ANNUAL REPORT 2016
SUPPLY
RECOVERY
STORAGE
Annual Report 2016
3
FuelCell Energy (NASDAQ: FCEL) delivers proprietary power solutions that enable economic prosperity with the
clean and affordable supply, recovery and storage of energy. Serving utilities, industry and large municipal power
users on three continents with solutions that include utility-scale and on-site power generation, carbon capture,
local hydrogen production for transportation and industry, and energy storage, FuelCell Energy is a global leader
with designing, manufacturing, installing, developing, operating and maintaining environmentally responsible fuel
cell power solutions.
Energy SUPPLY
MICRO-GRID CHP UTILITY GRID SUPPORT
DISTRIBUTED HYDROGEN TRI-GEN
Energy RECOVERY
CARBON CAPTURE: COAL AND GAS GAS PIPELINE H2 RECOVERY (EHS)
Energy STORAGE
LONG DURATION STORAGE POWER-TO-GAS
4
FuelCell Energy
MICRO-GRID CHP UTILITY GRID SUPPORT
DISTRIBUTED HYDROGEN TRI-GEN
DESIGN & MANUFACTURE PROJECT DEVELOPMENT TURN-KEY PROJECT DELIVERY PLANT OPERATION
>50 sites
operating on
3 continents
> 5 billion kWh’s
ultra-clean
power
generated
Versatile
global
technology
platform
Robust
intellectual
property
portfolio
DEAR SHAREHOLDERS,
The world needs cleaner and affordable answers to meet our current and future energy needs;
choices that are easy to site, support economic development, and provide savings to energy
consumers. FuelCell Energy delivers proprietary power solutions that enable economic value
with the clean and affordable supply, recovery and storage of energy.
Our innovative SureSource power plants are unique in their ability to generate predictable and
clean energy where the power is used. We use chemistry instead of combustion to generate
energy. Our solutions provide a comprehensive and complete energy generation solution with
predictable clean power, located next to existing electrical substations or on-site applications.
This minimizes or even avoids transmission, which is important to ratepayers and communities
as transmission is costly, inefficient as power is lost in transmission and not always welcome
in certain locations. The ability to install clean and affordable power generation near where
the power is used addresses numerous issues and challenges facing utilities, government
officials and communities. This supply of energy includes utility grid support as well as on-site
installations supplying electricity and heat directly to the user.
Our solutions for recovery include carbon capture and pipeline applications. The carbonate
fuel cell technology used in our SureSource solutions is distinctive and novel amongst different
technologies in its ability to efficiently concentrate and capture CO2 as a side reaction of the
regular fuel cell power generation process. This is the novelty of our approach, efficiently
capturing CO2 while simultaneously producing power with our scalable SureSource Capture
solution that generates a return on investment from the sale of electricity. For pipeline
applications, one of our SureSource Recovery installations began commercial operations
during fiscal 2016 at a utility owned natural gas let-down station generating very high electrical
efficiency by harnessing energy from the gas let-down process.
Efficient and affordable long-duration energy storage would be welcome by utilities to smooth
the interplay of intermittent power supply and demand. We are advancing our storage solution
Annual Report 2016
1
Utility-owned on-site
Combined Heat & Power
(CHP) in Germany
Enhancing energy resiliency
for Pfizer with clean and
affordable on-site power
utilizing hydrogen as an energy carrier. Hydrogen
emissions, scale and noise, they are difficult
is attractive for storage as it can be compressed,
to site near demand and homes, necessitating
safely stored for long periods of time and duration
transmission lines. Transmission adds cost for
can be extended for only negligible cost. Easy-
ratepayers, siting challenges for utilities and results
to-site and economical energy storage is a large
in line losses of 6-9 percent which is why our
potential market opportunity that we believe our
delivered electrical efficiency is so extraordinary.
solution is well-suited to address.
This 3.7 megawatt solution is scalable and can
We made progress on many fronts in 2016 ranging
from closing and commissioning a two-plant
project with global pharmaceutical leader, Pfizer,
entering into a fuel cell carbon capture development
agreement with ExxonMobil and announcing our first
be easily sited next to or near existing electrical
substations, adding power precisely where needed.
This high level of electrical efficiency reduces the
overall cost profile as we continue to enhance
affordability in every manner that we can.
demonstration carbon capture plant at a Southern
Our fuel cell projects provide a comprehensive
Company owned coal/gas-fired power plant. We also
solution. Generating predictable power near where
began the installation of our first SureSource 4000, a
it is used enhances resiliency, a key tenet of energy
configuration with absolutely extraordinary electrical
policy. Our price per kilowatt hour is grid competitive
efficiency that exceeds combined cycle gas plants of
in the markets we are pursuing and minimizing or
much larger scale.
Delivering clean and affordable
power where needed
Innovation is a key driver of our efforts, including
innovations to our core product offering, extending
our breadth of offerings and expanding project
financing alternatives. An example of product
innovation is our recently introduced SureSource
4000 with a delivered electrical efficiency of
approximately 60 percent. The most efficient
combined cycle gas power plants can generate
similar electrical efficiency though due to their
avoiding transmission entirely represents further
savings to ratepayers. The high overall operating
efficiency delivers significant greenhouse gas
emission reductions compared to other forms of
continuous power generation, and criteria pollutant
emissions such as smog producing NOx, acid rain
inducing SOx, and particulate matter are virtually
non-existent, which supports environmental policy.
Finally, fuel cell projects are uniquely positioned to
provide local and State level economic development
benefits to a much greater degree than other
forms of clean distributed generation. Projects are
often located within urban centers, including on
brownfield sites, generating a host of local, state
2
FuelCell Energy
Clean, affordable and continuous power for a city
Uses only 1.5 acres of land on a repurposed brownfield
site, providing state and local taxes and urban re-
development.
15 MEGAWATT DOMINION BRIDGEPORT FUEL CELL PARK
and Federal tax revenue that intermittent renewable
technologies are not able to do. Scalable, efficient
power generation can’t match. Evaluating fuel cell
and affordable is what drove ExxonMobil’s interest.
projects in their totality results in a compelling value
proposition that addresses energy, environmental
and economic policy goals.
Scalable Fuel Cell Carbon Capture
Our core carbonate fuel cell technology is very
versatile and our innovative carbon capture solution
is leveraging this versatility in a variety of novel
and exciting ways. In 2016, we made significant
We also announced our first demonstration project
at a 2.7 gigawatt mixed-use coal/gas fired power
plant owned by Southern Company subsidiary
Alabama Power. A leader in exploring carbon
capture, Southern Company is well-suited to
support our demonstration of fuel cell carbon
capture, first on coal flue gas and then on gas-fired
flue gas, using the same fuel cell power plant.
progress with commercializing fuel cell carbon
Carbon emissions are a global issue and our
capture. This began with announcing an agreement
solution can address a large potential global
with ExxonMobil to pursue fuel cell carbon capture
market, including power generation as well
together. As a global leader in carbon sequestration,
as industrial applications. Illustrating cross-
ExxonMobil is an ideal partner to be working with
border interest and an example of an industrial
to advance clean, scalable and affordable carbon
application was our announcement in late 2016 of
capture to address global carbon emissions.
an engineering study for a consortium of leading
Our value proposition is that the flue gas from coal
or gas-fired combustion plants can be routed into
the fuel cells, where it is efficiently concentrated
and captured. The CO2 is then compressed and
chilled outside the fuel cells and available for
industrial use such as enhanced oil recovery or for
sequestration. By producing power during the carbon
capture process, as opposed to conventional capture
technologies that consume power, the SureSource
Capture is unique in that it provides a revenue
stream from electricity generated. The fuel cells also
destroy much of the smog producing NOx in the coal/
gas-fired flue gas, something conventional capture
oil and gas producers in the Canadian oil sands.
This project could lead to a carbon capture fuel
cell installation at a gas-fired heavy oil/bitumen
processing plant at the oil sands.
Long-duration Energy Storage
Integrating intermittent resources into an ever more
demanding and complex grid requires innovative
approaches including efficient and affordable
long-duration storage. We are continuing to advance
our highly versatile solid oxide fuel cell (SOFC)
Annual Report 2016
3
and solid oxide electrolysis cell (SOEC) for utility-
operating cost reductions, predictability
scale energy storage applications. During periods of
of power pricing and avoidance of a
excess power supply, the SOEC acts in reverse and
capital investment.
converts excess power into hydrogen, which is then
compressed and stored on-site. As power is needed,
Conclusion
the plant switches back to power generation mode
and the SOFC uses the stored hydrogen to generate
power. With very high round-trip efficiency, we
believe the economics of our solution will be
very attractive to utilities. Supporting these efforts
is recognition from the U.S. Department of Energy
with research contracts awarded in 2016.
Our Focus
We purposefully seek the world’s industry leaders for
strategic partnerships and customer relationships.
While it can take longer to begin a relationship, it
speaks volumes when we say customer names like
Dominion, EON, NRG, ExxonMobil and Pfizer. We
announced a new customer relationship with Pfizer
in 2016 and began operating a two-power plant
installation at their campus in only 10 months. The
first megawatt-class fuel cell plant in Europe, owned
Our innovative, clean and affordable
fuel cell power plants meet and exceed
clean energy objectives, drive economic
development, create jobs and serve
customers and ratepayers with a
solution that is difficult for other forms
Arthur (Chip) Bottone
of power generation to match.
We are advancing new solutions including the
enhanced efficiency SureSource 4000 that enables
clean distributed power generation where the
power is used, at grid-competitive costs and with
large-scale combined cycle efficiency levels.
We are advancing our novel fuel cell carbon capture
solution with the global leader in sequestration,
ExxonMobil, and launching a demonstration project
at a utility-owned coal/gas-fired power plant.
by Germany-based utility EON, began operating
The cornerstones of this company include the
in 2016. We also sold our second megawatt-class
dedicated and talented associates who are making
power plant to Pepperidge Farm Bakeries and this
this happen and our investors for which we
second plant began commercial operations in 2016
appreciate the continued patience and support.
at one of their bakery operations.
We are continuing to enhance and expand our
offerings as we strive to create even better value
We are committed to continuing to strengthen and
grow our business model to deliver value to all of
our stakeholders over time.
for our customers and pursue adjacent market
Sincerely,
opportunities and geographies. Expanding adoption
is our key focus including existing and new
customers in North American and Europe.
We offer flexible ownership structures and source
project financing for our customers. We selectively
retain some projects that are structured with a
long term power purchase agreement (PPA),
generating recurring and predictable energy sales.
This PPA structure benefits the customer with
4
FuelCell Energy
Arthur (Chip) Bottone
President and Chief Executive Officer
FuelCell Energy, Inc.
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 (Loss)
Consolidated Statements of Changes
In Equity (Deficit)
Consolidated Statements of Cash Flows
Notes To Consolidated Financial Statements
Forward-Looking Statement Disclaimer
Shareholder Information
7
8
24
35
36
37
38
39
40
41
59
60
Directors and Officers
Inside Back Cover
Annual Report 2016
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,
2016 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 (loss) profit
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
Provision for income tax
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
Basic
Diluted
Weighted-average shares outstanding
Basic
Diluted
Consolidated Balance Sheet Data:
(Amounts presented in thousands, except for per share amounts)
Cash and cash equivalents (1)
Working capital
Total current assets
Total assets
Total current liabilities
Total non-current liabilities
Redeemable preferred stock
Total equity (deficit)
Book value per share (2)
2016
$ 62,563
32,758
12,931
108,252
63,474
33,256
11,879
108,609
(357)
25,150
20,846
45,996
(46,353)
(4,958)
—
—
—
622-
(519)
(51,208)
251
(50,957)
(3,200)
$ (54,157)
Years Ended October 31,
2015
2014
2013
$128,595
21,012
13,470
163,077
$136,842
25,956
17,495
180,293
$145,071
28,141
14,446
187,658
118,530
18,301
13,470
150,301
12,776
24,226
17,442
41,668
(28,892)
(2,960)
—
—
—
2,442
(274)
(29,684)
325
(29,359)
(3,200)
$ (32,559)
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)
(3,200)
$ (41,325)
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)
(3,200)
$ (37,558)
2012
$ 94,950
18,183
7,470
120,603
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)
(3,201)
$ (38,696)
$ (1.82)
$ (1.82)
$ (1.33)
$ (1.33)
$ (2.02)
$ (2.02)
$ (2.42)
$ (2.42)
$ (2.81)
$ (2.81)
29,774
29,774
24,514
24,514
20,474
20,474
15,544
15,544
13,789
13,789
At October 31,
2016
2015
2014
2013
2012
$118,316
150,206
202,469
342,137
52,263
115,621
59,857
114,396
$ 3.25
$ 85,740
129,010
203,898
277,231
74,888
47,732
59,857
94,754
$ 3.65
$108,833
141,970
217,031
280,636
75,061
47,269
59,857
98,449
$ 4.11
$ 77,699
83,066
189,329
237,636
106,263
84,708
59,857
(13,192)
$ (0.81)
$ 57,514
55,729
140,626
191,485
84,897
32,603
59,857
14,128
$ 0.91
[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.
Annual Report 2016
7
BUSINESS OVERVIEW
Overview
We deliver proprietary fuel cell power solutions that
enable economic value with the clean and affordable
supply, recovery and storage of energy. We serve utilities,
industry and municipal power users on three continents
with megawatt-class scalable solutions that include
utility-scale and on-site power generation, carbon capture,
local hydrogen production for transportation and industry,
and energy storage. With more than 5.6 million megawatt
hours of ultra-clean power produced, FuelCell Energy
is a global leader in designing, manufacturing, installing,
operating and maintaining environmentally responsible
fuel cell power solutions.
We provide comprehensive turn-key power generation
solutions to our customers, including power plant installation,
operations and maintenance under multi-year service
agreements. We develop projects and also sell direct to
customers, providing either a comprehensive turn-key solution
of developing, installing and servicing the fuel cell power plant,
or selling the power plant equipment only. For projects that
we develop, the end user of the power typically enters into a
Power Purchase Agreement (PPA), and we either identify a
project investor to purchase the power plant and assume the
PPA, or we retain the project and recognize electricity revenue
ratably over the term of the PPA. We target large-scale power
users with our megawatt-class installations. To provide
a frame of 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 the United
States, Germany and through a technology license, South
Korea. We are pursuing expanding opportunities in Asia,
Europe, and Canada.
Our value proposition is to enable economic value with clean
and affordable fuel cell power plants that supply power
where consumed. Our products can also be configured for
recovery and storage applications. Our solutions are easy-
to-site in populated areas as they are very clean, operate
quietly and without vibrations, and have only modest space
requirements. Fuel cells use an electrochemical process
to convert a fuel source into electricity and heat in a highly
efficient process that emits virtually no pollutants as the fuel
is not burned, generating power that is almost wholly absent
of criteria pollutants such as nitrogen oxide (NOx) that causes
smog, sulfur dioxide (SOx) that contributes to acid rain, and
particulate matter that can aggravate asthma. Locating power
generation near the point of use reduces reliance on the
transmission grid, leading to enhanced energy security and
power reliability. Utilities can minimize or even avoid the cost
of transmission or other infrastructure by adopting distributed
generation, which saves their ratepayers the cost of installing
and maintaining transmission and also avoids the losses
associated with transmitting electricity over great distances.
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 we believe will
lead to wider adoption.
8
FuelCell Energy
Utilizing our core Direct Fuel Cell (DFC) plants, we are
commercializing a tri-generation distributed hydrogen
configuration that generates electricity, heat and hydrogen
for industrial and/or transportation uses, as well as a fuel cell
carbon capture solution for coal or gas-fired power plants.
We also are developing and commercializing Solid Oxide Fuel
Cell (SOFC) plants for adjacent sub-megawatt applications
to the markets for our megawatt-class DFC power plants
as well as energy storage (Reversible Solid Oxide Fuel Cell
(RSOFC)) applications utilizing hydrogen as an energy carrier.
The market potential for these products is sizeable and these
applications are complementary to our core products, as they
leverage our existing customer base, project development,
manufacturing, sales and service expertise.
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 power generation solutions, operate and provide
comprehensive service for the life of the asset.
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 are difficult to
site, costly, and generally take 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 impact 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 that is affordable
to consumers.
Our solutions are installed on both sides of the electric meter
meaning that we serve on-site markets supplying power
directly to the end user, as well as utility-scale projects that
supply the power to the electric grid. We target seven distinct
markets including:
(1) Utilities and Independent Power Producers
(2) Industrial and Process Applications
(3) Education and Health Care
(4) Data Centers and Communication
(5) Wastewater Treatment
(6) Government
(7) Commercial and Hospitality
The Utilities and Independent Power Producers segment is our
largest vertical market with customers that include utilities on
the East and West coast of the United States such as Dominion
(NYSE: D), one of the largest utilities in the United States:
Avangrid Holdings (NYSE: AGR): and NRG Energy (NYSE: NRG),
the largest Independent Power Producer (“IPP”) in the United
States. Our carbon capture demonstration installation will be
located at a power plant owned by a subsidiary of Southern
Company (NYSE: SO). In Europe, utility customers include E.ON
Connecting Energies (DAX: EOAN), one of the largest utilities
in the world, and Switzerland-based ewz. The greatest number
of installed DFC plants 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 exclusive technology licensee 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.
Our DFC power plants are producing power for a variety of
industrial, commercial, municipal and government customers
including manufacturing, pharmaceutical processing,
universities, healthcare facilities and wastewater treatment
facilities. These institutions desire efficient, ultra-clean
continuous power to reduce operating expenses, reduce
greenhouse gas emissions and avoid pollutant emissions to
meet their sustainability goals, while achieving secure and
reliable on-site power. Combined heat and power fuel cell
applications further support economic and sustainability
initiatives by minimizing or avoiding use of combustion-based
boilers for heat.
Our products are fuel flexible, utilizing clean natural gas
and renewable biogas generated by the customer on-site
or directed biogas, generated at a distant location and
transported via the existing gas network. In addition, we
have demonstrated other fuel sources including coal syngas
and propane.
As renewable technologies such as wind and solar power are
deployed more widely, the need for a clean, continuous power
generation that complements and balances these intermittent
sources becomes greater to maintain grid stability or
consistent power supply for on-site applications. 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.
Our fuel cell solutions are well suited for micro-grid
applications, either as the sole source of power, or integrated
with other forms of power generation. We can model, install and
operate the micro-grid, which is a differentiator in the power
industry. We have fuel cells operating and under construction
as micro-grids at universities and municipalities. Under
normal operation, the fuel cell will supply power to the grid. If
the grid is disrupted, the fuel cell will automatically disconnect
from the grid and power a number of critical buildings.
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.
We estimate that the addressable distributed generation
market and geographies in which we compete for the supply
of energy, including distributed hydrogen production, is
approximately a $22 billion opportunity, with approximately
40-45 percent consisting of power plant sales and the
remainder representing associated service agreements.
We estimate that the addressable market for the recovery
of energy, including our fuel cell carbon capture solution
and our gas pipeline application is approximately $28 billion,
assuming only a 1% penetration rate of addressable coal and
gas-fired central generation power plant facilities within the
geographies where we do business, and only 25% carbon
capture at these coal or gas-fired plants. The addressable
energy storage market is still developing as different
technologies are beginning to come to market with different
approaches to storage and different durations for how long
the energy can be stored. We estimate that the addressable
market for long duration storage may be in the range of tens
of billions of dollars.
Geographic Markets
We target geographic markets with high urban density
that value clean distributed generation. We are pursuing a
density strategy, targeting markets with the potential for
recurring order flow that justifies investment in local service
infrastructure. 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 of demand for our power generation solutions.
Fuel cells can help states meet RPS clean power mandates
by generating highly efficient, clean electricity continuously
and near the point of use.
North America: We have active business development
activities primarily in the Northeast and on the West Coast
where high population density, higher energy costs, the need
for distributed generation solutions with a small footprint,
and public policy support our product offerings. We can
rapidly respond to market demands and construct utility
scale plants in less than a year. Most of our installed base
in the United States is located in California and Connecticut,
both of which have enacted RPS programs. 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. We
continue to explore opportunities in Canada as two separate
carbon capture engineering studies were announced in 2016
exploring the potential application of fuel cell carbon capture
systems for oil sand applications in Alberta, Canada.
Annual Report 2016
9
Europe: The European power generation market values
distributed generation, efficiency and low emissions and
represents opportunity for stationary fuel cell power plants.
As we promote awareness and grow the adoption of our
solutions, we are focusing on three specific geographies,
including Germany, as it transitions away from nuclear
power generation and works to integrate a significant
amount of intermittent power generation capacity; the United
Kingdom, as it evaluates how to achieve aggressive carbon
reduction goals; and Italy with growing adoption of distributed
generation. We are active in other West European countries
as well.
We serve the European market from offices in Dresden,
Germany and a manufacturing facility in Taufkirchen, Germany.
South Korea and the Broader Asia Market: 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 such as solar
and wind are not as well suited due to the geography (high
urban densities limit available land for power generation)
and climate/topography. 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 are helping South Korea achieve its RPS and electricity
generation goals.
