacturing
and commercialization of stationary carbonate fuel cells.
Emerging fuel cell technologies (and the companies
developing them) include stationary PEM fuel cells (Ballard
Power Systems), portable PEM fuel cells (Ballard Power
Systems, Plug Power, and increasing activity by numerous
automotive companies including Toyota, Hyundai and GM),
stationary phosphoric acid fuel cells (Doosan), stationary
solid oxide fuel cells (LG/Rolls Royce partnership, General
Electric, Bloom Energy), and small residential solid oxide
fuel cells (Parker Hannifin, Toyota/Kyocera and Ceramic
Fuel Cells Ltd.). Each of these competitors with stationary
fuel cell applications has the potential to capture market
share in our target markets.
There are other potential fuel cell competitors internationally.
In Japan, Fuji Electric has been involved with both PEM and
phosphoric acid fuel cells and Panasonic is involved with PEM
fuel cells for micro-CHP applications. In the United Kingdom,
AFC Energy is engaged in alkaline fuel cell development and
Intelligent Energy Holdings is engaged in PEM development
for consumer products and transportation.
Other than fuel cell developers, we also compete with
companies such as Caterpillar, Cummins, Wartsilla, MTU
Friedrichshafen GmbH (MTU), Mitsubishi Heavy Industries
and Detroit Diesel, which manufacture more mature
combustion-based distributed power generation equipment,
including various engines and turbines, and have well-
established manufacturing and distribution operations
along with product operating and cost features. Competition
on larger MW projects may also come from gas turbine
companies like General Electric, Caterpillar Solar Turbines
and Kawasaki.
We also compete against the electric grid, which is readily
available to prospective customers. The electric grid is
supplied by traditional centralized power plants including
coal, gas and nuclear, with transmission lines used to
transport the electricity to the point of use.
Our stationary fuel cell power plants generally do not directly
compete against solar and wind, but can complement
their intermittency with the continuous power output of
the fuel cells. Solar and wind require specific geographies
and weather profiles, as well as up to ten times the land
requirements of our DFC plants.
GOVERNMENT POLICY
We expect to transition the business towards operating in
sustainable markets that do not require specific government
subsidies or support programs to compete against more
traditional forms of power generation. Support programs for
fuel cells, depending on the jurisdiction, include renewable
portfolio standards, feed in tariffs and self-generation incentive
programs, net energy metering programs and tax incentives.
These incentives help to accelerate the adoption of clean,
efficient and renewable power generation.
In the United States, the federal government provides an
uncapped investment tax credit (ITC) that allows a taxpayer
to claim a credit of 30% of qualified expenditures (up to a tax
credit limit of $3,000/kW) for fuel cell power plants that are
placed in service on or before December 31, 2016. The ITC is a
primary economic driver of fuel cell projects in the USA. The ITC
expiration at the end of 2016 (unless extended) underscores the
need for the LCOE on our projects to continue to decline toward
grid parity. While the expiration of the 30% ITC poses potential
uncertainty in the USA, we believe that our LCOE reduction plans
can off-set the potential impact. The federal government also
provides accelerated depreciation for eligible fuel cell projects.
The majority of states in the U.S. have enacted legislation
adopting Renewable Portfolio Standards (RPS) mechanisms.
Under an RPS, regulated utilities and other load serving
entities are required to procure a specified percentage of their
total electricity sales to end-user customers from eligible
renewable resources, by a specified date. RPS legislation and
implementing regulations vary significantly from state to state,
particularly with respect to the percentage of renewable energy
required to achieve the state’s RPS, the definition of eligible
renewable energy resources, and the extent to which renewable
energy credits (certificates representing the generation of
renewable energy) qualify for RPS compliance. Fuel cells using
biogas qualify as renewable power generation technology in
all of the RPS states in the U.S., and seven states specify that
fuel cells operating on natural gas are also eligible for these
initiatives in recognition of the high efficiency of fuel cells and
near-zero pollutants.
In addition to RPS programs, states and municipalities in the
USA have also adopted programs for which our products qualify.
Most notably there are strong programs in California supporting
self-generation, clean air power generation and carbon reduction.
In the Northeast, Connecticut, New York and New Jersey all
have programs supporting on-site power production, combined
heat and power applications, carbon reduction, grid resiliency/
micro-grids and utility ownership of fuel cell projects.
Internationally, South Korea has adopted an RPS to promote
clean energy, reduce carbon emissions, and develop a local
green-industry to accelerate economic growth. The RPS is
designed to increase renewable power generation to ten percent
of total power generation by 2022 from two percent in 2012
by requiring an additional one half of one percent of new &
renewable power added annually from 2012 to 2016, increasing
to one percent per annum through 2022. This equates to an
estimated 350 MW annually through 2016, increasing to about
700 MW annually thereafter. Electric utilities and independent
power producers that have in excess of 500 MW of power
generation capacity are required to comply with the RPS.
In addition, a Renewable Heat Obligation program creation is
in process to accelerate the adoption of combined heat and
power (CHP) installations with targeted implementation in 2016.
The South Korean government expects to initiate a cap-and-
trade system in 2015, targeting about 60 percent of greenhouse
gas emissions from industrial operations that produce more
than 25,000 tons of CO2 per year. The South Korean government
has pledged to reduce greenhouse gas emissions 30 percent
by 2020 from projected levels. The cap-and-trade legislation is
designed to link internationally with emissions trading systems
in other countries.
18
FuelCell Energy
SUSTAINABILITY
FuelCell Energy’s ultra-clean, efficient and reliable fuel cell
power plants help our customers achieve their sustainability
goals. These highly efficient and environmentally friendly prod-
ucts support the “Triple Bottom Line” concept of sustainability,
consisting of Environmental, Social and Economic consider-
ations.
We value sustainability just as seriously as our customers. We
continue to incorporate sustainability best practices into our
corporate culture and into the design, manufacture, installation
and servicing of our stationary fuel cell power plants. For
example, at the end-of-life for our power plants, we refurbish
and re-use certain parts of the power plant and we are able
to recycle most of what we cannot re-use, supporting the
sustainability concept of “cradle-to-cradle.” Some of the parts
in the fuel cell module can be re-furbished, such as end plates,
while the individual fuel cell components are sent to a smelter
for recycling. The balance of plant has an operating life of twenty
to twenty-five years, at which time metals such as steel and
copper can be reclaimed for scrap value.
We have made measurable progress with incorporating
sustainable business practices throughout all aspects of our
organization but we recognize that there is still more to be
done. We have a designated Sustainability Officer who promotes
sustainable business practices in our manufacturing and
administrative functions. For example, on the production floor,
we reuse scrap from the manufacturing process, minimizing
production waste. We have a tri-generation fuel cell power
plant at our North American manufacturing plant, efficiently
generating power and heat for the facility and hydrogen for the
manufacturing process. From a sustainability standpoint, on-
site tri-generation avoids the use of a combustion-based boiler
for heat and its associated emissions and reduces pollutants
from the diesel truck needed for hydrogen delivery, reducing
our carbon footprint and benefiting the surrounding community.
In administrative functions, we strive to continually improve
energy efficiency, such as installing high efficiency lighting and
promoting recycling.
ASSOCIATES
At October 31, 2014, we had 622 full-time associates, of whom
304 were located at the Torrington, Connecticut manufacturing
plant, 269 were located at the Danbury, Connecticut facility
or various field offices, and 49 were located at our foreign
locations. In addition, at October 31, 2014, the Company had 18
temporary workers, 12 located at the Torrington manufacturing
plant and 6 located at the Danbury facility. None of our
associates is represented by a labor union or covered by a
collective bargaining agreement. We believe our relations with
our associates are good.
In Europe there are a number of renewable energy programs
and feed-in tariffs which contribute to growth in our markets. In
Germany there are several financial incentives for stationary fuel
cell power plants operating on either natural gas or renewable
biogas. Combined heat and power (CHP) configurations receive
additional incentives as the German government is targeting 25
percent of electricity generation to include CHP by 2020, up from
the current level of 15 percent. Germany uses a feed-in tariff as
the foundational incentive program driving adoption of CHP, and
the National Organization Hydrogen and Fuel Cell Technology
(NOW) program as the lever that provides differentiation for fuel
cells against conventional technology.
PROPRIETARY RIGHTS AND LICENSED TECHNOLOGY
Our Company was founded as a research company in 1969 and
began focusing on high-temperature carbonate fuel cells in the
1980s. After a multi-year period of research and development
including installation and operation of demonstration carbonate
fuel cell power plants, we began selling fully commercialized
Direct FuelCell (DFC) power plants in 2003. Our extensive
experience, trade secrets, proprietary processes and patents
combine to safeguard our intellectual property rights and act
as a significant barrier to entry for potential competitors.
At October 31, 2014, the Company, excluding its subsidiaries has
89 current U.S. patents and 65 international patents covering
our fuel cell technology (in certain cases covering the same
technology in multiple jurisdictions). 85 of our U.S. patents relate
to our Direct FuelCell technology, one patent relates to SOFC
technology and three patents relate to PEM fuel cell technology.
We also have submitted 11 U.S. and 66 international patent
applications. Our patents will expire between 2015 and 2032, and
the current average remaining life of our patents is approximately
10.7 years. During 2014, 9 new U.S. patents were issued or
allowed and 3 U.S. and 18 international patents expired or were
abandoned. The expiration of these patents has no material
impact on our current or anticipated operations. We also have
approximately 18 invention disclosures in process with our patent
counsel that may result in additional patent applications.
Our subsidiary, Versa Power Systems, Inc., has 27 current
U.S. patents and 52 international patents covering their SOFC
technology (in certain cases covering the same technology in
multiple jurisdictions), with an average remaining U.S. patent
life of approximately 9.4 years. Versa Power Systems, Inc. also
has submitted 7 U.S. and 12 international patent applications.
In addition, our subsidiary FuelCell Energy Solutions, GmbH
has license rights to use FuelCell Energy’s carbonate fuel cell
technology as well as 8 U.S. and 136 international patents for
carbonate fuel cell technology licensed from its co-owner,
Fraunhofer IKTS.
Many of our U.S. patents are the result of government-
funded research and development programs, including our
Department of Energy (DOE) programs. U.S. patents we
own that resulted from government-funded research are
subject to the government exercising “march-in” rights. We
believe that the likelihood of the U.S. government exercising
these rights is remote and would only occur if we ceased our
commercialization efforts and there was a compelling national
need to use the patents.
Annual Report 2014
19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an integrated fuel cell company with an expanding global
presence on three continents. We design, manufacture, sell,
install, operate and service ultra-clean, highly efficient station-
ary fuel cell power plants for distributed power generation. Our
power plants provide megawatt-class scalable on-site power
and utility grid support, helping customers solve their energy,
environmental and business challenges. Our plants are operat-
ing in more than 50 locations in nine countries on three different
continents and have generated more than three billion kilowatt
hours (kWh) of electricity, which is equivalent to powering more
than 270,000 average size U.S. homes for one year. Our growing
installed base and backlog exceeds 300 megawatts (MW).
We provide comprehensive turn-key power generation solutions
to our customers including installation of the power plants as
well as operating and maintaining the plants under multi-year
service agreements. We target large-scale power users with our
megawatt-class installations. As reference, one megawatt is
adequate to power approximately 1,000 average sized U.S. homes.
Our customer base includes utility companies, municipalities,
universities, government entities and businesses in a variety of
industrial and commercial enterprises. Our leading geographic
markets are South Korea and the United States and we are
pursuing expanding opportunities in Asia, Europe, and Canada.
Our value proposition provides highly efficient and
environmentally friendly power generation with easy-to-site
stationary fuel cell power plants. The power plants are located
in populated areas as they are virtually pollutant free, operate
quietly and without vibrations, and have only modest space
requirements. Locating the power generation near the point
of use provides many advantages including less reliance on or
even avoidance of the transmission grid leading to enhanced
energy security and power reliability. Our power plants provide
electricity priced competitively to grid-delivered electricity
in certain high cost regions and our strategy is to continue to
reduce costs, which is expected to lead to wider adoption.
We are developing Advanced Technologies which leverage our
commercial platform and expertise. Our Direct FuelCell® (DFC®)
power plants utilize carbonate fuel cell technology, which is
a very versatile type of fuel cell technology. Utilizing our core
DFC plants, we have developed and are commercializing both a
tri-generation distributed hydrogen configuration that generates
electricity, heat and hydrogen for industrial or transportation
uses, and a carbon capture application for coal or gas-fired
power plants. We also are developing and commercializing solid
oxide fuel cells (SOFC) for adjacent sub-megawatt applications
to the markets for our megawatt-class DFC power plants as
well as energy storage applications. These applications are
complementary to our core products, leverage our existing
customer base, project development, sales and service
expertise, and are potentially large markets.
FuelCell Energy was founded in Connecticut in 1969 as an
applied research organization, providing contract research and
development. The Company went public in 1992, raising capital
to develop and commercialize fuel cells and reincorporated
in Delaware in 1999. We began selling stationary fuel cell
power plants commercially in 2003. Today we develop turn-key
distributed generation combined heat and power solutions for
our customers and provide comprehensive service for the life
of the project.
RESULTS OF OPERATIONS
Management evaluates the results of operations and cash flows using a variety of key performance indicators including revenues
compared to prior periods and internal forecasts, costs of our products and results of our cost reduction initiatives, and operating
cash use. These are discussed throughout the “Results of Operations” and “Liquidity and Capital Resources” sections. Results of
Operations are presented in accordance with accounting principles generally accepted in the United States (“GAAP”).
COMPARISON OF THE YEARS ENDED OCTOBER 31, 2014 AND 2013
Revenues and Costs of Revenues
Our revenues and cost of revenues for the years ended October 31, 2014 and 2013 were as follows:
(dollars in thousands)
Total revenues
Total costs of revenues
Gross profit
Gross margin
Years Ended October 31,
Change
2014
2013
$
$180,293
$187,658
$166,567
$180,536
$ 13,726
$ 7,122
7.6%
3.8%
$ (7,365)
$(13,969)
$ 6,604
%
(4)
(8)
93
Total revenues for the year ended October 31, 2014 decreased $7.4 million, or 4 percent, to $180.3 million from $187.7 million during
the same period last year as a result of a change in product mix with less revenue from multi-megawatt installations and associated
engineering, procurement and construction (“EPC”) services. Total cost of revenues for the year ended October 31, 2014 decreased
by $14.0 million, or 8 percent, to $166.6 million from $180.5 million during the same period last year. The Company generated a 7.6
gross margin percentage in fiscal year 2014 which is approximately double the prior year. The expanding gross margin, despite a
nominal decrease in sales year-over-year, reflects a continued emphasis on reducing materials and manufacturing costs combined
with initiatives to improve the Service business.
20
FuelCell Energy
Product Sales
Our product sales, cost of product sales and gross profit for the years ended October 31, 2014 and 2013 were as follows:
(dollars in thousands)
Product sales
Cost of product sales
Gross profit from product sales
Product sales gross margin
Years Ended October 31,
Change
2014
2013
$
$136,842
$145,071
126,866
136,989
$
9,976
$ 8,082
7.3%
5.6%
$ (8,229)
(10,123)
$ 1,894
%
(6)
(7)
23
Product sales decreased $8.2 million, or 6 percent, for the year
ended October 31, 2014 to $136.8 million from $145.1 million
for the prior year period. The factory production level in fiscal
year 2014 totaled 70 MW versus 63 MW in the prior year. While
production was up, the decrease in revenue is primarily due
to lower turn-key projects including EPC services compared
to the prior year. Product sales for the year ended October 31,
2014 included $118.0 million of power plant revenue and fuel cell
kits and modules and $18.9 million of revenue primarily related
to power plant component sales and EPC services. This is
compared to product sales for the year ended October 31, 2013
which included $117.1 million of power plant revenue and fuel
cell kits revenue and $28.0 million of revenue primarily from
power plant component sales and EPC services.
Cost of product sales decreased $10.1 million for the year ended
October 31, 2014 to $126.9 million, compared to $137.0 million
in the same prior year period on less EPC activity. Gross profit
increased $1.9 million to a gross profit of $10.0 million for the
year ended October 31, 2014 compared to a gross profit of $8.1
million for the year ended October 31, 2013. The increase was
due to improved overhead absorption from higher production
levels and lower overall product costs and a sales mix that
included module sales partially offset by lower margins as a
result of less EPC activity. Cost of product sales includes costs
to design, engineer, manufacture and ship our power plants
and power plant components to customers, site engineering
and construction costs where we are responsible for power
plant system installation, costs for assembly and conditioning
equipment sold to POSCO Energy, warranty expense, liquidated
damages and inventory excess and obsolescence charges.
Service Agreements and License Revenues and Cost of Revenues
Our service agreements and license revenues and associated cost of revenues for the years ended October 31, 2014 and 2013 were
as follows:
(dollars in thousands)
Service agreements and license revenues
Cost of service agreements and license revenues
2014
2013
$ 25,956
$ 2 8,141
23,037
29,683
Gross profit (loss) from service agreements and license revenues
$ 2,919
$ (1,542)
Service agreements and license revenues gross margin
11.2%
(5.5)%
$
$ (2,185)
(6,646)
$ 4,461
%
(8)
(22)
289
Years Ended October 31,
Change
Revenues for the year ended October 31, 2014 from service
agreements and license fee and royalty agreements totaled
$26.0 million, compared to $28.1 million for the prior year.
Service agreement revenue decreased year over year due to the
prior year recognition of service revenue related to the Master
Service Agreement with POSCO Energy entered into during the
fourth quarter of 2013 which resulted in approximately $10.1
million of revenue associated with costs primarily related to the
provision of fuel cell stacks to POSCO Energy upon execution of
the agreement. This decrease was partially off-set by new plants
entering the service agreement fleet leading to incremental
increases in revenue and margins. License and royalty revenues
totaled $4.3 million and $4.1 million for the years ended
October 31, 2014 and 2013, respectively.
Service agreements and license cost of revenues decreased
to $23.0 million from $29.7 million for the prior year primarily
as a result of costs recorded relating to the Master Service
Agreement with POSCO Energy not having occurred in the
current year. The gross profit on service agreements and license
agreements was $2.9 million for the year ended October 31,
2014, compared to a gross loss of $1.5 million for the year ended
October 31, 2013. The historical loss on service agreements
has been due to high maintenance, module exchange and
other costs on older and sub-MW product designs and the
investment the Company has made in service infrastructure
to support a growing installed fleet. As profitable megawatt-
class service agreements are executed and as early generation
sub-megawatt products are retired or become a smaller overall
percentage of the installed fleet, we expect the margins on
service agreements to continue to increase.
