CARBON
CAPTURE
DISTRIBUTED
GENERATION
HYDROGEN
FOR TRANSPORTATION
LONG-DURATION
STORAGE
SOLUTIONS FOR TODAY’S GLOBAL ENERGY NEEDS
ANNUAL REPORT 2017
CARBON
CAPTURE
FuelCell Energy, Inc. (NASDAQ: FCEL) delivers efficient,
affordable and clean solutions for the supply, recovery
and storage of energy. We design, manufacture,
undertake project development of, install, operate and
maintain megawatt-scale fuel cell systems, serving
utilities and industrial and large municipal power users
with solutions that include both utility-scale and on-
site power generation, carbon capture, local hydrogen
production for transportation and industry, and long
duration energy storage. With SureSource™ installations
on three continents and millions of megawatt hours of
ultra-clean power produced, FuelCell Energy is a global
leader with environmentally responsible power solutions.
LONG-DURATION
STORAGE
DISTRIBUTED
GENERATION
H2 FOR
TRANSPORTATION
Dear Stockholders,
Many of today’s
unprecedented global
energy challenges
represent tremendous
growth opportunities
for our company.
FuelCell Energy is recognized as a global leader
in delivering clean, efficient and affordable
solutions configured for the supply, recovery
and storage of energy. Our fleet of SureSource™
power plants spans three continents and
outpaces the industry with millions of megawatt
hours of power produced.
Because our proprietary core fuel cell
technology is clean, economical and versatile,
we are uniquely positioned to address the
2017 Highlights
We made significant progress in every aspect
of our business, concluding our fiscal year
with strong revenue, record backlog and
a strong balance sheet. These results are
transformational and firmly position us for
future growth.
We received over $1.2 billion in project awards
during the second half of 2017. At fiscal year-
end, our backlog and project awards totaled
approximately $1.6 billion, putting us in a solid
position to execute our growth plans.
Our business model carefully balances revenue
from equipment sales against select projects
we retain in our power generation portfolio with
Power Purchase Agreements, or PPAs. We are
continuing to grow our generation portfolio in
needs of today’s diverse and growing energy
the U.S.
markets. We work in conjunction with industry
leaders and leverage our core technology to
deliver value for customers.
Annual Report 2017
1
20 MW fuel cell park
with Korea Southern
Power Company (KOSPO)
In July, we were awarded approximately
We signed a hydrogen and power off-take
40 megawatts of power projects by Long
agreement with Toyota, one of the world’s
Island Power Authority, or LIPA, in New York
largest automakers. Located at the Port of Long
State. These projects reinforce our strong
Beach in California, our multi-megawatt tri-
value proposition and competitiveness. LIPA
generation power plant will produce renewable
needed on-Island generation to supply densely
hydrogen for Toyota’s fuel cell electric vehicles
populated areas with clean power while
while simultaneously generating renewable
avoiding costly transmission investments, and it
power for the grid.
needed affordable, clean, quiet and easy-to-site
generation. Our projects are ideally suited to
those needs.
We completed the first stage of the expansion
of our North American manufacturing facility.
The expansion will generate cost reductions and
In December, we completed delivery of the power
has positioned us to execute on recent awards,
plants for the 20-megawatt fuel cell park in South
backlog and future orders.
Korea owned by Korea Southern Power Co., LTD,
(or KOSPO), one of the country’s leading utilities.
Our team responded quickly, demonstrating our
ability to rapidly execute on large projects. This
is the first Asian project to close since we began
marketing directly in the region.
Providing “energy as a service,” we executed
a PPA with CMEEC, a Connecticut municipal
electric cooperative, enabling the supply of
power to a U.S. Navy base requiring reliable and
secure electricity. Projects like this help utilities
participate in distributed generation and can be
replicated throughout our utility-scale markets.
2
FuelCell Energy
2.2 megawatt fuel cell plant generating continuous power and
usable heat. The fuel cell is the sole power source for a state-
of-the-art town microgrid providing power to critical facilities
including: the local high school, town hall, library, firehouse,
police station, public works facility and senior center.
2.8 MW Combined
Heat and Power (CHP)
SureSource 3000™
power plant at the
Tulare Wastewater
Treatment Facility
in California
Versatile Solutions
Distributed generation, once perceived as a
Our proprietary fuel cell technology is versatile
and we are building our growth on four key
strategic pillars (verticals). Originally designed
for clean power generation, we expanded
and leveraged our core technology and strong
customer relationships into three adjacent
markets that we expect to drive diversified
growth going forward and position us to
benefit from major global trends. We work in
conjunction with global industry leaders like
ExxonMobil to expand our solutions portfolio
and deliver superior value in multiple markets.
Specifically, our four key strategic pillars in
the global energy market are:
• Distributed power generation;
• Emissions reduction and de-carbonization;
• Distributed hydrogen solutions for
transportation and industry; and
• Long-duration energy storage solutions.
Grid investments by utilities are increasingly
focusing on higher levels of service and public
concerns. The project awards we received in
2017 highlight our ability to offer solutions that
utilities seek to solve issues they are facing.
threat, is now being embraced by utilities. Our
solutions enable customers to affordably install
non-intermittent distributed power into the grid
where it is needed most, enhancing resiliency
and reliability, while avoiding siting issues and
costly investments in transmission infrastructure.
This industry trend also affords us ample
opportunities to deliver energy as a service and
build a portfolio of projects that are capable of
generating long-term recurring cash flows for
the company.
While demand for emissions reduction and
de-carbonization solutions is growing, an
affordable and scalable solution for carbon
capture is needed to realize this market’s
potential. Working with ExxonMobil, we
developed a scalable solution for gas and
coal fired power plants that can also be applied
to oil sands applications. We believe our pilot
plant will be built in 2018, with operations
beginning in 2019. We expect the value of
carbon capture will increase around the globe
as industries and governments move ahead
with carbon reduction plans. We continue
to look for ways to leverage our technology
and provide solutions for industry.
Annual Report 2017
3
New energy transportation and specifically
Growing Momentum
hydrogen-powered vehicles are one of several
motive technologies that are gaining momentum
on a global scale and will be essential in helping
to reduce global emissions. One key to unlocking
this market is affordable and readily available
sources of distributed hydrogen and we have
a solution for the industry. Our SureSource
Hydrogen solution generates high-purity
hydrogen that is clean and affordable, and can
help facilitate the needed fueling infrastructure
required in order for the industry to reach
commercial scale for both passenger and
commercial transportation applications.
Cost-effective long-duration energy storage is
becoming a key enabling technology as more
intermittent generation sources are placed
As we build upon those four growth pillars,
global industry is increasingly recognizing
FuelCell Energy as a company uniquely
positioned to help solve the biggest energy
challenges of our day. Designed around
our core platform, our solutions are helping
customers address clean power generation,
carbon capture, distributed hydrogen and
long-term storage. Successful execution on our
strategy has produced strong revenue, record
backlog and a strong balance sheet which firmly
positions us for growth in 2018 and beyond.
On behalf of our Board of Directors and
talented team of associates, we appreciate your
continued interest and support as we work to
capitalize on the growing momentum in our
into electric grids. Our SureSource Storage is a
markets!
megawatt scalable solution that provides a long-
duration storage option with high round-trip
efficiency and compares very favorably against
other technologies.
Sincerely,
Arthur (Chip) Bottone
President and
Chief Executive Officer
FuelCell Energy, Inc.
Arthur (Chip) Bottone
4
FuelCell Energy
TABLE OF CONTENTS
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
Consolidated Statements of Cash Flows
Notes To Consolidated Financial Statements
Quantitative and Qualitative Disclosures about Market Risk
Performance Graph
Forward-Looking Statement Disclaimer
Shareholder Information
6
7
22
38
39
40
41
42
43
44
65
66
67
68
Directors and Officers
Inside Back Cover
Annual Report 2017
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,
2017 have been derived from our audited consolidated financial statements together with the notes thereto. We have no discontinued
operations. 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
Service and license
Generation
Advanced Technologies
Total revenues
Costs of revenues:
Product
Service and license
Generation
Advanced Technologies
Total cost of revenues
Gross profit (loss)
Operating expenses:
Administrative and selling expenses
Research and development costs
Restructuring expense
Total costs and expenses
Loss from operations
Interest expense
Income from equity investments
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 stockholders
Net loss to common stockholders
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)
2017
$ 43,047
27,050
7,233
18,336
95,666
49,843
25,285
5,076
12,728
92,932
2,734
25,916
20,398
1,355
47,669
(44,935)
(9,171)
—
247
(44)
(53,903)
—
(53,903)
(3,200)
$ (57,103)
Years Ended October 31,
2016
2015
2014
2013
$ 62,563
31,491
1,267
12,931
108,252
$128,595
21,012
—
13,470
163,077
$136,842
25,956
—
17,495
180,293
$145,071
28,141
—
14,446
187,658
63,474
32,592
664
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)
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)
$ (1.14)
$ (1.14)
$ (1.82)
$ (1.82)
$ (1.33)
$ (1.33)
$ (2.02)
$ (2.02)
$ (2.42)
$ (2.42)
49,915
49,915
29,774
29,774
24,514
24,514
20,474
20,474
15,544
15,544
At October 31,
2017
2016
2015
2014
2013
$ 87,448
105,432
203,510
383,786
98,078
96,895
87,557
101,256
$ 1.46
$118,316
150,206
202,204
340,729
51,998
114,478
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)
[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.
6
FuelCell Energy
BUSINESS OVERVIEW
Overview
We deliver proprietary fuel cell power solutions for the clean
and affordable supply, recovery and storage of energy. We
serve utilities and 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 7.0 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 complete 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 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 continually 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 and
South Korea. We are pursuing expanding opportunities in
other countries.
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 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 NOx that causes smog, 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 customers 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.
FuelCell Energy was founded as a Connecticut corporation in
1969 as an applied research organization, providing contract
research and development. The Company went public in 1992
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,
operating and providing comprehensive service for the life of
the asset.
Business Strategy
Our business model is to address power generation challenges
with versatile, efficient and economical fuel cell solutions.