The RPS in South Korea requires an increase of new and
renewable power generation to 10% by 2024 from 2% in 2012.
The program mandates the addition of 0.5% of renewable
power generation per year through 2016, which equates
to approximately 350 megawatts, increasing to 1% 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.
Select Asian markets with high urban densities, lack of
domestic fuel sources, movement away from nuclear power,
and a need for cleaner power to reduce smog represent
market opportunities. Highly efficient fuel cells maximize
power output from high cost imported fuel, and do so without
the need to add costly transmission. The Asian market is
addressed by our South Korean technology licensee, POSCO
Energy, as explained in the following section.
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 strategic allies typically have extensive experience
in developing and selling power generation products. We
believe our strength in the development of fuel cell products;
coupled with our allies’ understanding of broad range of
markets and customers, products and services, enhances the
sales and development of our products, as well as providing
endorsement of our power generation solutions. Our global
business allies include:
10
FuelCell Energy
NRG Energy: In 2013, we entered into a teaming and
co-marketing agreement with NRG Energy (“NRG”),
encompassing both direct sales to NRG customers in North
America as well as sales to NRG, to own the fuel cell power
plants and sell the power and heat to the end user under
power purchase agreements. NRG owns approximately 1.4
million shares of our common stock or approximately 4% of
our outstanding shares, extends a $40.0 million revolving
construction and term financing facility to FuelCell Energy
Finance, LLC (“FuelCell Finance”) our wholly-owned
subsidiary, and is represented on the FuelCell Energy Board
of Directors by the CEO of NRG Yield (NYSE: NYLD). NRG is the
largest IPP in the U.S. with approximately 50,000 megawatts
of generation capacity and almost three million retail and
commercial customers. We are actively marketing with NRG
to its existing customer base.
POSCO Energy: We are allied with POSCO Energy, an IPP
with 2015 annual revenues of approximately $1.7 billion
and a subsidiary of South Korean-based POSCO, one of the
world’s largest steel manufacturers (NYSE: PKX), with 2015
annual revenues of approximately $51 billion. POSCO Energy
owns 2.6 million of our common shares or approximately
7% 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 evolved to support
Korean market demand for clean distributed generation. The
relationship began in 2003 with the sale of a single sub-
megawatt demonstration plant and now South Korea has the
largest installed fleet, including a 59 megawatt facility, the
world’s largest fuel cell park consisting of 21 DFC3000 power
plants. POSCO Energy manufactures in South Korea and sells
to the Asian market under a licensing and royalty agreement
for DFC power plants and collaborates with the Company on
many market and product development initiatives.
Fraunhofer IKTS: The Fraunhofer Institute for Ceramic
Technologies and Systems 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 $2.1 billion) and
approximately 23,000 staff, primarily scientists and engineers.
Fraunhofer maintains more than 60 research centers and
representative offices in Europe, the United States, Asia and
the Middle East.
Our relationship with Fraunhofer IKTS began in 2012 and
involves cooperating on research and development of our core
fuel cell technology under research contracts. Fraunhofer
IKTS contributes its expertise and extensive research and
development capabilities with fuel cells and materials science
as well as shares its industry and government relationships to
support further adoption of fuel cells.
E.ON Connecting Energies GmbH (“E.ON”): E.ON Connecting
Energies is a business unit of E.ON that offers integrated
energy solutions for commercial and industrial customers as
well as public-sector institutions internationally. During fiscal
year 2015, we executed a Project Development Agreement with
E.ON Connecting Energies to offer decentralized CHP solutions
with megawatt and multi-megawatt fuel cell power plants to
E.ON’s existing and prospective European customer base, via
power purchase agreement financing or leasing structures.
The first sale announced under this agreement was a
CHP-configured megawatt-class fuel cell plant installation
at a German manufacturing company that was commissioned
in September 2016. E.ON Connecting Energies owns the
power plant and FuelCell Energy Solutions installs, operates
and maintains the plant under a long-term service agreement.
With more than 45,000 megawatts of power generation
assets, a presence in more than a dozen countries, and more
than 56,000 employees, the E.ON Group is one of the world’s
largest utilities.
Business Strategy
Our business model consists of growing and expanding diverse
revenue streams, selectively utilizing strategic partnerships
for market development, financing and cost reductions,
protecting and leveraging intellectual property to generate
value, and identifying and developing new markets for our
core technology. Revenue streams include power plant and
component sales; engineering, procurement and construction
(“EPC”) revenue; royalty and license revenue; service revenue
including long-term service agreements and the sale of power
under PPAs; and revenue from public and private industry
research contracts under Advanced Technologies.
Our Company vision is to provide ultra-clean, highly efficient,
reliable distributed power generation at a cost per kilowatt
hour that is less than the cost of grid-delivered electricity
in our target markets. We believe 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.
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 de-centralized 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, the Northeast the United
States and California. We have also installed and are operating
plants in the United Kingdom, Germany, and Switzerland and
are pursuing further opportunities in Western Europe and
certain other states in the United States. 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
provide. 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. Distributed generation enhances existing utility models
and it is being embraced in an increasing number of markets
to improve grid operations. An example is a 40 MW fuel cell-
only request for proposal (RFP) issued by PSEG Long Island in
late 2016 that seeks competitive fuel cell projects to address
power generation shortfalls in specifically targeted regions of
Long Island. We work with utilities and IPPs to demonstrate
how our solutions complement central generation by
incrementally adding clean power generation when and where
needed. One example of this is our two fuel cell plant sales to
European utility E.ON as they seek to operate on both sides
of the electric meter and avoid losing customers to growing
adoption of distributed generation. We believe that we have
a strong business model and strategy, demonstrated project
development execution and plant operating performance and
strategic relationships with committed businesses which will
enable the Company to overcome these challenges and grow
into a sustainable business.
Fuel Cell Power Plant Ownership Structures
Historically, customers generally purchased our fuel cell
power plants outright. As the size of our fuel cell projects has
grown and availability of project capital improved, project
structures have transitioned to predominantly PPAs. Under a
PPA, the end-user of the power commits to purchase power
as it is produced for an extended period of time, typically 10
to 20 years. End-users may be a university, pharmaceutical
company, hospital or a utility. A primary advantage for the end-
user is that it does not need to commit its own capital to own
a power generating asset yet it enjoys the multiple benefits of
fuel cell power generation.
Once the PPA is executed, construction of the fuel cell project
can begin. At or around the commercial operating date (COD),
the project may be sold to a project investor or retained by the
Company. If the project is sold, revenue from the product sale
is recognized. If the project is retained, electricity sales are
recognized monthly over the term of the PPA.
Our business model is continuing to evolve to meet the needs
and opportunities of the market and to best situate ourselves
for success. In 2016, we began to retain ownership of certain
projects through sale-leasebacks and retaining the PPA and
thus keep them on our balance sheet instead of selling them to
an end-user customer, investor, or utility. Our decision to retain
certain projects is based in part on the strong cash flows these
projects can offer to us, the proliferation of power purchase
agreements in the industry and the potential access to capital.
Retaining PPAs affords the Company with the full benefit of
future cash flows under the PPA’s, which is higher than if
the projects were sold. Our operating portfolio of retained
projects is currently 11.2 MW with an additional 2.8 MW under
construction. The Company plans to continue to grow this
portfolio in a balanced manner while also selling projects to
investors when that presents the best opportunity.
Levelized Cost of Energy
Our fuel cell projects are delivering power at a rate
comparable to pricing from the grid in our targeted markets.
Federal and state-level programs that help to support adoption
of clean distributed power generation lead to below-grid
Annual Report 2016
11
pricing. We measure power costs by calculating 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.
expanding fleet which will leverage our investments in this
area. Additionally, we are actively developing fuel cells that
have a longer life, which will reduce O&M costs by increasing
our scheduled module replacement period to seven years.
The Company is integrated across substantially the entire
value chain for our projects. We innovate, design and own
our proprietary fuel cell technology. We develop and execute
comprehensive fuel cell turn-key projects or sell direct. We
manufacture and install the fuel cell power plants and we then
operate and maintain the plants for our customers under
long-term service agreements. 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 are actively
managing and reducing costs in all four areas as follows:
• Capital Cost—Capital costs of our projects include cost
to manufacture, install, interconnect, and to provide 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% 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. Further cost reductions will be primarily
obtained from reducing the per-unit cost of materials
purchasing from higher volumes, supported by continued
actions with engineering and manufacturing cost reductions.
We manage an integrated global supply chain with our Asian
technology licensee, POSCO Energy, so as Asian production
leads to increased levels of purchasing from the integrated
global supply chain, both FuelCell Energy and POSCO Energy
will benefit with reductions in LCOE by obtaining lower
pricing tiers from suppliers from the greater combined
purchasing volume. On-site, our experienced 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 in 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
balance of plant (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
12
FuelCell Energy
• Fuel—Our fuel cells directly convert chemical energy (fuel)
into electricity, heat, water and in certain configurations,
other value streams such as high purity hydrogen. 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% and hybrid applications and
advanced configurations are capable of delivering electrical
efficiencies of 60% or greater. In a Combined Heat & Power
(CHP) configuration, our plants can deliver up to 90% 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—Most of our MW-scale projects are financed
either by the energy user/off-taker that owns the asset or a
project investor that owns the asset and sells energy to the
off-taker. We are witnessing greater interest in the pay-as-
you-go PPA approach by end users that prefer to avoid the
up-front investment in power generation assets. Our ability
to provide the end-user with financing options or to retain
projects that we develop helps to accelerate order flow.
Our projects create predictable recurring revenue that is
not dependent on weather or time of the day, investment tax
credits, accelerated tax depreciation or other incentives.
Credit risk is mitigated by contracting with customers with
strong credit. In addition, we offer meaningful system-level
output performance guarantees over the life of our projects.
As a result, cost of capital for our projects has declined
over time, partially due to our operating experience. With
continued execution, we expect our ability to attract bank
credit and financial and project performance credibility to
continue to improve, which we expect will lead to further
decreases in financing costs.
Our core fuel cell platform is versatile and part of our strategy
is finding new applications for our power generation solution.
Advanced Technology Programs, discussed in a following
section, identifies and obtains private and government funding
sources to commercialize new applications of the power
plants, such as distributed hydrogen and carbon capture.
Energy storage applications are also being pursued utilizing
both carbonate and solid oxide fuel cell technology.
Products
Our core fuel cell products offer ultra-clean, highly efficient
power generation for customers including the 2.8 MW
DFC3000®, the 1.4 MW DFC1500® and the recently introduced
3.7 MW DFC4000, plus derivations of this core DFC product
for specific applications. The plants are scalable for multi-
megawatt utility scale applications or on-site CHP generation
for a broad range of applications. We can provide
a comprehensive and complete turn-key fuel cell project
that includes project development, EPC services, O&M and
project finance.
Our proprietary DFC carbonate fuel cell 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. This internal “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 compared to some types of fuel cells that require high
purity hydrogen. The DFC operates at approximately 1,100°
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 PEM and
phosphoric acid. As a result, we are able to use less expensive
and readily available industrial metals as catalysts for our
fuel cell components. In addition, our DFC fuel cell produces
high quality byproduct heat (approximately 700°F) that can be
utilized for CHP applications using hot water, steam or chiller
water for facility heating and cooling.
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 standard
configuration produces 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%, depending
on the application, when configured for CHP.
We market different configurations of the DFC plants to meet
specific market needs, including:
Energy Supply
• 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 CHP
configuration support 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 CHP power projects generally
range in size from a single 1.4 MW DFC1500 to combining
multiple 2.8 MW DFC3000 power plants for larger on-site
projects. For example, an installation at a pharmaceutical
company uses two power plants for 5.6 MW of power and
heat production.
• Utility Grid Support: The DFC power plants are scalable,
which enables siting multiple fuel cell power plants together
in a fuel cell park. Fuel cell parks enable utilities to add
clean and continuous power generation when and where
needed and enhance the resiliency of the electric grid by
reducing reliance on large central generation plants and
the associated transmission grid. Consolidating certain
steps for multiple plants, such as fuel processing, reduces
the cost per megawatt hour for fuel cell parks compared to
individual fuel cell power plants. Fuel cell park examples
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 in excess of 10 megawatts
each that supply power to the electric grid and high quality
heat to district heating systems, such as a 59 MW installation
which consists of 21 power plants, the world’s largest fuel
cell park. 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. 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.
• Higher Electrical Efficienc—Multi-megawatt applications:
The DFC4000™ (High Efficiency Fuel Cell) system is
configured with a series of three fuel cell modules that
operate in sequence, yielding a higher electrical efficiency
than the standard DFC3000 configuration of two fuel cell
modules operating in parallel. The heat energy and unused
hydrogen from two fuel cell modules is supplied to the third
module, along with some natural gas to generate additional
electricity. This high efficiency configuration is designed to
extract more electrical power from each unit of fuel with
electrical efficiency of approximately 60% and is targeted at
applications with large load requirements and limited waste
heat utilization such as utility/grid support or data centers.
• Distributed Hydrogen: The DFC fuel cells internally
reform the fuel source (i.e. natural gas or biogas) to obtain
hydrogen. DFC plants can be configured for tri-generation,
supplying power, heat and high purity hydrogen. Power
output is modestly reduced to support hydrogen generation
that can then be used for industrial applications such as
metal or glass processing, material handling applications
or petrochemicals, or transportation applications. Siting
the tri-generation fuel cell plant at a source of biogas such
as wastewater treatment facilities, results in renewable
hydrogen for transportation, an attractive proposition to
regulatory and legislative officials and car companies. After
operating two sub-megawatt systems—one for renewable
vehicle fueling and one producing industrial hydrogen for our
Torrington manufacturing facility—we are now evaluating a
variety of possible sites for the first commercial MW-scale
application of the technology.
• Micro-grid: The DFC plants can also be configured as a
micro-grid, either independently or with other forms of power
generation. We possess the capabilities to model, design and
operate the micro grid and have multiple examples of our
DFC plants operating within micro-grids, some individually
and some with other forms of power generation.
Annual Report 2016
13
Energy Recovery
• Gas Pipeline Applications: DFC-ERG® (Direct FuelCell
Energy Recovery GenerationTM) power plants are used
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%. A 3.4 megawatt DFC-ERG system was sold to
Avangrid (formerly UIL Holdings) and began operating in
Connecticut during 2016.
• Carbon Capture: The DFC carbon capture system separates
CO2 from the flue gases of natural gas or coal-fired power
plants or industrial facilities while producing ultra-clean
power. Exhaust flue gas from the coal/gas plant is supplied
to the cathode side of the fuel cell, instead of ambient air.
The CO2 in the exhaust is transferred to the anode side of the
fuel cell, where it is much more concentrated and easy to
separate. The CO2 from the anode exhaust stream is liquefied
using common chilling equipment. The purified CO2 is then
available for enhanced oil recovery, industrial applications
or sequestration. Carbon concentration and capture within
the carbonate fuel cell is a side reaction of the natural gas-
fueled power generation process. Carbon capture systems
can be implemented in increments, starting with as little as
5% capture with no appreciable change in the cost of power
and with minimum capital outlay. Our solution generates a
return on capital resulting from the fuel cell’s production
of electricity rather than an increase in operating expense
required by other carbon capture technologies, and can
extend the life of existing coal-fired power plants, enabling
low carbon utilization of domestic coal and gas resources.
During 2016, we announced the site selection for the first
installation of a carbon capture configured DFC3000 power
plant, which will be located at a mixed coal/gas fired power
plant owned by a subsidiary of Southern Co. (NYSE: SO). The
project is partially funded by the U.S. Department of Energy
and ExxonMobil is also participating in the project.
Energy Storage
• Hydrogen Production: Our DFC plants can be configured
to produce both power and hydrogen from renewable fuels
or natural gas. The hydrogen and power production can be
traded off, producing less power and more hydrogen during
periods of lower power demand. Hydrogen is an energy
carrier that can be compressed and stored for long durations
and either used on-site or transported for use elsewhere.
• Electrolysis: Our solid oxide fuel cell technology has
electrolysis capabilities, which is the ability to operate “in
reverse” compared to fuel cell mode. Instead of producing
power from fuel and air, a solid oxide stack in electrolysis
mode splits water into hydrogen and oxygen using supplied
electricity. Many utilities are considering electrolysis as an
approach to store or utilize excess power from intermittent
renewable sources when grid demand is low, producing
hydrogen that can be used for thermal purposes, vehicle
fueling, or to then make power during peak demand periods.
14
FuelCell Energy
• Reversible Solid Oxide Energy Storage: Our solid oxide
stacks are capable of alternating between electrolysis
and power generation mode. This allows us to configure
efficient and cost-effective energy storage solutions where
hydrogen is produced from electricity in electrolysis mode
and stored until power is needed, at which point the stored
hydrogen is used in the same stacks to produce electricity.
Long durations of storage capacity can be achieved just by
providing sufficient hydrogen storage capability, making
this solution uniquely qualified for storage applications
requiring many hours or days of storage capacity. The need
for long duration energy storage behind the meter and on
the utility grid will increase as the penetration of intermittent
renewable sources on the grid increases. This solution can
be sited adjacent to an electric substation, avoiding the need
for transmission.
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 electrical 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 CHP configurations, system efficiencies can reach up to
90%, 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. These characteristics
facilitate the installation of the power plants in urban locations
with scarce and expensive land. 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, and adjacent to the demand
source thereby avoiding costly transmission construction.
• Dispatchability: We are offering a dispatchability option
for utility-scale applications where some degree of
power production cycling is valued on a pre-determined
schedule to accommodate periods of lower power demand.
Our power plants can also provide reactive power avoiding
the need for separate static or dynamic VAR (volt-ampere
reactive) compensation systems.
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 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 Natural Gas Turbine
DFC®—natural gas
DFC 4000 High Efficiency Plant
DFC—utility scale carbon capture
DFC—renewable biogas
Emissions (Lbs. Per MWh)
SO2
11.6
0.008
0.008
0.0001
0.0001
0.0001
0.0001
PM
0.27
0.09
0.08
0.00002
0.00002
0.00002
0.00002
CO2
2,031
1,596
1,494
940
740
80
<0
CO2 with CHP
n/a
520 - 680
520 - 680
520 - 680
520 - 680
n/a
<0
NOX
5.06
0.44
1.15
0.01
0.01
0.01
0.01
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. When operating on renewable
biogas, government agencies and regulatory bodies generally
classify our power plants as carbon neutral due to the
renewable nature of the fuel source.
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 an inverter. 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 then assembled
with the fuel cell module into a complete power plant.
High electrical 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% to 60% or higher
depending on configuration, location, and application, and up
to 90% total efficiency in a CHP configuration, depending on
the application. The electric grid in the United States is only
approximately 36% electrically efficient and typically does not
support CHP configurations.
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 MW size 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
Cell Manufacturing and Capacity
Our strategy is to produce power for prices that are below
typical grid prices. Higher purchasing volume reduces the
per unit cost of raw materials and componentry. As explained
below, the North American production facility has an annual
capacity of 100 MW with an expansion underway, and the Asian
manufacturing facility, owned and operated by our technology
licensee, POSCO Energy, has 100 MW of annual capacity in
a building that is sized for 200 MW annually. 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 shipped to customer sites. Our
overall DFC manufacturing process in North America (module
Annual Report 2016
15
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 is underway to add a 102,000 square foot
addition to our North American manufacturing facility in
Torrington, Connecticut. The building expansion will allow for
consolidation of warehousing and service facilities enabling
manufacturing efficiencies by providing the needed space to
re-configure production. As demand supports, the second
phase will be undertaken to add manufacturing equipment to
increase annual capacity to at least 200 megawatts. The State
of Connecticut is extending two low interest long-term loans
to us for each of the two phases and up to $10.0 million of
tax credits. Each loan is $10.0 million, with an interest rate
of 2.0% and a term of 15 years. Up to 50% of the principal is
forgivable if certain job creation and retention targets are met.
We have received the proceeds of the first $10 million loan to
support the first phase of the expansion.
The Torrington production facility, the Danbury corporate
headquarters and research and development, and Field
Service are ISO 9001:2008 certified, reinforcing the tenets of
the FuelCell Energy Quality Management System and our core
values of continual improvement and commitment to quality.
South Korea: To meet Asian demand, POSCO Energy built a
cell manufacturing facility in Pohang, Korea and the facility
became operational in late 2015. Annual production capability
is 100 MW and the building is sized to accommodate up to
200 MW of annual production to support future growth in the
Asian market.
Europe: We have a 20,000 square-foot manufacturing facility
in Taufkirchen, Germany that has the capability to perform
final module assembly for up to 20 MW per year of sub-
megawatt fuel cell power plants for the European market.
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 the POSCO-owned 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 and qualify new suppliers as we diversify our supplier
base in our pursuit of lower costs and consistent quality.