Total costs incurred under the Master Service Agreement during
the fourth quarter of fiscal year 2013 of $10.1 million resulted
in associated revenue recognized of $10.2 million. Such costs
primarily related to the provision of fuel cell stacks to POSCO
Energy upon execution of the agreement to service the power
plant installations under the ongoing service contract. Excluding
the revenue recognized from the Master Service Agreement,
revenue increased from the prior year due to a higher level of
scheduled module exchanges in the current year compared to
the prior year as well as the growing installed base of power
plants. Service revenue associated with scheduled module
exchanges is recognized at the time of the module exchange
Annual Report 2014
21
activity whereas the remaining portion of service revenue from service agreements is recognized ratably over the life of the service
contract such that a consistent margin is recognized throughout the term of the contract. Cost of service agreements include
maintenance and scheduled module exchanges costs and operating costs for our units under PPAs, performance guarantees and
service agreement loss accrual charges.
Advanced Technologies Contracts
Advanced technologies contracts revenue and related costs for the years ended October 31, 2014 and 2013 were as follows:
(dollars in thousands)
Advanced technologies contracts
Cost of advanced technologies contracts
Gross profit
Years Ended October 31,
Change
2014
$ 17,495
16,664
$
831
2013
$ 14,446
13,864
$
582
$
$ 3,049
2,800
$ 249
%
21
20
43
Advanced technologies contracts revenue for the year ended
October 31, 2014 was $17.5 million, which increased $3.0
million when compared to $14.4 million of revenue for the year
ended October 31, 2013. The increase is primarily attributable
to revenue recognized on a data center fuel cell power plant
research project and increased activity on solid oxide fuel cell
development under the U.S. Department of Energy Solid State
Energy Conversion Alliance (SECA) program, and accelerating
commercialization of carbon capture solutions with activity
under both a DOE contract and a contract from private industry.
Cost of advanced technologies contracts increased $2.8 million
to $16.7 million for the year ended October 31, 2014, compared
to $13.9 million for the prior year. Gross profit from advanced
technologies contracts for the year ended October 31, 2014
was $0.8 million compared to $0.6 million for the year ended
October 31, 2013.
Administrative and selling expenses
Administrative and selling expenses were $22.8 million for
the year ended October 31, 2014 compared to $21.2 million
during the year ended October 31, 2013. Administrative and
selling expenses increased primarily due to increased business
development activity and project proposal expenses for multi-
megawatt fuel cell park projects.
Research and development expenses
Research and development expenses increased $2.5 million to
$18.2 million during the year ended October 31, 2014, compared to
$15.7 million during the year ended October 31, 2013. Our internal
research and development continues to be focused on initiatives
that have near-term product implementation potential and
product cost reduction opportunities. The increase in research
and development expenses resulted from continued product
development initiatives to consolidate select componentry and
processes for the balance of plant functions as part of ongoing
cost reduction programs, product enhancements to further
enhance the customer value proposition such as high-efficiency
solutions for targeted applications, and a program to support
European market development.
Loss from operations
Loss from operations for the year ended October 31, 2014 was
$27.3 million compared to a loss of $29.8 million in fiscal year
2013. The decrease was a result of favorable gross profit from
product sales and service agreements and license revenue,
partially offset by higher operating expenses.
Interest expense
Interest expense for the years ended October 31, 2014 and 2013
was $3.6 million and $4.0 million, respectively. Interest expense
22
FuelCell Energy
includes the interest associated with the 8.0% Unsecured
Convertible Debt issued in June 2013. Interest expense for
both periods also includes interest for the amortization of the
redeemable preferred stock of a subsidiary fair value discount
of $2.0 million.
Income/(loss) from equity investments
Income of $0.05 million from equity investments recorded in
the year ended October 31, 2013 represents our share of Versa’s
income through the acquisition date in December 2012.
Other income (expense), net
Other income (expense), net, was expense of $7.5 million for
the year ended October 31, 2014 compared to net expense of
$1.2 million for the same period in fiscal year 2013. The current
period expense includes a charge of $8.4 million related to the
make-whole payment upon conversion of the $38.0 million of
principal of the 8.0% Convertible Notes. The Company primarily
used common stock to settle this make-whole obligation. The
prior year period expense was primarily associated with the
non-cash fair value adjustment of certain embedded derivatives.
Provision for income taxes
We have not paid federal or state income taxes in several years
due to our history of net operating losses (NOL), although we
have paid income taxes in South Korea. For the year ended
October 31, 2014, our provision for income taxes was $0.5
million. We are manufacturing products that are gross margin
profitable on a per unit basis; however, we cannot estimate
when production volumes will be sufficient to generate
taxable domestic income. Accordingly, no tax benefit has been
recognized for these net operating losses or other deferred
tax assets as significant uncertainty exists surrounding the
recoverability of these deferred tax assets.
At October 31, 2014, we had $655.0 million of federal NOL
carryforwards that expire in the years 2020 through 2034 and
$396.0 million in state NOL carryforwards that expire in the
years 2014 through 2034. Additionally, we had $10.4 million of
state tax credits available, of which $1.0 million expires in 2018.
The remaining credits do not expire.
Net loss attributable to noncontrolling interest
The net loss attributed to the noncontrolling interest for the
years ended October 31, 2014 and 2013 was $0.8 million and
$1.0 million, respectively.
Preferred Stock dividends
Dividends recorded and paid on the Series B Preferred Stock
were $3.2 million in each of the years ended October 31, 2014
and 2013.
Net loss attributable to common shareholders and loss per common share
Net loss attributable to common shareholders represents the net loss for the period, less the net loss attributable to noncontrolling
interest and less the preferred stock dividends on the Series B Preferred Stock. For the years ended October 31, 2014 and 2013,
net loss attributable to common shareholders was $41.3 million and $37.6 million, respectively, and basic and diluted loss per common
share was $0.17 and $0.20, respectively.
COMPARISON OF THE YEARS ENDED OCTOBER 31, 2013 AND 2012
Revenues and Costs of Revenues
Our revenues and cost of revenues for the years ended October 31, 2013 and 2012 were as follows:
(dollars in thousands)
Total revenues
Total costs of revenues
Gross profit
Gross margin
Years Ended October 31,
Change
2013
2012
$
$ 187,658
$120,603
$ 180,536
$120,158
$67,055
$60,378
%
56
50
$
7,122
$
455
$ 6,677
1,500
3.8%
0.4%
Total revenues for the year ended October 31, 2013 increased $67.1 million, or 56 percent, to $187.7 million from $120.6 million during
the same period last year. Total cost of revenues for the year ended October 31, 2013 increased by $60.4 million, or 50 percent, to
$180.5 million from $120.2 million during the same period last year.
Product Sales
Our product sales, cost of sales and gross profit for the years ended October 31, 2013 and 2012 were as follows:
(dollars in thousands)
Product sales
Cost of product sales
Gross profit from product sales
Product sales gross margin
Years Ended October 31,
Change
2013
2012
$145,071
$94,95 0
136,989
93,876
$ 8,082
$ 1,074
5.6%
1.1%
$
$50,121
43,113
$ 7,008
%
53
46
653
Product sales for the year ended October 31, 2013 included
$117.1 million of power plant revenue and fuel cell kits revenue
and $28.0 million of revenue primarily related to power plant
component sales and EPC services relating to the Bridgeport
Fuel Cell Park project. This is compared to product sales for the
year ended October 31, 2012 which included $77.0 million of power
plant revenue and fuel cell kits and $18.0 million of revenue
primarily from power plant component sales and EPC services.
Cost of product sales increased $43.1 million for the year ended
October 31, 2013 to $137.0 million, compared to $93.9 million in
the same prior year period. Gross profit increased $7.0 million
to a gross profit of $8.1 million for the year ended October 31,
2013 compared to a gross profit of $1.1 million for the year
ended October 31, 2012. The increase was due to improved
overhead absorption from higher production levels combined
with a sales mix that included complete power plants along with
fuel cell kits, partially offset by additional costs incurred in the
first quarter of the year ended October 31, 2013 due to a select
number of fuel cell stacks requiring repair and costs related to
the increase in production.
The annual production run-rate was increased to 70 MW at May 1,
2013 to meet demand, and maintained for the remainder of the
fiscal year. Higher production volumes supported increased
quarterly revenue in the year ended October 31, 2013 and we
believe will lead to expanding margins from improved absorption
of fixed overhead costs and broadening of the revenue mix to
include complete power plant sales in North America and Europe.
Annual Report 2014
23
Service Agreements and License Revenues and Cost of Revenues
(dollars in thousands)
Service agreements and license revenues
Cost of Service agreements and license revenues
Years Ended October 31,
Change
2013
$ 28,141
29,683
2012
$18,18 3
19,045
$
$ 9,958
10,638
%
55
56
Gross profit (loss) from Service agreements and license revenues
$ (1,542)
$
(862)
$ (680)
(79)
Service agreements and license revenues gross margin
(5.5)%
(4.7)%
Revenues for the year ended October 31, 2013 from service
agreements and license fee and royalty agreements totaled
$28.1 million, compared to $18.2 million the prior fiscal year.
Service agreement revenue increased year over year due to the
recognition of service revenue related to a new Master Service
Agreement with POSCO Energy entered into during the fourth
quarter of the year ended October 31, 2013. Costs incurred under
the Master Service Agreement during the fourth quarter of
fiscal year 2013 of $10.1 million resulted in associated revenue
recognized of $10.2 million. Such costs primarily related to the
provision of fuel cell stacks to POSCO Energy upon execution
of the agreement to service the installations under the ongoing
service contract. There was minimal revenue recorded relating to
scheduled module replacement compared to approximately $3.0
million of service revenue recognized during fiscal year 2012 from
scheduled module exchanges. Service revenue from scheduled
module exchanges is recognized at the time of the module
exchange activity whereas the remaining portion of service
revenue from service agreements is recognized ratably over the
life of the service contract. Also, license and royalty income was
included within revenues beginning in the first quarter of fiscal
year 2013. This change is a result of the new license agreement
entered into on October 31, 2012 for our core technology and
harmonization of the agreements to reflect fees and royalties for
the manufacture of complete DFC Power Plants. Classification
as revenue is reflective of our Asia market partnership and
royalty based strategy and this business activity has become a
significant component of non-product revenue and is expected
to continue to grow over time. Service agreements and license
cost of revenues increased to $29.7 million from $19.0 million for
the prior year period primarily as a result of the costs recorded
relating to the Master Service Agreement with POSCO Energy.
The gross loss on service agreements and license agreements
increased to $1.5 million for the year ended October 31, 2013,
compared to $0.9 million for the comparable prior year period.
The increase in service and license agreement negative margins
is primarily due to costs associated with unplanned module
exchanges partially offset by the inclusion of license and royalty
income in revenues beginning in fiscal year 2013. The historical
loss on service agreements has been due to high maintenance,
stack replacement and other costs on older and sub-MW product
designs. As profitable megawatt-class service agreements are
executed and as early generation sub-megawatt products are
retired or become a smaller overall percentage of the installed
fleet, we expect the margins on service agreements to increase.
Advanced Technologies Contracts
Advanced technologies contracts revenue and related costs for the years ended October 31, 2013 and 2012 were as follows:
Years Ended October 31,
Change
2013
2012
$14,446
$ 7,470
13,864
7,237
$
$ 6,976
6,627
%
93
92
$
582
$ 233
$ 349
150
Administrative and selling expenses
Administrative and selling expenses were $21.2 million for the
year ended October 31, 2013 compared to $18.2 million during
the year ended October 31, 2012. Administrative and selling
expenses increased as a result of expenditures to develop and
expand the European market for megawatt-class fuel cell power
plants and to continue efforts to commercialize solid oxide fuel
cell technology.
(dollars in thousands)
Advanced technologies contracts
Cost of advanced technologies contracts
Gross profit
Advanced technologies contracts revenue for the year ended
October 31, 2013 was $14.4 million, which increased $7.0 million
when compared to $7.5 million of revenue for the year ended
October 31, 2012. The increase was primarily related to solid
oxide fuel cell development programs, particularly the unmanned
aerial program with Boeing which was included in advanced
technologies contract revenues as a result of the December
2012 acquisition of Versa. Cost of advanced technologies
contracts increased $6.6 million to $13.9 million for the year
ended October 31, 2013, compared to $7.2 million for the same
period in the prior year. Gross profit from advanced technologies
contracts for the year ended October 31, 2013 was $0.6 million
compared to $0.2 million for the year ended October 31, 2012.
24
FuelCell Energy
Research and development expenses
Research and development expenses increased $1.3 million to
$15.7 million during the year ended October 31, 2013, compared
to $14.4 million during fiscal year 2012. The increase is a
result of the consolidation of Versa’s results with the results of
the Company beginning in fiscal year 2013 combined with
initiatives to continue to reduce the cost profile of large scale
multi-megawatt installations through consolidating certain
aspects of the balance of plant functions. Our internal research
and development continues to be focused on cost reduction
opportunities and product enhancements that have near-term
product implementation potential.
Loss from operations
Loss from operations for the year ended October 31, 2013 was
$29.8 million compared to a loss of $32.1 million in fiscal 2012.
The change year-over-year is a result of favorable gross profit
from product sales offset by the impact of increased business
development activity in the North American and European
markets and increased research and development costs
associated with consolidating Versa.
Interest expense
Interest expense for the years ended October 31, 2013 and 2012
was $4.0 million and $2.3 million, respectively. Interest expense
increased primarily as a result of interest expense associated
with the 8.0% Unsecured Convertible Debt issued in June 2013.
Interest expense for both periods also includes interest for the
amortization of the redeemable preferred stock of a subsidiary
of $2.0 million.
Income/(loss) from equity investments
Income of $0.05 million from equity investments recorded in
the year ended October 31, 2013 represents our share of Versa’s
income through the acquisition date. A loss of $0.6 million was
recorded for our share of Versa’s losses for the year ended
October 31, 2012.
License fee and royalty income
License fee income for the year ended October 31, 2012 was
$1.6 million which represents the license fee and royalty income
earned from POSCO Energy. Beginning in fiscal year 2013, license
fees and royalty income have been included within revenues
under service agreements and license revenues.
Impairment of Equity Investment
An impairment charge was recorded in the fourth quarter of the
year ended October 31, 2012 as an adjustment to the carrying
value of the investment in Versa to its estimated fair value.
Other income (expense), net
Other income (expense), net, was expense of $1.2 million for the
year ended October 31, 2013 compared to other income of $1.2
million for the same period in fiscal year 2012. The current period
expense recorded is primarily associated with the non-cash fair
value adjustment of certain embedded derivatives and the prior
year income recorded primarily represents proceeds received
relating to an insurance recovery from a prior year claim and
income received from scrap sales.
Provision for income taxes
We have not paid U.S. federal or state income taxes in several
years due to our history of net operating losses (NOL), although
we have paid foreign taxes in South Korea. For the year ended
October 31, 2013 our provision for income taxes was $0.4 million.
We have begun manufacturing products that are gross margin
profitable on a per unit basis; however, we cannot estimate
when production volumes will be sufficient to generate taxable
domestic income. Accordingly, no tax benefit has been recognized
for these net operating losses or other deferred tax assets as
significant uncertainty exists surrounding the recoverability of
these deferred tax assets.
At October 31, 2013, we had $631.0 million of federal NOL
carryforwards that expire in the years 2020 through 2033 and
$372.0 million in state NOL carryforwards that expire in the
years 2013 through 2033. Additionally, we had $9.9 million of state
tax credits available, of which $1.0 million expires in 2018. The
remaining credits do not expire.
Net loss attributable to noncontrolling interest
The net loss attributed to the noncontrolling interest for the
years ended October 31, 2013 and 2012 was $1.0 million and
$0.4 million, respectively.
Preferred Stock dividends
Dividends recorded and paid on the Series B Preferred Stock
were $3.2 million in each of the years ending October 31, 2013
and 2012.
Net loss attributable to common shareholders and loss per
common share
Net loss attributable to common shareholders represents the net
loss for the period, less the net loss attributable to noncontrolling
interest and less the preferred stock dividends on the Series B
Preferred Stock. For the years ended October 31, 2013 and 2012,
net loss attributable to common shareholders was $37.6 million
and $38.7 million, respectively, and basic and diluted loss per
common share was $0.20 and $0.23, respectively.
Customer Concentrations
We contract with a concentrated number of customers for the
sale of our products and for research and development contracts.
Refer to Note 1 of notes to consolidated financial statements for
more information on customer concentrations. There can be
no assurance that we will continue to achieve historical levels of
sales of our products to our largest customers. Even though our
customer base is expected to expand, diversifying our revenue
streams, a substantial portion of net revenues could continue
to depend on sales to a concentrated number of customers. Our
agreements with these customers may be canceled if we fail
to meet certain product specifications or materially breach the
agreements, and our customers may seek to renegotiate the
terms of current agreements or renewals. The loss of or
reduction in sales to one or more of our larger customers could
have a material adverse effect on our business, financial condition
and results of operations.
Annual Report 2014
25
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2014, we believe that our cash, cash equivalents
on hand, cash flows from operating activities, availability under
our loan and revolving credit facilities and access to the capital
markets will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months.
Cash and cash equivalents including restricted cash totaled
$108.8 million at October 31, 2014 compared to $77.7 million
at October 31, 2013. In addition, the Company has revolver
availability of approximately $3.1 million with JPMorgan Chase
and $40.0 million of availability under its project finance loan
agreement with NRG Energy. The Company has also executed a
Letter of Intent with the State of Connecticut which will provide
up to $20.0 million of term loans for expansion of our Torrington,
Connecticut manufacturing facility. Additionally, we have an
effective shelf registration statement with the SEC for issuance
of debt or equity securities.