We are leveraging our common core fuel cell technology and
products to target global markets including on-site and
utility-scale projects for the supply, recovery and storage
of energy. We selectively utilize strategic business alliances
and collaboration agreements for market development,
financing and cost reductions. Our extensive intellectual
property portfolio consists of patents, trade secrets and
collective experience, which acts as a foundation for expanding
and maximizing our solutions portfolio. Our business model
is based on multiple revenue streams, including power
plant and component sales; engineering, procurement and
construction (“EPC”) revenue; royalty and license revenue;
recurring service revenue, including long-term service
agreements; recurring electricity sales under PPAs and
tariffs for projects we retain in our generation portfolio; and
revenue from public and private industry research contracts
under Advanced Technologies.
Market Adoption
We target vertical markets and geographic regions that value
clean distributed generation, are located where there are high
energy costs, 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 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 U.S. and California. We have also
installed and are operating plants in the United Kingdom,
Germany, and Switzerland, have contracts and awards to install
and operate plants in New York, and are pursuing further
opportunities in Western Europe and certain other states in the
United States as well as certain countries in Asia. We selectively
develop strategic business relationships with some of the
leading energy and 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
Annual Report 2017
7
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.
We work with utilities and power generators to demonstrate
how our solutions complement central generation by
incrementally adding clean power generation when and where
needed. One example of this is a 40 megawatt fuel-cell only
program by Long Island Power Authority (“LIPA”) to address
load pockets or power needs in specific areas of its service
territory. LIPA operates in an area with high population density,
scarce and expensive land, the need for resiliency to ensure
power during storms, and vocal citizens that may not welcome
new transmission lines in their neighborhoods. The structure
of the program reflected the unique value drivers of fuel cells
to cleanly, efficiently and economically supply power where it is
needed, which for LIPA is near existing electrical substations.
LIPA awarded the entire 40 MW program to FuelCell Energy
through a competitive bidding process after a review of more
than 375 MW of proposals from multiple developers.
Fuel Cell Power Plant Ownership Structures
In the United States, 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 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 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 related PPAs, thus keeping 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 PPAs, which is higher than if we sell the projects. As of
October 31, 2017, our operating portfolio of retained projects
totaled 11.2 MW with an additional 19.5 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 deliver power at a rate comparable to
pricing from the grid in our targeted markets. Policy programs
that help to support adoption of clean distributed power
generation lead to below-grid pricing. We measure power
costs by calculating the Levelized Cost of Energy (“LCOE”)
over the life of the project.
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, or selectively retain projects in our generation
portfolio. Given this level of integration, there are multiple
areas and opportunities for cost reductions. There are several
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 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 higher production volumes which will lead
to reductions in the per-unit cost of materials purchased,
supported by continued actions with engineering and
manufacturing cost reductions. 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. Larger projects offer scale and
the opportunity to consolidate systems and reduce costs.
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 remotely monitor,
operate, and maintain the fuel cell power plants to optimize
performance and meet or exceed expected operating
parameters throughout the plant’s operational life.
Operations and maintenance (“O&M”) is a key driver for
power plants to deliver on projected electrical output and
revenue. Many of our service agreements include guarantees
for system performance levels, including electrical output.
Customers benefit from predictable savings and financial
returns over the life of the contract, while minimizing risk.
While the electrical and mechanical balance of plant (“BOP”)
in our power plants is designed to last 25 years, the fuel
cell modules are currently scheduled for replacement
every five years, the price of which is included in our service
8
FuelCell Energy
agreements. We expect to continually drive down the cost
of O&M with an expanding fleet which will leverage our
investments in this area. Additionally, we have completed
the development of fuel cells that have a longer life, which
will reduce O&M costs by increasing our scheduled module
replacement period to seven years.
• 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 can
operate on a variety of existing and readily available fuels,
including natural gas, renewable biogas, directed biogas
and propane. Our core SureSource power plants deliver
electrical efficiencies of 47%, and in 2017, the Company
introduced a power plant which operates at 60% efficiency
targeted at electric-only applications such as grid support
and data centers. In a CHP configuration, our plants can
deliver even higher 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 have responded to an evolving market
with greater interest in the pay-as-you-go PPA approach
by end users of the power that prefer to avoid the up-
front investment in power generation assets. 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 to continue to attract project finance
capital, and with financial and project performance credibility
continuing to improve, we expect continued reductions in risk
premiums leading to lower financing costs.
An additional factor that benefits fuel cells when comparing
LCOE to other forms of power generation is that our solutions
provide delivered electricity that minimizes or even avoids the
costs of transmission.
Our distributed generation solutions minimize or entirely avoid
the need for transmission. When comparing LCOE across
different forms of power generation, transmission needs to be
considered in the evaluation. Power generation far from where
the power is used requires transmission, which is a cost to
ratepayers and is inefficient due to line losses of power in the
transmission process.
We believe that our strong business model and strategy,
demonstrated project development execution, plant operating
performance, and strategic relationships will support
accelerated adoption of our fuel cell solutions.
Markets
Vertical Markets
Access to clean, affordable 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, 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 SureSource
power plants address these challenges by providing virtually
particulate 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, and
(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), Long Island Power & Light
and NRG Energy (NYSE: NRG), one of the largest Independent
Power Producers (“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
fuel cell 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
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 SureSource power plants are producing power for a
variety of industrial, commercial, municipal and government
customers, including manufacturing facilities, pharmaceutical
processing facilities, 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.
Annual Report 2017
9
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 and
consistent power supply for on-site applications. Our installed
base includes a number of locations where our customers use
SureSource plants for meeting power needs that complements
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 as micro-grids at
universities and municipalities, including one university micro-
grid owned by a wholly owned subsidiary of NRG Yield (NYSE:
NYLD) and a town-based micro-grid owned by Avangrid. Under
normal operation, the fuel cells supply power to the grid. If the
grid is disrupted, the fuel cell plant 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 SureSource power plants
convert this biogas into electricity and heat efficiently and
economically. Wastewater facilities with anaerobic digesters
are an attractive market for our SureSource solution including
the power plant as well as treatment of the biogas. Since
our fuel cells operate on the renewable biogas produced by
the wastewater treatment process and the heat is used to
support daily operations at the wastewater treatment facility,
the overall thermal efficiency of these installations is high,
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% 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. We believe there are additional
market opportunities for capture from industrial thermal
sources, such as boilers, in industries like steel and cement
production. The addressable energy storage market is still
developing as different technologies are beginning to come
to market with different approaches to storage and different
storage durations. We estimate that the addressable
market for long duration storage may be in the range of tens
of billions of dollars.
10
FuelCell Energy
Strategic Alliances
We leverage our core capabilities by forging strategic
alliances with carefully selected third parties 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 strategic allies’ understanding of a broad
range of markets and customers, products and services,
enhances the sales and development of our products, as well
as provides endorsement of our power generation solutions.
Our global business alliances include:
NRG Energy: NRG Energy (“NRG”) owns approximately 1.4
million shares of our common stock (or approximately 2%
of our outstanding common stock), 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
one of the largest IPPs in the U.S. with approximately 50,000
MW of generation capacity and almost three million retail and
commercial customers.
POSCO Energy: We entered into manufacturing and technology
transfer agreements in 2007, 2009 and 2012 with POSCO
Energy, which provide POSCO Energy with the technology rights
to manufacture SureSource power plants in South Korea and
the right to sell power plants throughout Asia. POSCO Energy
owns 2.6 million shares of our common stock (or approximately
4% of our outstanding shares of common stock). POSCO Energy
is one of the largest IPPs in South Korea.
In March 2017, we entered into a memorandum of
understanding (“2017 MOU”) with POSCO Energy to permit us
to directly develop the Asian fuel cell business, including the
right for us to sell SureSource solutions in South Korea and
the broader Asian market. We and POSCO Energy also agreed
to undertake to amend certain technology transfer and other
agreements by a target date of September 30, 2017 to reflect
our new relationship. Although these agreements have not
yet been amended, we continue to engage in discussions with
POSCO Energy regarding our relationship and the direction of
the fuel cell business in the South Korean and Asian markets.
Pursuant to the 2017 MOU, we have commenced marketing the
entire suite of SureSource solutions in South Korea. In June
2017, an EPC contractor was awarded a 20 megawatt project
utilizing our SureSource technology by a Korean utility after a
competitive bidding process. On August 29, 2017, we entered
into a definitive agreement for this 20 MW project with the EPC
contractor, Hanyang Industrial Development Co., Ltd (“HYD”),
pursuant to which we provided equipment to HYD for the fuel
cell project with Korea Southern Power Co., Ltd. (“KOSPO”).
The SureSource 3000TM power plants will cleanly produce
electricity and thermal energy to supply the electric grid and
support a district heating system. Construction began in 2017
and the installation is expected to be operational in 2018. The
value of the equipment sale contract to the Company is in
excess of $60 million.
In accordance with the 2017 MOU, we are collaborating with
POSCO Energy to pursue investor opportunities in the Korean
fuel cell business to further develop and advance the Korean
market for fuel cells.
E.ON Connecting Energies GmbH: E.ON Connecting Energies
(“E.ON”) specializes in integrated energy solutions for
industrial, commercial and public sector customers. E.ON
has purchased two SureSource fuel cell power plants to serve
E.ON end user customers. The first sale announced was a
CHP-configured megawatt-class fuel cell plant installation at
a German manufacturing company and the second sale was
a CHP-configured fuel cell power plant for a German hotel
owned by an international hotel chain.
ExxonMobil: We entered into a joint development agreement
in 2016 with ExxonMobil for advancing fuel cell carbon capture
with applications for gas-fired power stations. ExxonMobil
is supporting a demonstration fuel cell carbon capture plant
to be installed at the Plant Barry power station, owned by an
affiliate of Southern Company.
Products
Our core fuel cell products offer ultra-clean, highly efficient
power generation for customers, including the 1.4 MW
SureSource 1500TM, the 2.8 MW SureSource 3000TM, and the
recently introduced 3.7 MW SureSource 4000TM. The plants
are scalable for multi-megawatt utility scale applications
or on-site CHP generation for a broad range of applications.