We purchase mechanical 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, reducing the per-unit cost of the raw
materials and componentry we purchase. In addition, our cost
reduction strategy relies on implementation of further
16
FuelCell Energy
advancements in our manufacturing process, global
competitive sourcing integrated with POSCO sourcing volumes,
engineering design and technology improvements (including
modules with longer life 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% from the first commercial
installation in 2003 through engineering redesign, sourcing,
and improved power output and module life. Higher purchasing
volume reduces costs and strengthens 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. We
manage a global integrated supply chain to ensure consistent
pricing and leverage volume purchases whether by POSCO
Energy or the Company, to ensure both parties benefit 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, interconnection and operations for our fuel
cell projects. From an 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.
Services and Warranty Agreements
We offer a comprehensive portfolio of services including
engineering, project management and installation, and
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. Virtually all of our customers
purchase service agreements ranging up to 20 years. Pricing
for service contracts is based upon the markets in which we
compete and includes all future maintenance and fuel cell
module exchanges. While the electrical and mechanical BOP
in our DFC power plants is designed to last about 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 future production for scheduled fuel cell module
exchanges under service agreements through the year 2037.
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. 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 a warranty
for our products for a specific period of time against
manufacturing or performance defects. The warranty term
in the U.S. is typically 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 related to manufacturing and technology transfer
agreements entered into in 2007, 2009 and 2012. The Cell
Technology Transfer Agreement (“CTTA”), executed in
October 2012, provides POSCO Energy with the technology
to manufacture DFC power plants in South Korea and the
market access to sell power plants throughout Asia. In October
2012, the Company and POSCO Energy extended the terms
of the 2007 and 2009 license agreements to be consistent
with the term of the CTTA which expires on October 31, 2027.
The term of these agreements may be extended beyond 2027
through future extensions, each for a period of five (5) years,
by mutual agreement of the Company and POSCO Energy.
In conjunction with the CTTA, the Company receives a 3.0%
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 the Master Service
Agreement between the Company and POSCO Energy.
As we expand into other vertical or geographic markets, we
may pursue additional licensing and royalty opportunities.
Advanced Technology Programs (Third-Party Funded
Research and Development)
We undertake 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 our expertise and 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
CO2 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) SOFC, Solid Oxide Electrolysis Cells
(SOEC), and RSOFC 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 8%, 6% and 6% of our revenue for each
of the fiscal years ended 2016, 2015, and 2014, respectively.
Significant commercialization programs on which we are
currently working include:
Carbon Capture—Coal and natural gas are abundant, low
cost resources that are widely used to generate electricity
in developed and developing countries, but burning these
fuels results in the emission of criteria pollutants and CO2.
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 fuels.
Our carbonate fuel cell technology separates and concentrates
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 power plant 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.
We announced an agreement with ExxonMobil (NYSE: XOM) in
2016 to pursue fuel cell carbon capture for central generation
gas-fired power plants. We are working on the installation of
a megawatt-class fuel cell power plant at a mixed coal/gas-
fired power plant in Alabama that is owned by Alabama Power,
a subsidiary of Southern Company, a large southeastern
U.S. utility. This project is being supported by an award from
the U.S. Department of Energy to design and build the first
MW-scale carbon capture system for coal fired power, and
by ExxonMobil through a joint development agreement for
evaluating carbon capture from gas-fired power generation.
Successful demonstration may then lead to additional fuel
cell power plant installations at this site and/or other central
generation coal or gas-fired sites globally. In addition, in 2016
Annual Report 2016
17
we announced two engineering studies: one with Alberta
Innovates, a consortium of Canadian oil sands producers, and
one with Cenovus Energy, as lead partner of a Joint Industry
Project, to evaluate the feasibility of fuel cell carbon capture
for gas-fired boilers used in oil sands processing. These
various oil & gas and power producers are interested in the
fuel cell carbon capture value proposition, and these studies
are evaluating the application of our carbon capture system at
specific sites, which could be future MW-scale carbon capture
project opportunities.
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 and transportation
applications, further summarized as follows:
Industrial Applications: We operate 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 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 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.
SOFC/SOEC/RSOFC Development and Commercialization:
We are working towards commercialization of solid oxide
fuel cell technology to target sub-megawatt commercial
applications including smaller wastewater treatment facilities
that do not have enough gas production to support a multi-
megawatt solution as well as storage applications utilizing
hydrogen as an energy carrier and storage medium. 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 capabilities, and our existing
installation and service infrastructure.
We perform SOFC/SOEC/RSOFC research and development
at our Danbury facility as well as at our dedicated SOFC facility
in Calgary, Canada. We are working under a variety of awards
from DOE for development and commercialization of both
SOFC and SOEC.
We see significant market opportunities for distributed
hydrogen production, carbon capture, solid oxide fuel cell
solutions and energy storage. 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 designed and
are now introducing the 3.7 megawatt DFC4000 configuration
with increased electrical efficiency, and we invest in cost
reduction and improving the performance, quality and
serviceability of our plants. 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:
Years Ended October 31,
2016
2015
2014
Cost of advanced technologies
contract revenues
$11,879 $13,470 $16,664
Research and development
expenses
20,846
17,442
18,240
Total research and development $32,725 $30,912 $34,904
Backlog
The Company has a contract backlog totaling approximately
$432.3 million at October 31, 2016 compared to $381.4 million
at October 31, 2015. At October 31, 2016 and 2015, the backlog
includes approximately $347.3 million and $254.1 million,
respectively, of service and power purchase agreements.
Service backlog at October 31, 2016 has an average term of
18
FuelCell Energy
approximately 15 years weighted based on dollar backlog
and utility service contracts up to 20 years in duration. At
October 31, 2016, product sales backlog totaled approximately
$24.9 million compared to $90.7 million at October 31,
2015. At October 31, 2016, Advanced technologies contracts
backlog totaled $60.1 million, of which $39.6 million is funded
compared to $36.5 million at October 31, 2015, of which $33.4
million was funded.
Our backlog amount outstanding is not indicative of amounts
to be earned in the upcoming fiscal year. The specific elements
of backlog may vary in terms of timing and revenue recognition
from less than one year to up to 20 years. In addition, the
Company may retain operating power plants on the balance
sheet rather than selling them, thus creating variability in
timing of revenue recognition. Accordingly, the timing and the
nature of our business makes it difficult to predict what portion
of our backlog will be filled in the next fiscal year although we
are currently estimating revenues of at least $75 million both
from backlog and new contracts for our fiscal year 2017. In
all events, we expect the majority of our backlog will remain
unfilled in fiscal year 2017 given the nature of our business.
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 enables the use of commodity
metals rather than precious metals, and high-quality heat
suitable for CHP applications. We are also actively developing
SOFC technology, as discussed in the prior Advanced
Technology section. Other fuel cell types that may be used for
commercial applications include phosphoric acid and 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
Mobile
Technology
Carbonate (CFC)
Phosphoric Acid
(PAFC)
Solid Oxide
(SOFC)
PEM/SOFC
Polymer
Electrolyte
Membrane (PEM)
Plant Size
1.4 MW - 3.7 MW
400 kW
up to 200 kW
< 10 kW
5 - 100 kW
Typical Application
Utilities,
universities,
industrial, municipal
Commercial
buildings,
grocery stores
Commercial
buildings
Residential and
small commerical
Transportation
Fuel
Advantages
Electrical Efficiency
Combined Heat &
Power (CHP)
Natural gas, On-site
biogas, Directed
biogas, others
Efficiency, lowest cost,
fuel flexible & CHP
43% - 47% std.
configuration;
~60% for specialized
configurations
Steam, hot water,
chilling & hybrid
electrical
applications
Natural gas,
Directed biogas
Natural gas,
Directed biogas
Natural gas
Hydrogen
CHP
Efficiency
Load following &
CHP
Load following
40% - 42%
50% - 60%
25% - 35%
25% - 35%
Hot water
Depends on
technology used
Suitable for
facility heating
n/a
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 CFCs. Emerging fuel cell
technologies (and the companies developing them) include
stationary PEM fuel cells for pure hydrogen applications
(Ballard Power Systems), small or portable PEM fuel cells
(Ballard Power Systems, Plug Power, Intelligent Energy
Holdings, and increasing activity by numerous automotive
companies including Toyota, Hyundai, Honda and GM),
stationary phosphoric acid fuel cells (Doosan), stationary
solid oxide fuel cells (LG/Rolls Royce partnership, General
Electric, Bloom Energy and Ceres Power Holdings), 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.
Annual Report 2016
19
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 for
commercial applications.
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 can complement solar
and wind intermittency with the continuous power output of
the fuel cells. Solar and wind require specific geographies
and weather profiles and require transmission for utility-scale
applications as well as a significant amount of land compared
to our fuel cell power plants, making them difficult to site in
urban areas, unlike our solutions.
We believe that only carbonate fuel cells are suitable for
fuel cell carbon capture applications, so our fuel cell carbon
capture solution does not compete against fuel cells from
manufacturers utilizing other fuel cell technologies.
Our distributed hydrogen solution competes against traditional
centralized hydrogen generation as well as electrolyzers used
for distributed applications. Hydrogen is typically generated
at a central location in large quantities by combustion-
based steam reforming and then distributed to end users
by diesel truck. Besides utilizing tri-generation DFC plants
for distributed hydrogen, electrolyzers can be used that are
in essence, reverse fuel cells. Electrolyzers take electricity
and convert it to hydrogen. The hydrogen can be used as it is
generated, compressed and stored, or injected into the natural
gas pipeline. Companies using fuel cell-based electrolyzer
technology for transportation applications include Proton
Onsite, H2 Logic and Hydrogenics Corporation.
Hydrogen is an energy carrier and energy storage utilizing
hydrogen is a growing market opportunity that we are pursuing
with our SOFC/SOEC technology. Companies using PEM-
based fuel cell electrolyzer technology for storage include
Hydrogenics Corporation, ITM Power PLC, and McPhy Energy.
Regulatory and Legislative Support
Regulatory and legislative support encompasses policy,
incentive programs, and defined sustainability initiatives
such as Renewable Portfolio Standards (RPS).
Distributed generation solves different problems than central
generation and regulatory policy can impact deployment of
distributed generation. States and municipalities in the U.S.
have adopted programs for which our products qualify. For
example, there are strong programs in California supporting
self-generation, clean air power generation and carbon
reduction. Additional states 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.
Sometimes policy may be dated and inadvertently slows
adoption of distributed generation. When this occurs, industry
may work with regulatory and legislative bodies to revise
and update policy. An example of this from 2016 was the
State of California approval of a five megawatt departing load
charge exemption cap for fuel cells, which improves project
economics due to the operating characteristics of the continual
power generation profile of fuel cells. This represented an
increase from what was previously a one megawatt cap for
utility departing load charges.
The U.S. Federal Government extends an 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 eligible power generation technologies. In December
2015, the United States Congress extended the ITC for 5 years,
beginning January 1, 2017. The intention, as publicly stated by
Congressional leaders, was to extend the ITC to all eligible
technologies; however, the actual approved language only
extended the ITC for solar energy technologies. As of January 1,
2017, fuel cells and a number of other power generation
technologies are no longer eligible for the ITC.
Based on numerous public comments by leaders and
members of Congress in the media and in the Congressional
Record that the omission was an oversight that should be
corrected, the fuel cell industry is continuing outreach to
ensure parity of domestically designed and manufactured
fuel cells with solar technologies. American designed and
manufactured fuel cells provide value to the U.S. economy and
stakeholders in numerous ways that justify their inclusion in
the ITC, including:
• Fuel cells utilize domestic sources of natural gas to create
electricity cleaner and more efficiently than traditional
resources and improve power reliability by siting continual
power where it is used
• The ITC is currently only supporting solar panels that are
generally designed and manufactured overseas while
U.S. designed and manufactured fuel cells with their
strong domestic supply chain and export opportunities are
excluded.
20
FuelCell Energy
• Fuel cell carbon capture can help stabilize the U.S. coal
industry and drive demand for U.S. natural gas by
affordably reducing CO2 emissions from coal and gas-
fired power plants and industrial facilities. Additionally,
there is a global export market potential for this American
manufactured innovation.
While the ITC is a driver of fuel cell projects in the U.S., the ITC
is not relevant for our European presence or for sales in Asia.
We anticipate retaining ownership over more fuel cell projects,
which we believe will make us less dependent on support from
the ITC. Further, we believe that our products will achieve
efficiencies that will permit them to compete without ITC
support. For example, we are launching the DFC4000, which
enhances fuel cell project economies for utility and data
center applications by increasing the electrical efficiency. This
product was designed to address decreasing incentives over
time at both the federal and state level.
The majority of states in the U.S. have enacted legislation
adopting Clean Energy Standards (“CES”) or Renewable
Portfolio Standards (“RPS”) mechanisms. Under these
standards, 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
resources, by a specified date. CES and 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 mandate, the definition
of eligible clean and renewable energy resources, and
the extent to which renewable energy credits (certificates
representing the generation of renewable energy) qualify for
CES or RPS compliance. Fuel cells using biogas qualify as
renewable power generation technology in all of the CES and
RPS states in the U.S., and eight states (including Connecticut,
Delaware, Indiana, New York, Ohio, Oklahoma, Pennsylvania
and Maine) specify that fuel cells operating on natural gas
are also eligible for these initiatives in recognition of the high
efficiency and near-zero pollutants of fuel cells.
Internationally, South Korea has an RPS to promote clean
energy, reduce carbon emissions, and develop local
manufacturing of clean energy generation products to
accelerate economic growth. The RPS is designed to increase
new and renewable power generation to ten percent of
total power generation by 2023 from two percent in 2012 by
requiring an additional one half of one percent of new and
renewable power added annually from 2012 to 2017, increasing
to one percent per annum through 2023. This equates to an
estimated 370 MW market annually from 2016 to 2023. 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 Europe, there are a number of renewable energy programs
and several environmental initiatives that contribute to
growth in our markets. In addition, there are a variety of
research and development funding programs for fuel cells
and hydrogen at the European Union level as well as state
level within specific countries. Hydrogen Europe, an industrial
association with more than 100 members, is supporting the
expansion of the hydrogen and fuel cell industry by focusing
on market deployment and financing models. In Italy, there are
financial incentives for CHP configurations with high efficiency,
including our products whether operating on natural gas or
renewable biogas. Germany uses the National Innovation
Program for Fuel Cells and Hydrogen led by National
Organization for Hydrogen and Fuel Cell Technology as the
tool to differentiate and support fuel cells versus combustion-
based technology. There is also a technology deployment
program in Germany for stationary fuel cells operating on
either natural gas or renewable biogas.
Government Regulation
Our Company and its products are subject to various federal,
provincial, state and local laws and regulations relating
to, among other things, land use, safe working conditions,
handling and disposal of hazardous and potentially hazardous
substances and emissions of pollutants into the atmosphere.
Negligible emissions of SOx and NOx from our power plants
are substantially lower than conventional combustion-based
generating stations, and are far below existing and proposed
regulatory limits. The primary emissions from our power
plants, assuming no cogeneration application, are humid flue
gas that is discharged at temperatures of 700-800°F, water
that is discharged at temperatures of 10-20°F above ambient
air temperatures, and CO2 in per kW hour amounts that are
much less than conventional fossil fuel central generation
power plants due to the high efficiency of fuel cells. Due to the
high temperature of the flue gas emissions, we are required
to site or configure our power plants in a manner that allows
the flue gas to be vented at acceptable and safe distances. The
discharge of water from our power plants requires permits
that depend on whether the water is to be discharged into a
storm drain or into the local wastewater system.
We are also subject to federal, state, provincial and/or local
regulation with respect to, among other things, emissions
and siting. In addition, utility companies and several states
in the USA have created and adopted, or are in the process of
creating, interconnection regulations covering both technical
and financial requirements for interconnection of fuel cell
power plants to utility grids. Our power plants are designed to
meet all applicable laws, regulations and industry standards
for use in their international markets.
We are committed to providing a safe and healthy environment
for our employees and we are dedicated to seeing that
safety and health hazards are adequately addressed through
appropriate work practices, training and procedures. All
of our employees must observe the proper safety rules and
environmental practices in work situations, consistent with
these work practices, training and procedures, and consistent
with all applicable health, safety and environmental laws
and regulations.
Annual Report 2016
21
Proprietary Rights and Licensed Technology
Our intellectual property consists of patents, trade secrets and
institutional knowledge that we feel is a competitive advantage
and represents a significant barrier to entry for potential
competitors. Our Company was founded in 1969 as an applied
research company and began focusing on carbonate fuel cells
in the 1980s with our first fully commercialized DFC power
plant sold in 2003. Over this period of time, we have gained
extensive experience in designing, manufacturing, operating
and maintaining fuel cell power plants. This experience cannot
be easily or quickly replicated and combined with our trade
secrets, proprietary processes and patents, safeguards our
intellectual property rights.
At October 31, 2016, the Company, excluding its subsidiaries,
has 90 patents in the U.S. and 88 patents in other jurisdictions
covering our fuel cell technology (in certain cases covering
the same technology in multiple jurisdictions), with patents
directed to various aspects of our Direct FuelCell technology,
SOFC technology, PEM fuel cell technology, and applications
thereof. We also have 40 patent applications pending in the
U.S. and 62 pending in other jurisdictions. Our U.S. patents
will expire between 2016 and 2034, and the current average
remaining life of our U.S. patents is approximately 9.9 years.
Our subsidiary, Versa Power Systems, Inc., has 33 current
U.S. patents and 70 international patents covering the SOFC
technology (in certain cases covering the same technology
in multiple jurisdictions), with an average remaining U.S.
patent life of approximately 7.3 years. Versa Power Systems,
Inc. also has 3 pending U.S. patent applications and 16 patent
applications pending in other jurisdictions. In addition, our
subsidiary FuelCell Energy Solutions, GmbH has license rights
to use FuelCell Energy’s carbonate fuel cell technology as well
as 2 U.S. and 27 patents outside the U.S. for carbonate fuel cell
technology licensed from Fraunhofer IKTS.
No patents have expired that would have any material impact
on our current or anticipated operations. As has historically
been the case, we are continually innovating, and have a
significant number of invention disclosures that we are
reviewing that may result in additional patent applications.
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.
Significant Customers and Information about
Geographic Areas
We contract with a concentrated number of customers for
the sale of our products and for research and development
contracts. For the years ended October 31, 2016, 2015 and
2014, our top customers, POSCO Energy (which is a related
party and owns approximately 7% of the outstanding common
shares of the Company), the Department of Energy, the United
Illuminating Company, Dominion Bridgeport Fuel Cell, LLC,
and BioFuels Energy, LLC accounted for an aggregate of 78%,
89% and 85%, respectively, of our total annual consolidated
revenue. Revenue percentage by major customer for the last
three fiscal years is as follows:
Years Ended October 31,
2016
2015
2014
POSCO Energy
48%
67%
69%
The United Illuminating Company
10%
14%
Department of Energy
8%
Dominion Bridgeport Fuel Cell, LLC
6%
5%
3%
9%
4%
3%
BioFuels Energy, LLC
6%
—%
—%
Total
78%
89%
85%
We have marketing and manufacturing operations both within
and outside the United States. We source raw materials
and balance of plant components from a diverse global
supply chain. In 2016, the foreign country with the greatest
concentration risk was South Korea, accounting for 48% of our
consolidated net sales. A multi-year fuel cell component order
from our South Korean partner, POSCO Energy, concluded
at the end of 2016. The Company receives royalties from
POSCO Energy on the sale and module replacements related
to service of fuel cell power plants in Asia, so accordingly,
the concentration of sales to POSCO Energy may be lower in
future years compared to 2016. As part of our Strategic Plan,
we are in the process of diversifying our sales mix from both a
customer specific and geographic perspective.
The international nature of our operations subjects us to a
number of risks, including fluctuations in exchange rates,
adverse changes in foreign laws or regulatory requirements
and tariffs, taxes, and other trade restrictions.
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
products support the “Triple Bottom Line” concept of
sustainability, consisting of environmental, social and
economic considerations.
Product efficiency
The electrical efficiency of our fuel cell solutions ranges from
approximately 47 percent to 60 percent depending on the
configuration. This compares favorably to the average U.S.
electrical grid of about 33 percent. Our solutions deliver this
high electrical efficiency where the power is used, avoiding
transmission. Transmission line losses average about six
percent to nine percent for the U.S. grid, which is a hidden cost
to ratepayers. In a combined heat and power configuration,
total thermal efficiency of our fuel cell solutions can be up to
90 percent depending on the application.
22
FuelCell Energy
Energy management
We utilize our fuel cells to provide a portion of the electricity
used at our corporate office and at our North American
manufacturing facility. We have installed a tri-generation
fuel cell at our manufacturing facility that meets a portion
of the power and heating needs, as well as generating high
purity hydrogen used in the fuel cell manufacturing process.
Generating multiple value streams on-site from the same unit
of fuel avoids electrical transmission line losses, avoids the
fuel cost and emissions of a combustion-based boiler typically
used for heating, and cleanly generating hydrogen on-site
avoids the carbon emissions and criteria pollutants emitted
by standard hydrogen production at a distant location and
transported via diesel truck.