The Company’s future liquidity will be dependent on obtaining
the order volumes and cost reductions necessary to achieve
profitable operations. Increasing annual order volume and
reduced product costs are expected to further increase revenues
and margins and improve operating cash flows. The Company
is currently producing 70 MW annually at our production facility
in Torrington, Connecticut which has an annual manufacturing
capacity of 100 MW under its current configuration. Our current
backlog, which includes fuel cell kits to be delivered to POSCO
Energy under a multi-year order which extends through 2016,
combined with scheduled fuel cell module exchanges under
service agreements, provides a base level of production of
approximately 45-50 MW per year. The Company is targeting
converting approximately 30-40 MW of our sales pipeline into
incremental backlog annually in order to utilize our available
capacity. With this level of expected activity, the Company is
targeting total average quarterly revenues in the $50-$60
million range at the current production level. The Company is
targeting break-even cash flow as measured by earnings before
interest, taxes, depreciation and amortization (EBITDA) at the
current 70MW run-rate, dependent on sales mix. Timing may
vary depending on customer order and delivery dates as well
as the scope of such orders.
The Company has a contract backlog totaling approximately
$333.9 million at October 31, 2014. This backlog includes
approximately $196.8 million of service agreements, with an
average term in excess of ten years and utility service contracts
up to 20 years in duration, providing a committed source of
revenue to the year 2034. The Company also has a strong sales
and service pipeline of potential projects in various stages of
development in both North America and Europe. This pipeline
includes projects for on-site “behind-the-meter” applications and
for grid support multi-megawatt fuel cell parks. Behind-the-
meter applications provide end users with predictable long-term
economics, on-site power including micro-grid capabilities and
reduced carbon emissions. On-site projects being developed
are for project sizes ranging from 1.4MW-14.0 MW for end users
such as pharmaceuticals, technology companies, hospitals and
universities. In addition, a number of multi-megawatt utility grid
support projects are being developed for utilities and independent
power producers to support the grid where power is needed.
These projects help both utilities and states meet their renewable
portfolio standards. We expect to convert much of our sales
pipeline into contracted backlog over time. In addition to our
existing pipeline, we are actively developing opportunities
directly and through our business partners. The 15 MW project
in Bridgeport, CT owned by Dominion has now been operating for
twelve months and performance of the fuel cell park has met the
expectations of Dominion.
Factors that may impact our liquidity in 2015 and beyond include:
• Our expanding development of large scale turn-key projects in
the United States requires liquidity and is expected to continue
to have liquidity requirements in the future. Our business model
is evolving whereby we develop turn-key projects and may
commence construction upon the execution of a multi-year
power purchase agreement with an end-user that has a strong
credit profile. We may choose to substantially complete the
construction of a project before it is sold to a project investor.
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 to do so. If, for example, we
cannot sell a project at economics that are attractive to us, we
may instead elect to own and operate such projects, generally
until such time that we can sell a project on economically
attractive terms. Delays in construction progress or in
completing the sale of our projects which we are self-financing
may impact our liquidity. We have secured $40.0 million of
financing to enable this strategy but may seek to use our cash
reserves or other forms of financing as necessary.
• As project sizes evolve, project cycle times may increase.
We may need to make significant up-front investments of
resources in advance of the receipt of any cash from the sale
of our projects. These amounts include development costs,
interconnection costs, posting of letters of credit or other forms
of security, and incurring engineering, permitting, legal, and
other expenses.
• The amount of accounts receivable at October 31, 2014 was
$64.4 million. Included in accounts receivable at October 31,
2014 was $53.0 million of unbilled accounts receivable.
Unbilled accounts receivable represents revenue that has been
recognized in advance of billing the customer under the terms
of the underlying contracts. Such costs have been funded with
working capital and the unbilled amounts are expected to be
billed and collected from customers once we meet the billing
criteria under a construction contract. At this time, we bill
our customers according to the contract terms. Our accounts
receivable balances may fluctuate as of any balance sheet date
depending on the timing of individual contract milestones and
progress on completion of our projects.
• The amount of total inventory at October 31, 2014 was $55.9
million, which includes work in process and finished goods
inventory totaling $30.4 million. As we continue to execute
on our business plan we must produce fuel cell modules and
procure balance of plant components in required volumes to
support our planned construction schedules and potential
customer contractual requirements. As a result, we may
manufacture modules or acquire balance of plant or perform
site construction activities in advance of receiving payment for
such activities. This may result in fluctuations of inventory and
use of cash as of any balance sheet date.
• Under the terms of certain contracts, the Company will provide
performance security for future contractual obligations. We
have pledged approximately $25.1 million of our cash and cash
equivalents as collateral and letters of credit for certain banking
requirements and contracts at October 31, 2014. This balance
may increase with a growing backlog and installed fleet.
26
FuelCell Energy
• During fiscal year 2015, we expect to spend between $8.0
million to $15.0 million for capital expenditures, including
expenditures for upgrades to existing machinery, equipment
and investments in automation equipment that we believe will
improve the efficiency and cost profile of our operations and
facilitate the start of our Torrington facility expansion. The first
phase of the Torrington expansion involves the expansion of the
existing 65,000 square foot manufacturing facility by 90,000
square feet for a total size of 155,000 square feet. Initially,
this additional space will be used to enhance and streamline
logistics functions and provide the space needed to reconfigure
the existing production process to improve manufacturing
efficiencies and realize cost savings. The Company expects
to enter into a long-term lease of up to 15 years as part of
this expansion. Construction is expected to be completed by
early 2016.
• The second phase of our manufacturing expansion will
commence as demand supports. This includes adding
manufacturing equipment to increase annual capacity from
the current 100 megawatts to at least 200 megawatts. Plans
for this phase also include the installation of a megawatt scale
tri-generation fuel cell plant to power and heat the facility
as well as provide hydrogen for the manufacturing process
of the fuel cell components, and the creation of an Advanced
Technology Technology Center for technology testing and
prototype manufacturing. In addition, the final stage of the fuel
cell module manufacturing will be relocated to the Torrington
facility from its current location at the Danbury, Connecticut
headquarters, which will reduce logistics costs. The total
investment for both phases of the expansion could be up to
$65.0 million over a five year period. The State of Connecticut
has extended a financial package through the Department
of Economic and Community Development for both stages,
including $20.0 million of low interest long-term loans and up
to $10.0 million of tax credits, predicated on certain terms
and conditions, including the forgiveness of 50 percent of the
loan principal if certain job retention and job creation targets
are reached.
In addition to cash flows from operations, we may also pursue
raising capital through a combination of: (i) sales of equity to
public markets or strategic investors, (ii) debt financing (with
improving operating results as the business grows, the Company
expects to have increased access to the debt markets to finance
working capital and capital expenditures) and (iii) potential local
or state Government loans or grants in return for manufacturing
job creation and retention. The timing and size of any financing
will depend on multiple factors including market conditions,
future order flow and the need to adjust production capacity.
If we are unable to raise additional capital, our growth potential
may be adversely affected and we may have to modify our plans.
Cash Flows
Cash and cash equivalents and restricted cash and cash
equivalents totaled $108.8 million at October 31, 2014 compared
to $77.7 million at October 31, 2013. At October 31, 2014, restricted
cash and cash equivalents was $25.1 million, of which $5.5 million
was classified as current and $19.6 million was classified as
long-term compared to $10.0 million total restricted cash and
cash equivalents at October 31, 2013, of which $5.1 million was
classified as current and $4.9 million was classified as long term.
The following table summarizes our consolidated cash flows:
2014
2013
2012
Consolidated Cash Flow Data:
Net cash used in
operating activities
$(57,468) $(16,658) $(58,659)
Net cash (used in) provided
by investing activities
(7,079)
(6,194)
7,547
Net cash provided by financing
activities
80,821
43,634
54,957
Effects on cash from changes in
foreign currency rates
(260)
35
51
Net increase in cash and
cash equivalents
$ 16,014 $ 20,817 $ 3,896
The key components of our cash inflows and outflows were
as follows:
Operating Activities—Cash used in operating activities was $57.5
million during fiscal year 2014 compared to $16.7 million used
in operating activities during fiscal year 2013. Net cash used
in operating activities during fiscal year 2014 is a result of a an
increase in accounts receivable of $15.4 million due to revenue
recognized on multiple projects, a decrease in deferred revenue
of $12.3 million due to the timing of revenue recognition, a
decrease in accrued liabilities of $11.1 million which is partially
comprised of three replacement modules that were provided
to POSCO Energy to satisfy the previously accrued obligation to
provide such modules, and a decrease in accounts payable of
$1.6 million resulting from the timing of installation activities
in the prior year and vendor payments. These were partially
offset by a decrease in other assets of $3.4 million due to the
reduction in debt issuance costs relating to the Convertible note
conversions during fiscal year 2014. Net cash used in fiscal 2013
was a result of increases in accounts receivable of $12.0 million
and an increase in inventory of $5.9 million. These were offset
by increases in deferred revenue of $9.1 million due to achieving
customer milestone billings, an increase in accounts payable of
$11.8 million due to the increased production rate and a decrease
in other assets of $6.1 million, primarily due to the provisioning of
fuel cell stacks to POSCO Energy under the terms of the Master
Service Agreement.
Investing Activities—Cash used in investing activities was $7.1
million during fiscal year 2014 compared to net cash used in
investing activities was $6.2 million during fiscal year 2013. Net
cash used during fiscal year 2014 related to capital expenditures.
Net cash used during fiscal 2013 related to capital expenditures
of $6.6 million, partially offset by cash acquired from the Versa
acquisition of $0.4 million.
Financing Activities—Net cash provided by financing activities
was $80.8 million during fiscal year 2014 compared to net cash
provided by financing activities of $43.6 million in the prior year
period. Net cash provided by financing activities during fiscal
year 2014 related to the Securities Purchase Agreement entered
into with NRG wherein 14.6 million shares were issued for net
proceeds of $35.0 million, a public offering of 25.3 million shares
of common stock for net proceeds of $29.5 million and proceeds
from open market sales of common stock of $41.3 million
partially offset by an increase in restricted cash of $15.1 million
for the placement of funds in a Grantor’s Trust account to secure
the Company’s obligations under a 15-year service agreement
Annual Report 2014
27
for the Bridgeport Fuel Cell Park Project, the net paydown of
the JPMorgan Chase revolving credit facility of $5.7 million and
the payment of preferred dividends and return of capital of $4.3
million. The net cash provided by financing activities during fiscal
year 2013 was related to proceeds received from the convertible
debt issuance of $38.0 million, proceeds from the Connecticut
Clean Energy and Finance Investment Authority (CEFIA, now
known as the CT Green Bank) Loan of $4.8 million, a draw down
on the JPMorgan Chase revolving credit facility of $2.5 million,
a decrease in restricted cash of $0.6 million for letters of credit
issued to support the Company’s obligations under customer
contracts offset by the payment of preferred dividends and return
of capital payments of $4.4 million and the capitalization of
financing costs associated with the convertible debt issuance of
$2.5 million.
Commitments and Significant Contractual Obligations
A summary of our significant future commitments and contractual obligations at October 31, 2014 and the related payments by fiscal
year is summarized as follows:
(dollars in thousands)
Contractual Obligations
Purchase commitments (1)
Series 1 Preferred obligation (2)
Term loans (principal and interest)
Capital and operating lease commitments (3)
Revolving Credit Facility (4)
Series B Preferred dividends payable (5)
Payments Due by Period
Total
Less than
1 year
1-3
years
3-5 More than
5 years
years
$ 82,782
$76,378
$ 6,289
$ 115
$ —
10,670
12,451
5,775
945
—
1,117
671
2,294
945
—
2,233
1,342
2,234
—
—
2,233
3,049
929
—
—
5,087
7,389
318
—
—
Total
$112,623
$81,405
$12,098
$6,326
$12,794
(1) Purchase commitments with suppliers for materials, supplies and services incurred in the normal course of business.
(2) The terms of the Class A Cumulative Redeemable Exchangeable Preferred Share Agreement (the “Series 1 Preferred Share Agreement”) require
payments of (i) an annual amount of Cdn. $500,000 for dividends and (ii) an amount of Cdn. $750,000 as return of capital payments payable in cash. These
payments will end on December 31, 2020. Dividends accrue at a 1.25% quarterly rate on the unpaid principal balance, and additional dividends will accrue
on the cumulative unpaid dividends at a rate of 1.25% per quarter, compounded quarterly. On December 31, 2020 the amount of all accrued and unpaid
dividends on the Class A Preferred Shares of Cdn. $21.1 million and the balance of the principal redemption price of Cdn. $4.4 million will be due to the
holders of the Series 1 preferred shares. The Company has the option of making dividend payments in the form of common stock or cash under terms
outlined in the preferred share agreement. For purposes of preparing the above table, the final balance of accrued and unpaid dividends due December 31,
2020 of Cdn. $21.1 million is assumed to be paid in the form of common stock and not included in this table.
(3) Future minimum lease payments on capital and operating leases.
(4) The amount represents the amount outstanding at October 31, 2014 on the $4.0 million revolving credit facility with JPMorgan Chase Bank, N.A. and
the Export-Import Bank of the United States. The credit facility is used for working capital to finance the manufacture and production and subsequent
export sale of the Company’s products or services. This agreement was renewed on August 1, 2014 and the current expiration is one year from the date of
renewal. The outstanding principal balance of the facility bears interest, at the option of the Company of either the one-month LIBOR plus 1.5 percent or
the prime rate of JPMorgan Chase. The facility is secured by certain working capital assets and general intangibles, up to the amount of the outstanding
facility balance.
(5) We pay $3.2 million in annual dividends on our Series B Preferred Stock. The $3.2 million annual dividend payment has not been included in this table as
we cannot reasonably determine the period when or if we will be able to convert the Series B Preferred Stock into shares of our common stock. We may, at
our option, convert these shares into the number of shares of our common stock that are issuable at the then prevailing conversion rate if the closing price
of our common stock exceeds 150 percent of the then prevailing conversion price ($11.75) for 20 trading days during any consecutive 30 trading day period.
In October 2014, the State of Connecticut extended a financial
package through a letter of intent from the Department of
Economic and Community Development for a two-stage
expansion project to improve manufacturing and logistics
efficiencies. This financial package includes $20.0 million of
low interest long-term loans and up to $10.0 million of tax
credits, predicated on certain terms and conditions, including
the foregiveness of 50 percent of the loan principal if certain
job retention and job creation targets are reached. Each stage
is eligible for a $10.0 million loan at an interest rate of 2.0
percent, repayable over 15 years and $5.0 million of each loan
is forgivable. The project also qualifies for up to $10.0 million of
urban and industrial sites reinvestment tax credits, which the
Company can monetize over a ten-year period.
On July 30, 2014, the Company’s subsidiary, FuelCell Energy
Finance LLC (“FuelCell Finance”) entered into a Loan Agreement
with NRG. Pursuant to the Loan Agreement, NRG has extended
a $40.0 million revolving construction and term financing facility
to FuelCell Finance for the purpose of accelerating project
development by the Company and its subsidiaries. FuelCell
Finance and its subsidiaries may draw on the facility to finance
the construction of projects through the commercial operating
date of the power plants. FuelCell Finance has the option to
continue the financing term for each project after the commercial
operating date for a maximum term of five years per project. The
interest rate is 8.5 percent per annum for construction-period
financing and 8.0 percent thereafter. At October 31, 2014, there
were no drawdowns on the facility.
28
FuelCell Energy
On March 5, 2013, the Company closed on a long-term loan
agreement with the Connecticut Clean Energy and Finance
Investment Authority (CEFIA, now known as the CT Green Bank)
totaling $5.9 million in support of the Bridgeport Fuel Cell
Project. The loan agreement carries an interest rate of 5.0% and
principal repayments will commence on the eighth anniversary
of the project’s provisional acceptance date in December 2021.
Outstanding amounts are secured by future cash flows from the
Bridgeport contracts. The outstanding balance on the CEFIA Note
at October 31, 2014 was $6.1 million.
In April 2008, we entered into a 10-year loan agreement with the
Connecticut Development Authority allowing for a maximum
amount borrowed of $4.0 million. At October 31, 2014, we had an
outstanding balance of $3.0 million on this loan. The interest rate
is 5%. Interest only payments commenced in January 2014 and
the loan is collateralized by the assets procured under this loan
as well as $4.0 million of additional machinery and equipment.
Repayment terms require interest and principal payments
through May 2018.
We have pledged approximately $25.1 million of our cash and
cash equivalents as collateral and letters of credit for certain
banking requirements and contracts. At October 31, 2014,
outstanding letters of credit totaled $7.4 million. These expire
on various dates through April 2019. Under the terms of certain
contracts, the Company will provide performance security for
future contractual obligations. The restricted cash balance at
October 31, 2014 includes $15.0 million which has been placed in
a Grantor’s Trust account to secure certain FCE obligations under
the 15-year service agreement for the Bridgeport Fuel Cell Park
Project and has been reflected as long-term restricted cash. The
restrictions on the $15.0 million will be removed upon completion
of the final module exchange at the Bridgeport Fuel Cell Park
Project under the terms of the services agreement.
At October 31, 2014, we have uncertain tax positions aggregating
$41.7 million and have reduced our net operating loss
carryforwards by this amount. Because of the level of net
operating losses and valuation allowances, unrecognized tax
benefits, even if not resolved in our favor, would not result in any
cash payment or obligation and therefore have not been included
in the contractual obligation table above.
In addition to the commitments listed in the table above, we have
the following outstanding obligations:
Service and warranty agreements
We warranty our products for a specific period of time against
manufacturing or performance defects. Our standard warranty
period is generally 15 months after shipment or 12 months after
acceptance of the product. We have agreed to warranty kits and
components for 21 months from the date of shipment due to the
additional shipping and customer manufacture time required. In
addition to the standard product warranty, we have contracted
with certain customers to provide services to ensure the power
plants meet minimum operating levels for terms ranging from
one to 20 years. Pricing for service contracts is based upon
estimates of future costs, which could be materially different
from actual expenses.
Advanced technologies contracts (Research and development
contracts)
We have contracted with various government agencies and
certain companies from private industry to conduct research
and development as either a prime contractor or sub-contractor
under multi-year, cost-reimbursement and/or cost-share
type contracts or cooperative agreements. Cost-share terms
require that participating contractors share the total cost of the
project based on an agreed upon ratio. In many cases, we are
reimbursed only a portion of the costs incurred or to be incurred
on the contract. While government research and development
contracts may extend for many years, funding is often provided
incrementally on a year-by-year basis if contract terms are
met and Congress authorizes the funds. At October 31, 2014,
Advanced technologies contracts backlog totaled $24.0 million,
of which $21.0 million is funded. Should funding be delayed
or if business initiatives change, we may choose to devote
resources to other activities, including internally funded research
and development.