We provide a comprehensive and complete turn-key fuel cell
project that includes project development, EPC services, O&M,
and project finance.
Our proprietary 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 fuel cells operate at approximately 1,100° F.
An advantage of high temperature fuel cells is that they do not
require the use of precious metal electrodes required by lower
temperature fuel cells, such as proton-exchange membrane
(“PEM”) fuel cells. As a result, we are able to use less
expensive and readily available industrial metals as catalysts
for our fuel cell components.
The SureSource product line is a global platform based on
carbonate fuel cell technology. Using 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 particulate 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 (approximately 700° F), suitable for heating facilities or
water, or steam for industrial processes or absorption cooling.
Our system’s efficiencies can reach up to 90%, depending on
the application, when configured for CHP.
We market different configurations of the SureSource plants
to meet specific market needs for the supply, recovery and
storage of energy, 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 supports economics and sustainability goals
by lessening or even avoiding the need for combustion-
based boilers for heat and its associated cost, pollutants
and carbon emissions. On-site CHP power projects
generally range in size from an individual SureSource 1500
to combining multiple SureSource 3000 or SureSource
4000 power plants for larger on-site projects. For example,
an installation at a pharmaceutical company uses two
SureSource 3000 power plants for 5.6 MW of power and heat
production while an installation currently contracted for a
U.S. Navy base will use two SureSource 4000 power plants
for 7.4 MW of power.
• Utility Grid Support: The SureSource 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 multi-megawatt 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 MW
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 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 SureSource 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.
Annual Report 2017
11
• Higher Electrical Efficiency—Multi-megawatt applications:
The SureSource 4000 is designed to extract more electrical
power from each unit of fuel with electrical efficiency of
approximately 60% and targets applications with large load
requirements and limited waste heat utilization such as
utility/grid support or data centers. This 3.7 megawatt plant
is configured with a series of three fuel cell modules that
operate in sequence, yielding a higher electrical efficiency
than the standard SureSource 3000 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, enhancing overall electrical efficiency.
• Distributed Hydrogen: The SureSource fuel cells internally
reform the fuel source (i.e. natural gas or biogas) to obtain
hydrogen. The SureSource plants can be configured for
tri-generation, supplying power, heat and high purity
hydrogen. Power output is modestly reduced to support
hydrogen generation, which can then be used for industrial
applications such as metal or glass processing, or
petrochemical, or transportation applications. Siting the
tri-generation fuel cell plant at a source of biogas, such
as a wastewater treatment facility, enables the generation
of renewable hydrogen for transportation, an attractive
proposition to regulatory and legislative officials and auto
companies. We have announced the first commercial MW-
scale application of this product configuration at the Port of
Long Beach, California which will support Toyota’s logistical
support facility.
• Micro-grid: The SureSource 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 solutions operating within micro-grids, some
individually and some with other forms of power generation.
Energy Recovery
• Gas Pipeline Applications: SureSource RecoveryTM power
plants are used in natural gas pipeline applications,
harnessing energy that is otherwise lost during the
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 letdown station’s carbon footprint and enhancing the
project’s economics. Depending on the specific gas flows
and application, the SureSource Recovery configuration is
capable of achieving electrical efficiencies of up to 70%.
A 3.4 megawatt system is owned by a subsidiary of Avangrid
and operating at a gas letdown station owned by its regulated
gas utility subsidiary.
• Carbon Capture: The SureSource CaptureTM 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 2018,
we will be installing the first carbon capture configured
SureSource 3000 power plant, which will be located at a
mixed coal/gas fired power station owned by a subsidiary of
Southern Company. The project is partially funded by the U.S.
Department of Energy and ExxonMobil is also participating in
portions of the project.
Energy Storage
We are developing our long-duration SureSource StorageTM
solution, creating a system that utilizes both SOFC and SOEC
technology and using hydrogen as the energy storage medium.
Our solid oxide stacks are capable of alternating between
electrolysis and power generation mode. Instead of producing
power from fuel and air, a solid oxide fuel cell stack in
electrolysis mode splits water into hydrogen and oxygen using
supplied electricity. Hydrogen is an energy carrier that can
be compressed and stored for long durations in storage tubes
or underground.
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. Storage capacity is easily expanded
by adding additional storage tanks, a low cost approach 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 expands.
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 SureSource solutions 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.
12
FuelCell Energy
• 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 potentially reach
up to 90%, depending on the application.
• Reliability/continuous operation: Our SureSource 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 SureSource power plants can operate
on a variety of existing and readily available fuels, including
natural gas, renewable biogas, directed biogas and propane.
• Scalability: Our solutions 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
SureSource solutions operate quietly and without vibrations.
• Easy to site: Our SureSource 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 seven 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.
SureSource 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 SureSource power plants:
Average U.S. Fossil Fuel Plant
Microturbine (60 kW)
Small Natural Gas Turbine
SureSource—natural gas
SureSource 4000 High Efficiency Plant
SureSource—utility scale carbon capture
SureSource—renewable biogas
Emissions (Lbs. Per MWh)
SO 2
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 electrical
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.
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
even higher total efficiency in a CHP configuration, depending
on the application. This represents delivered efficiency as our
distributed solutions generate power near the point of use,
avoiding the line losses inherent in transmission. The electric
grid in the United States is only approximately 35% electrically
efficient and typically does not support CHP configurations.
Manufacturing
We design and manufacture the core SureSource 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 BOP. The mechanical BOP processes the incoming
fuel such as natural gas or renewable biogas and includes
various fuel handling and processing equipment such as
pipes and blowers. The electrical BOP processes the power
generated for use by the customer and includes electrical
interface equipment such as an inverter. The BOP
Annual Report 2017
13
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,
expertise and possess extensive intellectual property. BOP
components are shipped directly to a customer’s site and
are then assembled with the fuel cell module into a complete
power plant.
North America: We operate a 167,000 square-foot
manufacturing facility in Torrington, Connecticut where we
produce the individual 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. Annual
capacity (module manufacturing, final assembly, testing and
conditioning) is 100 MW per year, with full utilization under its
current configuration. The building is sized to accommodate
annual production capacity of 200 MW per year.
The expansion of the facility was recently completed,
representing the first phase of a two phase capacity expansion.
This expansion has enabled the consolidation of warehousing
and service facilities, which will lead to reduced leasing
expenses. The additional space is also expected to lead to
additional manufacturing efficiencies by providing the needed
space to re-configure the manufacturing lines without
interrupting production. As demand supports, the second
phase will be undertaken to add manufacturing equipment to
increase annual capacity to 200 MW. The State of Connecticut
is extending two low interest long-term loans to us (one 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
previously received the proceeds of the first $10 million loan to
support the first phase of the expansion and have received an
extension from the State of Connecticut to meet the required
job targets.
The Torrington production facility, the Danbury corporate
headquarters and research and development facility, and
our Field Service Operations (which maintains the installed
fleet for our plants) are ISO 9001:2015 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 which 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. We collaborate with POSCO Energy to manage
the supply chain and production volumes between the U.S.
and South Korean facilities.
Europe: We have a 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. Our operations
in Europe are certified under both ISO 9001:2015 and
ISO 14001:2015.
14
FuelCell Energy
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 Energy-owned Asian
production facilities. In addition to manufacturing the fuel cell
module in our Torrington facility, the electrical and mechanical
BOPs 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
BOP componentry from third party vendors, based on our
own proprietary designs.
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, we have an extensive
history of safe and timely delivery of turn-key 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 in numerous jurisdictions, both domestically
and abroad, all 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. All of our customers purchase
service agreements, some of which have terms of 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 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 our 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 2038.
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. We accrue for estimated
future warranty costs based on historical experience.
Retained projects in the generation portfolio do not have
service agreements with the off-takers but we maintain the
power plants through long-term service agreements with our
project level subsidiaries. Under the PPAs for these retained
projects, we are obligated to deliver a certain contractual level
of power. We operate and maintain the plants in our generation
portfolio in a manner intended to maximize power output, just
as we do for our customers who own their plants.
License Agreements and Royalty Income
We are entitled to 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
rights to manufacture SureSource power plants in South Korea
and the right to sell power plants throughout Asia. In October
2016, 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 by mutual agreement of the Company and
POSCO Energy. In conjunction with the CTTA, the Company is
entitled to receive 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 the terms of the Master Service Agreement between the
Company and POSCO Energy. The Company has contracted
directly with POSCO Energy for equipment and services for its
first direct order in the Korean market.
Advanced Technologies Programs (Third Party Funded
Research and Development)
We undertake both privately-funded and public research
and development to expand the markets for our 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 for our commercial product
solution portfolio. Our power plants can be configured to provide
a number of value streams including clean electricity, high
quality usable heat, hydrogen suitable for vehicle fueling or
industrial purposes as well as configuration to concentrate CO2
from coal and natural gas fired power plants. Our Advanced
Technologies Programs are focused on commercializing
solutions within three strategic areas: (1) carbon capture for
emissions reduction and power generation; (2) distributed
hydrogen production, compression, and recovery; and (3) SOFC/
SOEC 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 historically 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), the Office of
Naval Research (ONR), and the National Aeronautics and Space
Administration (NASA). Government funding, principally from
the DOE, provided 9%, 8% and 6% of our revenue for the fiscal
years ended 2017, 2016, and 2015, 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.
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 station owned by Alabama Power, a subsidiary
of Southern Company. 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
2017, we conducted 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
oil and 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.
Annual Report 2017
15
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. Current initiatives include increasing
the net power output of the fuel cell stacks to 375 kW from
350 kW, and extending the stack life to seven years from
five-year life modules produced in fiscal 2017. The Company’s
seven-year module design will enter production in fiscal 2018.
Greater power output and improved longevity are expected
to 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 SureSource 4000
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.