Other examples of energy management include routing excess
heat from production processes throughout the manufacturing
facility to reduce both heating costs and associated emissions,
utilizing the power produced by fuel cells undergoing R&D
at our corporate office for a portion of the power needs
of the facility, and installation of high efficiency lighting at
our North American manufacturing facility and corporate
office. We recognize that there is more to be done and utilize
cross-functional teams to identify and evaluate additional
areas for improvement.
While we continue to enhance and adopt sustainable business
practices, we recognize this is an ongoing effort with more
to be accomplished; such as further reducing the direct and
indirect aspects of our carbon footprint. Our manufacturing
process has a very low carbon footprint, utilizing an assembly
oriented production strategy.
Product end-of-life management
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 fuel cell power plants. For
example, at the end-of-life of 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-grave”. 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 are reclaimed for scrap value. By weight,
approximately 93% of the entire power plant can either be
re-used or recycled.
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 are working to measure our carbon
footprint in relation to production levels and actively working
to reduce this carbon footprint.
Workforce health & safety
We work to continually improve what we feel is a robust safety
program. This is demonstrated by an improving safety trend
over each of the past 3 years. We have never had a workplace
fatality at any of our facilities or power plant installations.
Sustainability also incorporates social risks and human
rights and we will not knowingly support or do business
with suppliers that treat workers improperly or unlawfully,
including, without limitation, those that engage in human
trafficking, child labor, slavery or other unlawful or morally
reprehensible employment practices. We are continuing to
implement comprehensive monitoring of our global supply
chain to eliminate social risks and ensure respect for human
rights. We contractually ensure that all qualified suppliers
in our supply chain comply with the Fair Labor Standards
Act (FLSA) of 1938, as amended. Our employees with supply
chain responsibilities are trained on sustainability, social
risks and human rights, and utilize this knowledge to evaluate
existing suppliers and new potential suppliers on social
and sustainability metrics to ensure compliance with our
requirements and congruence with our Company values.
Materials sourcing
Assuring the absence of conflict minerals in our power plants
is a continuing initiative. Our fuel cells, including the fuel cell
components and completed fuel cell module, do not utilize
any 3TG minerals (tin, tungsten, tantalum and gold) that are
classified as conflict minerals. We do utilize componentry
in the balance of plant such as computer circuit boards that
utilize trace amounts of 3TG minerals. For perspective, total
shipments in fiscal year 2015 weighed approximately 7.1
million pounds of which less than 2 pounds, or 0.000024%,
represented 3TG minerals, so the presence of these minerals
is minimal. Our conflict mineral disclosure filed with the
Securities and Exchange Commission on Form SD contains
specifics on the actions we are taking to avoid the use of
conflict minerals.
Associates
At October 31, 2016, we had 580 full-time associates, of whom
246 were located at the Torrington, Connecticut manufacturing
plant, 292 were located at the Danbury, Connecticut facility
or various field offices, and 42 were located at our foreign
locations. In addition, at October 31, 2016, the Company had 19
temporary workers. 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.
On December 1, 2016, we announced a decrease in the
production level and a reduction in force that impacted 96
associates or approximately 17 percent of the global workforce.
Annual Report 2016
23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Restructuring
The Company completed a business restructuring on
November 30, 2016 to reduce costs and align production
levels with current levels of demand in a manner that is
consistent with the Company’s long-term strategic plan.
The Company is reducing materials spend as well as
implementing various cost control initiatives. The workforce
was reduced at both the North American production facility
in Torrington, Connecticut, as well as at corporate offices
in Danbury and remote locations. A total of 96 positions, or
approximately 17 percent of the global workforce, was impacted.
The Company expects that Operating expenses (Administrative
and selling, Research and development expenses) will be
approximately $6.0 million lower on an annualized basis as a
result of personnel reductions and related benefits, as well as
lower overhead spending. The production rate has been reduced
to 25 megawatts annually, from the prior rate of 50 megawatts
annually, in order to position for delays in anticipated order flow.
A personnel-related restructuring charge of approximately
$3.0 million will be incurred in fiscal year 2017, with
approximately one half of the charge composed of cash
severance costs and the remainder representing non-cash
charges. This production level is anticipated to be temporary
and will be reevaluated as order flow dictates, with any
future increases being undertaken from what is now a lower
cost basis.
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”).
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 on three continents and
have generated more than 5.6 million megawatt hours (MWh)
of electricity, which is equivalent to powering more than 509,000
average size U.S. homes for one year.
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
and Europe.
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 working
to commercialize 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 large markets.
24
FuelCell Energy
COMPARISON OF THE YEARS ENDED OCTOBER 31, 2016 AND 2015
Revenues and Costs of Revenues
Our revenues and cost of revenues for the years ended October 31, 2016 and 2015 were as follows:
(dollars in thousands)
Total revenues
Total costs of revenues
Gross (loss) profit
Gross margin
Years Ended October 31,
Change
2016
2015
$
$108,252
$163,077
$ (54,825)
108,609
150,301
(41,692)
%
(34)
(28)
$
(357)
$ 12,776
$ (13,133)
(103)
(0.3)%
7.8%
Total revenues for the year ended October 31, 2016 decreased $54.8 million, or 34%, to $108.3 million from $163.1 million during
the same period last year, due primarily to decreased product sales as discussed below. Total cost of revenues for the year ended
October 31, 2016 decreased by $41.7 million, or 28%, to $108.6 million from $150.3 million during the same period last year. The
Company’s gross margin was a loss of 0.3% in fiscal year 2016, as compared to the prior year margin of 7.8%. A discussion of the
changes in product sales, service agreement and license revenues, and advanced technologies contract revenues follows.
Product Sales
Our product sales, cost of product sales and gross profit for the years ended October 31, 2016 and 2015 were as follows:
(dollars in thousands)
Product sales
Cost of product sales
Gross (loss) profit from product sales
Product sales gross margin
Years Ended October 31,
Change
2016
2015
$
$ 62,563
$128,595
63,474
118,530
$(66,032)
(55,056)
%
(51)
(46)
$
(911)
$ 10,065
$ (10,976)
(109)
(1.5)%
7.8%
Product sales for the year ended October 31, 2016 included
$11.7 million of power plant revenue, $41.8 million from sales
of fuel cell kits and $9.1 million of revenue primarily related to
power plant component sales and engineering, procurement
and construction services (EPC services). This is compared
to product sales for the year ended October 31, 2015 which
included $19.6 million of power plant revenue, $84.5 million
fuel cell kits and module revenue and $24.5 million of revenue
primarily from power plant component sales and EPC services.
Product sales decreased $66.0 million, or 51%, for the year
ended October 31, 2016 to $62.6 million from $128.6 million
for the prior year period.
The decline in revenue during the period as compared to
the prior year period is due primarily to lower revenue from
POSCO Energy due to the transition of the kit and module
sales to POSCO Energy to a royalty-based model. POSCO
Energy has completed building its manufacturing facility and
is manufacturing cell components and modules in South
Korea. The Company’s multi-year kit order with POSCO Energy
concluded in the fourth fiscal quarter in 2016 and as a result,
the Company does not expect to recognize product sales
revenue at the levels previously recognized from POSCO
Energy. The Company will receive (under Service agreements)
license revenues from a 3.0% royalty on POSCO Energy net
product sales manufactured in South Korea. We believe
that this revenue stream will grow over time as POSCO Energy
increases production.
Also contributing to the decline in revenue over the comparable
period is certain power plants that are being recognized as
Project assets on the balance sheet and accordingly, product
and engineering, procurement and construction revenue
is not recognized when sales are made. As the Company’s
development business expands, it is installing power plants
for customers that have executed power purchase agreements
(PPAs). These assets generally are the subject of sale-
leaseback transactions with PNC, which are recorded under
the financing method of accounting for a sale-leaseback.
Under the finance method, the Company does not recognize
the proceeds received from the lessor as a sale of such
assets. The power plants are recognized as Project assets
on the balance sheet and revenue will be recognized as
electricity revenue is earned over the life of the power purchase
agreement or when a definitive sales agreement is executed.
With the transition of manufacturing to South Korea in POSCO
Energy’s manufacturing facility for POSCO Energy’s demand,
we expect that production in the Company’s Torrington, CT
manufacturing facility will be largely dictated by the demand
of the U.S. market. As a result, quarterly revenue will vary
depending on the timing and level of demand in the U.S. and
the project revenue recognition method.
Cost of product sales decreased $55.1 million for the year
ended October 31, 2016, to $63.5 million compared to $118.5
million in the prior year period. The decrease in cost of sales in
fiscal 2016 was driven by lower overall product volume during
Annual Report 2016
25
the fiscal year and retention of project assets on balance sheet
versus a sale to end customer or investor. 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 and inventory excess and obsolescence charges.
At October 31, 2016, product sales backlog totaled approximately
$24.9 million compared to $90.7 million at October 31, 2015.
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, 2016 and 2015 were
as follows:
(dollars in thousands)
Service agreements and license revenues
Cost of service agreements and license revenues
Gross (loss) profit from service agreements and license revenues
$ (498 )
$ 2,711
Service agreements and license revenues gross margin
(1.5)%
12.9%
Years Ended October 31,
Change
2016
2015
$
$32,758
$21,012
33,256
18,301
$11,746
14,955
$ (3,209)
%
56
82
118
Revenues for the year ended October 31, 2016 from service
agreements and license fee and royalty agreements totaled
$32.8 million, compared to $21.0 million for the prior year. The
increase relates primarily to more module exchanges performed
in 2016, some of which resulted from service contract extensions
for certain projects. Revenue for license fee and royalty
agreements totaled $6.2 million and $4.7 million for the years
ended October 31, 2016 and 2015, respectively.
Service agreements and license cost of revenues increased to
$33.3 million for fiscal year 2016 from $18.3 million for the prior
year, resulting in a decrease in gross margin to a loss of 1.5%
from a profit of 12.9% during the year-ago period. The decrease
in gross margin over the prior year relates to an increase in
performance guarantee accruals due to plant performance at
certain sites, contract loss accruals recorded in connection
with the extension of certain legacy contracts as well as due to
changes in estimated costs for certain legacy contracts, and
charges incurred in connection with termination of service
agreements at certain sites.
At October 31, 2016, service backlog totaled approximately
$347.3 million compared to $254.1 million at October 31, 2015.
Service backlog does not include future royalties or license
revenues. This backlog is for service agreements of up to twenty
years and is expected to generate positive margins and cash
flows based on current estimates.
Advanced Technologies Contracts
Advanced technologies contracts revenue and related costs for the years ended October 31, 2016 and 2015 were as follows:
(dollars in thousands)
Advanced technologies contracts
Cost of advanced technologies contracts
Gross profit
Advanced technologies contracts gross margin
Years Ended October 31,
Change
2016
2015
$ 12,931
$13,470
11,879
13,470
$ 1,052
$
—
8.1%
—%
$
$ (539)
(1,591)
$ 1,052
%
(4)
(12)
Advanced technologies contracts revenue for the year ended
October 31, 2016 was $12.9 million, representing a decrease
of $0.5 million when compared to $13.5 million of revenue for
the year ended October 31, 2015. Cost of advanced technologies
contracts decreased $1.6 million to $11.9 million for the year
ended October 31, 2016, compared to $13.5 million for the prior
year. Gross profit from advanced technologies contracts for
the year ended October 31, 2016 was $1.1 million compared
to breakeven for the year ended October 31, 2015, and gross
margin was 8.1% compared to breakeven during the prior year
period. The increase in gross margin is related to timing and
mix of contracts currently being performed, particularly the
transition to a larger mix of private industry contracts.
At October 31, 2016, advanced technology contract backlog
totaled approximately $60.1 million compared to $36.5 million
at October 31, 2015.
26
FuelCell Energy
Administrative and selling expenses
Administrative and selling expenses were $25.2 million for the
year ended October 31, 2016 compared to $24.2 million for the
year ended October 31, 2015. The increase results primarily from
higher business development costs incurred early in the year.
Business development costs may vary from period to period
depending on the nature of customer and state-level requests
for proposals.
Research and development expenses
Research and development expenses increased $3.4 million to
$20.8 million for the year ended October 31, 2016, compared
to $17.4 million during the year ended October 31, 2015. The
increase in research and development expenses reflects
increased research and development activity related to
near-term product introductions, including the HEFC. This
configuration has an overall electrical efficiency of approximately
sixty percent and is designed for utility scale applications and
data centers. The first power plant is currently being installed
and is expected to be fully operational in fiscal year 2017.
Loss from operations
Loss from operations for the year ended October 31, 2016 was
$46.4 million compared to a loss of $28.9 million for the year
ended October 31, 2015, primarily as a result of lower gross
margins in fiscal year 2016.
Interest expense
Interest expense for the years ended October 31, 2016 and 2015
was $5.0 million and $3.0 million, respectively. The increase
results from borrowings under the Company’s new Hercules
Loan and Security Agreement, the $10.0 million low-cost loan
granted by the State of Connecticut in early 2016, and interest
expense related to sales-leaseback transactions recorded
under the finance method. The interest expense for both
periods includes interest for the amortization of the redeemable
preferred stock of a subsidiary fair value discount of $1.8 million.
Other income (expense), net
Other income (expense), net, was other income, net of $0.6
million for the year ended October 31, 2016 compared to other
income, net of $2.4 million for the year ended October 31, 2015.
Unrealized foreign exchange gains aggregated to $0.1 million
and $1.7 million in fiscal year 2016 and 2015, respectively,
which primarily related to the preferred stock obligation of our
Canadian subsidiary, FCE Ltd. FCE Ltd.’s functional currency
is U.S. dollars, while the preferred stock obligation is payable
in Canadian dollars. Refundable research and development
tax credits for the years ended October 31, 2016 and 2015
were $0.4 million and $0.6 million, respectively.
Provision for income taxes
We have not paid federal or state income taxes in several years
due to our history of net operating losses (NOLs), although
we have paid income taxes in South Korea. For the year ended
October 31, 2016, our provision for income taxes was $0.5
million, compared to $0.3 million in the prior year. 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, 2016, we had $748.6 million of federal NOL
carryforwards that expire in the years 2020 through 2035 and
$405.8 million in state NOL carryforwards that expire in the
years 2015 through 2035. Additionally, we had $11.1 million of
state tax credits available, of which $0.7 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 each
of the years ended October 31, 2016 and 2015 was $0.3 million.
During October 2016, the Company purchased the noncontrolling
interest in FuelCell Energy Services, GmbH, from Fraunhofer
IKTS, giving the Company sole ownership and eliminating future
noncontrolling interest in earnings.
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, 2016
and 2015.
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, 2016 and 2015, net loss attributable to common
shareholders was $54.2 million and $32.6 million, respectively,
and basic and diluted loss per common share was $1.82 and
$1.33, respectively.
COMPARISON OF THE YEARS ENDED OCTOBER 31, 2015 AND 2014
Revenues and Costs of Revenues
Our revenues and cost of revenues for the years ended October 31, 2015 and 2014 were as follows:
(dollars in thousands)
Total revenues
Total costs of revenues
Gross profit
Gross margin
Years Ended October 31,
Change
2015
2014
$163,077
$180,293
150,301
166,567
$ 12,776
$ 13,726
7.8%
7.6%
$
$(17,216)
(16,266)
$
(950)
%
(10)
(10)
(7)
Annual Report 2016
27
Total revenues for the year ended October 31, 2015 decreased $17.2 million, or 10%, to $163.1 million from $180.3 million during
the same period last year. Total cost of revenues for the year ended October 31, 2015 decreased by $16.3 million, or 10%, to $150.3
million from $166.6 million during the same period last year. The Company generated a 7.8% gross margin percentage in fiscal year
2015, which is improved from the prior year margin of 7.6% despite lower revenue. A discussion of the changes in product sales,
service agreement and license revenues, and advanced technologies contract revenues follows.
Product Sales
Our product sales, cost of product sales and gross profit for the years ended October 31, 2015 and 2014 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
2015
2014
$128,595
$136,842
118,530
126,866
$ 10,065
$
9,976
7.8%
7.3%
$
$(8,247)
(8,336)
$
89
%
(6)
(7)
1
Product sales for the year ended October 31, 2015 included $19.6 million of power plant revenue, $84.5 million from sales of fuel cell
kits and modules and $24.5 million of revenue primarily related to power plant component sales and engineering, procurement and
construction services (EPC services). This is compared to product sales for the year ended October 31, 2014 which included $22.2
million of power plant revenue, $95.7 million fuel cell kits and module revenue and $18.9 million of revenue primarily from power
plant component sales and EPC services. Product sales decreased $8.2 million, or 6%, for the year ended October 31, 2015 to $128.6
million from $136.8 million for the prior year period. The decline in revenue during the period is due to decreased sales of fuel cell
kits to POSCO and power plant revenue partly offset by an increase in engineering and construction services.
Cost of product sales decreased $8.3 million for the year ended October 31, 2015, to $118.5 million compared to $126.9 million
in the same prior year period. Gross profit increased slightly despite the lower sales volume primarily due to lower warranty
and quality expenses. 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 and inventory excess and
obsolescence charges.
At October 31, 2015, product sales backlog totaled approximately $90.7 million compared to $113.1 million at October 31, 2014.
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, 2015 and 2014 were
as follows:
(dollars in thousands)
Service agreements and license revenues
Cost of service agreements and license revenues
Gross profit from service agreements and license revenues
Years Ended October 31,
Change
2015
$ 21,012
18,301
$ 2,711
2014
$ 25,956
23,037
$ 2,919
$
$ (4,944)
(4,736)
$ (208)
%
(19)
(21)
(7)
Service agreements and license revenues gross margin
12.9%
11.2%
Revenues for the year ended October 31, 2015 from service
agreements and license fee and royalty agreements totaled
$21.0 million, compared to $26.0 million for the prior year. The
decrease was due to the timing of module exchanges during the
year ended October 31, 2015 compared to the prior year period.
Revenue for license fee and royalty agreements totaled $4.7
million and $4.3 million for the years ended October 31, 2015
and 2014, respectively.
Service agreements and license cost of revenues decreased
to $18.3 million for fiscal year 2015 from $23.0 million for the
prior year, resulting in an increase in gross margin to 12.9%
from 11.2% during the year-ago period. The increase in gross
margin reflects higher margins recognized on new service
agreements related to the growing 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.
At October 31, 2015, service backlog totaled approximately
$254.1 million compared to $196.8 million at October 31, 2014.
Service backlog does not include future royalties, license or
electricity revenues.
28
FuelCell Energy
Advanced Technologies Contracts
Advanced technologies contracts revenue and related costs for the years ended October 31, 2015 and 2014 were as follows:
(dollars in thousands)
Advanced technologies contracts
Costs of advanced technologies contracts
Gross profit
Years Ended October 31,
Change
2015
$13,470
13,470
$
—
2014
$17,495
16,664
$
831
$
$(4,025)
(3,194)
$ (831)
%
(23)
(19)
(100)
Advanced technologies contracts gross margin
—%
4.7%
Advanced technologies contracts revenue for the year ended
October 31, 2015 was $13.5 million, representing a decrease
of $4.0 million when compared to $17.5 million of revenue for
the year ended October 31, 2014. The decrease is primarily
attributable to the completion of a data center fuel cell power
plant research project. Cost of advanced technologies contracts
decreased $3.2 million to $13.5 million for the year ended
October 31, 2015, compared to $16.7 million for the prior year.
Gross profit from advanced technologies contracts for the
year ended October 31, 2015 was breakeven compared to $0.8
million for the year ended October 31, 2014, and gross margin
was breakeven compared to 4.7% during the prior year period.
The decrease in gross margin is related to the mix of contracts
currently being performed which include cost share obligations.
At October 31, 2015, advanced technology contract backlog
totaled approximately $36.5 million compared to $24.0 million
at October 31, 2014.
Administrative and selling expenses
Administrative and selling expenses were $24.2 million for
the year ended October 31, 2015 compared to $22.8 million
for the year ended October 31, 2014. The increase results
primarily from increased marketing activity and project proposal
expenses for multiple power plant installations and advanced
technology contracts.
Research and development expenses
Research and development expenses decreased $0.8 million
to $17.4 million for the year ended October 31, 2015, compared
to $18.2 million during the year ended October 31, 2014.
The decrease in research and development expenses resulted
from completion of prior year initiatives in enhancing the cost
profile of multi-megawatt installations. Decreases were
partially offset by increased investment in product development
of the high efficiency fuel cell. The Company’s internal
research and development is focused on initiatives that have
near-term product introduction potential and product cost
reduction opportunities, all of which are expected to expand
market opportunities.
preferred stock of a subsidiary fair value discount of $1.8 million
and $2.0 million, respectively.