Annual Report 2014
29
MANAGEMENT’S ANNUAL REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
We, as members of management of FuelCell Energy, Inc., and its subsidiaries (the “Company”), are responsible for establishing and
maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control
over financial reporting includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles of the United States of America, and that receipts and expenditures
of the Company are being made only in accordance with authorizations of management and directors of the Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
Under the supervision and with the participation of management, including our principal executive and financial officers, we
assessed the Company’s internal control over financial reporting as of October 31, 2014, based on criteria for effective internal
control over financial reporting established in the Internal Control—Integrated Framework (1992), issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, we have concluded that the Company
maintained effective internal control over financial reporting as of October 31, 2014 based on the specified criteria.
Arthur A. Bottone
President and Chief Executive Officer
Michael Bishop
Senior Vice President, Chief Financial Officer, Corporate Secretary and Treasurer
30
FuelCell Energy
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FuelCell Energy, Inc.:
We have audited the accompanying consolidated balance sheets of FuelCell Energy, Inc. and subsidiaries as of October 31, 2014
and 2013, and the related consolidated statements of operations and comprehensive income (loss), changes in equity (deficit),
and cash flows for each of the years in the three-year period ended October 31, 2014. We also have audited FuelCell Energy Inc’s
internal control over financial reporting as of October 31, 2014, based on criteria established in Internal Control—Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). FuelCell Energy Inc.’s
management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
management report on internal controls over financial reporting. Our responsibility is to express an opinion on these consolidated
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of FuelCell Energy, Inc. and subsidiaries as of October 31, 2014 and 2013, and the results of its operations and its cash flows for
each of the years in the three-year period ended October 31, 2014, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, FuelCell Energy, Inc. maintained, in all material respects, effective internal control over financial reporting as
of October 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Hartford, Connecticut
January 9, 2015
Annual Report 2014
31
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash and cash equivalents — short-term
Accounts receivable, net of allowance for doubtful accounts of $132 and $14 at October 31, 2014
and 2013, respectively
Inventories
Other current assets
Total current assets
Restricted cash and cash equivalents — long-term
Property, plant and equipment, net
Goodwill
Intangible assets
Other assets, net
Total assets
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued liabilities
Deferred revenue
Preferred stock obligation of subsidiary
Total current liabilities
Long-term deferred revenue
Long-term preferred stock obligation of subsidiary
Long-term debt and other liabilities
Total liabilities
Redeemable preferred stock (liquidation preference of $64,020 at October 31, 2014 and October 31, 2013)
Total equity (deficit):
Shareholders’ equity (deficit)
Common stock ($.0001 par value; 400,000,000 and 275,000,000 shares authorized at
October 31, 2014 and 2013, respectively; 287,160,003 and 196,310,402 shares issued and
outstanding at October 31, 2014 and 2013, respectively)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Treasury stock, Common, at cost (45,550 and 5,679 shares at October 31, 2014 and 2013,
respectively)
Deferred compensation
Total shareholders’ equity (deficit)
Noncontrolling interest in subsidiaries
Total equity (deficit)
Total liabilities and equity (deficit)
See accompanying notes to consolidated financial statements.
32
FuelCell Energy
October 31,
2014
2013
$ 83,710
$ 67,696
5,523
5,053
64,375
49,116
55,895
7,528
217,031
19,600
26,609
4,075
9,592
3,729
56,185
11,279
189,329
4,950
24,225
4,075
9,592
5,465
$ 280,636
$ 237,636
$
1,439
$
6,931
22,969
12,066
37,626
961
75,061
20,705
13,197
13,367
122,330
59,857
24,535
21,912
51,857
1,028
106,263
18,763
13,270
52,675
190,971
59,857
29
20
909,431
758,656
(809,314)
(771,189)
(159)
(95)
95
99,987
(1,538)
98,449
101
(53)
53
(12,412)
(780)
(13,192)
$ 280,636
$ 237,636
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands, except share and per share amounts) For the Years Ended October 31,
Revenues:
Product sales (including $115.0 million, $81.6 million and $83.9 million of
related party revenue)
Service agreements and license revenues (including $14.9 million, $20.1 million
and $8.4 million of related party revenue)
Advanced technologies contract revenues (including $0.4 million, $0.3 million
and $0.02 million of related party revenue)
Total revenues
Costs of revenues:
Cost of product sales
Cost of service agreements and license revenues
Cost of advanced technologies contract revenues
Total cost of revenues
Gross profit
Operating expenses:
Administrative and selling expenses
Research and development expenses
Total operating expenses
Loss from operations
Interest expense
Income (loss) from equity investments
Impairment of equity investment
License fee and royalty income
Other income (expense), net
Loss before provision for income taxes
Provision for income taxes
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to FuelCell Energy, Inc.
Preferred stock dividends
Net loss to common shareholders
Net loss to common shareholders per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustments
Comprehensive loss
See accompanying notes to consolidated financial statements.
2014
2013
2012
$136,842
$145,071
$ 94,950
25,956
28,141
18,183
17,495
14,446
7,470
180,293
187,658
120,603
126,866
23,037
16,664
166,567
13,726
22,797
18,240
41,037
(27,311)
(3,561)
—
—
—
(7,523)
(38,395)
(488)
(38,883)
758
(38,125)
(3,200)
136,989
29,683
13,864
180,536
7,122
21,218
15,717
36,935
(29,813)
(3,973)
46
—
—
(1,208)
(34,948)
(371)
(35,319)
961
(34,358)
(3,200)
93,876
19,045
7,237
120,158
445
18,220
14,354
32,574
(32,129)
(2,304)
(645)
(3,602)
1,599
1,244
(35,837)
(69)
(35,906)
411
(35,495)
(3,201)
$ (41,325)
$ (37,558)
$(38,696)
$ (0.17)
$ (0.17)
$
$
(0.20)
(0.20)
$ (0.23)
$ (0.23)
245,686,983
186,525,001
165,471,261
245,686,983
186,525,001
165,471,261
For the Years Ended October 31,
2014
2013
2012
$ (38,883)
$ (35,319)
$ (35,906)
(260)
35
51
$ (39,143)
$ (35,284)
$ (35,855)
Annual Report 2014
33
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
For the Years Ended October 31, 2014, 2013 and 2012
(Amounts in thousands, except share and per share amounts)
Common Stock
Shares Amount
Additional
Paid-in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Deferred
Compensation
Noncontrol-
ling Interest
in
Subsidiaries
Total Equity
(Deficit)
Balance, October 31, 2011
138,400,497 $ 13 $ 687,857 $ (701,336)
$ 15
$ (53)
$ 53 $ (924) $ (14,375)
Sale of common stock
45,012,306
5
63,998
Share-based compensation
— —
2,054
Stock issued under benefit plans
net of taxes paid upon vesting of
restricted stock awards
Preferred dividends — Series B
Sale of noncontrolling interest
in subsidiary
Noncontrolling interest in subsidiaries
Effect of foreign currency translation
Net loss attributable to
FuelCell Energy, Inc.
2,443,320 —
548
— —
(3,201)
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
(35,495)
—
—
—
—
—
—
51
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
954
(411)
—
64,003
2,054
548
(3,201)
954
(411)
51
— (35,495)
Balance, October 31, 2012
185,856,123 $ 18 $ 751,256
(736,831)
$ 66
$ (53)
$ 53 $ (381)
14,128
Sale of common stock
4,295,800
Common stock issued for acquisition
3,526,764
1
1
Share-based compensation
— —
5,547
3,562
2,226
Taxes paid upon vesting of restricted
stock awards, net of stock issued
under benefit plans
Reclass of noncontrolling interest due
to liquidation of subsidiaries
Preferred dividends — Series B
Noncontrolling interest in subsidiaries
Effect of foreign currency translation
Net loss attributable to
FuelCell Energy, Inc.
2,631,715 —
(173)
— —
— —
— —
— —
— —
(562)
(3,200)
—
—
—
—
—
—
—
—
—
—
—
(34,358)
—
—
—
—
—
—
—
35
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
562
—
(961)
—
5,548
3,563
2,226
(173)
—
(3,200)
(961)
35
— (34,358)
Balance, October 31, 2013
196,310,402 $ 20 $ 758,656 $ (771,189)
$ 101
$ (53)
$ 53 $ (780) $ (13,192)
Sale of common stock
59,683,252
Common stock issued for convertible
note conversions including interest
24,766,752
6
3
105,960
33,303
Common stock issued to settle
make-whole obligation
5,514,272 — 12,883
Share-based compensation
— —
2,908
Taxes paid upon vesting of restricted
stock awards, net of stock issued
under benefit plans
913,627 —
(1,079)
Noncontrolling interest in subsidiaries
— —
—
Preferred dividends — Series B
— —
(3,200)
Adjustment for deferred
compensation
Effect of foreign currency translation
Net loss attributable to
FuelCell Energy, Inc.
(28,302) —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(260)
(38,125)
—
—
—
—
—
—
—
—
(42)
—
—
—
—
—
—
—
—
—
42
—
—
— 105,966
— 33,306
— 12,883
—
2,908
—
(1,079)
(758)
(758)
—
—
—
(3,200)
—
(260)
— (38,125)
Balance, October 31, 2014
287,160,003 $ 29 $909,431 $(809,314)
$(159)
$ (95)
$ 95 $(1,538) $ 98,449
See accompanying notes to consolidated financial statements.
34
FuelCell Energy
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share amounts) For the Years Ended October 31,
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation
(Income) loss in equity investments
Impairment of equity investment
(Gain) loss from change in fair value of embedded derivatives
Make whole derivative expense
Depreciation
Amortization of convertible note discount and interest expense
Other non-cash transactions
(Increase) decrease in operating assets:
Accounts and license fee receivables
Inventories
Other assets
Increase (decrease) in operating liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities:
Capital expenditures
Cash acquired from acquisition
Treasury notes matured
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Repayment of debt
Proceeds from debt
Financing costs for convertible debt securities
Proceeds received for noncontrolling interest in subsidiary
Increase (decrease) in restricted cash and cash equivalents
Proceeds from sale of common stock, net of registration fees
Payment of preferred dividends and return of capital
Common stock issued for stock plans and related expenses
Net cash provided by financing activities
Effects on cash from changes in foreign currency rates
Net increase in cash and cash equivalents
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of year
See accompanying notes to consolidated financial statements.
2014
2013
2012
$(38,883)
$(35,319)
$(35,906)
2,908
2,226
—
—
(126)
8,347
4,384
2,140
(425)
(46)
—
1,359
—
4,097
2,480
(382)
2,054
645
3,602
180
—
5,192
2,018
(297)
(15,378)
(12,000)
(14,066)
1,059
3,417
(1,566)
(11,056)
(12,289)
(57,468)
(5,901)
6,076
11,776
(172)
9,148
(7,600)
3,032
(1,790)
(6,081)
(9,642)
(16,658)
(58,659)
(7,079)
(6,551)
(4,453)
—
—
357
—
(7,079)
(6,194)
(5,971)
250
—
—
(15,120)
105,844
(4,343)
161
80,821
(260)
16,014
67,696
(374)
45,250
(2,472)
—
632
5,040
(4,442)
—
43,634
35
20,817
46,879
—
12,000
7,547
(173)
—
—
954
(2,203)
64,003
(7,624)
—
54,957
51
3,896
42,983
$ 83,710
$ 67,696
$ 46,879
Annual Report 2014
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 31, 2014, 2013 and 2012 (Tabular amounts in thousands, except share and per share amounts)
Note 1. Nature of Business, Basis of Presentation and
Significant Accounting Policies
Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.
Nature of Business and Basis of Presentation
FuelCell Energy, Inc. and its subsidiaries (the “Company”,
“FuelCell Energy”, “we”, “us”, or “our”) is a leading integrated
fuel cell company with a growing global presence. We design,
manufacture, install, operate and service ultra-clean, efficient
and reliable stationary fuel cell power plants. Our Direct
FuelCell power plants continuously produce base load electricity
and usable high quality heat around the clock for commercial,
industrial, government and utility customers. We have
commercialized our stationary carbonate fuel cells and are also
pursuing the complementary development of planar solid oxide
fuel cells and other fuel cell technologies. We continue to invest
in new product and market development and, as such, we are
not currently generating net income from our operations. Our
operations are funded primarily through cash generated from
product sales, service and advanced technologies contracts,
license fee income and sales of equity and debt securities. In
order to continually produce positive cash flow from operations,
we need to be successful at increasing annual order volume and
production and in our cost reduction efforts.
The consolidated financial statements include our accounts and
those of our wholly-owned subsidiaries, including FCE FuelCell
Energy Ltd. (“FCE Ltd.”), our Canadian subsidiary; Waterbury
Renewable Energy, LLC (“WRE”), FuelCell Energy Finance, LLC,
which was formed for the purpose of financing projects within
the U.S., UB Fuel Cell LLC, DFC-ERG Milford, LLC and DFC-
ERG CT, LLC, which were formed for the purpose of developing
projects within Connecticut; UCI Fuel Cell, LLC, which was
formed for the purpose of developing a project within California;
Long Beach Clean Energy, LLC, which was formed for the
purpose of developing projects within New York; and FCE Korea,
Ltd., which was formed to facilitate our business operations in
South Korea. FuelCell Energy Solutions GmbH (“FCES GmbH”),
a joint venture with Fraunhofer IKTS (Fraunhofer), was formed
in the fourth quarter of fiscal year 2011 to facilitate business
development in Europe. We have an 86 percent interest in FCES
GmbH and accordingly, the financial results are consolidated
with our financial results. Alliance Star Energy, LLC (“Alliance
Star”) is a joint venture with Alliance Power, Inc. (“Alliance”)
established to construct fuel cell power plants and sell power
under power purchase agreements (“PPAs”). We have an 80
percent interest in the entity and accordingly, the financial
results of Alliance Star are consolidated with our financial
results. Versa Power Systems, Inc. (“Versa”), a domestic
entity, which includes its Canadian subsidiary Versa Power
Systems Ltd., is a sub-contractor for the Department of Energy
(“DOE”) large-scale hybrid project to develop a coal-based,
multi-megawatt solid oxide fuel cell (“SOFC”) based hybrid
system. We had a 39 percent ownership interest and historically
accounted for Versa under the equity method of accounting.
On December 20, 2012, the Company acquired the remaining
61 percent ownership position of Versa and it is now a wholly
owned subsidiary and consolidated with our financial results. All
intercompany accounts and transactions have been eliminated.
36
FuelCell Energy
Significant Accounting Policies
Cash and Cash Equivalents and Restricted Cash
All cash equivalents consist of investments in money market
funds with original maturities of three months or less at date of
acquisition. We place our temporary cash investments with high
credit quality financial institutions. At October 31, 2014, $25.1
million of cash and cash equivalents was pledged as collateral
for letters of credit for certain banking requirements and
contractual commitments, compared to $10.0 million pledged
at October 31, 2013. The restricted cash balance at October 31,
2014 includes $15.0 million which has been placed in a Grantor’s
Trust account to secure certain FCE obligations under a 15-year
service agreement for the Bridgeport Fuel Cell Park project and
has been classified as Restricted cash and cash equivalents—
long-term. At October 31, 2014 and 2013, we had outstanding
letters of credit of $7.4 million and $7.7 million, respectively.
Inventories and Advance Payments to Vendors
Inventories consist principally of raw materials and work-in-
process. In certain circumstances, we will make advance
payments to vendors for future inventory deliveries. These
advance payments are recorded as other current assets on
the consolidated balance sheets.
Inventories are reviewed to determine if reserves are required
for obsolescence (excess, obsolete, and slow-moving inventory).
This review includes analyzing inventory levels of individual
parts considering the current design of our products and
production requirements as well as the expected inventory
requirements for maintenance on installed power plants.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less
accumulated depreciation provided on the straight-line method
over the estimated useful lives of the respective assets.
Leasehold improvements are amortized on the straight-line
method over the shorter of the estimated useful lives of the
assets or the term of the lease. When property is sold or
otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations for the period.
Intellectual Property
Intellectual property, including internally generated patents and
know-how, is carried at no value.
Goodwill and Intangible Assets
Goodwill represents the excess of the aggregate purchase
price over the fair value of the net assets acquired in a purchase
business combination and is reviewed for impairment at
least annually.
Accounting Standards Codification Topic 350, “Intangibles—
Goodwill and Other,” (ASC 350) permits the assessment
of qualitative factors to determine whether events and
circumstances lead to the conclusion that it is necessary to
perform the two-step goodwill impairment test required under
ASC 350.
The Company completed its annual impairment analysis of
goodwill and intangible assets with indefinite lives at July 31,
2014 during the fourth quarter of fiscal year 2014 which
was completed at the reporting unit level. The goodwill and
intangible assets all relate to the Company’s Versa reporting
unit, since Versa has a segment manager that regularly reviews
the results of that operation. Goodwill and other indefinite lived
intangible assets are also reviewed for possible impairment
whenever changes in conditions indicate that the fair value of a
reporting unit is more likely than not below its carrying value.
No impairment charges were recorded during fiscal year 2014
or fiscal year 2013.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset group may not be recoverable. If events or
changes in circumstances indicate that the carrying amount
of the asset group may not be recoverable, we compare the
carrying amount of an asset group to future undiscounted net
cash flows, excluding interest costs, expected to be generated
by the asset group and their ultimate disposition. If the sum
of the undiscounted cash flows is less than the carrying value,
the impairment to be recognized is measured by the amount
by which the carrying amount of the asset group exceeds
the fair value of the asset group. Assets to be disposed of are
reported at the lower of the carrying amount or fair value,
less costs to sell.
Revenue Recognition
We earn revenue from (i) the sale and installation of fuel cell
power plants (ii) the sale of fuel cell modules, component part
kits and spare parts to customers, (iii) site engineering and
construction services, (iv) providing services under service
agreements, (v) the sale of electricity under PPAs, (vi) license
fees and royalty income from manufacturing and technology
transfer agreements, and (vii) customer-sponsored advanced
technology projects.
The Company periodically enters into arrangements with
customers that involve multiple elements of the above items.
We assess such contracts to evaluate whether there are
multiple deliverables, and whether the consideration under
the arrangement is being appropriately allocated to each of
the deliverables.