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
expenditures, are as follows:
Years Ended October 31,
(amounts in thousands)
2017
2016
2015
Cost of Advanced Technologies
contract revenues
Research and development
expenses
Total research and
development
$12,728 $11,879 $13,470
20,398 20,846
17,442
$33,126 $32,725 $30,912
Backlog
The Company had a contract backlog totaling approximately
$554.2 million as of October 31, 2017 compared to $432.3
million as of October 31, 2016. At October 31, 2017 and 2016,
backlog included approximately $182.3 million and $204.8
million, respectively, of service agreements. Service backlog
as of October 31, 2017 had an average term of approximately
17 years weighted based on dollar backlog and utility service
contracts up to twenty years in duration. Generation backlog
as of October 31, 2017 and 2016 was $296.3 million and $142.5
million, respectively. As of October 31, 2017, product sales
backlog totaled approximately $31.3 million compared to $24.9
million as of October 31, 2016. As of October 31, 2017, Advanced
Technologies contracts backlog totaled $44.3 million, of which
$24.5 million was funded compared to $60.1 million as of
October 31, 2016, of which $39.6 million was funded.
Distributed Hydrogen production, compression, and
recovery—On-site or distributed hydrogen generation,
produced cleanly, represents an attractive market. Our high
temperature fuel cells generate 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
SureSource Hydrogen. This value-added proposition may be
compelling for industrial users of hydrogen and transportation
applications, further summarized as follows:
Fueling Applications: We recently announced a renewable
hydrogen generation project under a hydrogen power
purchase agreement with Toyota. The multi-megawatt
SureSource Hydrogen plant will be located at the Port of
Long Beach, California and will use renewable directed
biogas for fuel. Toyota will purchase the hydrogen output of
approximately 1,200 kg per day to fuel its fuel cell cars that
arrive at the Port from overseas as well as fuel a Class 8
fuel cell truck located at the Port. Toyota will also purchase
a portion of the renewable electricity generated with the
remainder of the electricity to be sold to the local utility
under the California BioMAT program.
We previously demonstrated renewable hydrogen generation
under a three year project at the Orange County Wastewater
Treatment Facility in Irvine, California, utilizing renewable
biogas to supply hydrogen for use in fuel cell vehicle fueling
and produce clean renewable electricity. The demonstration
was performed under a sub-contract to Air Products
(NYSE: APD), with funding provided by the DOE, California
Air Resources Board, South Coast Air Quality Management
District, Orange County Sanitation District, and Southern
California Gas Company.
SOFC/SOEC development and commercialization: We are
working towards commercialization of solid oxide fuel cell
technology to target long-duration storage applications
utilizing hydrogen as an energy carrier and storage
medium. SOFC power plant design and manufacturing is
complementary to our carbonate technology-based MW
scale 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. Additionally, the target market for storage
application is electric utilities, which is a market in which we
are already active.
We perform SOFC/SOEC research and development at our
Danbury facility as well as at our dedicated SOFC/SOEC
facility in Calgary, Canada. We are working under a variety of
awards from the DOE for development and commercialization
of both SOFC and SOEC. We are currently installing a
demonstration SOFC power plant at the NRG Energy Center
in Pittsburgh, Pennsylvania.
We believe there are 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 leverage third-party resources and funding
to accelerate the commercialization and realize the market
potential for each of these solutions.
16
FuelCell Energy
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 twenty 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.
Backlog represents firm definitive agreements executed by the
Company and our customers. As of October 31, 2017, we also
had project awards totaling between $600.0 million and $1.0
billion, with the range based on whether the projects are sold
or retained as part of our Generation portfolio. Project awards
referenced by the Company are notifications that the Company
has been selected, typically through a competitive bidding
process, to enter into definitive agreements. These awards
have been publicly disclosed. Negotiations are in process and if
successfully completed, project awards will become backlog.
Fuel Cell Technologies
Fuel cell technologies are classified according to the electrolyte used by each fuel cell type. Our SureSource technology utilizes
a carbonate electrolyte. Carbonate-based fuel cells are well-suited for megawatt-class applications, offering a number of
advantages over other types of fuel cells in the markets we are pursuing. 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 Technologies
Programs” section. Other fuel cell types that may be used for commercial applications include phosphoric acid and PEM.
The following table illustrates the four principal types of fuel cells, highlighting typical market applications, industry estimates of
the electrical efficiency, expected capacity range, and versatility for applications in addition to power generation:
MW-Class
Sub-MW-Class
Micro CHP
Mobile
System Size Range
Carbonate (CFC)
Solid Oxide
(SOFC)
Phosphoric Acid
(PAFC)
PEM/SOFC
Polymer
Electrolyte
Membrane (PEM)
Plant Size
1.4 MW - 3.7 MW
up to 250 kW
up to 440 kW
< 10 kW
5 - 100 kW
Typical Application
Utilities,
Universities,
Industrial
Commercial
Buildings & “Big
Box” Retail Stores
Commercial
Buildings & Grocery
Stores
Residential and
Small Commerical
Transportation
Fuel
Advantages
Natural gas, On-site
or Directed
Biogas, Others
High Efficiency,
Scalable, Fuel
Flexible & CHP
Natural Gas
Natural Gas
Natural Gas
Hydrogen
High Efficiency
CHP
Load Following &
CHP
Load Following &
Low Temperature
Electrical Efficiency
43% - 47% to 60%
50% - 60%
40%-42%
25% - 35%
25% - 35%
Combined Heat &
Power (CHP)
Yes, Steam &
Chilling
Depends on
Technology Used
Limited: Hot
Water, Chilling
Suitable for
Facility Heating
Carbon Capture
Distributed
Hydrogen
Reversible
for Storage
Yes
Yes
no
no
Yes
Yes
no
no
no
no
no
no
no
no
no
no
Annual Report 2017
17
Competition
Our SureSource 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.
Several companies in the U.S. are engaged in fuel cell
development, although we are the only domestic company
engaged in manufacturing and deployment of stationary
carbonate fuel cells. Other emerging fuel cell technologies
(and the companies developing them) include small or
portable PEM fuel cells (Ballard Power Systems, Plug Power,
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 and Bloom Energy), and
small residential solid oxide fuel cells (Ceres Power Holdings
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.
Other than fuel cell developers, we may compete with
companies such as Caterpillar, Cummins, Wartsilla, MTU
Friedrichshafen GmbH (MTU), 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 compete against
large scale solar and wind technologies, although we 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 it difficult
to site MW-class projects 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 SureSource 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 NEL 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 and ITM Power PLC.
Regulatory and Legislative Support
Distributed generation addresses certain power generation
issues that central generation does not and regulatory policy
can impact deployment of distributed generation. Regulatory
and legislative support encompasses policy, incentive
programs, and defined sustainability initiatives such as
Renewable Portfolio Standards (“RPS”).
Various states and municipalities in the U.S. have adopted
programs for which our products qualify, including programs
supporting self-generation, clean air power generation,
combined heat and power applications, carbon reduction,
grid resiliency/micro-grids and utility ownership of fuel
cell projects.
The majority of states in the U.S. have enacted legislation
adopting Clean Energy Standards (“CES”) or 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. 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 (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
low pollutants of fuel cells. Massachusetts has recently
promulgated regulations that will qualify certain fuel cells
under its Alternative Portfolio Standard.
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 10% of total power
generation by 2023 from 2% when the RPS began in 2012.
Eighteen of the largest power generators are obligated to
achieve the RPS requirements in their generation or purchase
offsetting renewable energy certificates. Financial penalties
are levied by the government for non-compliance.
18
FuelCell Energy
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. 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 U.S. 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. Our SureSource
solutions are CARB 2007 certified, and our SureSource 1500,
when operating on biogas, is certified for the CARB 2013
biogas standards.
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.
Proprietary Rights and Licensed Technology
Our intellectual property consists of patents, trade secrets
and institutional knowledge that we believe 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
SureSource power plant sold in 2003. Over this 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.
As of October 31, 2017, our Company, excluding its
subsidiaries, had 92 patents in the U.S. and 106 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 SureSource
technology, SOFC technology, PEM fuel cell technology, and
applications thereof. As of October 31, 2017, we also had 30
patent applications pending in the U.S. and 93 pending in
other jurisdictions. Our U.S. patents will expire between 2018
and 2035, and the current average remaining life of our U.S.
patents is approximately 9.2 years.
Our subsidiary, Versa Power Systems, Ltd., as of October 31,
2017, had 35 U.S. patents and 75 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 6.8 years. As of
October 31, 2017, Versa Power Systems, Ltd. also had four
pending U.S. patent applications and 14 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, and, as of
October 31, 2017, had two U.S. patents and nine patents outside
the U.S. for carbonate fuel cell technology licensed from
Fraunhofer IKTS.
No patents have expired or will expire in 2018 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, 2017, 2016 and
2015, our top customers, Hanyang Industrial Development
Co., Ltd, Dominion Bridgeport Fuel Cell, LLC, the Department
of Energy, ExxonMobil, POSCO Energy (which owns
approximately 4% of the outstanding shares of common stock
of the Company), and Avangrid Holdings (through its various
subsidiaries), accounted for an aggregate of 78%, 75% and
90%, respectively, of our total annual consolidated revenue.
Revenue percentage by major customer for the last three
fiscal years is as follows:
Annual Report 2017
19
Hanyang Industrial Development Co. Ltd
Dominion Bridgeport Fuel Cell, LLC
Department of Energy
ExxonMobil
POSCO Energy
Avangrid Holdings (through its various subsidiaries)
Total
Years Ended October 31,
2017
2016
2015
40%
11%
9%
9%
6%
3%
78%
—%
6%
8%
3%
48%
10%
75%
—%
3%
5%
1%
67%
14%
90%
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Consolidated Financial
Statements and Supplementary Data” for further information
regarding our revenue and revenue recognition policies.
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 marketing and manufacturing operations both within
and outside the United States. We source raw materials and
BOP components from a diverse global supply chain. In 2017,
the foreign country with the greatest concentration risk was
South Korea, accounting for 46% of our consolidated net sales.
The Company is entitled to receive royalties from POSCO
Energy on the sale of power plants and module replacements
related to service of fuel cell power plants in Asia. 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% to 60% depending on the configuration.
This compares favorably to the average efficiency of the
U.S. electrical grid of about 35%. Our solutions deliver this
high electrical efficiency where the power is used, avoiding
transmission. Transmission line losses average about 6%
to 9% for the U.S. grid, which represents inefficiency and is
a hidden cost to ratepayers. In a combined heat and power
configuration, total thermal efficiency of our fuel cell solutions
can potentially be up to 90% depending on the application.