Other income (expense), net
Other income (expense), net, was net income of $2.4 million for
the year ended October 31, 2015 compared to net expense of
$7.5 million for the year ended October 31, 2014. The fiscal year
2015 income includes unrealized foreign exchange gains of $1.7
million which primarily related to the preferred stock obligation
of our Canadian subsidiary, FCE Ltd for which the functional
currency is U.S. dollars, which is payable in Canadian dollars
and refundable research and development tax credits of $0.6
million. The fiscal year 2014 expense includes a charge of $8.4
million related to the make-whole payment upon conversion
of $38.0 million of principal of then-existing 8.0% Convertible
Notes. The Company primarily used common stock to settle
this make-whole obligation.
Provision for income taxes
We have not paid federal or state income taxes in several years
due to our history of net operating losses (NOLs), although
we have paid income taxes in South Korea. For the year ended
October 31, 2015, our provision for income taxes was $0.3
million. 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, 2015, we had $721.0 million of federal NOL
carryforwards that expire in the years 2020 through 2036 and
$406 million in state NOL carryforwards that expire in the years
2015 through 2035. Additionally, we had $11.0 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, 2015 and 2014 was $0.3 million and
$0.8 million, respectively.
Loss from operations
Loss from operations for the year ended October 31, 2015 was
$28.9 million compared to a loss of $27.3 million in for the year
ended October 31, 2014.
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, 2015
and 2014.
Interest expense
Interest expense for the years ended October 31, 2015 and 2014
was $3.0 million and $3.6 million, respectively. Interest expense
for fiscal year 2014 includes interest of $0.4 million associated
with 8.0% Unsecured Convertible Notes which were converted to
common stock during fiscal year 2014. Interest expense for both
periods includes interest for the amortization of the redeemable
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,
Annual Report 2016
29
2015 and 2014, net loss attributable to common shareholders
was $32.6 million and $41.3 million, respectively, and
basic and diluted loss per common share was $1.33 and
$2.02, 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.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2016, we believe that our cash, cash equivalents
on hand, cash flows from operating activities, availability under
our loan facilities and access to the capital markets will be
sufficient to meet our working capital and capital expenditure
needs for at least the next twelve months.
Cash and cash equivalents including restricted cash totaled
$118.3 million at October 31, 2016 compared to $85.7 million
at October 31, 2015. At October 31, 2016, restricted cash and
cash equivalents was $34.1 million, of which $9.4 million was
classified as current and $24.7 million was classified as non-
current, compared to $26.9 million total restricted cash and
cash equivalents at October 31, 2015, of which $6.3 million
was classified as current and $20.6 million was classified as
non-current. In addition, the Company has $38.2 million
of availability under its project finance loan agreement with
NRG Energy through its finance subsidiary, which can be used
for project asset development. We also have an effective
shelf registration statement on file with the SEC for issuance
of debt and equity securities.
On November 30, 2016 the Company completed a business
restructuring to reduce costs and align production levels with
current levels of demand in a manner that is consistent with
the Company’s long-term strategic plan.
The Company is reducing materials spend as well as
implementing various cost control initiatives. The workforce
was reduced at both the North American production facility
in Torrington, Connecticut, as well as at corporate offices in
Danbury and remote locations. A total of ninety-six positions,
or approximately seventeen percent of the global workforce,
was impacted. In conjunction with the personnel reduction,
the Company is implementing other measures to reduce
operating costs by at least $6 million on an annualized basis.
The production rate has been reduced to twenty-five megawatts
annually, from the prior rate of fifty megawatts annually, in order
to position for delays in anticipated order flow. A personnel-
related restructuring charge of approximately $3.0 million will
30
FuelCell Energy
be incurred in fiscal year 2017, with approximately one half of the
charge composed of cash severance costs and the remainder
representing non-cash charges. This production level is
anticipated to be temporary and will be reevaluated as order flow
dictates, with any future increases being undertaken from what
is now a lower cost basis.
Project development activities are continuing with proposals
being submitted for a utility-scale fuel cell only request for
proposal process in New York with decisions expected in the first
half of 2017. The Company also hopes to continue to develop and
complete utility-scale fuel cell projects in Connecticut under
future processes to further the State’s stated critical energy
goals. Favorable legislative and regulatory developments in New
York and California are expected to be supportive of projects in
the Company’s pipeline and the European market is expanding
as illustrated by the second utility order for E.On Connecting
Energies GMBH which was recently announced by the Company.
Fuel cell carbon capture opportunities are advancing with a
demonstration project at a utility-owned coal/gas-fired power
plant and developing interest from Canadian oil sands operators
as demonstrated by a recently announced engineering study.
The Company’s future liquidity will be dependent on obtaining
a combination of increasing order and contract volumes,
increasing cash flows from our power purchase agreement
and service portfolios and cost reductions necessary to achieve
profitable operations. Management currently estimates that the
Company could be net income positive in the range of 60-70 MW
of annual production volume. This estimate assumes a sales mix
of turn-key projects in the U.S. and Europe, royalties from the
Asia market and growing service, power purchase agreement
and advanced technologies revenues and margins.
Our business model continues to evolve. As a result of the
strong, predictable and recurring cash flows of our projects,
proliferation of power purchase agreements in the industry and
access to capital, the Company has been retaining projects on
the balance sheet versus sale to an end customer, investor,
utility or YieldCo. This provides the Company with the full benefit
of future cash flows under the PPA’s. Our operating portfolio
(currently 11.2 MW) contributes higher long-term cash flows to
the Company than if these projects had been sold. The Company
plans to continue to grow this portfolio while also selling
projects to investors. Retaining long-term cash flow positive
PPAs combined with our service fleet reduces reliance on new
project sales to achieve cash flow positive operations.
The Company has a contract backlog totaling approximately
$432.3 million at October 31, 2016. This backlog includes
approximately $347.3 million of service and power purchase
agreements, with an average term of approximately 15 years
weighted based on dollar backlog and utility service contracts
up to twenty years in duration, providing a committed source of
revenue to the year 2036. 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 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. Utility
scale projects in our pipeline range in size from 5.6 MW up to
63 MW. These projects help both utilities and states meet their
renewable portfolio standards.
The Company produced approximately 62 MW during fiscal
year 2016 at its production facility in Torrington, Connecticut.
This facility is currently producing at an annual rate of 25MW
and has an annual manufacturing capacity of 100 MW under
its current configuration. At October 31, 2016, our backlog of
future production for existing product sales, service and power
purchase agreements is approximately 102.8 MW for the U.S.
and European markets. We expect approximately 13 MW to be
delivered over the next twelve months. The Company is targeting
converting at least 70 MW of our sales pipeline into incremental
backlog in 2017 in order to deploy inventory and project assets as
well as utilize our available capacity. Based on the timing of new
contracts, the Company will evaluate increases to the production
schedule. Based on hiring and adjustments to the supply chain,
we estimate that it takes approximately six to nine months
to incrementally ramp to an additional 25 MW of annualized
production volume.
Factors that may impact our liquidity in 2017 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 includes the development of turn-key projects and we
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. Alternatively, 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.
In markets where there is a compelling value proposition, we
may also build one or more power plants on an uncontracted
“merchant” basis in advance of securing long-term contracts
for the project attributes (including energy, renewable energy
credits and capacity). Delays in construction progress or in
completing the sale of our projects which we are self-financing
may impact our liquidity. At October 31, 2016, we had $40.0
million of committed construction period and term project
financing, of which $38.2 million was available, to enable
this strategy though we may seek to use our cash balances
or other forms of financing as necessary. We have partnered
with financial institutions to secure long-term debt and
leases for our PPA portfolio. In fiscal year 2016, we financed
approximately $41.5 million of projects and expect that activity
to continue in 2017.
• The amount of accounts receivable at October 31, 2016 and
2015 was $38.7 million ($14.1 million classified as Other
assets, net) and $60.8 million, respectively. Included in
accounts receivable at October 31, 2016 and 2015 was $22.4
million and $41.0 million, respectively, 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 the contracts. 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, 2016 and 2015
was $73.8 million and $65.8 million, respectively, which
includes work in process inventory totaling $48.5 million and
$36.7 million, respectively. 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 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.
• Cash and cash equivalents at October 31, 2016 included $5.3
million of cash advanced by POSCO Energy for raw material
purchases made on its behalf by FuelCell Energy. Under an
inventory procurement agreement that ensures coordinated
purchasing from the global supply chain, FuelCell Energy
provides procurement services for POSCO Energy and receives
compensation for services rendered. While POSCO Energy
makes payments to us in advance of supplier requirements,
quarterly receipts may not match disbursements.
• The amount of total project assets including current and
long-term at October 31, 2016 and October 31, 2015 was $47.1
million and $12.2 million, respectively. Project assets consist
of capitalized costs for fuel cell projects in various stages of
development, whereby we have entered into power purchase
agreements prior to entering into a definitive sales or long-
term financing agreement for the project, or of capitalized
costs for fuel cell projects which are the subject of a sale-
leaseback transaction with PNC or projects in development
for which we expect to secure long-term contracts. There
were no short-term project assets as of October 31, 2016. The
long-term portion of project assets of $29.3 million represents
completed installations for which there is a PPA and which are
the subject of our sale-leaseback program and $17.8 million of
project assets represent projects in development. At October 31,
2016, we had 8.4 MW of our operating project assets that we
estimate will generate approximately $6.0 million a year of
revenue for the Company. We expect this portfolio to continue
to grow in fiscal year 2017.
• 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.
• Under the terms of certain contracts, the Company will provide
performance security for future contractual obligations.
At October 31, 2016, we have pledged approximately $34.1
million of our cash and cash equivalents as collateral for
performance security and for letters of credit for certain banking
requirements and contracts. This balance may increase with a
growing backlog and installed fleet.
Annual Report 2016
31
• For fiscal year 2017, we forecast capital expenditures in the
range of $9.0 - $12.0 million compared to $7.7 million in fiscal
year 2016. We have commenced the first phase of our project
to expand our existing 65,000 square foot manufacturing
facility in Torrington, Connecticut by approximately 102,000
square feet for a total size of 167,000 square feet. Initially,
this additional space will be used to enhance and streamline
logistics functions through consolidation of satellite warehouse
locations and will provide the space needed to reconfigure
the existing production process to improve manufacturing
efficiencies and realize cost savings. On November 9, 2015,
the Company closed on a definitive Assistance Agreement
with the State of Connecticut and received a disbursement
of $10 million to be used for the first phase. Pursuant to the
terms of the loan, payment of principal is deferred for the
first four years of this 15 year loan. Interest at a fixed rate of
2% is payable beginning December 2015. Up to 50 percent of
the principal balance is forgivable if certain job creation and
retention targets are met.
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), (iii) project level debt
and equity financing and (iv) 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 $118.3 million at October 31, 2016 compared
to $85.7 million at October 31, 2015. At October 31, 2016,
restricted cash and cash equivalents was $34.1 million, of
which $9.4 million was classified as current and $24.7 million
was classified as non-current, compared to $26.9 million total
restricted cash and cash equivalents at October 31, 2015, of
which $6.3 million was classified as current and $20.6 million
was classified as non-current.
The following table summarizes our consolidated cash flows:
2016
2015
2014
Consolidated Cash Flow Data:
Net cash used in
operating activities
$(46,595) $(44,274) $(57,468)
Net cash used in
investing activities
(41,452)
(6,930)
(7,079)
Net cash provided by
financing activities
120,658
28,219
95,941
Effects on cash from changes
in foreign currency rates
(35)
(108)
(260)
Net increase (decrease)
in cash, cash
equivalents, and
restricted cash
$ 32,576 $(23,093) $ 31,134
The key components of our cash inflows and outflows were
as follows:
Operating Activities—Cash used in operating activities was
$46.6 million during fiscal year 2016 compared to $44.3 million
used in operating activities during fiscal year 2015. Net cash
used in operating activities during fiscal year 2016 is primarily
the result of a net loss of $51.2 million and a $26.6 million
decrease in deferred revenue. Cash used by operating activities
also included a $3.0 million reduction in accounts payable,
and an $8.1 million increase in inventories. 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. Cash used by operating
activities was partially offset by a $30.2 million decrease in
accounts receivable.
Net cash used in operating activities during fiscal year 2015
is primarily a result of increases in current project assets
and inventory of $11.4 million and $10.1 million, respectively,
due to an increase in power purchase agreements in backlog
and projects under development versus direct sales in the
comparable prior year period. Decreases in fiscal year 2015
accounts payable and deferred revenue of $7.2 million and $3.9
million, respectively, also contributed to cash used in operating
activities. These changes were partially offset by a decrease in
accounts receivable of $3.2 million and an increase in accrued
liabilities of $6.4 million.
Investing Activities—Cash used in investing activities was
$41.5 million during fiscal year 2016 compared to net cash
used in investing activities of $6.9 million during fiscal year
2015. Net cash used during fiscal year 2016 consists of a $33.7
million investment in project assets as a result of expanding
our business model to retain operating PPAs with contract
durations of up to twenty years. At October 31, 2016, we had
8.4 MW of operating assets expected to generate revenues of
approximately $6.0 million per year on an annualized basis.
Capital expenditures totaled $7.7 million primarily related to
the expansion of our Torrington facility.
Net cash used during fiscal year 2015 pertains to capital
expenditures including expenditures for upgrades to existing
machinery, equipment and investments in automation
equipment that improved the efficiency and cost profile of our
operations and facilitated our Torrington facility expansion
which commenced in early 2016.
Financing Activities—Net cash provided by financing activities
was $120.7 million during fiscal year 2016 compared to $28.2
million in the prior year period. Net cash provided by financing
activities during the year ended October 31, 2016 includes
net proceeds from open market sales of common stock of
$36.2 million and proceeds from a registered direct offering of
common stock and warrants to a single institutional investor
totaling $34.7 million. The Company also had net debt proceeds
of $55.5 million consisting of long-term debt from the State
of Connecticut for our facility expansion, Hercules Capital Inc.
to support working capital and NRG Energy and PNC Energy
Capital to support long-term project financing. Proceeds of
financing activities were partially offset primarily by the payment
of preferred dividends and return of capital payments of $4.2
million and the payment of deferred finance costs of $1.8 million.
32
FuelCell Energy
Net cash provided by financing activities during the fiscal year ended October 31, 2015 includes proceeds from open market sales
of common stock of $27.1 million and net debt proceeds of $5.2 million, partially offset by the payment of preferred dividends and
return of capital payments of $4.2 million.
Commitments and Significant Contractual Obligations
A summary of our significant future commitments and contractual obligations at October 31, 2016 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)
Sale-leaseback financing obligation (4)
Option fee (5)
Series B Preferred dividends payable (6)
Payments Due by Period
Total
Less than
1 year
1-3
years
3-5 More than
5 years
years
$ 61,677
$52,141
$ 9,455
$ 81
$ —
7,221
49,315
8,209
24,940
1,450
—
956
4,553
1,695
2,906
500
—
1,911
26,208
2,066
6,809
650
—
4,354
2,571
697
6,098
300
—
—
15,983
3,751
9,127
—
—
Total
$152,812
$62,751
$47,099
$14,101
$28,861
(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 percent quarterly rate on the unpaid principal balance, and additional dividends will accrue on
the cumulative unpaid dividends at a rate of 1.25 percent 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 payments due on sale-leaseback transactions of our wholly-owned subsidiary, under its financing agreement with PNC. Projects
financed under this facility are generally payable in fixed quarterly installments over a ten-year period.
(5) The Company entered into an agreement with one of its customers on June 29, 2016 which includes a fee for the purchase of the plants at the end of the term
of the agreement. The option fee is payable in installments over the term of the agreement.
(6) 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 ($141) for 20 trading days during any consecutive 30 trading day period.
In April 2016, the Company entered into a loan and security
agreement (the “Agreement”) with Hercules Capital, Inc.
(“Hercules”) for an aggregate principal amount of up to $25.0
million, subject to certain terms and conditions. The Company
received an initial term loan advance on the date of closing of
$15.0 million and an additional $5.0 million in September 2016.
As of October 31, 2016, drawdowns and accrued amortization of
the end of term charge on the facility aggregated $20.5 million.
The Company may take an additional loan advance of $5.0
million beginning on the later of January 1, 2017 or the date
certain milestones are met, and June 15, 2017. The loan is a 30
month secured facility and the term loan interest is currently
9.5%. Interest is paid on a monthly basis. As of October 31, 2016,
interest only payments are required through November 1, 2017.
If certain additional performance milestones are achieved, the
interest only period would be extended to May 1, 2018. Upon
completion of interest only payments, the loan balance and
all accrued and unpaid interest is due and payable in equal
monthly installments by October 1, 2018. Per the terms of the
Agreement, there is an end of term charge of $1.7 million which
is being accreted by the effective interest rate method which
would increase to $2.1 million if the Company receives
an additional $5.0 million advance as discussed above.
On November 9, 2015, the Company closed on a definitive
Assistance Agreement with the State of Connecticut and
received a disbursement of $10.0 million to be used for the
first phase of the expansion of our Torrington, Connecticut
manufacturing facility. In conjunction with this financing, the
Company entered into a $10.0 million Promissory Note and
related security agreements securing the loan with equipment
liens and a mortgage on its Danbury, Connecticut location.
Pursuant to the terms of the loan, payment of principal is
deferred for the first four years. Interest at a fixed rate of 2
percent is payable beginning December 2015. The financing is
payable over 15 years, and is predicated on certain terms and
conditions, including the forgiveness of up to 50 percent of the
loan principal if certain job retention and job creation targets
are reached. In addition, the Company may receive up to $10.0
million of non-refundable transferable tax credits if certain
terms and conditions are met.
The second phase of our manufacturing expansion, for which
we will be eligible to receive an additional $10.0 million in low-
cost financing from the State of Connecticut, will commence as
demand supports. This includes adding manufacturing equipment
to increase annual capacity from the current 100 megawatts to
Annual Report 2016
33
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 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 cost of
both phases of the expansion could be up to $65.0 million over
a five-year period, including the proposed Advanced Technology
Center and tri-generation fuel cell power plant.
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, 2016, drawdowns on the facility aggregated
$1.8 million.
In March 2013, we 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 percent and principal
repayments will commence on the eighth anniversary of the
project’s provisional acceptance date which is in December 2021.
Outstanding amounts are secured by future cash flows from the
Bridgeport contracts. The outstanding balance on the CEFIA
Note as of October 31, 2016 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, 2016, we had
an outstanding balance of $2.6 million on this loan. The interest
rate is 5 percent. 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 $34.1 million of our cash
and cash equivalents as performance security and for letters
of credit for certain banking requirements and contracts.
At October 31, 2016, outstanding letters of credit totaled
$7.9 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 as of July 31, 2016 includes
$15.0 million which was 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 is
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. The restricted
cash balance as of October 31, 2016 also includes $8.5 million
to support obligations of the power purchase and service
agreements related to the PNC sale-leaseback transaction.
At October 31, 2016, we have uncertain tax positions aggregating
$15.7 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:
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. 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. As of October 31, 2016, our operating portfolio is 11.2 MW.
Service and warranty agreements
We warranty our products for a specific period of time against
manufacturing or performance defects. Our standard U.S.
warranty period is generally fifteen months after shipment
or twelve months after acceptance of the product. We have
agreed to warranty kits and components for twenty-one 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 up to twenty 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, 2016,
Advanced technologies contracts backlog totaled $60.1 million,
of which $39.6 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.
34
FuelCell Energy
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, 2016, based on criteria for effective internal
control over financial reporting established in the Internal Control—Integrated Framework 2013, 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, 2016 based on the specified criteria.
Arthur A. Bottone
President and Chief Executive Officer
Michael S. Bishop
Senior Vice President, Chief Financial Officer, Corporate Secretary and Treasurer
Annual Report 2016
35
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, 2016 and
2015, and the related consolidated statements of operations and comprehensive loss, changes in equity (deficit), and cash flows
for each of the years in the three-year period ended October 31, 2016. We also have audited FuelCell Energy, Inc.’s internal control
over financial reporting as of October 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013)
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, 2016 and 2015, and the results of its operations and its cash flows for
each of the years in the three-year period ended October 31, 2016, 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, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Hartford, Connecticut
January 12, 2017
36
FuelCell Energy
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 $193 and $544 at October 31, 2016
and 2015, respectively
Inventories
Project assets current
Other current assets
Total current assets
Restricted cash and cash equivalents—long-term
Project assets noncurrent
Property, plant and equipment, net
Goodwill
Intangible assets
Other assets, net
Total assets
LIABILITIES AND EQUITY
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 $64,020 at October 31, 2016 and October 31, 2015)
Total equity:
Shareholders’ equity
Common stock ($.0001 par value; 75,000,000 and 39,583,333 shares authorized at October 31,
2016 and 2015, respectively; 35,174,424 and 25,964,710 shares issued and outstanding at
October 31, 2016 and 2015, respectively)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Treasury stock, Common, at cost (21,527 and 5,845 shares at October 31, 2016 and 2015,
respectively)
Deferred compensation
Total shareholders’ equity
Noncontrolling interest in subsidiaries
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
October 31,
2016
2015
$ 84,187
$ 58,852
9,437
6,288
24,593
73,806
—
10,466
202,469
24,692
47,111
36,640
4,075
9,592
17,558
60,790
65,754
5,260
6,954
203,898
20,600
6,922
29,002
4,075
9,592
3,142
$ 342,137
$ 277,231
$
5,275
$
7,358
18,475
20,900
6,811
802
52,263
20,974
12,649
81,998
167,884
59,857
4
1,004,566
(889,630)
(544)
(179)
179
114,396
—
114,396
15,745
19,175
31,787
823
74,888
22,646
12,088
12,998
122,620
59,857
3
934,488
(838,673)
(509)
(78)
78
95,309
(555)
94,754
$ 342,137
$ 277,231
Annual Report 2016
37
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(Amounts in thousands, except share and per share amounts)
For the Years Ended October 31,
Revenues:
Product sales (including $43.6 million, $100.5 million and $115.0 million of related
party revenue)
Service agreements and license revenues (including $8.5 million, $11.4 million and
$14.9 million of related party revenue)
Advanced technologies contract revenues (including $0 million, $0.6 million and
$0.4 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 (loss) profit
Operating expenses:
Administrative and selling expenses
Research and development expenses
Total operating expenses
Loss from operations
Interest expense
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 loss:
Foreign currency translation adjustments
Comprehensive loss
See accompanying notes to consolidated financial statements.