Our revenue is primarily generated from customers located
throughout the U.S. and Asia and from agencies of the U.S.
Government. Revenue from product and module kit sales,
construction services and component part revenue is recorded
as product sales in the consolidated statements of operations.
Construction services includes engineering, procurement and
construction (EPC) services of the overall fuel cell project.
The installation of a power plant at a customer site includes
significant site preparation which is included in the EPC
component and is required to be completed before integration
of the fuel cell power plant. Revenue from service agreements,
PPAs, license and royalty revenue and engineering services
revenue is recorded as service and license revenues. Revenue
from customer-sponsored advanced technology research and
development projects is recorded as advanced technologies
contract revenues in the consolidated statements of operations.
For customer contracts for complete DFC Power Plants
which the Company has adequate cost history and estimating
experience, and that management believes it can reasonably
estimate total contract costs, revenue is recognized under
the percentage of completion method of accounting. The use
of percentage of completion accounting requires significant
judgment relative to estimating total contract costs, including
assumptions relative to the length of time to complete the
contract, the nature and complexity of the work to be performed,
anticipated increases in wages and prices for subcontractor
services and materials, and the availability of subcontractor
services and materials. Our estimates are based upon the
professional knowledge and experience of our engineers,
program managers and other personnel, who review each
long-term contract on a quarterly basis to assess the contract’s
schedule, performance, technical matters and estimated cost
at completion. When changes in estimated contract costs
are identified, such revisions may result in current period
adjustments to operations applicable to performance in prior
periods. Revenues are recognized based on the percentage of
the contract value that incurred costs to date bear to estimated
total contract costs, after giving effect to estimates of costs
to complete based on most recent information. For customer
contracts for new or significantly customized products, where
management does not believe it has the ability to reasonably
estimate total contract costs, revenue is recognized using the
completed contract method and therefore all revenue and
costs for the contract are deferred and not recognized until
installation and acceptance of the power plant is complete.
For all types of contracts, we recognize anticipated contract
losses as soon as they become known and estimable. We have
recorded an estimated contract loss reserve of $0.03 million
and $0.09 million at October 31, 2014 and October 31, 2013,
respectively. Actual results could vary from initial estimates
and reserve estimates will be updated as conditions change.
Revenue from the sale of fuel cell modules, kits and spare parts
is recognized upon shipment or title transfer under the terms of
the customer contract. Terms for certain contracts provide for a
transfer of title and risk of loss to our customers at our factory
locations upon completion of our contractual requirement to
produce products and prepare the products for shipment. A
shipment in place may occur in the event that the customer is
not ready to take delivery of the products on the contractually
specified delivery dates.
Site engineering and construction services revenue is recognized
on a percentage of completion basis as costs are incurred.
Revenue from service agreements is generally recorded ratably
over the term of the service agreement, as our performance
of routine monitoring and maintenance under these service
agreements are generally expected to be incurred on a straight-
line basis. For service agreements where we expect to have
a module exchange at some point during the term (generally
service agreements in excess of five years), the costs of
performance are not expected to be incurred on a straight-
line basis, and therefore, a portion of the initial contract value
related to the module exchange is deferred and is recognized
upon such module replacement event.
Annual Report 2014
37
Under PPAs, revenue from the sale of electricity is recognized
as electricity is provided to the customer.
Beginning in fiscal year 2013, license fees and royalty income
are included within revenues on the consolidated statement of
operations. This change is a result of the license agreement
entered into on October 31, 2012 for our core technology and
the harmonization of the existing agreements to provide fees
and royalties for the manufacture of complete DFC Power
Plants. Classification as revenue is reflective of our Asia market
partnership and royalty based strategy and this business activity
is a significant component of non-product revenue.
Revenue from funded advanced technology contracts is
recognized as direct costs are incurred plus allowable overhead
less cost share requirements, if any. Revenue from customer
funded advanced technology programs are generally multi-
year, cost-reimbursement and/or cost-shared type contracts
or cooperative agreements. We are reimbursed for reasonable
and allocable costs up to the reimbursement limits set by the
contract or cooperative agreement, and on certain contracts
we are reimbursed only a portion of the costs incurred. While
advanced technology contracts may extend for many years,
funding is often provided incrementally on a year-by-year basis
if contract terms are met and funds are authorized.
Warranty and Service Expense Recognition
We warranty our products for a specific period of time against
manufacturing or performance defects. Our warranty is limited
to a term generally 15 months after shipment or 12 months after
acceptance of our products, except for fuel cell kits. We have
agreed to warranty fuel cell kits and components for 21 months
from the date of shipment due to the additional shipping and
customer manufacture time required. We accrue for estimated
future warranty costs based on historical experience. We
also provide for a specific accrual if there is a known issue
requiring repair during the warranty period. Estimates used
to record warranty accruals are updated as we gain further
operating experience. At October 31, 2014 and October 31, 2013,
the warranty accrual, which is classified in accrued liabilities
on the consolidated balance sheet totaled $1.2 million and $0.9
million, respectively.
In addition to the standard product warranty, we have entered
into service agreements with certain customers to provide
monitoring, maintenance and repair services for fuel cell power
plants. Under the terms of these service agreements, the power
plant must meet a minimum operating output during the term. If
minimum output falls below the contract requirement, we may
be subject to performance penalties or may be required to repair
and/or replace the customer’s fuel cell module. The Company
has accrued for performance guarantees of $0.8 million and
$0.5 million at October 31, 2014 and 2013, respectively.
The Company provides for loss accruals for all service
agreements when the estimated cost of future module
exchanges and maintenance and monitoring activities exceed
the remaining contract value. Estimates for future costs on
service agreements are determined by a number of factors
including the estimated remaining life of the module, used
replacement modules available, our limit of liability on service
agreements and future operating plans for the power plant.
Our estimates are performed on a contract-by-contract basis
and include cost assumptions based on what we anticipate
the service requirements will be to fulfill obligations for each
contract. At October 31, 2014, our loss accruals on service
agreements totaled $3.0 million compared to $3.7 million at
October 31, 2013.
At the end of our service agreements, customers are
expected to either renew the service agreement or, based on
the Company’s rights to title of the module, the module will
be returned to the Company as the plant is no longer being
monitored or having routine service performed. At October 31,
2014, the asset related to the residual value of replacement
modules in power plants under service agreements was $2.7
million compared to $2.9 million at October 31, 2013.
During fiscal year 2011, the Company committed to a repair
and upgrade program for a select group of 1.2 megawatt (MW)
fuel cell modules produced between 2007 and early 2009. At
October 31, 2014, the obligation to supply modules to POSCO
Energy has been fulfilled and there is no remaining balance
compared to $7.3 million accrued at October 31, 2013.
License Agreements and Royalty Income
We generally recognize license fees and other revenue over
the term of the associated agreement. Beginning in fiscal
year 2013, license fees and royalty income have been included
within revenues on the consolidated statement of operations.
This change is a result of the new license agreement entered
into on October 31, 2012 for our core technology and the
harmonization of the existing agreements to provide license
fees and royalties for the value of complete DFC Power Plants
sold by POSCO Energy. Classification as revenue is reflective
of our Asia market partnership and royalty based strategy
having become a significant component of non-product revenue.
Prior to November 1, 2012, license fee and royalty income were
classified as such in the accompanying Statement of Operations.
The Company receives license fees and royalty income from
POSCO Energy as a result of manufacturing and technology
transfer agreements entered into in 2007, 2009 and 2012. The
Cell Technology Transfer Agreement (“CTTA”) we entered
into on October 31, 2012 provides POSCO Energy with the
technology to manufacture Direct FuelCell power plants in
South Korea and the exclusive market access to sell power
plants throughout Asia. In conjunction with this agreement we
amended the 2010 manufacturing and distribution agreement
with POSCO Energy and the 2009 License Agreement. The 2012
agreement and the previously referenced amendments contain
multiple elements, including the license of technology and
market access rights, fuel cell module kit product deliverables,
as well as professional service deliverables. We identified
these three items as deliverables under the multiple-element
arrangement guidance and evaluated the estimated selling
prices to allocate the relative fair value to these deliverables, as
vendor-specific objective evidence and third-party evidence was
not available. The Company’s determination of estimated selling
prices involves the consideration of several factors based on
the specific facts and circumstances of each arrangement.
Specifically, the Company considers the cost to produce the
tangible product and cost of professional service deliverables,
the anticipated margin on those deliverables, prices charged
38
FuelCell Energy
when those deliverables are sold on a stand-alone basis in
limited sales, and the Company’s ongoing pricing strategy
and practices used to negotiate and price overall bundled
product, service and license arrangements. We are recognizing
the consideration allocated to the license of technology and
market access rights as revenue over the 15 year license
term on a straight-line basis, and will recognize the amounts
allocated to the module kit deliverables and professional
service deliverables when such items are delivered to POSCO
Energy. We have also determined that based on the utility to the
customer of the fully developed technology that was licensed in
the Cell Technology Transfer Agreement, there is stand-alone
value for this deliverable.
In conjunction with the CTTA, a $10.0 million fee was paid to
the Company on November 1, 2012. Future fees, totaling $8.0
million are payable on a milestone basis between 2014 and 2016.
In conjunction with the CTTA, the Company also amended the
royalty provisions in the 2007 Technology Transfer, Distribution
and Licensing Agreement (“TTA”) and the 2009 Stack Technology
Transfer and License Agreement (“STTA”) revising the royalty
from 4.1 percent to 3.0 percent of POSCO Energy net sales. The
reduction in the royalty rate resulted in a net fee of $6.7 million
paid to the Company in January 2013.
Under the terms of the 2007 TTA, POSCO Energy manufactures
balance of plant (“BOP”) in South Korea using its design,
procurement and manufacturing expertise. The 2009 STTA
allows POSCO Energy to produce fuel cell modules which will be
combined with BOP manufactured in South Korea to complete
electricity-producing fuel cell power plants for sale in South
Korea. Under the STTA and prior to the CTTA, we were receiving
4.1 percent of the revenues generated from sales of fuel cell
modules manufactured and sourced by POSCO Energy. The
STTA also provided for an upfront license fee of $10.0 million.
License fee income was recognized ratably over the 10-year
term of the STTA through October 31, 2012. As a result of
the CTTA, the remaining license fee income of $7.0 million is
being recognized ratably over an additional 15 years beginning
November 1, 2012.
In September 2013, the Company entered into a revised Master
Service Agreement with POSCO Energy, hereby POSCO Energy
assumed more responsibility for servicing installations in Asia
that utilize power plants manufactured by POSCO Energy. The
Company will perform engineering and support services for
each unit in the installed fleet and receive quarterly fees as well
as a royalty on each scheduled fuel cell module replacement
under service agreements that were built by POSCO Energy and
installed at any plant in Asia.
The Company recorded license and royalty income of $4.3
million, $4.1 million and $1.6 million for the years ended
October 31, 2014, 2013 and 2012, respectively, relating to the
above agreements. Future license and royalty income will
consist of amortization of the payments discussed above as well
as a 3.0 percent royalty on POSCO Energy net product sales
related to FCE’s technology and a 3.0 percent royalty on each
scheduled fuel cell module replacement under terms of our
Master Service Agreement.
Deferred Revenue and Customer Deposits
We receive payments from customers upon the acceptance of a
purchase order and when contractual milestones are reached.
These payments may be deferred based on the nature of the
payment and status of the specific project. Deferred revenue
is recognized as revenue in accordance with our revenue
recognition policies summarized above.
Research and Development Costs
We perform both customer-sponsored research and
development projects based on contractual agreement with
customers and company-sponsored research and development
projects. Costs incurred for customer-sponsored projects
include manufacturing and engineering labor, applicable
overhead expenses, materials to build and test prototype units
and other costs associated with customer-sponsored research
and development contracts. These costs are recorded as
Advanced Technologies contract revenues in the consolidated
statements of operations.
Costs incurred for company-sponsored research and
development projects consist primarily of labor, overhead,
materials to build and test prototype units and consulting
fees. These costs are recorded as research and development
expenses in the consolidated statements of operations.
Share-Based Compensation
We account for restricted stock awards (RSAs) and restricted
stock units (RSUs) based on the closing market price of the
Company’s common stock on the date of grant. We account
for stock options awarded to employees and non-employee
directors under the fair value method of accounting using
the Black-Scholes valuation model to estimate fair value at
the grant date. The model requires us to make estimates and
assumptions regarding the expected life of the option, the risk-
free interest rate, the expected volatility of our common stock
price and the expected dividend yield. The fair value of equity
awards is amortized to expense over the vesting period, which is
generally four years. Refer to Note 14 for additional information.
Income Taxes
Income taxes are accounted for under the liability method.
Deferred tax assets and liabilities are determined based on net
operating loss (“NOL”) carryforwards, research and
development credit carryforwards, and differences between
financial reporting and the income tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates and laws expected to be in effect when the
differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
A valuation allowance is recorded against deferred tax assets
if it is unlikely that some or all of the deferred tax assets will
be realized.
The Company’s financial statements reflect expected future tax
consequences of uncertain tax positions that the Company has
taken or expects to take on a tax return (including a decision
whether to file or not file a return in a particular jurisdiction)
presuming the taxing authorities’ full knowledge of the position
and all relevant facts.
Annual Report 2014
39
Concentrations
We contract with a concentrated number of customers for the
sale of our products, for service agreement contracts and for
advanced technologies contracts. For the years ended October 31,
2014, 2013 and 2012, our top five customers accounted for 88
percent, 88 percent and 83 percent, respectively, of our total
annual consolidated revenue.
The percent of consolidated revenues from each customer for
the years ended October 31, 2014, 2013 and 2012, respectively,
are presented below.
POSCO Energy
2014
2013
2012
69% 54% 76%
The United Illuminating Company
9% —% —%
Bridgeport Dominion Fuel Cell, LLC
3% 29% —%
Department of Energy
NRG Energy
Total
4% 5%
7%
3% —% —%
88%
88% 83%
POSCO Energy is a related party and owns approximately 11.0
percent of the outstanding common shares of the Company and
NRG Energy is a related party and owns approximately 6 percent
of the outstanding common shares of the Company.
Derivatives
We do not use derivatives for speculative purposes and through
fiscal year end 2014, have not used derivatives for hedging or
trading purposes. Derivative instruments consist of embedded
derivatives in our Series 1 Preferred Shares. Derivative
instruments also consisted of embedded derivatives for the
change of control put redemption and an interest make-whole
payment upon conversion feature embedded in the 8.0%
Senior Unsecured Convertible Notes which required bifurcation
from the host debt contract. We account for these derivatives
using the fair-value method with changes in the underlying
fair value recorded to earnings. Refer to Notes 10 and 12 for
additional information.
Use of Estimates
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted
in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. Actual results could differ
from those estimates. Estimates are used in accounting for,
among other things, revenue recognition, excess, slow-moving
and obsolete inventories, product warranty costs, service
agreement loss accruals, allowance for uncollectible receivables,
depreciation and amortization, impairment of assets, taxes,
and contingencies. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the
consolidated financial statements in the period they are
determined to be necessary.
Foreign Currency Translation
The translation of FuelCell Korea Ltd’s and FCES GmbH’s
financial statements results in translation gains or losses,
which are recorded in accumulated other comprehensive
income within stockholders’ equity (deficit).
Our Canadian subsidiary, FCE Ltd., is financially and
operationally integrated and therefore the temporal method
of translation of foreign currencies is followed. The functional
currency is U.S. dollars. We are subject to foreign currency
transaction gains and losses as certain transactions are
denominated in foreign currencies. We recognized a gain of
$0.6 million, a gain of $0.4 million and a gain of $0.1 million for
the years ended October 31, 2014, 2013 and 2012, respectively.
These amounts have been classified as other income (expense),
net in the consolidated statements of operations.
Recently Adopted Accounting Guidance
None.
Recent Accounting Guidance Not Yet Effective
In May 2014, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606).” This
topic provides for five principles which should be followed to
determine the appropriate amount and timing of revenue
recognition for the transfer of goods and services to customers.
The principles in this ASU should be applied to all contracts
with customers regardless of industry. The amendments in this
ASU are effective for fiscal years, and interim periods within
those years beginning after December 15, 2016, with two
transition methods of adoption allowed. Early adoption for
reporting periods prior to December 15, 2016 is not permitted.
We are evaluating the financial statement impacts of the
guidance in this ASU and determining which transition method
we will utilize.
Note 2. Acquisitions
Versa was previously one of our sub-contractors under the
DOE’s large-scale hybrid project to develop a coal-based,
multi-megawatt SOFC based hybrid system. Versa is developing
advanced SOFC systems for various stationary and mobile
applications since 2001. Prior to December 20, 2012, we had a
39 percent ownership interest and accounted for Versa under
the equity method of accounting. We recognized our share of the
income or losses as income (loss) from equity investment on the
consolidated statements of operations.
On December 20, 2012, the Company acquired the remaining
61 percent ownership position of Versa in a stock transaction
by exchanging approximately 3.5 million shares of its common
stock for the outstanding Versa shares held by the other
Versa shareholders.
The transaction has been accounted for using the acquisition
method of accounting which requires, among other things, that
assets acquired and liabilities assumed be recognized at their
fair values as of the acquisition date. Step-acquisition accounting
guidance was applied and an impairment charge of $3.6 million
relating to the previously held equity investment was recorded
in the fourth quarter of 2012 and is included in Impairment of
equity investment on the consolidated statement of operations.
The pre-acquisition value of the ownership in Versa was $6.2
million and represents the book value of the investment as of
the acquisition date.
40
FuelCell Energy
The following table summarizes the final allocation of the
purchase price to the estimated fair value of the assets
acquired and liabilities assumed as of the acquisition date.
Cash and cash equivalents
Accounts receivable
Other current assets
Property, plant and equipment
Goodwill
In-process research and development
Other assets
Accounts payable
Other current liabilities
Deferred tax liabilities (1)
Other long-term liabilities
Total identifiable net assets
$
357
1,133
23
480
4,075
9,592
101
(302)
(1,492)
(3,377)
(155)
$10,435
(1) Classified in Long-term debt and other liabilities on the consolidated
balance sheets.