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 have expanded our manufacturing facility in Torrington
and consolidated other locations, reducing transportation
emissions and transportation costs, incorporating energy
efficient building standards and reducing leasing costs. We are
pursuing additional consolidation initiatives in 2018 as we plan
to relocate fuel cell module conditioning to Torrington from
our Danbury facility, which will further reduce transportation
emissions and costs. We recognize that there is more to be
done and we are utilizing cross-functional teams to identify
and evaluate additional areas for improvement.
Product end-of-life management
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. 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 BOP 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 is either re-used or recycled.
20
FuelCell Energy
Our manufacturing process has a very low carbon footprint,
utilizing an assembly oriented production strategy. 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.
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 4 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 child labor,
human trafficking, 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 domestic
suppliers in our supply chain comply with the Fair Labor
Standards Act of 1938, as amended.
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 (i.e. tin, tungsten, tantalum and gold) that
are classified as conflict minerals. We do utilize componentry
in the BOP such as computer circuit boards that utilize trace
amounts of 3TG minerals. For perspective, total shipments in
fiscal year 2016 weighed approximately 5.8 million pounds, of
which 3 pounds, or 0.000052%, represented 3TG minerals, so
the presence of these minerals is minimal. Our conflict mineral
disclosure filed with the Securities and Exchange Commission
(“SEC”) on Form SD contains specific information on the actions
we are taking to avoid the use of conflict minerals.
Associates
As of October 31, 2017, we had 458 full-time associates, of
whom 173 were located at the Torrington manufacturing plant,
246 were located at the Danbury, Connecticut facility or other
field offices within the U.S., and 39 were located abroad. None
of our associates are represented by a labor union or covered
by a collective bargaining agreement. We believe our relations
with our associates are good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to
those reports are made available free of charge through the
Investor Relations section of the Company’s Internet website
(http://www.fuelcellenergy.com) as soon as practicable after
such material is electronically filed with, or furnished to, the
SEC. Material contained on our website is not incorporated by
reference in this report. Our executive offices are located at 3
Great Pasture Road, Danbury, CT 06810. The public may also
read and copy any materials that we file with the SEC at the
SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. The SEC also maintains an Internet website that contains
reports and other information regarding issuers that file
electronically with the SEC located at http://www.sec.gov.
Annual Report 2017
21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
FuelCell Energy delivers efficient, affordable and clean solutions
for the supply, recovery and storage of energy. We design,
manufacture, undertake project development of, install, operate
and maintain megawatt-scale fuel cell systems, serving utilities
and industrial and large municipal power users with solutions
that include both utility-scale and on-site power generation,
carbon capture, local hydrogen production for transportation
and industrial users, and long duration energy storage.
Our plants are operating in more than 50 locations on three
continents and have generated more than 7.0 million megawatt
hours (MWh) of electricity.
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 a reference, one
megawatt is adequate to continually 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 particulate 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 SureSource
power plants utilize carbonate fuel cell technology, which is
a very versatile type of fuel cell technology. Utilizing our core
SureSource 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 for adjacent sub-megawatt
applications to the markets for our megawatt-class SureSource
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.
RECENT DEVELOPMENTS
Korea Market Developments. In June 2017, an EPC contractor,
Hanyang Industrial Development Co., Ltd (“HYD”), was
awarded a 20MW project by a utility in South Korea utilizing
the Company’s SureSource technology. On August 29, 2017,
we entered into a contract with HYD pursuant to which we will
provide equipment to HYD for this 20 MW fuel cell project. The
SureSource 3000TM power plants will cleanly produce electricity
and thermal energy to support a district heating system.
Construction began in fall 2017 and the installation is expected
to be operational in August 2018. The value of the equipment
sale contract to the Company is expected to be in excess
of $60 million, a portion of which has been included backlog
as of October 31, 2017.
U.S. Market Developments. During 2017, the Company received
notices of award on multiple projects in the U.S. and there have
been favorable policy developments summarized as follows:
• In November 2017, the Company announced a renewable
hydrogen generation project under a hydrogen power
purchase agreement with Toyota. The multi-megawatt
SureSource Hydrogen plant will be located at the Port of
Long Beach, California and will use renewable directed
biogas for fuel. Toyota will purchase the hydrogen output
of approximately 1,200 tons per day to fuel its fuel cell
cars that arrive at the Port from overseas as well as fuel a
Class 8 fuel cell truck located at the Port. Toyota will also
purchase a portion of the renewable power generated, with
the remainder of the power to be sold to the local utility
under the California BioMAT program. The Company has
executed a definitive agreement with Toyota and the project
will be recorded as backlog in the first quarter of 2018. The
Company is actively marketing its distributed hydrogen
technology, which can provide a hydrogen fueling solution for
fuel cell vehicles, and expects further market developments
for this product offering.
• In October 2017, we executed a PPA with the Connecticut
Municipal Electric Energy Cooperative (“CMEEC”) for the
long-term supply of power to the U.S. Navy Submarine Base
in Groton, Connecticut. CMEEC is owned by six municipal
utilities: Groton Utilities, Norwich Public Utilities, Jewett City
Department of Public Utilities, Bozrah Light and Power, South
Norwalk Electric and Water and Norwalk Third Taxing District.
CMEEC will be acting through and working with Groton
Utilities to implement the new power supply. Two SureSource
4000 power plants with total output of 7.4 MW will be located
on the U.S. Submarine Base in Groton, Connecticut, to supply
an existing electrical substation. The fuel cell plant is part of a
multifaceted plan by CMEEC to provide new power resources
and support the desire of the Department of Defense to add
resiliency and grid independence to key military installations.
We will begin construction of the plants in 2018 and full
commercial operations are expected in 2019.
22
FuelCell Energy
• In July 2017 the Company was awarded three fuel cell projects
totaling 39.8 MW by LIPA under the Fuel Cell Resources
Feed-in Tariff. This 40 MW FIT IV program is structured to
enhance energy resiliency with clean local power generation
for western Long Island, New York. LIPA will purchase
the power from the fuel cell projects under 20 year power
purchase agreements. The Company will install, operate
and maintain the fuel cell power plants. The next steps in
project development include working with the utility on the
interconnection agreements, executing power purchase
agreements, and finalizing site engineering. Upon execution of
power purchase agreements (expected in 2018), the projects
will become contracted backlog. Contracted revenues over
the twenty year operating period are expected to be up to
approximately $800.0 million based on committed pricing and
expected power generation over the term. This total may vary
depending on actual power generation or if the Company were
to sell these projects.
• In June 2017, the State of Connecticut passed Public Act
17-144—An Act Promoting the use of Fuel Cells for Electric
Distribution System Benefits and Reliability. The Act values
cost of power, reliability and resiliency, along with the
multiple economic development benefits that are unique to
fuel cell projects. The Act has two parts, including enabling
Connecticut electric utilities to purchase up to 30 MW of
fuel cells. Separately, the Act includes a provision for the
Connecticut Department of Energy and Environmental
Protection (the “CT DEEP”) to issue an RFP for the
procurement of clean energy with a focus on enhancing the
reliability and resiliency of energy supply and in a manner that
promotes in-state economic development. A draft RFP was
issued by the CT DEEP on December 15, 2017 with a schedule
anticipating contract awards in late 2018.
Production Rate Adjustment. In June 2017, the Company
reduced its production to approximately fifteen MW on an
annualized basis. This adjustment was made to manage
inventory levels, prepare to transition to new product
introductions and complete certain building expansion
activities. From June through September 2017, approximately
110 manufacturing employees worked shortened work weeks.
The Company participated in the State of Connecticut’s
“Shared Work Program” allowing affected employees to collect
unemployment benefits for days they did not work. Employees
returned to work full time in October 2017 and the production
rate is currently 25 MW on an annualized basis. The Company is
evaluating an increase in the production rate during 2018 due to
increased backlog and project awards.
Convertible Preferred Offering. On September 5, 2017, the
Company priced an underwritten offering of 33,500 shares
Series C Preferred Stock. The Series C Preferred Stock carries
a 0.0% dividend and a $1.84 conversion price. Each share of
Series C Preferred Stock was sold at a price of $895.52 for
gross proceeds of approximately $30.0 million. FuelCell Energy
intends to use the net proceeds from this offering for working
capital, project financing, and general corporate purposes.
The offering closed on September 8, 2017.
The Certificate of Designations with respect to the Series C
Preferred Stock describes certain triggering events the
occurrence of which would give the holders of the Series C
Preferred Stock (i) the right to convert all or a portion of their
shares of Series C Preferred Stock into shares of our common
stock, and/or (ii) the right to require the Company to redeem
all or a portion of their shares of Series C Preferred Stock. One
of the specified triggering events is the Company’s failure to
receive certain payments under a sales contract on or prior
to the earlier of (a) the Company’s public announcement of its
fiscal 2017 fourth quarter earnings and (b) January 15, 2018.
As of January 11, 2018 (the date of filing of this report and
public announcement of fiscal 2017 fourth quarter earnings),
the Company has received such payments and none of the
triggering events described in the Certificate of Designations
have occurred.
In connection with the offering of the Series C Preferred Stock,
we amended our loan and security agreement with Hercules
Capital, Inc. (“Hercules”) to permit us to make certain cash
payments that may be required pursuant to the terms of the
Series C Preferred Stock and to adjust the cash covenant.
Effective December 14, 2017, the minimum cash covenant
requires the Company to maintain an unrestricted cash balance
in accounts subject to an account control agreement in favor of
Hercules of at least $10.0 million.
RESULTS OF OPERATIONS
Management evaluates the results of operations and cash
flows using a variety of key performance indicators, including
revenues compared to prior periods and internal forecasts,
costs of our products and results of our cost reduction
initiatives, and operating cash use. These are discussed
throughout the “Results of Operations” and “Liquidity and
Capital Resources” sections. Results of Operations are
presented in accordance with accounting principles generally
accepted in the United States (“GAAP”).