38
FuelCell Energy
2016
2015
2014
$ 62,563
$ 128,595
$136,842
32,758
21,012
25,956
12,931
108,252
63,474
33,256
11,879
108,609
(357)
25,150
20,846
45,996
(46,353)
(4,958)
622
(50,689)
(519)
(51,208)
251
(50,957)
(3,200)
13,470
163,077
118,530
18,301
13,470
150,301
12,776
24,226
17,442
41,668
(28,892)
(2,960)
2,442
(29,410)
(274)
(29,684)
325
(29,359)
(3,200)
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)
(38,395)
(488)
(38,883)
758
(38,125)
(3,200)
$ (54,157)
$ (32,559)
$ (41,325)
$ (1.82)
$ (1.82)
$
$
(1.33)
(1.33)
$
$
(2.02)
(2.02)
29,773,700
29,773,700
24,513,731
20,473,915
24,513,731
20,473,915
For the Years Ended October 31,
2016
2015
2014
$ (51,208)
$ (29,684)
$ (38,883)
(35)
(350)
(260 )
$ (51,243)
$ (30,034)
$ (39,143)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
For the Years Ended October 31, 2016, 2015 and 2014
(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
Noncontrolling
Interest in
Subsidiaries
Total Equity
(Deficit)
Balance, October 31, 2013
16,359,200
$ 2 $ 758,674 $ (771,189)
$ 101 $ (53)
$ 53 $ (780) $ (13,192)
Sale of common stock
Common stock issued for convertible
note conversions including interest
Common stock issued to settle make-
whole obligation
Share-based compensation
Taxes paid upon vesting of restricted stock
awards, net of stock issued under benefit plans
Noncontrolling interest in subsidiaries
Preferred dividends — Series B
Adjustment for deferred compensation
Effect of foreign currency translation
Net loss attributable to FuelCell Energy, Inc.
Balance, October 31, 2014
Sale of common stock
Share-based compensation
Taxes paid upon vesting of restricted stock
awards, net of stock issued under benefit plans
Reclassification of noncontrolling interest
due to liquidation of subsidiary
Noncontrolling interest in subsidiaries
Preferred dividends — Series B
Adjustment for deferred compensation
Effect of foreign currency translation
Net loss attributable to FuelCell Energy, Inc.
4,973,604 —
105,966
2,063,896 —
33,306
459,523 —
— —
12,883
2,908
76,136 —
(1,079)
— —
— —
(2,359) —
— —
— —
—
(3,200)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(38,125)
(260)
—
—
—
—
—
—
—
—
(42)
—
—
—
—
—
—
—
—
—
42
—
—
— 105,966
—
—
—
—
(758)
—
—
—
—
33,306
12,883
2,908
(1,079)
(758)
(3,200)
—
(260)
(38,125)
23,930,000
$ 2 $ 909,458 $ (809,314)
$ (159) $ (95)
$ 95 $ (1,538) $ 98,449
1,845,166
1
— —
26,920
3,157
191,593 —
(539)
(1,308)
—
(3,200)
—
— —
— —
— —
(2,049) —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17
—
—
—
—
—
—
—
—
(17)
—
—
—
—
—
1,308
(325)
—
—
—
—
26,921
3,157
(539)
—
(325)
(3,200)
—
(350)
(29,359)
—
—
—
(29,359)
(350)
—
Balance, October 31, 2015
25,964,710
$ 3 $ 934,488 $ (838,673)
$ (509) $ (78)
$ 78 $ (555) $ 94,754
Sale of common stock, prepaid warrants and
warrants, public offering
Exercise of prepaid warrants
Sale of common stock
Common stock issued, non-employee
compensation
Share-based compensation
1,474,000 —
34,736
1,100,000 —
—
6,023,372
1
36,055
24,379 —
— —
Taxes paid upon vesting of restricted stock
awards, net of stock issued under benefit plans
587,963 —
Preferred dividends — Series B
Noncontrolling interest in subsidiary
Purchase of noncontrolling shares of subsidiary
Effect of foreign currency translation
Adjustment for deferred compensation
Net loss attributable to FuelCell Energy, Inc.
— —
— —
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(35)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (101)
—
—
101
—
— 34,736
—
—
— 36,056
—
—
—
—
(251)
806
—
—
157
3,425
(286)
(3,200)
(251)
(3)
(35)
—
— (50,957)
157
3,425
(286)
(3,200)
—
(809)
—
—
— (50,957)
Balance, October 31, 2016
35,174,424 $4 $1,004,566 $(889,630 )
$(544) $(179)
$ 179 $ — $114,396
See accompanying notes to consolidated financial statements.
Annual Report 2016
39
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
Gain from change in fair value of embedded derivatives
Make whole derivative expense
Depreciation
Amortization of convertible note discount and non-cash interest expense
Foreign currency transaction gains
Other non-cash transactions
Decrease (increase) in operating assets:
Accounts receivable
Inventories
Project assets
Other assets
(Decrease) increase in operating liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities:
Capital expenditures
Expenditures for long-term project assets
Net cash used in investing activities
Cash flows from financing activities:
Repayment of debt
Proceeds from debt
Payments of deferred finance costs
Purchase of non-controlling shares of subsidiary
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, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash—beginning of year
2016
2015
2014
$ (51,208)
$(29,684)
$ (38,883)
3,425
3,157
(14)
—
4,949
3,207
(324)
451
30,235
(8,052)
—
(837)
(3,019)
1,240
(26,648)
(46,595)
(7,726)
(33,726)
(41,452)
(30,452)
85,935
(1,758)
(3)
70,929
(4,170)
177
120,658
(35)
32,576
85,740
(23)
—
4,099
1,830
(2,075)
412
3,173
(10,100)
(11,398)
1,022
(7,224)
6,435
(3,898)
(44,274)
(6,930)
—
(6,930)
(1,535)
6,763
—
—
27,060
(4,202)
133
28,219
(108)
(23,093)
108,833
2,908
(126)
8,347
4,384
2,140
(571)
146
(15,378)
1,059
—
3,417
(1,566)
(11,056)
(12,289)
(57,468)
(6,295)
(784)
(7,079)
(5,971)
250
—
—
105,844
(4,343)
161
95,941
(260)
31,134
77,699
Cash, cash equivalents, and restricted cash—end of year
$ 118,316
$ 85,740
$108,833
See accompanying notes to consolidated financial statements.
40
FuelCell Energy
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 31, 2016, 2015 and 2014 (Tabular amounts in thousands, except share and per share amounts)
Note 1. Nature of Business, Basis of Presentation and
Significant Accounting Policies
Significant Accounting Policies
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.
Our operations are funded primarily through sales of equity
instruments to strategic investors or in public markets,
debt financing and local or state government loans or grants.
In order to 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. All intercompany
accounts and transactions have been eliminated. In October
2016, the Company purchased the noncontrolling interest in
FuelCell Energy Services, GmbH.
On December 3, 2015, we effected a 1-for-12 reverse stock
split, reducing the number of our common shares outstanding
on that date from 314.5 million shares to approximately
26.2 million shares. Concurrently with the reverse stock split
the number of authorized shares of our common stock was
reduced proportionately from 475 million shares to 39.6 million
shares. Additionally, the conversion price of our Series B
Preferred Stock, and the exchange price of our Series 1
Preferred Shares, the exercise price of all outstanding options
and warrants, and the number of shares reserved for future
issuance pursuant to our equity compensation plans were all
adjusted proportionately to the reverse stock split. All such
amounts presented herein have been adjusted retroactively
to reflect these changes.
Certain reclassifications have been made to conform to
the current year presentation. Expenditures for long-term
project assets for the year ended October 31, 2014 has been
reclassified on the Consolidated Statement of Cash Flows
from capital expenditures and foreign currency transaction
gains for the year ended October 31, 2014 has been reclassified
on the Consolidated Statement of Cash Flows from Other
non-cash transactions to Foreign currency transaction gains.
The Company also has early adopted Accounting Standards
Update (“ASU”) 2016-18, “Statement of Cash Flows (Topic 230)
Restricted Cash,” and has applied a retrospective transition
method for each period presented. Accordingly, Restricted
Cash and Cash Equivalents has been reclassified as a
component of Cash, Cash Equivalents, and Restricted
Cash in the Consolidated Statement of Cash Flows for all
periods presented.
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, 2016, $34.1
million of cash and cash equivalents was pledged as collateral
for letters of credit and for certain banking requirements and
contractual commitments, compared to $26.9 million pledged
at October 31, 2015. The restricted cash balance includes $15.0
million as of October 31, 2016 and 2015, 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, 2016 and 2015,
we had outstanding letters of credit of $7.9 million and $8.7
million, respectively, which expire on various dates through
April 2019. Cash and cash equivalents at October 31, 2016 and
2015 also included $5.3 million and $9.6 million, respectively,
of cash advanced by POSCO Energy for raw material
purchases made on its behalf by FuelCell Energy. Under an
inventory procurement agreement that ensures coordinated
purchasing from the global supply chain, FuelCell Energy
provides procurement services for POSCO Energy and receives
compensation for services rendered. While POSCO Energy
makes payments to us in advance of supplier requirements,
quarterly receipts may not match disbursements.
Inventories and Advance Payments to Vendors
Inventories consist principally of raw materials and work-in-
process. Cost is determined using the first-in, first-out cost
method. 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 valuation allowances 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.
Project Assets
Project assets consist of capitalized costs for fuel cell projects
in various stages of development, whereby we have entered
into power purchase agreements prior to entering into a
definitive sales or long-term financing agreement for the
project, or of capitalized costs for fuel cell projects which
are the subject of a sale-leaseback transaction with PNC
or projects in development for which we expect to secure
long-term contracts. These projects are actively being
marketed and intended to be sold, although we may choose to
retain ownership of one or more of these projects after they
become operational if we determine it would be of economic
and strategic benefit. Additionally, Project assets include
capitalized costs for fuel cell projects which are the subject of a
sale-leaseback transaction (see “Sale-Leaseback Accounting”
Annual Report 2016
41
below). Project asset costs include costs for developing
and constructing a complete turn-key fuel cell project.
Development costs can include legal, consulting, permitting,
interconnect, and other similar costs. Once we enter into a
definitive sales agreement we expense project assets to cost
of sales after the respective project asset is sold to a customer
and all revenue recognition criteria have been met. We classify
project assets as current if the expected commercial operation
date is less than twelve months and long-term if it is greater
than twelve months from the balance sheet date. The current
portion of project assets is currently held for sale, however,
should the Company elect to retain a project asset, or elect
to enter into a sale-leaseback transaction with respect to it,
it will be classified as long-term upon such election. There
were no short-term project assets as of October 31, 2016.
We review project assets for impairment whenever events or
changes in circumstances indicate that the carrying amount
may not be recoverable.
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,
2016. The goodwill and intangible assets all relate to the
Company’s Versa reporting unit. 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
any of the years presented.
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
42
FuelCell Energy
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. No impairment charges were recorded during any of the
years presented.
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) performance under long-term service
agreements, (v) the sale of electricity under power purchase
agreements (“PPA”), (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., Asia and Europe and from agencies of
the U.S. Government. Revenue from power plant construction,
module 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 and
license and royalty 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,
project 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 revenue. Revenues are recognized based on the
proportion of costs incurred to date relative to total estimated
costs at completion as compared to the contract value. 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. Actual results
could vary from initial estimates and the estimates will be
updated as conditions change.
Revenue from the sale of fuel cell modules, component part
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.
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.
Sale-Leaseback Accounting
From time to time, the Company, through an indirect wholly-
owned subsidiary, enters into sale-leaseback transactions for
commissioned projects where we have entered into a PPA with
a customer who is both the site host and end user of the power
(the “Customer”). Due to the Company’s continuing involvement
with the project and because the leased property being
considered integral equipment, sale accounting is precluded by
Accounting Standard Codification Topic 840-40, “Sale-Leaseback
Transactions.” Accordingly, the Company uses the financing
method to account for these transactions.
Under the financing method of accounting for a sale-leaseback,
the Company does not recognize as income any of the sale
proceeds received from the lessor that contractually constitutes
payment to acquire the assets subject to these arrangements.
Instead, the sale proceeds received are accounted for as
financing obligations and leaseback payments made by the
Company are allocated between interest expense and a
reduction to the financing obligation. Interest on the financing
obligation is calculated using the Company’s incremental
borrowing rate at the inception of the arrangement on the
outstanding financing obligation. Judgment is required to
determine the appropriate borrowing rate for the arrangement
and in determining any gain or loss on the transaction that
would be recorded at the end of the lease term. While we receive
financing for the full value of the related power plant asset, we
have not recognized revenue on the sale-leaseback transaction.
Instead, revenue is recognized through the sale of electricity and
energy credits which are generated as energy is produced.
Warranty and Service Expense Recognition
We warranty our products for a specific period of time against
manufacturing or performance defects. Our U.S. 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, 2016
and 2015, the warranty accrual, which is classified in accrued
liabilities on the consolidated balance sheet, totaled $0.5 million
and $1.0 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 $3.3 million and
$2.6 million at October 31, 2016 and 2015, respectively.
The Company provides for loss accruals for all service
agreements when the estimated cost of future module
exchanges and maintenance and monitoring activities exceeds
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, 2016, our loss accruals on service
agreements totaled $2.7 million compared to $0.8 million
at October 31, 2015.
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, 2016, the Company did
not have an asset related to the residual value of replacement
modules in power plants under service agreements compared to
$2.5 million at October 31, 2015.
Annual Report 2016
43
License Agreements and Royalty Income
We generally recognize license fees and other revenue over
the term of the associated agreement. License fees and royalty
income have been included within revenues on the consolidated
statement of operations.
The Company receives license fees and royalty income from
POSCO Energy as a result of certain manufacturing and
technology transfer agreements. In October 2016, these
agreements were extended until October 31, 2027, after which
they may be extended in five-year increments by mutual
agreement of the parties.
The Cell Technology Transfer Agreement (“CTTA”) 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. The CTTA contains
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
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 fifteen-year license term
on a straight-line basis, and have recognized the amounts
allocated to the module kit deliverables and professional
service deliverables when such items were 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 connection with the CTTA, fees
totaling $18.0 million were paid between fiscal year 2012
and 2015.
The Company also receives royalties from POSCO Energy
under the 2007 Technology Transfer, Distribution and Licensing
Agreement (“TTA”) and the 2009 Stack Technology Transfer
and License Agreement (“STTA”) at the rate of 3.0% of POSCO
Energy net sales. Additionally, under the STTA certain license fee
income aggregating $7.0 million is being recognized ratably over
fifteen years beginning November 1, 2012. Under the terms of
the TTA, POSCO Energy manufactures balance of plant (“BOP”)
in South Korea using its design, procurement and manufacturing
expertise. The 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.
The Company has a Master Service Agreement with POSCO
Energy, whereby POSCO Energy has more responsibility
for servicing installations in Asia that utilize power plants
manufactured by POSCO Energy. The Company performs
engineering and support services for each unit in the installed
fleet and receives quarterly fees as well as a 3.0% royalty on
each fuel cell module replacement under service agreements
44
FuelCell Energy
that were built by POSCO Energy and installed at any plant
in Asia.
In April 2014, the Company entered into an Integrated Global
Supply Chain Plan Agreement (“IGSCP”) with POSCO Energy.
FuelCell Energy provides procurement services for POSCO
Energy and receives compensation as recognized revenue for
services rendered.
The Company recorded revenue of $6.2 million, $3.9 million
and $4.3 million for the years ended October 31, 2016, 2015 and
2014, respectively, relating to the above agreements. Future
license and royalty income will consist of amortization of the
license payments discussed above as well as a 3.0% royalty on
POSCO Energy net product sales related to FCE’s technology and
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.
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, 2016, 2015 and 2014, our top customers accounted
for 78%, 89% and 85%, respectively, of our total annual
consolidated revenue.
The percent of consolidated revenues from each customer for
the years ended October 31, 2016, 2015 and 2014, respectively,
are presented below.
POSCO Energy
The United Illuminating Company
Department of Energy
Dominion Bridgeport Fuel Cell, LLC
BioFuels Energy, LLC
Total
2016
2015
2014
48%
10%
8%
6%
6%
78%
67%
14%
5%
3%
—%
89%
69%
9%
4%
3%
—%
85%
POSCO Energy is a related party and owns approximately 7% of
the outstanding common shares of the Company. Additionally,
NRG Energy is a related party, which owns approximately 4% of
the outstanding common shares of the Company. Revenues from
NRG aggregated less than 3% of consolidated revenues during
each of the years presented.
has early-adopted ASU 2016-18 using a retrospective transition
method for each period presented in this ASU. Accordingly,
Restricted Cash and Cash Equivalents has been reclassified
as a component of Cash, Cash Equivalents, and Restricted
Cash in the Consolidated Statement of Cash Flows for all
periods presented.
Derivatives
We do not use derivatives for speculative purposes and through
fiscal year end 2016, have not used derivatives for hedging
or trading purposes. Our derivative instruments consist of
embedded derivatives in our Series 1 Preferred Shares. We
account for these derivatives using the fair-value method with
changes in fair value recorded to operations. Refer to Note 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 uncollectable
receivables, depreciation and amortization, impairment of
goodwill, intangible and long-lived assets, income 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, FCES GmbH’s and Versa
Power Systems Ltd. financial statements results in translation
gains or losses, which are recorded in accumulated other
comprehensive loss within stockholders’ equity (deficit).
Our Canadian subsidiary, FCE Ltd., is financially and
operationally integrated and 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 gains of $0.3 million, $1.7 million
and $0.6 million for the years ended October 31, 2016, 2015
and 2014, respectively. These amounts have been classified
as other income (expense), net in the consolidated statements
of operations.
Recently Adopted Accounting Guidance
In October 2016, the FASB issued Accounting Standards Update
(ASU) 2016-18, “Statement of Cash Flows (Topic 230) Restricted
Cash.” The amendments require that a statement of cash flows
explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash
or restricted cash equivalents. Therefore, amounts generally
described as restricted cash and restricted cash equivalents
should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The Company
Recent Accounting Guidance Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, “Leases,” which,
for operating leases, requires a lessee to recognize a right-of-
use asset and a lease liability, initially measured at the present
value of the lease payments, in its balance sheet. The standard
also requires a lessee to recognize a single lease cost, calculated
so that the cost of the lease is allocated over the lease term, on
a generally straight-line basis. The ASU is effective for public
companies for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years (first quarter
of fiscal 2020 for the Company). Early adoption is permitted.
The Company has both operating and capital leases (Refer to
Note 17. Commitments and Contingences) as well as sale
leasebacks accounted for under the finance method and may
have other arrangements that contain embedded leases as
characterized in this ASU. We expect this will result in the
recognition of right-of-use assets and lease liabilities not
currently recorded on our consolidated financial statements under
existing accounting guidance, but we are still evaluating all of
the Company’s contractual arrangements and the impact that
adoption of ASU 2016-02 will have on the Company’s consolidated
financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest –
Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs.” This ASU simplifies the
presentation of debt issuance costs by requiring that such costs
be presented in the balance sheet as a direct deduction from
the carrying value of the associated debt instrument, consistent
with debt discounts. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2015 and for
interim periods therein. Adoption of this ASU is not expected
to have a material impact on the Company’s consolidated
financial position.