The acquisition date fair value of the 61 percent investment was
approximately $10.2 million and is included in the measurement
of the consideration transferred. The acquisition date fair value
represented the fair value of our common stock on the acquisition
date provided to the other Versa shareholders in exchange for
their shares of Versa. The cost approach was used to value the
in-process research and development value as this represents
an indication of the intangible asset’s value by the cost to replace
or rebuild the asset. The carrying value for the remaining assets
and liabilities acquired approximated fair value.
Acquisition-related costs of $0.1 million were expensed as
incurred. These costs were recognized in administrative and selling
expenses on the statement of operations and comprehensive (loss)
income for the year ended October 31, 2013.
Versa has been consolidated into the Company’s financial
statements as of the acquisition date. Versa receives revenue under
a number of research contracts including the U.S. Department
of Energy Solid State Energy Conversion Alliance (SECA) coal-
based systems program and a research contract with The Boeing
Company. Revenue and associated costs are recognized under
advanced technologies contract revenues in the consolidated
statements of operations.
Note 3. Accounts Receivable
Accounts receivable at October 31, 2014 and 2013 consisted of
the following:
Advanced Technology (including
U.S. Government (1)):
Amount billed
Unbilled recoverable costs
Commercial customers:
Amount billed
Unbilled recoverable costs
2014
2013
$ 2,517
2,886
5,403
8,871
50,101
58,972
$64,375
$
786
639
1,425
17,344
30,347
47,691
$49,116
We bill customers for power plant and module kit sales based
on certain contractual milestones being reached. We bill service
agreements based on the contract price and billing terms of the
contracts. Generally, our advanced technology contracts are
billed based on actual recoverable costs incurred, typically in the
month subsequent to incurring costs. Some advanced technology
contracts are billed based on contractual milestones or costs
incurred. Unbilled recoverable costs relate to revenue recognized
on customer contracts that have not been billed. Accounts
receivable are presented net of an allowance for doubtful
accounts of $0.1 million and $0.01 million at October 31, 2014 and
2013, respectively.
Commercial customers accounts receivable (including Unbilled
recoverable costs) are amounts due from POSCO Energy of $29.9
million and $17.4 million at October 31, 2014 and 2013, respectively.
Note 4. Inventories
Inventories at October 31, 2014 and 2013 consisted of
the following:
Raw materials
Work-in-process (1)
Net inventories
2014
2013
$ 25,460
$20,599
30,435
35,586
$ 55,895
$56,185
(1) Work-in-process includes the standard components of inventory used to
build the typical modules or module components that are intended to be
used in future power plant orders or to service our service agreements.
Included in Work-in-process at October 31, 2014 and 2013 is $19.2 million
and $5.8 million, respectively, of completed standard components.
Raw materials consist mainly of various nickel powders and
steels, various other components used in producing cell stacks
and purchased components for balance of plant. Work-in-
process inventory is comprised of material, labor, and overhead
costs incurred to build fuel cell stacks and modules, which are
subcomponents of a power plant.
Raw materials and work in process are net of valuation allowances
of approximately $1.4 million and $1.4 million at October 31, 2014
and 2013, respectively.
Note 5. Property, Plant and Equipment
Property, plant and equipment at October 31, 2014 and 2013
consisted of the following:
2014
2013
Estimated
Useful Life
Land
$
524
$
524
—
Building and improvements
Machinery, equipment
and software
Furniture and fixtures
Power plants for use
under PPAs
9,117
8,679 10-26 years
75,868
73,051
3-8 years
2,955
2,899
10 years
996
8,216
3-10 years
Construction in progress
10,534
9,537
Less: Accumulated
depreciation
Property, plant and
equipment, net
99,994
102,906
(73,385)
(78,681)
$ 26,609
$ 24,225
(1) Total U.S. Government accounts receivable outstanding at October 31,
2014 is $1.7 million.
Annual Report 2014
41
Depreciation expense was $4.4 million, $4.1 million and
$5.2 million for the years ended October 31, 2014, 2013
and 2012, respectively.
Note 8. Other Assets, net
Other assets, net at October 31, 2014 and 2013 consisted of
the following:
Note 6. Goodwill and Intangible Assets
At October 31, 2014 and 2013, the Company had goodwill of $4.1
million and intangible assets of $9.6 million associated with the
Versa acquisition. Versa’s goodwill resulted from the purchase
price residual value method. All identifiable assets and liabilities
were deducted from the total purchase price and the difference
represents the implied fair value of goodwill. The intangible asset
represents indefinite lived in-process research and development
for which the fair value was determined utilizing the cost approach
which estimated the costs to replicate cumulative research and
development efforts associated with the development of SOFC
stationary power generation and had a 10 percent obsolescence
factor applied to account for improvements that could be made on
the current technology.
The Company has completed a qualitative assessment at July 31,
2014 and determined that the goodwill and indefinite-lived
intangible assets recorded as a result of the Versa acquisition
which are included within the Versa reporting unit are not impaired.
Note 7. Other Current Assets
Other current assets at October 31, 2014 and 2013 consisted of
the following:
Advance payments to vendors (1)
$2,372
$ 4,235
2014
2013
Debt issuance costs (2)
Deferred finance costs (3)
Notes receivable
Prepaid expenses and other (4)
Total
—
129
529
494
—
478
4,498
6,072
$7,528
$11,279
(1) Advance payments to vendors relate to inventory purchases.
(2) Represents the current portion of capitalized debt issuance costs
relating to the convertible debt issuance. The convertible notes have been
converted and the debt issuance costs have been adjusted to additional
paid in capital.
(3) Represents the current portion of direct deferred finance costs relating
to securing a $40.0 million loan facility and will be amortized over the
five-year life of the facility.
(4) Primarily relates to other prepaid vendor expenses including insurance,
rent and lease payments.
Long-term stack residual value (1)
Debt issuance costs (2)
Deferred finance costs (3)
Other
2014
$2,725
—
483
521
2013
$ 2,898
1,721
—
846
Other assets, net
$3,729
$ 5,465
(1) Relates to expected residual value for module exchanges performed
under the Company’s service agreements where the useful life extends
beyond the contractual term of the service agreement and the Company
obtains title for the module from the customer upon expiration or non-
renewal of the service agreement. If the Company does not obtain rights
to title from the customer, the cost of the module is expensed at the time
of the module exchange.
(2) Represents the long-term portion of debt issuance costs capitalized
relating to the convertible debt issuance. At October 31, 2014, the
convertible notes have been converted and the debt issuance costs
have been adjusted to additional paid in capital.
(3) Represents the long-term portion of direct deferred finance costs
relating to securing a $40.0 million loan facility and will be amortized
over the five-year life of the facility.
Note 9. Accrued Liabilities
Accrued liabilities at October 31, 2014 and 2013 consisted of
the following:
2014
2013
Accrued payroll and employee benefits
$ 4,432
$ 4,647
Accrued contract and operating costs
Reserve for product warranty costs (1)
Reserve for service agreement costs
Reserve for B1200 repair and upgrade
program and modules due
POSCO Energy (2)
34
1,156
3,882
—
Accrued taxes, legal, professional and other
2,562
87
860
4,186
7,267
4,865
$12,066
$21,912
(1) Activity in the accrued product warranty costs during the year ended
October 31, 2014 and 2013 included additions for estimates of potential
future warranty obligations of $2.4 million and $1.2 million, respectively,
on contracts in the warranty period and reductions related to actual
warranty spend of $1.2 million and $0.3 million, respectively, as contracts
progress through the warranty period or are beyond the warranty period.
(2) The balance of the accrual at October 31, 2013 related to three
replacement modules due to POSCO Energy, which were delivered in the
first quarter of 2014.
42
FuelCell Energy
Note 10. Debt and Leases
Debt at October 31, 2014 and 2013, consisted of the following:
Revolving credit facility
2014
2013
$
945
$ 6,500
Senior Unsecured Convertible Notes
Connecticut Development Authority Note
Connecticut Clean Energy and Finance
Investment Authority Note
Capitalized lease obligations
—
3,033
6,052
721
38,000
3,246
5,744
497
Total debt
$10,751
$ 53,987
Less: Unamortized debt discount
—
10,751
Less: Current portion of long-term debt
(1,439)
(3,106)
50,881
(6,931)
Long-term debt
$ 9,312
$ 43,950
proportional amount of unamortized debt issuance costs.
The change of control put redemption and interest make-
whole payment upon conversion features embedded in the
Notes required bifurcation from the host debt contract. As a
result of the conversion of all the outstanding Notes, there
is no remaining derivative balance at October 31, 2014. The
aggregate fair value of these derivatives at October 31, 2013 was
$4.7 million. The fair values were determined using a lattice-
based valuation model. In determining the fair value of these
bifurcated derivatives, various assumptions were used. Stock
price was projected assuming a log-normal distribution. The
stock volatility, the interest rate curve, the borrowing cost and
credit spread are all assumed to be deterministic. The value was
calculated as the difference between the value of the original
note and a note with no change of control or make-whole
payments upon conversion features. The inputs used to estimate
the fair value of the control put redemption feature ad make-
whole payment embedded derivatives include several significant
unobservable inputs (Level 3).
Aggregate annual principal payments under our loan
agreements (excluding payments relating to the revolving credit
facility) and capital lease obligations for the years subsequent to
October 31, 2014 are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
$ 493
537
351
2,368
5
6,052
$ 9,806
On July 30, 2014, the Company’s subsidiary, FuelCell Energy
Finance, LLC (“FuelCell Finance”) entered into a Loan
Agreement (the “Loan Agreement”) with NRG Energy, Inc.
(“NRG”). Pursuant to the Loan Agreement, NRG has extended
a $40.0 million revolving construction and term financing
facility to FuelCell Finance for the purpose of accelerating
project development by the Company and its subsidiaries.
FuelCell Finance and its subsidiaries may draw on the facility
to finance the construction of projects through the commercial
operating date of the power plants. FuelCell Finance has the
option to continue the financing term for each project after the
commercial operating date for a maximum term of five years
per project. The interest rate is 8.5 percent per annum for
construction-period financing and 8.0 percent thereafter. Fees
that were paid by FuelCell Finance to NRG for making the loan
facility available and related legal fees incurred were capitalized
and will be amortized straight-line over the life of the related
loan agreement, which is five years.
On June 25, 2013, the Company sold $38.0 million in aggregate
principal amount of 8.0% Senior Unsecured Convertible
Notes (“Notes”). During the year ended October 31, 2014, the
total $38.0 million of outstanding principal was converted by
Note holders and the Company issued 24.5 million shares of
common stock. In connection with the conversion of the Notes,
the Company recorded an increase in common stock and
additional paid in capital based on the carrying value of the
converted Notes which included the converted Notes principal,
a proportional amount of unamortized debt discount, and a
As a result of the Note conversions, 5.5 million shares were
issued and a payment of $0.3 million was made to settle the
make-whole payment. The total fair value of the shares issued
for the make-whole payment was $12.9 million which resulted
in a charge of $8.7 million and a reduction to the embedded
derivative liability of $4.6 million. The derivatives were included
in Long-term debt and other liabilities on the consolidated
balance sheets and the make-whole charge is included in
Other income (expense), net on the consolidated statements
of operations.
On August 1, 2014, the Company entered into a new revolving
credit facility with JPMorgan Chase Bank, N.A. (the “Bank”)
which has a total borrowing capacity of $4.0 million. This credit
facility replaces the Company’s previous credit facility with the
Bank. The credit facility is used for working capital to finance
the manufacture and production and subsequent export sale of
the Company’s products or services. The agreement has a one-
year term with renewal provisions and the current expiration
date is August 1, 2015. The outstanding principal balance of
the facility will bear interest, at the option of the Company of
either the one-month LIBOR plus 1.5 percent or the prime rate
of JPMorgan Chase. The facility is secured by certain working
capital assets and general intangibles, up to the amount of the
outstanding facility balance.
In April 2008, we entered into a 10-year loan agreement with
the Connecticut Development Authority to finance equipment
purchases associated with manufacturing capacity expansion
allowing for a maximum amount borrowed of $4.0 million. The
interest rate is 5.0 percent and the loan is collateralized by
the assets procured under this loan as well as $4.0 million of
additional machinery and equipment. Repayment terms require
interest and principal payments through May 2018.
On March 5, 2013 the Company closed on a long-term loan
agreement with the Connecticut Clean Energy and Finance
Investment Authority (CEFIA, now known as the CT Green
Bank) totaling $5.9 million in support of the Bridgeport Fuel
Cell Park project. The loan agreement carries an interest rate
of 5.0 percent. Interest only payments commenced in January
2014 and principal payments will commence on the eighth
anniversary of the project’s provisional acceptance date, which
is December 20, 2021, payable in forty-eight equal monthly
installments. Outstanding amounts are secured by future cash
flows from the Bridgeport Fuel Cell Park service agreement.
Annual Report 2014
43
We lease computer equipment under master lease agreements.
Lease payment terms are generally thirty-six months from the
date of acceptance for leased equipment.
On April 30, 2012, POSCO Energy purchased, and the Company
issued, 20.0 million shares of common stock at a price of $1.50
per share for proceeds of $30.0 million.
Note 11. Shareholders’ Equity (Deficit)
Common Stock and Warrant Issuances
During the year ended October 31, 2014, investors elected to
convert the total outstanding $38.0 million in aggregate princi-
pal of the 8.0% Senior Unsecured Convertible Notes. As a result
of these conversions, the Company issued 24.5 million shares
of common stock related to the conversions, 5.5 million shares
to settle the make-whole obligation and 0.3 million shares for
accrued interest.
On July 30, 2014, the Company entered into a Securities
Purchase Agreement with NRG and issued 14,644,352 shares
of common stock to NRG at a per share price of $2.39 for a total
purchase price of $35.0 million. The per share price was equal
to the per share closing NASDAQ market price on July 29,
2014. In conjunction with the sale of common stock to NRG,
the Company also issued a warrant to NRG. Pursuant to the
Warrant Agreement, NRG has the right to purchase up to 2.0
million shares of the Company’s common stock at an exercise
price of $3.35 per share. The Warrant has a term of three years
from the Closing Date. The warrants qualified for permanent
equity accounting treatment.
On January 23, 2014, the Company completed a public offering
of 23.0 million shares of common stock, including 3.0 million
shares sold pursuant to the full exercise of an over-allotment
option granted to the underwriters. All shares were offered by
the Company at a price of $1.50 per share. Total net proceeds to
the Company were approximately $32.0 million.
The Company may sell common stock on the open market
from time to time. The proceeds of these sales may be used for
general corporate purposes or to pay obligations related to the
Company’s outstanding Series I and Series B preferred shares.
During fiscal year 2014 and 2013, the Company sold 19.7 million
and 4.3 million shares, respectively, of the Company’s common
stock at prevailing market prices through periodic trades on the
open market and raised approximately $41.3 million and $5.6
million, respectively, net of fees.
On December 20, 2012, the Company issued 3.5 million shares
of common stock for the remaining 61 percent of outstanding
Versa shares.
On September 4, 2013, the Company entered into a co-
marketing agreement with NRG Energy (“NRG”) for the
marketing and sales of the Company’s power plants. The
terms of the agreement included the issuance of warrants to
NRG that permit NRG to purchase up to 5.0 million shares of
the Company’s common stock at predetermined prices based
on attaining minimum sales goals. The first tranche of 1.25
million warrants expired unvested on March 1, 2014. There
are two tranches remaining of warrants with varying strike
prices, varying minimum levels of qualifying orders, and
different vesting and expiration dates. The weighted average
strike price for the remaining 3.75 million warrants is $2.08.
The qualifying order vesting dates range from December 2014
through September 2015 and the expiration dates range from
December 2017 through August 2018. Any costs associated with
the warrants will be recorded as a reduction of potential future
revenue recorded under the arrangement. No warrants were
vested at October 31, 2014 and no expense has been recorded.
44
FuelCell Energy
On March 27, 2012, the Company completed a public offering
of 23.0 million shares of common stock, including 3.0 million
shares sold pursuant to the full exercise of an over-allotment
option previously granted to the underwriters. All shares were
offered by the Company at a price of $1.50 per share. Total net
proceeds to the Company were approximately $32.0 million.
Note 12. Redeemable Preferred Stock
Redeemable Series B Preferred Stock
We have 250,000 shares of our 5 percent Series B Cumulative
Convertible Perpetual Preferred Stock (Liquidation Preference
$1,000) (“Series B Preferred Stock”) authorized for issuance. At
October 31, 2014 and 2013, there were 64,020 shares of Series B
Preferred Stock issued and outstanding, with a carrying value of
$59.9 million. The following is a summary of certain provisions
of our Series B Preferred Stock.
• Ranking — Shares of Series B Preferred Stock rank with
respect to dividend rights and rights upon our liquidation,
winding up or dissolution:
• senior to shares of our common stock;
• junior to our debt obligations; and
• effectively junior to our subsidiaries’ (i) existing and future
liabilities and (ii) capital stock held by others.
• Dividends — The Series B Preferred Stock pays cumulative
annual dividends of $50 per share which are payable quarterly
in arrears on February 15, May 15, August 15 and November 15,
and if declared by the board of directors. Dividends accumulate
and are cumulative from the date of original issuance.
Accumulated dividends on the Series B Preferred Stock do not
bear interest.
The dividend rate is subject to upward adjustment as set forth
in the Certificate of Designation if we fail to pay, or to set apart
funds to pay, any quarterly dividend. The dividend rate is also
subject to upward adjustment as set forth in the Registration
Rights Agreement entered into with the Initial Purchasers if we
fail to satisfy our registration obligations with respect to the
Series B Preferred Stock (or the underlying common shares)
under the Registration Rights Agreement.
The dividend on the Series B Preferred Stock may be paid in
cash; or at the option of the holder, in shares of our common
stock, which will be registered pursuant to a registration
statement to allow for the immediate sale of these common
shares in the public market. Dividends of $3.2 million were paid
in cash in each of the years ended October 31, 2014, 2013 and
2012. There were no cumulative unpaid dividends at October 31,
2014 and 2013.
• Liquidation — The Series B Preferred Stock stockholders
are entitled to receive, in the event that we are liquidated,
dissolved or wound up, whether voluntary or involuntary,
$1,000 per share plus all accumulated and unpaid dividends
to the date of that liquidation, dissolution, or winding up
(“Liquidation Preference”). Until the holders of Series B
Preferred Stock receive their Liquidation Preference in full, no
payment will be made on any junior shares, including shares of
our common stock. After the Liquidation Preference is paid in
full, holders of the Series B Preferred Stock will not be entitled
to receive any further distribution of our assets. At October 31,
2014 and 2013, the Series B Preferred Stock had a Liquidation
Preference of $64.0 million.