COMPARISON OF THE YEARS ENDED OCTOBER 31, 2017 AND 2016
Revenues and Costs of Revenues
Our revenues and cost of revenues for the years ended October 31, 2017 and 2016 were as follows:
(dollars in thousands)
Total revenues
Total costs of revenues
Gross profit (loss)
Gross margin
Years Ended October 31,
Change
2017
2016
$
%
$95,666
$108,252
$ (12,586)
(12)%
92,932
108,609
(15,677)
(14)%
$ 2,734
$
(357)
$ 3,091
866%
2.9%
(0.3)%
Annual Report 2017
23
Total revenues for the year ended October 31, 2017 decreased
$12.6 million, or 12%, to $95.7 million from $108.3 million during
the year ended October 31, 2016, due primarily to decreased
product sales as discussed below. Total cost of revenues for
the year ended October 31, 2017 decreased by $15.7 million, or
14%, to $92.9 million from $108.6 million during the year ended
October 31, 2016. The Company’s gross margin was 2.9% in
fiscal year 2017, as compared to the prior year gross margin loss
of 0.3%. A discussion of the changes in product sales, service
agreement and license revenues, Advanced Technologies
contract revenues, and generation revenues follows. Refer
to “Critical Accounting Policies and Estimates” for more
information on revenue and cost of revenue classifications.
Product sales
Our product sales, cost of product sales and gross profit for the years ended October 31, 2017 and 2016 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
2017
$ 43,047
49,843
2016
$ 62,563
63,474
$
%
$(19,516)
(13,631)
(31)%
(21)%
$ (6,796)
$
(911
)
$ (5,885)
(646)%
(15.8)%
(1.5
)%
Product sales for the year ended October 31, 2017 included
$41.0 million of power plant revenue and $2.0 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, 2016 which included $11.7 million of power plant
revenue, $41.8 million of fuel cell kits revenue and $9.1 million of
revenue primarily from power plant component sales and EPC
services. Product sales decreased $19.5 million, or 31%, for the
year ended October 31, 2017 to $43.0 million from $62.5 million
for the prior year period.
The decline in revenue during the period is due primarily to
lower revenue from POSCO Energy due to (i) the lack of kit sales
for the year ended October 31, 2017 as the Company’s multi-
year kit order with POSCO Energy concluded at the end of fiscal
year 2016 and (ii) the transition to a royalty-only based model.
The Company is entitled to receive a 3.0% royalty on POSCO
Energy net product sales manufactured in South Korea as well
as a royalty on each scheduled fuel cell module replacement
under service agreements for modules that were built by
POSCO Energy. Also contributing to the decline in revenue over
the comparable period is the increase in instances in which
the Company installs power plants for customers that have
executed PPAs. The power plants are recognized as “Project
assets” on the Consolidated Balance Sheets and generation
revenue is recognized as earned over the life of the PPA or as a
product sale in the event the Company sells the entire project
(service agreement revenues would accompany a product sale).
The decrease in kit revenue is partially offset by an increase
in power plant revenue primarily relating to the 20 MW order
from HYD of which a substantial portion of revenue has been
recorded for the delivered components.
Cost of product sales decreased $13.7 million for the year ended
October 31, 2017, to $49.8 million compared to $63.5 million in
the prior year period. The decrease in cost of sales in fiscal year
2017 was driven by lower overall product volume which included
no kit sales during the fiscal year and retention of project assets
on balance sheet rather than sales to end customer or investors.
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. The decrease in product sales gross
margin is primarily due to lower manufacturing production for
the year ended October 31, 2017 resulting in a higher level of
under-absorbed fixed costs.
As of October 31, 2017, product sales backlog totaled
approximately $31.3 million compared to $24.9 million as of
October 31, 2016.
Service and license revenues
Our service agreements and license revenues and associated cost of revenues for the years ended October 31, 2017 and 2016
were as follows:
(dollars in thousands)
Service and license revenues
Cost of service and license revenues
Years Ended October 31,
Change
2017
2016
$
%
$27,050
$31,491
$(4,441)
(14)%
25,285
32,592
(7,307)
(22)%
Gross profit (loss) from service and license revenues
$ 1,765
$ (1,101)
$ 2,866
260 %
Service and license revenues gross margin
6.5%
(3.5)%
24
FuelCell Energy
Revenues for the year ended October 31, 2017 from service
agreements and license fee and royalty agreements totaled
$27.1 million, compared to $31.5 million for the prior year. The
decrease relates primarily to fewer module exchanges under
service agreements performed in 2017. Revenue for license fee
and royalty agreements totaled $2.7 million and $6.2 million for
the years ended October 31, 2017 and 2016, respectively, due to
lower royalties recognized. The Company’s license and royalty
agreements with POSCO Energy included a minimum royalty
which expired in December 2016.
Service agreements and license cost of revenues decreased
to $25.3 million for fiscal year 2017 from $32.6 million for the
prior year. Gross margin for the year ended October 31, 2017
was 6.5% which improved from a gross margin loss of 3.5%.
The improvement in gross margin over the prior year was a
result of the fact that the prior year included 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 which were incurred
in connection with the termination of service agreements at
certain sites. The fiscal year 2017 gross margin also included
MW module replacements with favorable margins.
As of October 31, 2017, service backlog totaled approximately
$182.3 million compared to $204.8 million as of October 31,
2016. 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.
Generation revenues
(dollars in thousands)
Generation revenues
Cost of generation revenues
Gross profit from generation revenues
Generation revenues gross margin
Years Ended October 31,
Change
2017
$ 7,233
5,076
$ 2,157
2016
$1,267
664
$ 603
29.8%
47.6%
$
%
$ 5,966
471%
4,412
664%
$1,554
258%
Revenues for the year ended October 31, 2017 from generation
totaled $7.2 million, compared to $1.3 million for the prior year
period. Revenues for the year ended October 31, 2017 reflects
revenue from electricity generated pursuant to the Company’s
PPAs. Cost of generation totaled $5.1 million for the year ended
October 31, 2017, compared to $0.7 million for the prior year
period. Gross profit from generation revenues increased to $2.2
million for the year ended October 31, 2017, compared to $0.6
million for the prior year period. The increases represent the
growth in the Company’s operating portfolio. The reduction in
generation revenues gross margin percentage is the result of
higher costs and lower revenues from electricity generation on
certain plants during the initial startup operation period. As of
October 31, 2017, the Company had 11.2 MW of operating power
plants in its portfolio.
As of October 31, 2017, generation backlog totaled approximately
$296.3 million compared to $142.5 million as of October 31, 2016.
Advanced Technologies contract revenues
(dollars in thousands)
Advanced Technologies contract revenues
Cost of Advanced Technologies contract revenues
Advanced Technologies contract revenues gross profit
Years Ended October 31,
Change
2017
$18,336
12,728
$ 5,608
2016
$12,931
11,879
$ 1,052
$
%
$ 5,405
849
42%
7%
$4,556
433%
Advanced Technologies contract revenues gross margin
30.6%
8.1%
Advanced Technologies contract revenues for the year ended
October 31, 2017 was $18.3 million, representing an increase
of $5.4 million compared to $12.9 million of revenue for the
year ended October 31, 2016. Cost of Advanced Technologies
contract revenues increased to $12.7 million for the year ended
October 31, 2017, compared to $11.9 million for the prior year.
Gross profit from Advanced Technologies contracts for the year
ended October 31, 2017 was $5.6 million compared to $1.1 million
for the year ended October 31, 2016, and gross margin was
30.6% for the year ended October 31, 2017 compared to 8.1%
during the prior year period. The increase in gross margin
is related to the timing and mix of contracts currently being
performed, particularly a higher proportion related to private
industry contracts.
At October 31, 2017, Advanced Technologies contract backlog
totaled approximately $44.3 million compared to $60.1 million
at October 31, 2016.
Administrative and selling expenses
Administrative and selling expenses were $25.9 million for the
year ended October 31, 2017 compared to $25.2 million for the
year ended October 31, 2016. The increase results primarily
from higher business development costs incurred. Business
development costs may vary from period to period depending on
the nature and frequency of customer and state-level requests
for proposals.
Annual Report 2017
25
Research and development expenses
Research and development expenses decreased $0.4 million to
$20.4 million for the year ended October 31, 2017, compared to
$20.8 million during the year ended October 31, 2016.
Restructuring expense
Restructuring expense of $1.4 million was recorded for the year
ended October 31, 2017, relating to personnel separation costs
from the business restructuring that was undertaken to reduce
costs and align production levels with the level of production
needs at the time.
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, 2017, our provision for income taxes was $0.04
million, compared to $0.5 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 NOLs or other deferred tax assets as
significant uncertainty exists surrounding the recoverability of
these deferred tax assets.
Loss from operations
Loss from operations for the year ended October 31, 2017 was
$44.9 million compared to $46.4 million for the year ended
October 31, 2016, primarily as a result of higher gross margins in
fiscal year 2017, which were partially offset by higher operating
expenses primarily for restructuring expense.
As of October 31, 2017, we had $752.7 million of federal NOL
carryforwards that expire in the years 2019 through 2037 and
$414.7 million in state NOL carryforwards that expire in the
years 2018 through 2037. Additionally, we had $11.6 million of
state tax credits available, of which $0.6 million expires in 2018.
The remaining credits do not expire.
Interest expense
Interest expense for the years ended October 31, 2017 and 2016
was $9.2 million and $5.0 million, respectively. The increase
results from borrowings under the Company’s Loan and Security
Agreement with Hercules and interest expense related to sale-
leaseback transactions recorded under the finance method.
The interest expense for the years ended October 31, 2017 and
2016 includes interest for the amortization of the redeemable
preferred stock of a subsidiary fair value discount of $2.0 million
and $1.8 million, respectively.
Other income, net
Other income, net, was $0.2 million for the year ended October 31,
2017 compared to other income, net of $0.6 million for the
year ended October 31, 2016. Unrealized foreign exchange
(losses) gains aggregated to ($0.7) million and $0.1 million in
fiscal year 2017 and 2016, 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, 2017 and 2016 were $0.9 million and $0.4
million, respectively.