In May 2014, the FASB issued ASU 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. In March
2015, the FASB voted to defer the effective date by one year
to fiscal year, and interim periods within those fiscal years
beginning after December 15, 2017 (first quarter of fiscal 2019
for the Company), but allow adoption as of the original adoption
date. The Company has numerous different revenue sources
including from the sale and installation of fuel cell power plants,
site engineering and construction services, sale of modules and
spare parts, providing service under service agreements, sale
of electricity under power purchase agreements, license fees
and royalty income from manufacturing and technology transfer
agreements and customer-sponsored advanced technology
projects. This requires application of various revenue recognition
methods under current accounting guidance. Although we
Annual Report 2016
45
anticipate that upon adoption of this new ASU the timing of
revenue recognition for certain of our revenue sources might
change, we are still evaluating the financial statement impacts
of the guidance in this ASU and determining which transition
method we will utilize. In May 2016, the FASB issued ASU
2016-12, “Revenue from Contracts with Customers (Topic 606).”
This topic provides narrow-scope improvements and practical
expedient regarding collectability, presentation of sales tax
collected from customers, non-cash consideration, contract
modifications at transition, completed contracts at transition and
other technical corrections
Note 2. Accounts Receivable
Accounts receivable at October 31, 2016 and 2015 consisted of
the following:
Advanced Technology (including
U.S. Government (1)):
Amount billed
Unbilled recoverable costs
Commercial customers:
Amount billed
Unbilled recoverable costs
Accounts receivable
2016
2015
$ 2,463
3,068
5,531
$
433
3,077
3,510
5,411
13,651
19,062
$24,593
19,331
37,949
57,280
$ 60,790
(1) Total U.S. Government accounts receivable outstanding at October 31,
2016 and 2015 is $2.2 million and $2.6 million, respectively.
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 has not been billed.
Accounts receivable are presented net of an allowance for
doubtful accounts of $0.2 million and $0.5 million at October 31,
2016 and 2015, respectively. Uncollectible accounts receivable
are charged against the allowance for doubtful accounts when
all collection efforts have failed and it is deemed unlikely that
the amount will be recovered.
Accounts receivable from commercial customers (including
unbilled recoverable costs) include amounts due from POSCO
Energy of $5.0 million and $34.4 million, and amounts due from
NRG of $0.1 million and $0.02 million at October 31, 2016 and
2015, respectively.
Note 3. Inventories
Inventories at October 31, 2016 and 2015 consisted of the
following:
Raw materials
Work-in-process (1)
Inventories
2016
2015
$25,286
$ 29,103
48,520
36,651
$73,806
$ 65,754
(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, 2016 and 2015 is $40.6 million
and $13.3 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 a valuation
allowance of approximately $0.8 million and $0.2 million at
October 31, 2016 and 2015, respectively.
Note 4. Project Assets
Project assets at October 31, 2016 and 2015 consisted of the
following:
Current project assets
Long-term project assets
Project assets
2016
2015
$
—
$ 5,260
47,111
6,922
$ 47,111
$12,182
Project assets at October 31, 2016 include $29.3 million which
represents three completed, commissioned installations
where we have a PPA with the end-user of power and site host.
These assets are the subject of sales-leaseback arrangements
with PNC, which are recorded under the financing method of
accounting for a sale-leaseback. Under the finance method,
the Company does not recognize the proceeds received from
the lessor as a sale of such assets. This balance also includes
assets aggregating $17.8 million which are being constructed
by the Company under PPAs which have been executed or are
expected to be executed in 2017.
The long-term portion of project assets has been partially offset
by project-related grant awards. Project construction costs
incurred after classification as long-term project assets are
reported as investing activities in the Consolidated Statement of
Cash Flows. The proceeds received for the sale and subsequent
leaseback of project assets are classified as cash flows from
financing activities within the Consolidated Statement of Cash
Flows and are classified as a financing obligation within Long-
term debt and other liabilities on the Consolidated Balance
Sheets (refer to Note 10 for more information).
46
FuelCell Energy
Note 8. Other Assets, net
Other assets, net at October 31, 2016 and 2015 consisted of the
following:
Long-term accounts receivable (1)
Long-term unbilled recoverable costs (2)
Deferred finance costs (3)
87,350
83,578
3-8 years
Long-term stack residual value (4)
10 years
Other (5)
—
Other assets, net
2016
$ 8,353
5,714
1,368
—
2,123
2015
$ —
—
354
2,509
279
$17,558
$3,142
Note 5. Property, Plant and Equipment
Property, plant and equipment at October 31, 2016 and 2015
consisted of the following:
2016
2015
Estimated
Useful Life
Land
$
524
$
524
—
9,218
9,263 10-26 years
Building and improvements
Machinery, equipment
and software
Furniture and fixtures
Construction in progress
Accumulated
depreciation
Property, plant and
equipment, net
3,509
16,388
3,137
9,948
116,989
106,450
(80,349)
(77,448)
$ 36,640
$ 29,002
In December 2015, the Company commenced the first
phase of its project to expand the existing 65,000 square
foot manufacturing facility in Torrington, Connecticut by
approximately 102,000 square feet for a total size of 167,000
square feet.
Depreciation expense was $4.9 million, $4.1 million and
$4.4 million for the years ended October 31, 2016, 2015 and
2014, respectively.
Note 6. Goodwill and Intangible Assets
At October 31, 2016, the Company had goodwill of $4.1 million
and intangible assets of $9.6 million associated with the 2012
Versa acquisition. The intangible asset represents indefinite
lived in-process research and development.
The Company completed its annual impairment analysis of
goodwill and in-process research and development asset
at July 31, 2016. To determine the fair value of the reporting
unit that holds goodwill and to determine the fair value of
the in-process research and development asset, the Company
used a discounted cash flow model and a multi-period excess
earnings model, respectively. The estimated fair value of the
reporting unit and in-process research and development
intangible asset substantially exceeds the respective carrying
values and therefore no impairments have been recognized
at October 31, 2016.
Note 7. Other Current Assets
Other current assets at October 31, 2016 and 2015 consisted of
the following:
Advance payments to vendors (1)
Deferred finance costs (2)
Notes receivable
Prepaid expenses and other (3)
2016
$ 1,247
417
1,007
7,775
2015
$2,281
198
585
3,890
Other current assets
$10,446
$6,954
(1) Advance payments to vendors relate to inventory purchases ahead of
receipt.
(2) Primarily represents the current portion of direct deferred finance costs
relating to securing a $40.0 million loan facility with NRG which is being
amortized over the five-year life of the facility, and direct deferred finance
costs relating to the Hercules loan and security agreement entered into in
April 2016 which is being amortized over the 2.5 years life of the loan.
(3) Primarily relates to other prepaid vendor expenses including insurance,
rent and lease payments.
(1) Represents receivables related to project and stack replacement reserve
accounts pertaining to a sale-leaseback transaction and upon receipt, the
funds will be recorded as long-term restricted cash.
(2) Represents unbilled recoverable costs that relate to revenue recognized
on customer contracts that will be billed in future periods in excess of
twelve months from October 31, 2016.
(3) Represents the long-term portion of direct deferred finance costs,
including those relating to: a) the Company’s loan facility with NRG which
is being amortized over the five-year life of the facility; b) sale-leaseback
transactions entered into with PNC Energy Capital, LLC which are being
amortized over the ten-year term and c) the Hercules loan and security
agreement which is being amortized over the 30 month life of the loan.
(4) Relates to estimated 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 full cost of the module is expensed
at the time of the module exchange. The decrease from October 31,
2015 represents the residual value being recognized as cost of service
agreements due to contract term extensions.
(5) The Company entered into an agreement with one of its customers on
June 29, 2016 which includes a fee for the purchase of the plants at the end
of the term agreement. The fee is payable in installments over the term
agreement and the total paid at October 31, 2016 is $0.9 million The increase
at October 31, 2016 also includes deposits for projects in development.
Note 9. Accrued Liabilities
Accrued liabilities at October 31, 2016 and 2015 consisted of the
following:
2016
2015
Accrued payroll and employee benefits
$ 4,183
$ 3,914
Accrued product warranty costs (1)
Accrued material purchases (2)
Accrued service agreement costs (3)
Accrued taxes, legal, professional and other
516
6,908
6,030
3,263
964
7,568
3,437
3,292
Accrued liabilities
$20,900
$ 19,175
(1) Activity in the accrued product warranty costs during the fiscal year ended
October 31, 2016 and 2015 included additions for estimates of potential
future warranty obligations of $0.3 million and $.06 million, respectively,
on contracts in the warranty period and reductions related to actual
warranty spend of $0.7 million and $0.8 million, respectively, as contracts
progress through the warranty period or are beyond the warranty period.
(2) The Company acts as a procurement agent for POSCO under the Integrated
Global Supply Chain Plan (“IGSCP”) whereby the Company procures
materials on POSCO’s behalf for its production facility. The liability
represents amounts received for the purchase of materials on behalf
of POSCO. Amounts due to vendors is recorded as Accounts Payable.
(3) Activity in service agreement costs represents an increase in loss accruals
on service contracts of $1.9 million from $0.8 million as of October 31,
2015 to $2.7 million as of October 31, 2016. The increase primarily relates
to renewals of legacy service contracts. The accruals for performance
guarantees also increased from $2.6 million as of October 31, 2015 to
$3.3 million as of October 31, 2016 based on the minimum output falling
below the contract requirements for certain contracts offset by guarantee
payments to customers.
Annual Report 2016
47
Note 10. Debt
Debt at October 31, 2016 and 2015 consisted of the following:
2016
2015
Hercules Loan and Security Agreement
$20,521
$
State of Connecticut Loan
PNC obligation of Company’s finance
subsidiary
NRG loan agreement
Connecticut Clean Energy and Finance
Investment Authority Note
Connecticut Development Authority Note
Revolving credit facility
Capitalized lease obligations
10,000
41,603
1,755
6,050
2,589
—
660
—
—
—
3,763
6,052
2,817
2,945
726
Total debt
$83,178
$16,303
Current portion of long-term debt
(5,275)
(7,358)
Long-term debt
$77,903
$ 8,945
Aggregate annual principal payments under our loan
agreements and capital lease obligations for the years
subsequent to October 31, 2016 are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
$ 5,275
26,530
3,426
3,954
3,743
40,250
$83,178
In April 2016, the Company entered into a loan and security
agreement (the “Agreement”) with Hercules Capital, Inc.
(“Hercules”) for an aggregate principal amount of up to $25.0
million, subject to certain terms and conditions. The Company
received an initial term loan advance on the date of closing of
$15.0 million. The Company took an additional loan advance of
$5.0 million in September 2016 due to certain milestones being
met (“Tranche II”). We may also have available a loan advance of
$5.0 million beginning on the later of January 1, 2017 or the date
certain milestones are met and June 15, 2017 (“Tranche III”). The
loan is a 30-month secured facility and the term loan interest
is currently 9.5%. Interest is paid on a monthly basis. As of
October 31, 2016, interest only payments are required through
November 1, 2017. If certain additional performance milestones
are achieved, the interest only period would be extended to
May 1, 2018. Upon completion of interest only payments, the
loan balance and all accrued and unpaid interest is due and
payable in equal monthly installments by October 1, 2018. Per
the terms of the Agreement, there is an end of term charge of
$1.7 million,which is being accreted over the thirty-month term
using the effective interest rate method, which would increase
to $2.1 million if the Company receives an additional $5.0 million
advanced as discussed above.
As collateral for obligations under the Agreement, the Company
granted Hercules a security interest in its existing and hereafter-
acquired assets except for intellectual property and certain
48
FuelCell Energy
other excluded assets. Collateral does not include assets held
by the Company’s finance subsidiary or any project subsidiary
thereof. The Company may continue to collateralize and finance
its project subsidiaries through other lenders and partners.
The loan contains a financial covenant whereby the Company
is required to maintain an unrestricted cash balance of at least
(a) 75% of the outstanding Loan balance plus (b) the amount of
accounts payable (as defined under GAAP) not paid within 90
days of the date payment was issued.
In November 2015, the Company closed on a definitive
Assistance Agreement with the State of Connecticut and
received a disbursement of $10.0 million to be used for the first
phase of the expansion project to expand the existing 65,000
square foot manufacturing facility in Torrington, Connecticut
by approximately 102,000 square feet for a total size of 167,000
square feet. In conjunction with this financing, the Company
entered into a $10.0 million Promissory Note and related
security agreement, securing the loan with equipment liens
and a mortgage on its Danbury, Connecticut location. Pursuant
to the terms of the Note, payment of principal is deferred for
the first four years. Interest at a fixed rate of 2.0% became
payable beginning December 2015. The principal is payable over
15 years, and is predicated on certain terms and conditions,
including the forgiveness of up to half of the loan principal if
certain job retention and job creation targets are reached.
In 2015, the Company entered into an agreement with PNC,
whereby the Company’s project finance subsidiaries may enter
into sale-leaseback agreements for commissioned projects
where we have entered into a PPA with the end-user of power
and site host. Under the financing method of accounting
for a sale-leaseback, the Company does not recognize as
income any of the sale proceeds received from the lessor that
contractually constitutes payment to acquire the assets subject
to these arrangements. Instead, the sale proceeds received
are accounted for as financing obligations. During 2016, three
sales-leaseback transactions were completed under the PNC
agreement, generating financing aggregating $41.6 million as of
October 31, 2016.
In July 2014, the Company, through its wholly-owned
subsidiary, entered into a Loan Agreement with NRG (the “Loan
Agreement”). Pursuant to the Loan Agreement, NRG extended
a $40.0 million revolving construction and term financing facility
for the purpose of accelerating project development by the
Company and its subsidiaries. We may draw on the facility to
finance the construction of projects through the commercial
operating date of the power plants. The interest rate is 8.5% per
annum for construction-period financing and 8.0% thereafter.
Fees that were paid to NRG for making the loan facility available
and related legal fees incurred were capitalized and are
being amortized straight-line over the life of the related loan
agreement, which is five years. Borrowings under the Loan
Agreement are secured by the related project assets. The loans
may be repaid early should the projects be sold or refinanced at
the option of the Company.
The Company has 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 2013 Bridgeport Fuel Cell Park project. The
loan agreement carries an interest rate of 5.0%. 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 cash flows from the Bridgeport Fuel
Cell Park service agreement.
We have a 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% 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.
During 2015, the Company had a revolving credit facility with
JPMorgan Chase Bank, N.A. (the “Bank”) for financing export
receivables and was supported by the U.S. Import Export
Bank. The credit facility expired on November 28, 2015 and the
outstanding balance was paid back on November 24, 2015.
We lease computer equipment under master lease agreements.
Lease payment terms are generally 36 months from the date of
acceptance for leased equipment.
Note 11. Shareholders’ Equity
Authorized Common Stock
In April 2016, the number of authorized shares of the Company’s
common stock was increased from 39,583,333 to 75,000,000, by
vote of a majority of the Company’s security holders.
July 2016 Securities Offering
On July 12, 2016 Company closed on a registered public offering
of securities to a single institutional investor pursuant to a
placement agent agreement with J.P. Morgan Securities LLC.
The Company received net proceeds from the transaction
of $34.7 million, after deducting underwriter discounts and
offering expenses of $2.6 million. The transaction consisted of
1,474,000 shares of common stock, 7,680,000 Series A Warrants
and 4,926,000 pre-funded Series B Warrants (the “Series B
Warrants”). The Series A warrants have an exercise price of
$5.83 per share. They are initially exercisable beginning on the
date that is six months and one day after the issue date and will
expire on the fifth anniversary of the initial exercisability date.
The Series B Warrants are fully pre-funded warrants and are
immediately exercisable. They have an exercise price of $0.0001
per share and will expire on the fifth anniversary of the issue
date. The Series B Warrants were offered to the investor, whose
purchase of shares of common stock in this offering would
otherwise result in the investor, together with its affiliates and
certain related parties, beneficially owning more than 4.99%
of FuelCell Energy’s outstanding common stock following the
consummation of this offering. In lieu of purchasing shares of
common stock that would result in its ownership of the Company
in excess of 4.99%, the investor purchased the Series B Warrants.
Such Series B Warrants grant the investor the right to acquire
additional shares of FuelCell Energy common stock at a point
in time of its choosing within five years of the issue date of the
Series B Warrants. The following table outlines the warrant
activity during the year ended October 31, 2016:
Balance at July 12, 2016
(date of issuance)
Warrants exercised
Warrants expired
Series A
Warrants
Series B
Warrants
7,680,000
4,926,000
—
—
(1,100,000)
—
Balance at October 31, 2016
7,680,000
3,826,000
The warrants and pre-funded warrants continue to qualify for
permanent equity accounting treatment. Subsequent to the year
ended October 31, 2016, 1.8 million additional Series B Warrants
were exercised.
Other Common Stock Sales and Outstanding Warrants
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 1 and Series B preferred
shares. During the years ended October 31, 2016 and 2015,
respectively, the Company sold 6.0 million shares and 1.9 million
shares of the Company’s common stock at prevailing market
prices through periodic trades on the open market and raised
approximately $36.1 million and $26.9 million, net of fees.
On July 30, 2014, the Company issued a warrant to NRG in
conjunction with the entry into a Securities Purchase Agreement
for the sale of common stock. Pursuant to the warrant agreement,
NRG has the right to purchase up to 0.2 million shares of the
Company’s common stock at an exercise price of $40.20 per
share. The warrants continue to qualify for permanent equity
accounting treatment and expire on July 30, 2017.
Note 12. Redeemable Preferred Stock
Redeemable Series B Preferred Stock
We have 250,000 shares of our 5% Series B Cumulative
Convertible Perpetual Preferred Stock (Liquidation Preference
$1,000) (“Series B Preferred Stock”) authorized for issuance.
At October 31, 2016 and 2015, 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 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.
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 Company, 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
Annual Report 2016
49
were paid in cash in each of the years ended October 31, 2016,
2015 and 2014. There were no cumulative unpaid dividends at
October 31, 2016 and 2015.
• 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, 2016
and 2015, 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
7.0922 shares of our common stock (which is equivalent to an
initial conversion price of $141 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% of the
then prevailing conversion price ($141 at October 31, 2016) 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% 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.
50
FuelCell Energy
• Voting Rights — Holders of Series B Preferred Stock currently
have no voting rights.
Series 1 Preferred Shares
FuelCell Energy Ltd. (“FCE Ltd”), the Company’s wholly owned
subsidiary, has 1,000,000 Series 1 Preferred Shares outstanding,
(“Preferred Shares”) which are held by Enbridge, Inc. (“Enbridge”).
FuelCell guarantees the return of principal and dividend
obligations of FCE Ltd. to the Series 1 preferred shareholder.
The terms of the Series 1 Preferred Shares includes 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.
Because the Series 1 preferred shares are classified as
a mandatorily redeemable financial instrument, they are
presented as a liability on the consolidated balance sheet.
The Company made its scheduled payments of Cdn. $1.3 million
during each of fiscal year 2016, 2015 and 2014, under the terms
of the agreement, including the recording of interest expense,
which reflects the amortization of the fair value discount of
approximately Cdn. $2.4 million, Cdn. $2.3 million and Cdn.
$2.1 million, respectively. At October 31, 2016 and 2015, the
carrying value of the Series 1 Preferred shares was Cdn. $18.0
million ($13.5 million) and Cdn. $16.9 million ($12.6 million),
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% of the volume
weighted-average price in U.S. 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.
• 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. $1,664.52 per share of common stock after July 31,
2015 until July 31, 2020; and
• at any time after July 31, 2020, at a price equal to 95% of
the then current market price (in Cdn. $) of the Company’s
common stock at the time of conversion.
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% 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.
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
derivative instruments and are required to be bifurcated 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, 2016 and 2015 was $0.7 million.
Note 13. Segment Information
We are engaged in the development, design, production,
construction 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 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
standalone 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, 2016, 2015
and 2014 were as follows:
United States
South Korea
England
Germany
Canada
Spain
Total
2016
2015
2014
$ 48,697 $ 52,109 $ 52,765
52,007
109,953
124,669
277
7,147
124
—
142
764
—
109
119
869
820
1,051
$108,252 $163,077 $180,293
Service agreement revenue which is included within Service
agreements and license revenues on the consolidated
statement of operations was $26.6 million, $16.3 million and
$21.7 million, for the years ended October 31, 2016, 2015 and
2014, respectively.
Long-lived assets located outside of the United States at
October 31, 2016 and 2015 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 Company has 2006 and 2010 Equity Incentive Plans
(collectively, the “Equity Plans”). In April 2016, the number of
shares of common stock reserved for issuance under the Equity
Plans was increased to 2.5 million shares by vote of a majority
of the Company’s security holders. 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. The Company also has an international award program
to provide RSUs for the benefit of certain employees outside
the United States. At October 31, 2016, there were 0.8 million
shares available for grant. At October 31, 2016, equity awards
outstanding consisted of incentive stock options, nonstatutory
stock options, RSAs and RSUs.
The Company’s 1998 Equity Incentive Plan remains in effect
only to the extent of awards outstanding under the plan at
October 31, 2016.
Annual Report 2016
51
Share-based compensation was reflected in the consolidated
statements of operations as follows:
Cost of revenues
General and administrative
expense
Research and development
expense
2016
2015
2014
$ 745 $ 769 $ 751
2,110
1,990
1,718
504
360
436
Share-based compensation
$3,359 $ 3,119 $2,905
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.