• Conversion Rights — Each Series B Preferred Stock share
may be converted at any time, at the option of the holder, into
85.1064 shares of our common stock (which is equivalent to an
initial conversion price of $11.75 per share) plus cash in lieu of
fractional shares. The conversion rate is subject to adjustment
upon the occurrence of certain events, as described below, but
will not be adjusted for accumulated and unpaid dividends. If
converted, holders of Series B Preferred Stock do not receive
a cash payment for all accumulated and unpaid dividends;
rather, all accumulated and unpaid dividends are canceled.
We may, at our option, cause shares of Series B Preferred
Stock to be automatically converted into that number of shares
of our common stock that are issuable at the then prevailing
conversion rate. We may exercise our conversion right only if
the closing price of our common stock exceeds 150 percent
of the then prevailing conversion price ($11.75 at October 31,
2014) for 20 trading days during any consecutive 30 trading day
period, as described in the Certificate of Designation.
If holders of Series B Preferred Stock elect to convert their
shares in connection with certain fundamental changes,
as defined, we will in certain circumstances increase the
conversion rate by a number of additional shares of common
stock upon conversion or, in lieu thereof, we may in certain
circumstances elect to adjust the conversion rate and
related conversion obligation so that shares of our Series B
Preferred Stock are converted into shares of the acquiring or
surviving company, in each case as described in the Certificate
of Designation.
The adjustment of the conversion price is to prevent dilution
of the interests of the holders of the Series B Preferred
Stock from certain dilutive transactions with holders of
common stock.
• Redemption — We do not have the option to redeem the shares
of Series B Preferred Stock. However, holders of the Series B
Preferred Stock can require us to redeem all or part of
their shares at a redemption price equal to the Liquidation
Preference of the shares to be redeemed in the case of a
fundamental change, as defined.
We may, at our option, elect to pay the redemption price in
cash or, in shares of our common stock valued at a discount
of 5 percent from the market price of shares of our common
stock, or any combination thereof. Notwithstanding the
foregoing, we may only pay such redemption price in shares of
our common stock that are registered under the Securities Act
of 1933 and eligible for immediate sale in the public market by
non-affiliates of the Company.
• Voting Rights — Holders of Series B Preferred Stock currently
have no voting rights.
Series 1 Preferred Shares
In connection with our acquisition of Global Thermoelectric Inc.
(“Global”) in November 2003, we acquired the obligations of
Global pursuant to its outstanding 1,000,000 Series 2 Preferred
Shares (“Series 2 Preferred Shares”) which continued to be
held by Enbridge, Inc. With the sale of Global in May of 2004, the
Series 2 Preferred Shares were canceled, and replaced with
substantially equivalent Series 1 Preferred Shares (“Series 1
Preferred Shares”) issued by FuelCell Energy Ltd. (“FCE Ltd”).
On March 31, 2011, the Company entered into an agreement with
Enbridge, Inc. (“Enbridge”) to modify the Class A Cumulative
Redeemable Exchangeable Preferred Shares agreement (the
“Series 1 preferred share agreement”) between FCE Ltd,
a wholly-owned subsidiary of FuelCell, and Enbridge, the
sole holder of the Series 1 preferred shares. Consistent with
the previous Series 1 preferred share agreement, FuelCell
continues to guarantee the return of principal and dividend
obligations of FCE Ltd. to the Series 1 preferred shareholders
under the modified agreement.
The modified terms of the Series 1 Preferred Shares provides
for payments of (i) annual dividend payments of Cdn. $500,000
and (ii) annual return of capital payments of Cdn. $750,000.
These payments commenced on March 31, 2011 and will end on
December 31, 2020. On December 31, 2020, the amount of all
accrued and unpaid dividends on the Series 1 Preferred Shares
of Cdn. $21.1 million and the balance of the principal redemption
price of Cdn. $4.4 million shall be paid to the holders of the
Series 1 Preferred Shares. FCE Ltd. has the option of making
dividend payments in the form of common stock or cash under
the Series 1 Preferred Shares provisions.
The Company assessed the accounting guidance related to the
classification of the preferred shares after the modification on
March 31, 2011 and concluded that the preferred shares should
be classified as a mandatorily redeemable financial instrument,
and presented as a liability on the consolidated balance sheet.
The Company made its scheduled payments of Cdn. $1.3 million,
Cdn. $1.3 million and Cdn. $4.4 million during fiscal year 2014,
2013 and 2012, under the terms of the modified agreement,
including the recording of interest expense, which reflects the
fair value discount, of approximately Cdn. $2.1 million, Cdn.
$2.0 million and Cdn. $2.0 million, respectively. At October 31,
2014 and 2013, the carrying value of the Series 1 Preferred
shares was Cdn. $15.8 million ($14.2 million USD) and Cdn.
$15.0 million ($14.3 million USD), respectively, and is classified
as preferred stock obligation of subsidiary on the consolidated
balance sheets.
In addition to the above, the significant terms of the Series 1
Preferred Shares include the following:
• Voting Rights —The holders of the Series 1 Preferred Shares
are not entitled to any voting rights.
• Dividends — Dividend payments can be made in cash or
common stock of the Company, at the option of FCE Ltd., and
if common stock is issued it may be unregistered. If FCE Ltd.
elects to make such payments by issuing common stock of
the Company, the number of common shares is determined
by dividing the cash dividend obligation by 95 percent of the
volume weighted average price in US dollars at which board
lots of the common shares have been traded on NASDAQ
during the 20 consecutive trading days preceding the end
of the calendar quarter for which such dividend in common
shares is to be paid converted into Canadian dollars
using the Bank of Canada’s noon rate of exchange on the
day of determination.
• Redemption — The Series 1 Preferred Shares are redeemable
by FCE Ltd. for Cdn. $25 per share less any amounts paid as
a return of capital in respect of such share plus all unpaid
dividends and accrued interest. Holders of the Series 1
Preferred Shares do not have any mandatory or conditional
redemption rights.
Annual Report 2014
45
• Liquidation or Dissolution — In the event of the liquidation
or dissolution of FCE Ltd., the holders of Series 1 Preferred
Shares will be entitled to receive Cdn. $25 per share less any
amounts paid as a return of capital in respect of such share
plus all unpaid dividends and accrued interest. The Company
has guaranteed any liquidation obligations of FCE Ltd.
• Exchange Rights — A holder of Series 1 Preferred Shares
has the right to exchange such shares for fully paid and non-
assessable common stock of the Company at the following
exchange prices:
• Cdn. $129.46 per share of common stock after July 31, 2010
until July 31, 2015;
• Cdn. $138.71 per share of common stock after July 31, 2015
until July 31, 2020; and
are viewed as another product line that contributes to the
development, design, production and sale of fuel cell products,
however, it is not considered a separate operating segment.
Due to the nature of the internal financial and operational
reports reviewed by the chief operating decision maker, who
does not review and assess financial information at a discrete
enough level to be able to assess performance of research
and development activities as if it operated as a stand-alone
business segment, we have identified one business segment:
fuel cell power plant production and research.
Revenues, by geographic location (based on the customer’s
ordering location) for the years ended October 31, 2014, 2013
and 2012 was as follows:
• at any time after July 31, 2020, at a price equal to 95 percent
of the then current market price (in Cdn. $) of the Company’s
common stock at the time of conversion.
United States
South Korea
The exchange rates set forth above shall be adjusted if
the Company: (i) subdivides or consolidates the common
stock; (ii) pays a stock dividend; (iii) issues rights, options
or other convertible securities to the Company’s common
stockholders enabling them to acquire common stock at a
price less than 95 percent of the then-current price; or (iv)
fixes a record date to distribute to the Company’s common
stockholders shares of any other class of securities,
indebtedness or assets.
England
Indonesia
Germany
Canada
Spain
Total
2014
2013
2012
$ 52,765 $ 80,199 $ 26,929
124,669
101,928
92,163
119
—
869
820
1,051
2,036
1,061
—
1,503
1,912
80
147
128
175
—
$180,293 $187,658 $120,603
Derivative liability related to Series 1 Preferred Shares
The conversion feature and variable dividend contained in the
terms of the Series 1 Preferred Shares are not clearly and
closely related to the characteristics of the Series 1 Preferred
Shares. Accordingly, these features qualify as embedded deriva-
tive instruments and are required to be accounted for separately
and recorded as derivative financial instruments at fair value.
The conversion feature is valued using a lattice model. Based
on the pay-off profiles of the Series 1 Preferred Shares, it is
assumed that we will exercise the call option to force conversion
in 2020. Conversion after 2020 delivers a fixed pay-off to
the investor, and is modeled as a fixed payment in 2020. The
cumulative dividend is modeled as a quarterly cash dividend
component (to satisfy minimum dividend payment requirement),
and a one-time cumulative dividend payment in 2020.
The variable dividend is valued using a Monte Carlo simulation
model.
The assumptions used in these valuation models include
historical stock price volatility, risk-free interest rate and a
credit spread based on the yield indexes of technology high yield
bonds, foreign exchange volatility as the security is denominated
in Canadian dollars, and the closing price of our common stock.
The aggregate fair value of these derivatives included within
long-term debt and other liabilities on the consolidated balance
sheets at October 31, 2014 and 2013 was $0.7 million.
Note 13. Segment Information
We are engaged in the development, design, production, sale
and servicing of high temperature fuel cells for clean electric
power generation. Critical to the success of our business is,
among other things, our research and development efforts,
both through customer-sponsored projects and Company-
sponsored projects. The research and development activities
Service agreement revenue which is included within Service
agreements and license revenues on the consolidated
statement of operations was $21.7 million, $24.0 million and
$18.2 million, for the years ended October 31, 2014, 2013 and
2012, respectively.
Long-lived assets located outside of the United States at
October 31, 2014 and 2013 are not significant individually or in
the aggregate.
Note 14. Benefit Plans
We have shareholder approved equity incentive plans, a
shareholder approved Section 423 Stock Purchase Plan (the
“ESPP”) and an employee tax-deferred savings plan, which are
described in more detail below.
Equity Incentive Plans
The Board adopted the 2006 and 2010 Equity Incentive Plans
(collectively, the “Equity Plans”). Pursuant to the Equity Plans,
18.0 million shares of common stock were reserved for issu-
ance. The Board is authorized to grant incentive stock options,
nonstatutory stock options, stock appreciation rights (“SARs”),
restricted stock awards (“RSAs”), restricted stock units
(“RSUs”), performance units, performance shares, dividend
equivalent rights and other stock-based awards to our officers,
key employees and non-employee directors. Stock options,
RSAs and SARs have restrictions as to transferability. Stock
option exercise prices are fixed by the Board but shall not be
less than the fair market value of our common stock on the date
of the grant. SARs may be granted in conjunction with stock
options. Stock options generally vest ratably over 4 years and
expire 10 years from the date of grant. During the second
quarter of fiscal year 2013, the Company established an
international award program to provide RSUs for the benefit
of certain employees outside the United States. At October 31,
2014, there were 7.5 million shares available for grant. As of
46
FuelCell Energy
October 31, 2014 equity awards outstanding consisted of
incentive stock options, nonstatutory stock options, RSAs
and RSUs. The 1998 Equity Incentive Plan remains in effect
only to the extent of awards outstanding under the plan as of
October 31, 2014.
Share-based compensation was reflected in the consolidated
statements of operations as follows:
Expected life (in years)
Risk free interest rate
Volatility
Dividends yield
2014
2013
2012
7.0
2.3%
7.0
1.2%
7.0
1.6%
81.1%
76.5%
75.5%
—%
—%
—%
Cost of revenues
General and
administrative expense
Research and
development expense
Total share-based
compensation
2014
$ 751
2013
$ 584
2012
$ 587
1,718
1,325
1,182
The expected life is the period over which our employees are
expected to hold the options and is based on historical data for
similar grants. The risk free interest rate is based on the expected
U.S. Treasury rate over the expected life. Expected volatility is
based on the historical volatility of our stock. Dividend yield is
based on our expected dividend payments over the expected life.
436
308
280
The following table summarizes our stock option activity for the
year ended October 31, 2014:
$2,905
$2,217
$2,049
Stock Options
We account for stock options awarded to employees and
non-employee directors under the fair value method. The fair
value of stock options is estimated on the grant date using
the Black-Scholes option valuation model and the following
weighted-average assumptions:
Options
Weighted Average
Option
Price
Shares
Outstanding at October 31, 2013
3,181,464
Granted
Cancelled
146,841
(300,225)
Outstanding at October 31, 2014
3,028,080
$ 6.42
$ 2.42
$12.18
$ 5.66
The weighted average grant-date fair value per share for options
granted during the years ended October 31, 2014, 2013 and 2012
was $1.79, $0.66 and $0.89, respectively. There were no options
exercised in fiscal year 2014, 2013 or 2012.
The following table summarizes information about stock options outstanding and exercisable at October 31, 2014:
Range of
Exercise Prices
$0.26 — $ 5.10
$5.11 — $ 9.92
$9.93 — $14.74
Options Outstanding
Weighted Average
Remaining
Contractual Life
Weighted Average
Exercise
Price
7.0
2.4
1.5
4.3
$ 1.89
$ 8.09
$10.60
$ 5.66
Number
outstanding
1,367,028
1,218,404
442,648
3,028,080
Options Exercisable
Number
exercisable
1,293,606
1,218,404
442,648
2,954,658
Weighted Average
Exercise
Price
$ 1.86
$ 8.09
$10.60
$ 5.74
There was no intrinsic value for options outstanding and exercisable at October 31, 2014.
Restricted Stock Awards and Units
The following table summarizes our RSA and RSU activity for the
year ended October 31, 2014:
Restricted Stock Awards and Units
Outstanding at October 31, 2013
Granted
Vested
Forfeited
Shares
5,036,104
1,410,479
(1,654,775)
(67,728)
Outstanding at October 31, 2014
4,724,080
Weighted
Average
Price
$1.20
$2.39
$1.36
$1.24
$1.49
RSA and RSU expense is based on the fair value of the award
at the date of grant and is amortized over the vesting period,
which is generally four years. At October 31, 2014, there were 4.7
million outstanding RSAs and RSUs had an average remaining
life of 2.5 years and an aggregate intrinsic value of $8.8 million.
At October 31, 2014, total compensation cost related to
nonvested stock options and RSAs including RSUs not yet
recognized was $0.1 million and $5.5 million, respectively,
which is expected to be recognized over the next 0.4 and
2.5 years, respectively, on a weighted-average basis.
Stock Awards
Stock may be issued to employees as part of the annual
incentive bonus. During fiscal year 2012, we issued 550,355
shares of common stock, respectively, in lieu of cash bonuses,
with a value of $0.6 million to fulfill the accrued obligation
Annual Report 2014
47
from the prior fiscal year. Beginning in fiscal year 2013, the
bonus was paid in cash to fulfill the accrued obligation from the
prior fiscal year and no stock awards were issued for fiscal year
2013 and fiscal year 2014.
Note 15. Income Taxes
The components of loss from continuing operations before
income taxes for the years ended October 31, 2014, 2013, and
2012 were as follows:
During the years ended October 31, 2014 and 2013, we awarded
11,570 shares and 29,787 shares, respectively, of fully vested,
unrestricted shares of common stock to the independent
members of our board of directors as a component of board
of director compensation which resulted in recognizing $0.1
million or less of expense for each of the respective years.
Employee Stock Purchase Plan
Under the ESPP, eligible employees have the right to purchase
shares of common stock at the lesser of (i) 85 percent of the last
reported sale price of our common stock on the first business
day of the offering period, or (ii) 85 percent of the last reported
sale price of the common stock on the last business day of the
offering period, in either case rounded up to avoid impermissible
trading fractions. Shares issued pursuant to the ESPP contain a
legend restricting the transfer or sale of such common stock for
a period of six months after the date of purchase. At October 31,
2014, there were 282,209 shares of common stock available for
issuance under the ESPP.
ESPP activity for the year ended October 31, 2014 was as follows:
ESPP
Balance at October 31, 2013
Issued at $0.85
Issued at $1.13
Available for issuance at October 31, 2014
Number of
Shares
549,584
(124,334)
(143,041)
282,209
The fair value of shares under the ESPP was determined at the
grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions:
Expected life (in years)
Risk free interest rate
Volatility
Dividends yield
2014
2013
2012
0.5
0.5
0.5
0.08% 0.15% 0.07%
75.0% 75.0% 92.0%
—%
—%
—%
The weighted-average fair value of shares issued under the
ESPP during fiscal year 2014 was $1.00 per share.
Employee Tax-Deferred Savings Plans
We offer a 401(k) plan (the “Plan”) to all full-time employees
that provides for tax-deferred salary deductions for eligible
employees (beginning the first month following an employee’s hire
date). Employees may choose to make voluntary contributions
of their annual compensation to the Plan, limited to an annual
maximum amount as set periodically by the Internal Revenue
Service. Employee contributions are fully vested when made.
Under the Plan, there is no option available to the employee to
receive or purchase our common stock. After suspending our
matching contribution in February 2009, we commenced matching
contributions of 1 percent in January 2012 and increased the
amount to 2 percent in January 2013. Matching contributions under
the Plan were $0.3 million and $0.3 million for the years ended
October 31, 2014 and 2013, respectively.
48
FuelCell Energy
U.S.
Foreign
2014
2012
$ (35,167) $ (31,044) $ (35,535)
2013
(3,228)
(3,904)
(302)
Loss before income taxes
$ (38,395) $ (34,948) $ (35,837)
There was current income tax expense of $0.5 million, $0.4
million and $0.07 million related to foreign withholding taxes and
income taxes in South Korea and no deferred federal income tax
expense (benefit) for each of the years ended October 31, 2014,
2013 and 2012, respectively. Franchise tax expense, which is
included in administrative and selling expenses, was $0.2 million
for the years ended October 31, 2014, 2013 and 2012, respectively.