Net loss attributable to noncontrolling interest
The net loss attributed to the noncontrolling interest for the
year ended October 31, 2016 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.
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, 2017
and 2016.
Net loss attributable to common stockholders and loss per
common share
Net loss attributable to common stockholders 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, 2017 and 2016, net loss attributable to common
stockholders was $57.1 million and $54.2 million, respectively,
and basic and diluted loss per common share was $1.14 and
$1.82, respectively.
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)
(34)%
108,609
150,301
(41,692)
(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
year ended October 31, 2015, 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 for the year ended October 31, 2015. 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. Refer to
“Critical Accounting Policies and Estimates” for more information on revenue and cost of revenue classifications.
26
FuelCell Energy
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
$(66,032)
(51)%
63,474
118,530
(55,056)
(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 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 of
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.
Also contributing to the decline in revenue over the comparable
prior year period is certain power plants that are being
recognized as Project assets on the balance sheet, as product
and EPC revenue is not recognized with respect to these Project
assets when sales are made. As the Company’s development
business expands, it is installing power plants for customers
that have executed PPAs. These assets generally are the subject
of sale-leaseback transactions with PNC Energy Capital, LLC
(“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
PPA or when a definitive sales agreement is executed.
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
year 2016 was driven by lower overall product volume during the
fiscal year and retention of project assets on the balance sheet
rather than sales to end customers or investors.
As of October 31, 2016, product sales backlog totaled
approximately $24.9 million compared to $90.7 million as of
October 31, 2015.
Service and License 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 and license revenues
Cost of service and license revenues
Years Ended October 31,
Change
2016
2015
$
$ 31,491
$21,012
32,592
18,301
$10,479
14,291
%
50%
78%
Gross (loss) profit from service and license revenues
$ (1,101 )
$ 2,711
$ (3,812)
(141)%
Service and license revenues gross margin
(3.5)%
12.9%
Revenues for the year ended October 31, 2016 from service
agreements and license fee and royalty agreements totaled
$31.5 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
$32.6 million for the fiscal year ended October 31, 2016 from
$18.3 million for the prior year, resulting in a decrease in gross
margin to a loss of 3.5% from a profit of 12.9% during the prior
year 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
$204.8 million compared to $254.1 million as of October 31,
2015. Service backlog does not include future royalties
or license revenues. This backlog is for service agreements
of up to twenty years.
Annual Report 2017
27
Generation revenues
(dollars in thousands)
Generation revenues
Cost of generation revenues
Generation revenues gross profit
Generation revenues gross margin
Years Ended October 31,
Change
2016
$1,267
664
$ 603
47.6%
2015
$
%
$—
—
$—
—
$1,267
100%
664
100%
$ 603
100 %
Revenues for the year ended October 31, 2016 from generation
totaled $1.3 million. Revenues are from electricity generated
pursuant to the Company’s PPAs. Cost of generation totaled
$0.7 million for the year ended October 31, 2016. The increases
represent the growth in the Company’s operating portfolio.
The Company did not have any operating assets in its generation
portfolio during fiscal 2015.
Advanced Technologies contract revenues
Advanced Technologies contracts revenue and related costs for the years ended October 31, 2016 and 2015 were as follows:
(dollars in thousands)
Advanced Technologies contract revenues
Cost of Advanced Technologies contract revenues
Advanced Technologies contract revenues gross profit
Advanced Technologies contract revenues gross margin
Years Ended October 31,
Change
2016
2015
$12,931
$13,470
11,879
13,470
$ 1,052
$
8.1%
—
—
$
$ (539)
(1,591)
%
(4)%
(12)%
$ 1,052
100%
Advanced Technologies contract revenues 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 the timing and
mix of contracts currently being performed, particularly
the transition to a larger mix of private industry contracts.
As of October 31, 2016, Advanced Technologies contract backlog
totaled approximately $60.1 million compared to $36.5 million as
of October 31, 2015.
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 high efficiency fuel cell. This
configuration has an overall electrical efficiency of approximately
60% 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 2018.
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 Loan and Security
Agreement with Hercules, 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, net
Other income, net, was $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
28
FuelCell Energy
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 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 NOLs
or other deferred tax assets as significant uncertainty exists
surrounding the recoverability of these deferred tax assets.
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 stockholders and loss per
common share
Net loss attributable to common stockholders 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 stockholders was $54.2 million
and $32.6 million, respectively, and basic and diluted loss per
common share was $1.82 and $1.33, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2017, we believe that our cash and 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.
We intend to maintain appropriate cash and debt levels based
upon our expected cash requirements for operations, capital
expenditures, construction of project assets as well as principal,
interest and dividend payments. In the future, we may also
engage in additional debt or equity financings, including project
specific debt financings. We believe that when necessary, we
will have adequate access to the capital markets, although 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 and cash equivalents including restricted cash, totaled
$87.5 million as of October 31, 2017 compared to $118.3 million
as of October 31, 2016. As of October 31, 2017:
• Unrestricted cash and cash equivalents was $49.3 million
compared to $84.2 million as of October 31, 2016, and
• Restricted cash and cash equivalents was $38.2 million, of
which $4.6 million was classified as current and $33.5 million
was classified as non-current, compared to $34.1 million total
restricted cash and cash equivalents as of October 31, 2016, of
which $9.4 million was classified as current and $24.7 million
was classified as non-current.
During the third quarter of fiscal year 2017, the Company
completed an equity capital raise netting $13.9 million of
proceeds which included common stock and two tranches of
warrants. Warrants to purchase 9.8 million shares of common
stock were exercised in the third and fourth quarters of fiscal
year 2017, yielding proceeds of $12.7 million. If all remaining
warrants related to this equity offering are exercised in periods
subsequent to October 31, 2017, the Company could receive
additional cash proceeds of up to $19.6 million.
In addition to the cash and cash equivalents described above,
the Company has $40.0 million of availability under its project
finance loan agreement with NRG Energy through FuelCell
Finance, which can be used for project asset construction.
Draws under the facility are subject to traditional project finance
conditions precedent, including the existence of a PPA with the
end-user of the power and customary project documentation,
economic performance and compliance with applicable laws and
regulations. Projects must be located in the United States.
We also have an effective shelf registration statement on file
with the SEC for issuance of debt and equity securities.
The Company’s future liquidity will be dependent on obtaining a
combination of increased order and contract volumes, increased
cash flows from our generation and service portfolios and cost
reductions necessary to achieve profitable operations. Our
expanding development of large-scale turn-key projects in the
United States requires liquidity and is expected to continue to
have increasing liquidity requirements. A key element of our
business model includes the development of turn-key projects
and we may commence construction upon the execution of a
multi-year PPA with an end-user that has a strong credit profile.
Project development and construction cycles, which span the
time between securing a PPA and commercial operations of
the plant, vary substantially and can take years. As a result
of these project cycles and strategic decisions to finance
the construction of certain projects, we may need to make
significant up-front investments of resources in advance of the
receipt of any cash from the sale or long-term financing of such
projects. These up-front investments may include using our
working capital availability under our construction financing
facility or other project financing arrangements. 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 project, generally until such time
Annual Report 2017
29
that we can sell such 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.
Our operating portfolio (11.2 MW as of October 31, 2017)
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.
As of October 31, 2017, the Company had an additional 19.5 MW
under construction some of which would be expected to
generate operating cash flows in fiscal 2018. Retaining long-
term cash flow positive projects combined with our service
fleet reduces reliance on new project sales to achieve cash flow
positive operations. We have partnered with financial institutions
to secure long-term debt and sale-leasebacks for our project
asset portfolio as well as NRG for construction period financing.
Through October 31, 2017, we have financed four projects
through sale-leaseback transactions. As of October 31, 2017,
total finance obligations and debt outstanding related to project
assets was $48.3 million. Our generation portfolio provides the
Company with the full benefit of future cash flows.
The Company had a contract backlog totaling approximately
$554.2 million as of October 31, 2017. This backlog includes
approximately $182.3 million of service agreements and $296.3
million of PPAs, combined for an average term of approximately
17 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 2037. Backlog also includes
$31.3 million of product sales contracts, which are expected to
generate revenue in 2018. Product sales are primarily related
to the Korean utility market and complements the U.S. PPA
market. Backlog represents firm definitive agreements executed
by the Company and our customers. This backlog excludes
the following recent awards: LIPA for 39.8 MW projects, the
Toyota hydrogen project and the Korean 20 MW twenty year
service agreement. Backlog is expected to increase by over $1.0
billion once these project awards are converted to definitive
agreements. Project awards referenced by the Company are
notifications that the Company has been selected, typically
through a competitive bidding process, to enter into definitive
agreements. These awards have been publicly disclosed.
Negotiations are in process and if successfully completed,
project awards will become backlog.
The Company also has a strong sales and service pipeline of
potential projects in various stages of development in North
America, Asia 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. In addition, a number of multi-megawatt
utility grid support projects are being developed for utilities and
independent power producers to support the grid where power is
needed. These projects help both utilities and governments meet
their renewable portfolio standards.
30
FuelCell Energy
Factors that may impact our liquidity in fiscal year 2018 and
beyond include:
• Timing of project awards and factory production rate. The
Company bids on large projects into diverse markets which
can have long decision cycles and uncertain outcomes. In fiscal
year 2017, given the timing of market development activities,
the Company took certain actions to reduce costs and manage
inventory levels as follows:
• On November 30, 2016, the Company announced a business
restructuring to reduce costs and align production levels
with then-current levels of demand. The Company reduced
its materials spend and implemented 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, Connecticut
and remote locations. A total of ninety-six positions, or
approximately 17% of the global workforce, was eliminated.
The production rate was reduced to twenty-five MW annually,
from the prior rate of fifty MW annually, in order to position
for delays in anticipated order flow.
• In June 2017, the Company further reduced its production
to approximately fifteen MW on an annualized basis. This
adjustment was made to manage inventory levels, prepare to
transition to new product introductions and complete certain
building expansion activities. From June through September
2017, approximately 110 manufacturing employees worked
shortened work weeks. The Company participated in the State
of Connecticut’s “Shared Work Program” allowing affected
employees to collect unemployment benefits for days they
do not work. Employees returned to work in October 2017
and the Company is now operating at a 25 MW annualized
run-rate.