The following table summarizes our stock option activity for the
year ended October 31, 2016:
Options
Weighted-Average
Option
Price
Shares
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:
Outstanding at October 31, 2015
257,769
$ 57.89
Granted
Cancelled
24,310
$ 6.44
(35,156)
$113.31
Outstanding at October 31, 2016
246,923
$ 44.88
Expected life (in years)
Risk free interest rate
Volatility
Dividend yield
2016
7.0
2015
2014
7.0
7.0
1.5%
1.7%
2.3%
80.1% 80.3% 81.1%
—%
—%
—%
The weighted-average grant-date fair value per share for options
granted during the years ended October 31, 2016, 2015 and 2014
was $6.44, $13.24 and $21.48, respectively. There were no options
exercised in fiscal year 2016, 2015 or 2014.
The following table summarizes information about stock options outstanding and exercisable at October 31, 2016:
Range of
Exercise Prices
$ 3.24 — $ 61.20
$ 61.21 — $119.04
$119.05 — $176.88
Options Outstanding
Weighted-Average
Remaining
Contractual Life
Options Exercisable
Weighted-Average
Exercise
Price
Number
exercisable
Weighted-Average
Exercise
Price
6.2
0.9
0.9
4.5
$ 18.78
$ 96.40
$120.28
$ 44.88
154,421
76,205
5,220
235,846
$ 19.49
$ 96.40
$ 120.28
$ 46.57
Number
outstanding
165,498
76,205
5,220
246,923
There was no intrinsic value for options outstanding and exercisable at October 31, 2016.
Restricted Stock Awards and Units
The following table summarizes our RSA and RSU activity for the
year ended October 31, 2016:
Restricted Stock Awards and Units
Outstanding at October 31, 2015
Granted
Vested
Forfeited
Outstanding at October 31, 2016
Shares
483,570
704,153
182,738
14,950
990,035
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 4 years. At October 31, 2016, the 1.0 million
outstanding RSAs and RSUs had an average remaining life of 2.8
years and an aggregate intrinsic value of $3.0 million.
52
FuelCell Energy
Weighted-
Average
Price
$ 16.67
$ 6.40
$16.11
$13.21
$ 9.52
At October 31, 2016, total unrecognized compensation cost
related to RSAs including RSUs was $7.5 million which is
expected to be recognized over the next 2.8 years on a weighted-
average basis.
Stock Awards
During the years ended October 31, 2016, 2015 and 2014, we
awarded 24,379; 2,399 and 979 shares, respectively, of fully
vested, unrestricted common stock to the independent members
of our board of directors as a component of board of director
compensation which resulted in recognizing $0.2 million, $0.1
million and $0.1 million 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% of the last
reported sale price of our common stock on the first business
day of the offering period, or (ii) 85% 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 avaoid 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 0.5 years after the date of purchase.
ESSP activity for the year ended October 31, 2016 was
as follows:
ESPP
Balance at October 31, 2015
Issued at $9.02 per share
Issued at $5.07 per share
Available for issuance at October 31, 2016
Number of
Shares
88,043
(11,664)
(14,153)
62,226
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)
2016
0.5
2015
0.5
2014
0.5
Risk free interest rate
0.30% 0.07% 0.08%
Volatility
Dividends yield
37.0% 72.0% 75.0%
—%
—%
—%
The weighted-average fair value of shares issued under the
ESPP during fiscal year 2016 and 2015 was $6.86 and $16.08
per share, respectively.
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.
Matching contributions of 2% under the Plan aggregated
$0.6 million, $0.4 million and $0.3 million for the years ended
October 31, 2016, 2015, and 2014, respectively.
Note 15. Income Taxes
The components of loss from continuing operations before
income taxes for the years ended October 31, 2016, 2015 and
2014 were as follows:
U.S.
Foreign
2016
2015
2014
$ (46,708) $ (26,459 ) $ (35,167 )
(3,981)
(2,951)
(3,228)
Loss before income taxes
$ (50,689) $ (29,410 ) $ (38,395 )
There was current income tax expense of $0.5 million, $0.3
million and $0.5 million related to foreign withholding taxes and
income taxes in South Korea and no deferred federal income tax
expense (benefit) for the years ended October 31, 2016, 2015 and
2014, respectively. Franchise tax expense, which is included in
administrative and selling expenses, was $0.4 million for year
ended October 31, 2016 and $0.2 million for each of the years
ended October 31, 2015 and 2014.
The reconciliation of the federal statutory income tax rate to our
effective income tax rate for the years ended October 31, 2016,
2015 and 2014 was as follows:
Statutory federal income tax rate (34.0)%
(34.0)%
(34.0)%
2016
2015
2014
Increase (decrease) in income
taxes resulting from:
State taxes net of
Federal benefits
(0.2)%
(0.1)%
(1.8)%
Foreign withholding tax
1.1%
0.9%
1.0%
Net operating loss adjustment
and true-ups
Nondeductible expenditures
Change in state tax rate
Other, net
Valuation allowance
Effective income tax rate
3.3%
0.9%
(0.3)%
0.2%
30.1%
1.1%
4.7%
0.1%
1.6%
0.4%
(25.4)%
14.5%
(0.8)%
0.4%
27.3%
47.1%
0.9%
1.0%
Our deferred tax assets and liabilities consisted of the following
at October 31, 2016 and 2015:
Deferred tax assets:
Compensation and benefit accruals
Bad debt and other allowances
Capital loss and tax credit
carryforwards
Net operating losses
(domestic and foreign)
Deferred license revenue
Inventory valuation allowances
Accumulated depreciation
Grant revenue
Gross deferred tax assets:
Valuation allowance
Deferred tax assets after
valuation allowance
Deferred tax liability:
2016
2015
$
9,625 $
1,276
8,389
1,109
12,772
12,998
265,799
257,373
8,616
278
4,653
1,327
9,313
77
535
—
304,346
289,794
(304,346)
(289,794)
—
—
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. None of the valuation allowance will reduce
additional paid in capital upon subsequent recognition of any
related tax benefits. In connection with our 2012 acquisition
Annual Report 2016
53
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, 2016, we had federal and state NOL carryforwards
of $748.6 million and $405.8 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 2035 while state
NOL carryforwards expire in varying amounts from fiscal year
2017 through 2035. Additionally, we had $11.1 million of state
tax credits available, of which $0.7 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
2016 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 2016 under Section 382. The acquisition of VERSA in fiscal
year 2013 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,
2016 and 2015 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 year 2000 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, 2016, 2015 and 2014 was as follows:
Numerator
Net loss
Net loss attributable to noncontrolling interest
Preferred stock dividend
Net loss attributable 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)
2016
2015
2014
$(51,208)
$ (29,684)
$ (38,883)
251
(3,200)
325
(3,200)
758
(3,200)
$(54,157)
$ (32,559)
$ (41,325)
29,773,700
24,513,731
20,473,915
—
—
—
29,773,700
24,513,731
20,473,915
$(1.82)
$(1.82)
$(1.33)
$(1.33)
$(2.02)
$(2.02)
(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. At October 31, 2016 and 2015, potentially dilutive securities excluded from
the diluted loss per share calculation are as follows:
October 31, 2016
October 31, 2015
July 2016 Offering - Series A Warrants
July 2016 Offering - Series B Warrants
July 2014 Offering - NRG Warrants
Outstanding options to purchase common stock
Unvested RSAs
5% Series B Cumulative Convertible Preferred Stock (2)
Series 1 Preferred Shares to satisfy conversion requirements (2)
Total potentially dilutive securities
7,680,000
3,826,000
166,666
246,923
915,831
454,043
1,042,000
14,331,463
—
—
166,666
257,769
450,783
454,043
337,200
1,666,461
(2) Refer to Note 12, Redeemable Preferred Stock, for information on the calculation of the common shares upon conversion.
54
FuelCell Energy
Note 17. Commitments and Contingencies
Lease Agreements
At October 31, 2016 and 2015, we had capital lease obligations
of $0.7 million. 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 2019.
Rent expense was $1.8 million, $1.7 million and $1.7 million for
the years ended October 2016, 2015 and 2014, respectively.
On April 22, 2016, the Company modified its Torrington,
Connecticut, lease to extend the term for an additional period of
15 years from January 1, 2016, and to provide the Company the
right to expand the existing facility to 167,000 square feet. The
Company has the right to purchase the facility and premises for
a price of $4.7 million at any time during the fifteen year term,
but no later than December 31, 2030.
Non-cancelable minimum payments applicable to operating
and capital leases at October 31, 2016 were as follows:
2016
2017
2018
2019
2020
Thereafter
Total
Operating
Leases
$1,321
1,053
737
325
363
3,751
$7,550
Capital
Leases
$375
216
60
9
—
—
$660
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
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 $3.3 million and $2.6 million at October 31, 2016 and
2015, respectively, and is recorded in Accrued Liabilities.
Our loss accrual on service agreements, excluding the
accrual for performance guarantees, totaled $2.7 million
and $0.8 million at October 31, 2016 and 2015, 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.
Expansion of Torrington Facility and Related
Low-Cost Financing
In December 2015, the Company commenced the first
phase of its project to expand the existing 65,000 square
foot manufacturing facility in Torrington, Connecticut by
approximately 102,000 square feet for a total size of 167,000
square feet. Initially, this additional space will be used
to enhance and streamline logistics functions through
consolidation of satellite warehouse locations and will provide
the space needed to reconfigure the existing production process
to improve manufacturing efficiencies and realize cost savings.
On November 9, 2015, the Company closed on a definitive
Assistance Agreement with the State of Connecticut and
received a disbursement of $10.0 million to be used for the
first phase of the expansion project. In conjunction with this
financing, the Company entered into a $10.0 million Promissory
Note and related security agreements. See Note 10 for additional
information. The second phase of our manufacturing expansion,
for which we will be eligible to receive an additional $10.0
million in low-cost financing from the State of Connecticut, will
commence as demand supports.
The first phase of the expansion is expected to result in
expenditures of up to $23.0 million that will be partially off-set
by the $10.0 million of first phase funding received from the
State of Connecticut. The total investment for both phases of the
expansion could be up to $65.0 million over a five-year period, of
which $20.0 million will be funded by low-cost financing from the
State of Connecticut.
Other
At October 31, 2016, the Company has unconditional purchase
commitments aggregating $61.7 million, for materials, supplies
and services in the normal course of business.
Under certain sales and financing agreements the Company
is contractually committed to provide compensation for any
losses that our customers and finance partners may suffer in
certain limited circumstances resulting from reductions in the
U.S. Investment Tax Credit. Such obligations would arise as
a result of reductions to the value of the underlying fuel cell
projects as assessed by the U.S. Internal Revenue Service (IRS).
The Company does not believe that any payments under these
contracts are probable based on the facts known at the reporting
date. The maximum potential future payments that the Company
could have to make under this obligation would depend on the
difference between the fair values of the fuel cell projects sold
or financed and the values the IRS would determine as the fair
value for the systems for purposes of claiming the Investment
Tax Credit. The value of the Investment Tax Credit in the
Company’s agreements is based on guidelines provided by the
Annual Report 2016
55
statutory regulations from the IRS. The Company and its customers use fair values determined with the assistance of independent
third-party appraisals.
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.
Note 18. Supplemental Cash Flow Information
The following represents supplemental cash flow information:
Cash interest paid
Income taxes paid
Noncash financing and investing activity:
Common stock issued for convertible note conversions and make-whole settlements
Common stock issued for Employee Stock Purchase Plan in settlement of prior year accrued
employee contributions
Accrued sale of common stock, cash received in a subsequent period
Accrued purchase of fixed assets, cash paid in subsequent period
Accrued purchase of project assets, cash paid in subsequent period
Year Ended October 31,
2016
$1,941
80
—
105
357
3,952
1,797
2015
$677
8
2014
$ 1,892
35
—
46,186
169
494
—
—
105
633
—
—
Note 19. Quarterly Information (Unaudited)
Selected unaudited financial data for each quarter of fiscal year 2016 and 2015 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, 2016
Revenues
Gross (loss) profit
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)
Year ended October 31, 2015
Revenues
Gross profit
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)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
$ 33,482
$ 28,581
$21,716
$24,473
$108,252
(166)
(11,517)
(11,779)
(800)
(157)
(12,708)
(15,414)
(800)
434
(10,323)
(11,067)
(800)
(468)
(11,805)
(12,948)
(800)
(12,512)
(16,173)
(11,810)
(13,662)
(357)
(46,353)
(51,208)
(3,200)
(54,157)
$ (0.48)
$
(0.56)
$ (0.38)
$ (0.41)
$
(1.82)
$ 41,670
$ 28,600
$ 41,356
$ 51,451
$ 163,077
4,014
(5,130)
(4,154)
(800)
(4,866)
2,023
(8,793)
(9,997)
(800)
(10,694)
3,595
(7,103)
(6,628)
(800)
(7,339)
3,144
(7,866 )
(8,905 )
(800 )
(9,660 )
12,776
(28,892)
(29,684)
(3,200)
(32,559)
$
(0.20)
$
(0.44)
$ (0.29)
$ (0.38 )
$
(1.33)
[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.
56
FuelCell Energy
Note 20. Subsequent Events
On November 30, 2016, a business restructuring was completed to reduce costs and align production levels with current levels of
demand in a manner that is consistent with the Company’s long-term strategic plan.
The Company is reducing materials spend as well as implementing various cost control initiatives. The workforce was reduced
at both the North American production facility in Torrington, Connecticut, as well as at corporate offices in Danbury and remote
locations. A total of 96 positions, or approximately 17% of the global workforce, was impacted. The production rate has been reduced
to twenty-five megawatts annually, from the prior rate of fifty megawatts annually, in order to position for delays in anticipated order
flow. A personnel-related restructuring charge of approximately $3.0 million will be incurred in fiscal year 2017, with approximately
one half of the charge composed of cash severance costs and the remainder representing non-cash charges. This production level
is anticipated to be temporary and will be reevaluated as order flow dictates, with any future increases being undertaken from what
is now a lower cost basis.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Exposure
Cash is invested overnight with high credit quality financial institutions and therefore we are not exposed to market risk on our
cash holdings from changing interest rates. Based on our overall interest rate exposure at October 31, 2016, including all interest
rate sensitive instruments, a change in interest rates of 1% would not have a material impact on our results of operations.
Foreign Currency Exchange Risk
At October 31, 2016, approximately 6% of our total cash, cash equivalents and investments were in currencies other than U.S. dollars
(primarily the Euro, Canadian dollars and South Korean Won) and we have no plans of repatriation. We make purchases from certain
vendors in currencies other than U.S. dollars. Although we have not experienced significant foreign exchange rate losses to date,
we may in the future, especially to the extent that we do not engage in currency hedging activities. The economic impact of currency
exchange rate movements on our operating results is complex because such changes are often linked to variability in real growth,
inflation, interest rates, governmental actions and other factors. These changes, if material, may cause us to adjust our financing
and operating strategies.
Derivative Fair Value Exposure
Series 1 Preferred Stock
The conversion feature and the variable dividend obligation of our Series 1 Preferred shares are embedded derivatives that require
bifurcation from the host contract. The aggregate fair value of these derivatives included within long-term debt and other liabilities
at October 31, 2016 and 2015 was $0.7 million. The fair value was based on valuation models using various assumptions including
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 Series 1 Preferred security is denominated in Canadian dollars, and the closing price of
our common stock. Changes in any of these assumptions would change the underlying fair value with a corresponding charge or
credit to operations. However, any changes to these assumptions would not have a material impact on our results of operations.
Annual Report 2016
57
PERFORMANCE GRAPH
The following graph compares the annual change in the Company’s cumulative total stockholder return on its Common Stock
for the five years ended October 31, 2016 with the cumulative stockholder total return on the Russell 2000 Index and a peer
group consisting of Standard Industry Classification (“SIC”) Group Code 3690 companies listed on the Nasdaq Global Market and
New York Stock Exchange for that period (“Peer Index”). It assumes $100 invested on October 31, 2011 with dividends reinvested.
*The graph compares the annual change in the Company’s cumulative total stockholder return on its Common Stock for the five
fiscal years ended October 31, 2016 with the cumulative stockholder total return on the Russell 2000 Index, a peer group consisting
of Standard Industry Classification (“SIC) Group Code 369 companies listed on the Nasdaq Global Market and New York Stock
Exchange and a customized 17 company peer group.
58
FuelCell Energy
FORWARD-LOOKING STATEMENT DISCLAIMER
When used in this report, the words “expects,” “anticipates,” “estimates,” “should,” “will,” “could,” “would,” “may,” “forecast,” and
similar expressions are intended to identify forward-looking statements. Such statements relate to, among other things,
the following: the development and commercialization by FuelCell Energy, Inc. and its subsidiaries (“FuelCell Energy,” “Company,”
“we,” “us” and “our”) of fuel cell technology and products and the market for such products; expected operating results such as
revenue growth and earnings; our belief that we have sufficient liquidity to fund our business operations for the next 12 months;
future funding under Advanced technology 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.
The 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, the following:
general risks associated with product development and manufacturing; general economic conditions; changes in the utility
regulatory environment; changes in the utility industry and the markets for distributed generation, distributed hydrogen, and
carbon capture configured fuel cell power plants for coal and gas-fired central generation; potential volatility of energy prices;
availability of government subsidies and economic incentives for alternative energy technologies; rapid technological change;
competition; market acceptance of our products; changes in accounting policies or practices adopted voluntarily or as required
by accounting principles generally accepted in the United States; factors affecting our liquidity position and financial condition;
government appropriations; the ability of the government to terminate its development contracts at any time; the ability of the
government to exercise “march-in” rights with respect to certain of our patents; POSCO’s ability to develop the market in Asia,
deploy Direct FuelCell® (“DFC”) power plants and successfully operate its Asian manufacturing facility; our ability to implement
our strategy; our ability to reduce our levelized cost of energy; the risk that commercialization of our products will not occur
when anticipated; our ability to generate positive cash flow from operations; our ability to service our long-term debt; our ability
to increase the output and longevity of our power plants; and our ability to expand our customer base and maintain relationships
with our largest customers and strategic partners.
We cannot assure you that: we will be able to meet any of our development or commercialization schedules; any of our new
products or technology, once developed, will be commercially successful; our existing DFC power plants will remain commercially
successful; or the government will appropriate the funds anticipated by us under our government contracts; the government will not
exercise its right to terminate any or all of our government contracts; 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 2016
59
SHAREHOLDER INFORMATION
Corporate Offices
FuelCell Energy, Inc.
3 Great Pasture Road
Danbury, CT 06810
Form 10-K
A copy of the Annual Report on Form 10-K for the year ended
October 31, 2016, 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, 2016. 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:
FuelCell Energy, Inc.
Investor Relations
3 Great Pasture Road
Danbury, CT 06810
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
Independent Registered Public Accounting Firm
KPMG LLP
Legal Counsel
Patterson Belknap Webb & Tyler LLP
Robinson & Cole LLP
Annual Meeting
The Annual Meeting of Shareholders will be held Thursday,
April 6, 2017 at 10:00 a.m. at:
JW Marriott Essex House New York
160 Central Park South
New York, NY
Common Stock Price Information
Our common stock has been publicly traded since June 25,
1992. 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 2017
(through December 30, 2016)
Year Ended October 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended October 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 3.40
$ 1.60
$12.24
8.08
8.88
5.67
$27.60
17.40
15.36
12.00
$ 4.51
4.56
5.02
3.35
$12.60
13.68
9.72
7.68
On December 30, 2016, the closing price of our common
stock on the Nasdaq Global Market was $1.75 per share.
At December 30, 2016, there were 169 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.
60
FuelCell Energy
Christopher S. Sotos
President, Chief Executive Officer and Director,
NRG Yield, Inc.
Natica von Althann 3, 4, 5
Founding partner of C&A Advisors and a former financial
executive at Bank of America and Citigroup
Togo Dennis West, Jr. 2, 4, 5
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
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
John A. Rolls 1, 2, 3, 5
Managing Partner of Core Capital Group, a private
investment partnership and former Executive
Vice President and Chief Financial Officer of
United Technologies
Arthur A. Bottone 2
President and Chief Executive Officer of
FuelCell Energy, Inc.
James H. England 3, 4
Corporate Director and Chief Executive Officer of
Stahlman—England Irrigation, Inc.
Matthew Hilzinger 3, 5
Executive Vice President and Chief Financial Officer,
USG Corporation and former Chief Financial Officer
of Exelon Corporation
OFFICERS
Arthur A. Bottone
President and Chief Executive Officer
Michael S. Bishop
Senior Vice President, Chief Financial Officer,
Corporate Secretary and Treasurer
Anthony F. Rauseo
Senior Vice President and Chief Operating Officer
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, 2016, 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. 2017
Annual Report 2016
61
3 Great Pasture Road
Danbury, CT 06813-1305
203.825.6000
www.FuelCellEnergy.com