The reconciliation of the federal statutory income tax rate to our
effective income tax rate for the years ended October 31, 2014,
2013 and 2012 was as follows:
2014
2013
2012
Statutory federal income tax rate (34.0)%
Increase (decrease) in income
taxes resulting from:
State taxes net of
Federal benefits
(1.8)%
(34.0)%
(34.0)%
(1.7)%
(2.6)%
1.0%
0.9%
0.2%
Foreign withholding tax
Net operating loss adjustment
and true-ups
(25.4)%
Nondeductible expenditures
14.5%
Change in state tax rate
(0.8)%
10.5%
Other, net
Valuation allowance
Effective income tax rate
0.4%
47.1%
1.0%
0.1%
0.8%
4.1%
(34.9)%
1.2%
(6.8)%
(0.1)%
20.3%
77.2%
1.0%
0.2%
Our deferred tax assets and liabilities consisted of the following
at October 31, 2014 and 2013:
Deferred tax assets:
Compensation and benefit accruals
Bad debt and other reserves
Capital loss and tax credit
carryforwards
Net operating losses
(domestic and foreign)
Deferred license revenue
Lower of cost or market
inventory reserves
Investment in partnerships
Accumulated depreciation
Gross deferred tax assets:
Valuation allowance
Deferred tax assets after
valuation allowance
Deferred tax liability:
2014
2013
$ 7,591 $
1,859
6,452
1,841
13,486
13,582
247,170
8,894
228,154
8,033
521
404
590
509
419
625
280,515
259,615
(280,515)
(259,615)
—
—
In process research and development
(3,377)
(3,377)
Net deferred tax liability
$ (3,377) $ (3,377)
We continually evaluate our deferred tax assets as to whether
it is “more likely than not” that the deferred tax assets will
be realized. In assessing the realizability of our deferred tax
assets, management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax
planning strategies. Based on the projections for future taxable
income over the periods in which the deferred tax assets are
realizable, management believes that significant uncertainty
exists surrounding the recoverability of the deferred tax assets.
As a result, we recorded a full valuation allowance against our
deferred tax assets. Approximately $4.3 million of the valuation
allowance will reduce additional paid in capital upon subsequent
recognition of any related tax benefits. In connection with our
acquisition of Versa we recorded a deferred tax liability for
IPR&D, which has an indefinite life. Accordingly, we do not
consider it to be a source of taxable income in evaluating the
recoverability of our deferred tax assets.
At October 31, 2014, we had federal and state NOL carryforwards
of $655.0 million and $396.0 million, respectively, for which a
portion of the NOL has not been recognized in connection with
share-based compensation. The Federal NOL carryforwards
expire in varying amounts from 2020 through 2034 while state
NOL carryforwards expire in varying amounts from fiscal year
2014 through 2034. Additionally, we had $10.4 million of state tax
credits available, of which $1.0 million expires in fiscal year 2018.
The remaining credits do not expire.
Certain transactions involving the Company’s beneficial
ownership occurred in fiscal year 2014 and prior years, which
could have resulted in a stock ownership change for purposes of
Section 382 of the Internal Revenue Code of 1986, as amended. We
have completed a detailed Section 382 study in fiscal year 2014 to
determine if any of our NOL and credit carryovers will be subject
to limitation. Based on that study we have determined that there
was no ownership change as of the end of our fiscal year 2014
under Section 382. The acquisition of VERSA in the prior fiscal
year triggered a Section 382 ownership change which will limit
the future usage of some of the Federal and state NOLs. The
Federal and state NOLs that are non 382-limited are included in
the NOL deferred tax assets as disclosed.
As discussed in Note 1, the Company’s financial statements
reflect expected future tax consequences of uncertain tax
positions that the Company has taken or expects to take on a tax
return (including a decision whether to file or not file a return in
a particular jurisdiction) presuming the taxing authorities’ full
knowledge of the position and all relevant facts.
The liability for unrecognized tax benefits at October 31, 2014
and 2013 was $15.7 million. This amount is directly associated
with a tax position taken in a year in which federal and
state NOL carryforwards were generated. Accordingly, the
amount of unrecognized tax benefit has been presented as a
reduction in the reported amounts of our federal and state NOL
carryforwards. It is our policy to record interest and penalties
on unrecognized tax benefits as income taxes; however, because
of our significant NOLs, no provision for interest or penalties has
been recorded.
We file income tax returns in the U.S. and various states, primarily
Connecticut and California, as well as income tax returns
required internationally for South Korea and Germany. We are
open to examination by the Internal Revenue Service and various
states in which we file for fiscal years 1998 to the present. We are
currently not under any income tax examinations.
Note 16. Earnings Per Share
Basic earnings (loss) per common share (“EPS”) are generally calculated as income (loss) available to common shareholders
divided by the weighted average number of common shares outstanding. Diluted EPS is generally calculated as income (loss)
available to common shareholders divided by the weighted average number of common shares outstanding plus the dilutive
effect of common share equivalents.
The calculation of basic and diluted EPS for the years ended October 31, 2014, 2013 and 2012 was as follows:
Numerator
Net loss
Net loss attributable to noncontrolling interest
Preferred stock dividend
Net loss to common shareholders
Denominator
Weighted average basic common shares
Effect of dilutive securities (1)
Weighted average diluted common shares
Basic loss per share
Diluted loss per share (1)
2014
2013
2012
$(38,883)
$(35,319)
$(35,906)
758
(3,200)
961
(3,200)
411
(3,201)
$(41,325)
$(37,558)
$(38,696)
245,686,983
186,525,001
165,471,261
—
—
—
245,686,983
186,525,001
165,471,261
$(0.17)
$(0.17)
$(0.20)
$(0.20)
$(0.23)
$(0.23)
(1) Due to the net loss to common shareholders in each of the years presented above, diluted earnings per share was computed without consideration
to potentially dilutive instruments as their inclusion would have been antidilutive. Potentially dilutive instruments include stock options, warrants,
unvested RSAs and RSUs, convertible preferred stock and convertible notes. At October 31, 2014, 2013 and 2012, there were options to purchase 3.0
million, 3.2 million and 3.1 million shares of common stock, respectively, and at October 31, 2014 and 2013, there were warrants to purchase 5.75
million and 5.0 million, respectively, shares of common stock that were not included in the calculation of diluted earnings per share as they would be
antidiulutive. There were no warrants outstanding at October 31, 2012.
Annual Report 2014
49
Note 17. Commitments and Contingencies
Lease agreements
At October 31, 2014 and 2013, we had capital lease obligations of
$0.7 million and $0.5 million, respectively. Lease payment terms
are thirty-six months from the date of lease.
We also lease certain computer and office equipment and
manufacturing facilities in Torrington, and Danbury, Connecticut
under operating leases expiring on various dates through 2015.
Rent expense was $1.7 million, $1.6 million and $1.6 million for
the years ended October 2014, 2013 and 2012, respectively.
Non-cancelable minimum payments applicable to operating and
capital leases at October 31, 2014 were as follows:
2015
2016
2017
2018
2019
Thereafter
Total
Operating
Leases
$1,978
1,087
711
578
330
318
Capital
Leases
$276
310
110
20
5
—
$5,002
$721
Service and warranty agreements
Under the provisions of our service agreements, we provide
services to maintain, monitor, and repair customer power plants
to meet minimum operating levels. Under the terms of our
service agreements, the power plant must meet a minimum
operating output during the term. If minimum output falls below
the contract requirement, we may be subject to performance
penalties and/or may be required to repair or replace the
customer’s fuel cell module. An estimate is not recorded for a
potential performance guarantee liability until a performance
issue has occurred on a particular power plant. At that point, the
actual power plant’s output is compared against the minimum
Note 18. Supplemental Cash Flow Information
The following represents supplemental cash flow information:
Cash interest paid
Income taxes paid
Noncash financing and investing activity:
output guarantee and an accrual is recorded. The review of
power plant performance is updated for each reporting period
to incorporate the most recent performance of the power plant
and minimum output guarantee payments made to customers, if
any. The Company has provided for an accrual for performance
guarantees, based on actual historical fleet performance, which
totaled $0.8 million and $0.5 million at October 31, 2014 and
2013, respectively, and is recorded in Accrued Liabilities.
Our loss accrual on service agreements, excluding the
accrual for performance guarantees, totaled $3.0 million
and $3.7 million at October 31, 2014 and 2013, respectively,
and is recorded in Accrued Liabilities. Our accrual estimates
are performed on a contract-by-contract basis and include
cost assumptions based on what we anticipate the service
requirements will be to fulfill obligations for each contract.
Power purchase agreements
Under the terms of our PPAs, customers agree to purchase
power from our fuel cell power plants at negotiated rates.
Electricity rates are generally a function of the customers’
current and future electricity pricing available from the grid.
As owner of the power plants, we are responsible for all
operating costs necessary to maintain, monitor and repair the
power plants. Under certain agreements, we are also responsible
for procuring fuel, generally natural gas, to run the power
plants. We are typically not required to produce minimum
amounts of power under our PPA agreements and we typically
have the right to terminate PPA agreements by giving written
notice to the customer, subject to certain exit costs.
Other
We are involved in legal proceedings, claims and litigation
arising out of the ordinary conduct of our business. Although
we cannot assure the outcome, management presently believes
that the result of such legal proceedings, either individually, or
in the aggregate, will not have a material adverse effect on our
consolidated financial statements, and no material amounts
have been accrued in our consolidated financial statements with
respect to these matters.
Year Ended October 31,
2014
$ 1,892
2013
$ 280
35
17
2012
$302
—
Common stock issued for convertible note conversions and make-whole settlements
46,186
—
—
Common stock issued for employee annual incentive bonus
Common stock issued for Employee Stock Purchase Plan in settlement of prior year accrued
employee contributions
Common stock issued for acquisition of Versa
Accrued sale of common stock, cash received in a subsequent period
—
106
—
85
— 3,563
633
509
550
84
—
—
50
FuelCell Energy
Note 19. Quarterly Information (Unaudited)
Selected unaudited financial data for each quarter of fiscal year 2014 and 2013 is presented below. We believe that the information
reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented.
Year ended October 31, 2014
Revenues
Gross profit
Loss on operations
Net loss
Preferred stock dividends
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
$ 44,434
$ 38,274
$43,176
$ 54,409
$180,293
2,199
1,611
(7,570)
(8,773)
(10,815)
(16,039)
(800)
(800)
3,961
(6,000)
(7,139)
(800)
5,955
(4,968)
(4,890)
(800)
13,726
(27,311)
(38,883)
(3,200)
Net loss to common shareholders
(11,404)
(16,643)
(7,778)
(5,500)
(41,325)
Net loss to common shareholders per basic
and diluted common share (1)
$ (0.06)
$
(0.07)
$ (0.03)
$ (0.02)
$
(0.17)
Year ended October 31, 2013
Revenues
Gross profit (loss)
Loss on operations
Net loss
Preferred stock dividends
Net loss to common shareholders
Net loss to common shareholders per basic
and diluted common share (1)
$ 36,358
$ 42,436
$ 53,707
$ 55,157
$ 187,658
(2,311)
(11,070)
(11,879)
(800)
(12,481)
2,314
(7,197)
(7,629)
(800)
(8,165)
4,522
(4,594)
(5,814)
(800)
2,597
(6,952)
(9,997)
(800)
7,122
(29,813)
(35,319)
(3,200)
(6,412)
(10,500)
(37,558)
$
(0.07)
$ (0.04)
$ (0.03)
$ (0.06)
$
(0.20)
[1] The full year net loss to common shareholders basic and diluted share may not equal the sum of the quarters due to weighting of outstanding shares.
FORWARD-LOOKING STATEMENT DISCLAIMER
When used in this report, the words “expects”, “anticipates”, “estimates”, “should”, “will”, “could”, “would”, “may”, and similar
expressions are intended to identify forward-looking statements. Such statements relate to the development and commercialization
by FuelCell Energy, Inc. and its subsidiaries (“FuelCell Energy”, “Company”, “we”, “us” and “our”) of fuel cell technology and
products, future funding under government research and development contracts, future financing for projects including publicly
issued bonds, equity and debt investments by investors and commercial bank financing, the expected cost competitiveness of our
technology, and our ability to achieve our sales plans and cost reduction targets. These and other forward-looking statements
contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results to differ
materially from those forward-looking statements, including, without limitation, general risks associated with product development
and manufacturing, changes in the utility regulatory environment, potential volatility of energy prices, government appropriations,
the ability of the government to terminate its development contracts at any time, rapid technological change, competition and
changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the
United States, as well as other risks contained in the Form 10-K filed with the U.S. SEC. We cannot assure you that we will be able
to meet any of our development or commercialization schedules, that the government will appropriate the funds anticipated by us
under our government contracts, that the government will not exercise its right to terminate any or all of our government contracts,
that any of our new products or technology, once developed, will be commercially successful, that our existing DFC power plants
will remain commercially successful, or that we will be able to achieve any other result anticipated in any other forward-looking
statement contained herein. The forward-looking statements contained herein speak only as of the date of this report. Except for
ongoing obligations to disclose material information under the federal securities laws, we expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any such statement to reflect any change in our expectations or any
change in events, conditions or circumstances on which any such statement is based.
Annual Report 2014
51
SHAREHOLDER INFORMATION
Corporate Offices
FuelCell Energy, Inc.
3 Great Pasture Road
Danbury, CT 06813-1305
Form 10-K
A copy of the Annual Report on Form 10-K for the year ended
October 31, 2014, which is filed with the U.S. Securities and
Exchange Commission, can be accessed from our website
at www.fuelcellenergy.com. We will provide, without charge,
a copy of the Annual Report on Form 10-K for the year ended
October 31, 2014. You may request a copy by writing to Investor
Relations at the address below.
Company Contacts
For additional information about FuelCell Energy, Inc.
please contact:
Investor Relations
FuelCell Energy, Inc.
Shareholder Relations
3 Great Pasture Road
Danbury, CT 06813-1305
IR@fce.com
Corporate Website
www.fuelcellenergy.com
Registrar and Transfer Agent
Shareholders with questions regarding lost certificates,
address changes or changes of ownership should contact:
American Stock Transfer & Trust Company, LLC
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
(800) 937.5449
(718) 921.8124
info@amstock.com
www.amstock.com
Auditors
KPMG LLP
Legal Counsel
Robinson & Cole LLP
Annual Meeting
The Annual Meeting of Shareholders will be held Thursday,
April 2, 2015 at 10:00 a.m. at:
The Hartford Marriott Downtown
200 Columbus Boulevard
Hartford, CT 06103-2807
Common Stock Price Information
Our common stock has been publicly traded since June 25,
1992. From September 21, 1994 through February 25, 1997,
it was quoted on the NASDAQ National Market, and from
February 26, 1997 through June 6, 2000, it was traded on the
American Stock Exchange. Our common stock trades under
the symbol “FCEL” on the Nasdaq Global Market. The following
table sets forth the high and low sale prices for our common
stock for the fiscal periods indicated as reported by the Nasdaq
Global Market during the indicated quarters.
Common Stock Price
High
Low
First Quarter
(through December 31, 2014)
Year Ended October 31, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended October 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$2.30
$1.45
$1.95
4.74
2.65
2.84
$1.30
1.15
1.64
1.57
$1.28
1.37
1.86
1.55
$ 0.83
0.84
1.00
1.12
On December 31, 2014, the closing price of our common stock on
the Nasdaq Global Market was $1.54 per share. At December 31,
2014, there were 501 holders of record of our common stock. This
does not include the number of persons whose stock is in nominee
or “street” name accounts through brokers.
We have never paid a cash dividend on our common stock and
do not anticipate paying any cash dividends on common stock
in the foreseeable future. In addition, the terms of our Series
B preferred shares prohibit the payment of dividends on our
common stock unless all dividends on the Series B preferred
stock have been paid in full.
Non-Discrimination Statement
FuelCell Energy, Inc. is an Equal Opportunity/Affirmative Action employer. In order to provide equal employment and advancement opportunities to
all individuals, our employment decisions will be based on merit, qualifications and abilities. We do not discriminate in employment opportunities
or practices on the basis of race, color, religion, creed, age, sex, marital status, national origin, ancestry, past or present history of mental disorder,
mental retardation, learning disabilities, physical disability, sexual orientation, gender identification, genetic information, or any other characteristic
protected by law.
52
FuelCell Energy
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
OFFICERS
John A. Rolls 1, 2, 3, 5
Managing Partner of Core Capital Group,
a private investment partnership
Arthur A. Bottone 2, 6
President and Chief Executive Officer of FuelCell Energy, Inc.
Arthur A. Bottone
President and Chief Executive Officer
Michael S. Bishop
Senior Vice President, Chief Financial Officer,
Corporate Secretary and Treasurer
Richard A. Bromley 4, 6
Retired Vice President—Law and Government Affairs for AT&T
Anthony F. Rauseo
Senior Vice President and Chief Operating Officer
James H. England 3, 4, 5
Corporate Director and Chief Executive Officer of Stahlman—
England Irrigation, Inc.
William A. Lawson 2, 4, 5
Retired Chairman of the Board of Newcor, Inc.
Christopher S. Sotos 6
Senior Vice President of Strategy and Mergers and Acquisitions
for NRG Energy, Inc.
Togo Dennis West, Jr. 3, 4, 6
Former U.S. Secretary of the Army and
U.S. Secretary of Veterans Affairs
1 Chairman of the Board of Directors
2 Executive Committee
3 Audit and Finance Committee
4 Compensation Committee
5 Nominating and Corporate Governance Committee
6 Government Affairs Committee
Statements in this Report relating to matters not historical are forward-looking statements that involve important factors that could
cause actual results to differ materially from those anticipated. Cautionary statements identifying such important factors are described in
reports, including the Form 10-K for the fiscal year ended October 31, 2014, filed by FuelCell Energy, Inc. with the Securities and Exchange
Commission and available at www.fuelcellenergy.com.
FuelCell Energy with the corresponding logo is a registered trademark of FuelCell Energy, Inc. “Direct FuelCell,” “DFC,” “DFC-H2” and
“DFC/T” are registered trademarks of FuelCell Energy, Inc. DFC-ERG is a registered trademark of FuelCell Energy, Inc. and Enbridge Inc.
All rights reserved. © FuelCell Energy, Inc. 2015
3 Great Pasture Road | Danbury, CT 06813-1305 | 203.825.6000
www.FuelCellEnergy.com
www.youtube.com/user/FuelCellEnergyInc?feature=watch
www.linkedin.com/company/fuelcell-energy