• 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, bonding or
other forms of security, and incurring engineering, permitting,
legal, and other expenses.
• The amount of accounts receivable as of October 31, 2017 and
2016 was $81.3 million ($12.8 million of which is classified
as “Other assets, net”) and $38.7 million ($14.1 million of
which is classified as “Other assets, net”), respectively. The
increase in 2017 relates to increasing utility scale activity in
the South Korean market. Included in accounts receivable as
of October 31, 2017 and October 31, 2016 was $38.3 million
and $29.7 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. 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 as of October 31, 2017 and
2016 was $74.5 million and $73.8 million, respectively, which
includes work in process inventory totaling $54.4 million
and $48.5 million, respectively. As we continue to execute on
our business plan, we must produce fuel cell modules and
procure BOP components in required volumes to support
our planned construction schedules and potential customer
contractual requirements. As a result, we may manufacture
modules or acquire BOP 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. The Company
reduced its production rate during fiscal year 2017 and expects
to operate at lower levels for a period of time in order to deploy
inventory to new projects and mitigate future increases in
inventory. A total of approximately $25.0 million of inventory
is expected to be deployed during the first quarter of 2018 for
the HYD contract.
• Cash and cash equivalents as of October 31, 2017 included
$3.0 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 as of October 31, 2017 and
2016 was $73.0 million and $47.1 million, respectively. Project
assets consist of capitalized costs for fuel cell projects that are
either operating and producing revenue or under construction.
Project assets as of October 31, 2017 consist of $32.1 million,
representing completed installations currently operating
and $40.9 million of project assets representing projects in
development. As of October 31, 2017, we had 11.2 MW of our
operating project assets that generated $7.2 million of revenue
for the Company in fiscal year 2017. Also, as of October 31,
2017 the Company had an additional 19.5 MW under
construction which would be expected to generate operating
cash flows in fiscal year 2018. We expect this portfolio to
continue to grow.
• Under the terms of certain contracts, the Company will provide
performance security for future contractual obligations. As of
October 31, 2017, we had pledged approximately $38.2 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.
• For fiscal year 2018, we forecast capital expenditures in
the range of $11.0 million to $13.0 million compared to
$12.4 million in fiscal year 2017. We have substantially
completed the first phase of our project to expand our 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 that was used for
this first phase of our expansion project. 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 in December 2015. Up to 50% of the principal balance
is forgivable if certain job creation and retention targets are
met. In April 2017, the Company entered into an amendment to
the Assistance Agreement extending certain job creation target
dates by two years to October 28, 2019.
Cash Flows
Cash and cash equivalents and restricted cash and cash
equivalents totaled $87.4 million as of October 31, 2017
compared to $118.3 million as of October 31, 2016. As of
October 31, 2017, restricted cash and cash equivalents was
$38.2 million, of which $4.6 million was classified as current
and $33.5 million was classified as non-current, compared to
$34.1 million total restricted cash and cash equivalents as
of October 31, 2016, of which $9.4 million was classified as
current and $24.7 million was classified as non-current.
The following table summarizes our consolidated cash flows:
2017
2016
2015
Consolidated Cash Flow Data:
Net cash used in
operating activities
$(71,845) $(46,595) $(44,274)
Net cash used in
investing activities
(31,444)
(41,452)
(6,930)
Net cash provided by
financing activities
72,292
120,658
28,219
Effects on cash from changes
in foreign currency rates
129
(35)
(108)
Net (decrease) increase
in cash and cash
equivalents
$(30,868) $ 32,576 $(23,093)
The key components of our cash inflows and outflows were
as follows:
Operating Activities —Net cash used in operating activities was
$71.8 million during fiscal year 2017 compared to $46.6 million
used in operating activities during fiscal year 2016.
Net cash used in operating activities during fiscal year 2017
is primarily a result of the net loss of $53.9 million, increases
in accounts receivable of $51.3 million and inventory of $8.0
million, and decreases in accrued liabilities of $2.3 million and
deferred revenue of $0.9 million. The decreases were offset
by non-cash adjustments of $20.2 million and an increase in
accounts payable of $25.0 million.
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, partially offset by a $30.2
million decrease in accounts receivable. Cash used in operating
activities also included a $3.0 million reduction in accounts
payable, and an $8.1 million increase in inventories.
Annual Report 2017
31
Investing Activities—Net cash used in investing activities was
$31.4 million during fiscal year 2017 compared to net cash used
in investing activities of $41.5 million during fiscal year 2016.
Net cash used in investing activities during fiscal year 2017
included a $19.7 million investment in project assets to expand
our operating portfolio and $12.4 million for capital expenditures
which was primarily for the substantial completion of the
Torrington facility expansion. Net cash used for the year was
offset by cash received in connection with an asset acquisition
of $0.6 million.
Net cash used in investing activities during fiscal year 2016
consists of a $33.7 million investment in project assets as a
result of expanding our portfolio to retain long-term positive
cash flow projects (many under PPAs with contract durations
of up to twenty years). Capital expenditures totaled $7.7 million
and primarily related to the expansion of our Torrington facility.
Financing Activities—Net cash provided by financing activities
was $72.3 million during fiscal year 2017 compared to $120.7
million in fiscal year 2016.
Net cash provided by financing activities during fiscal year 2017
includes net proceeds received from the issuance of preferred
shares of $27.9 million, cash received from a common stock
offering of $14.2 million, cash received from warrant exercises
of $12.7 million, and net proceeds from open market sales of
common stock of $12.6 million. Net cash provided by financing
activities also included $17.9 million of net proceeds from debt
primarily relating to a sale-leaseback transaction with PNC.
Cash received was offset by the repayment of debt of $8.6
million, the payment of preferred dividends and the return of
capital of $4.2 million.
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 issued to (i) the State of Connecticut for our facility
expansion, (ii) Hercules pursuant to the loan and security
agreement to support working capital and (iii) NRG Energy
and PNC 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.
Commitments and Significant Contractual Obligations
A summary of our significant future commitments and contractual obligations as of October 31, 2017 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
$ 29,107
$25,909
$ 3,043
$ 155
$ —
6,369
972
46,115
26,391
7,261
25,032
950
—
1,534
3,802
400
—
1,943
2,621
1,577
7,277
400
—
3,454
3,506
773
5,564
150
—
—
13,597
3,377
8,389
—
—
Total
$114,834
$59,008
$16,861
$13,602
$25,363
(1) Purchase commitments with suppliers for materials, supplies and services incurred in the normal course of business.
(2 ) The terms of the Class A Cumulative Redeemable Exchangeable Preferred Share Agreement (the “Series 1 Preferred Share Agreement”) require payments
of (i) an annual amount of Cdn. $500,000 for dividends and (ii) an amount of Cdn. $750,000 as return of capital payments payable in cash. These payments
will end on December 31, 2020. Dividends accrue at a 1.25% quarterly rate on the unpaid principal balance, and additional dividends will accrue on the
cumulative unpaid dividends at a rate of 1.25% per quarter, compounded quarterly. On December 31, 2020 the amount of all accrued and unpaid dividends
on the Series 1 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
Series 1 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 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% of the then prevailing conversion price ($141.00 per share) for 20 trading days during any consecutive 30 trading day period.
32
FuelCell Energy
In March 2017, the Connecticut Green Bank approved a $5.0
million credit facility for a 3.7 MW project under construction in
Danbury, Connecticut. The credit facility will be funded after the
power plant achieves commercial operations and is secured by
the power plant and the underlying revenues from the sale of
electricity, renewable energy credits (“RECs”), and capacity. The
20 year credit facility bears a fixed interest rate. Construction is
currently in process and commercial operation is expected in
early 2018. The credit facility is subject to execution of definitive
documentation and customary closing conditions. This project
will distribute power to the Connecticut grid and is expected
to demonstrate electrical efficiency and the ability of utilities
to affordably and cleanly solve power generation challenges in
land-constrained areas.
In November 2016, the Company’s wholly-owned subsidiary,
FuelCell Finance, entered into a membership interest purchase
agreement with GW Power LLC (“Seller”) whereby FuelCell
Finance purchased all of the outstanding membership interests
in New Britain Renewable Energy, LLC (“NBRE”) from Seller.
Seller assigned the NBRE interest to FuelCell Finance free
and clear of all liens other than a pledge in favor of Webster
Bank, National Association (“Webster Bank”). FuelCell Finance
assumed the debt outstanding with Webster Bank in the amount
of $2.3 million. The term loan interest is 5.0% and payment due
on a quarterly basis commenced in January 2017. The balance
outstanding as of October 31, 2017 was $1.7 million.
In April 2016, the Company entered into a loan and security
agreement (the “Hercules Agreement”) with Hercules for an
aggregate principal amount of up to $25.0 million, subject to
certain terms and conditions. The Hercules Agreement was
subsequently amended in the fourth fiscal quarter of 2017.
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, 2017, drawdowns and
accrued amortization of the end of term payment on the facility
aggregated $21.5 million. The loan is a 30 month secured facility
and the term loan interest was previously 9.5% and increased to
9.75% resulting from the increase in the prime rate. Interest is
paid on a monthly basis. Interest only payments were to be made
for the first 18 months as a result of the Company achieving
certain milestones. In addition to interest, principal payments
commenced on November 1, 2017 in equal monthly installments.
The loan balance and all accrued and unpaid interest is due
and payable by October 1, 2018. Per the terms of the Hercules
Agreement, there is an end of term payment of $1.7 million
which is being accreted using the effective interest rate method.
As collateral for obligations under the Hercules Agreement,
the Company granted Hercules a security interest in FuelCell
Energy, Inc.’s existing and hereafter-acquired assets except
for intellectual property and certain other excluded assets.
Collateral does not include assets held by FuelCell Finance
or any project subsidiary thereof. The Company may continue
to collateralize and finance its project subsidiaries through
other lenders and partners. Under the Hercules Agreement, as
amended, there is a minimum cash covenant which requires the
Company to maintain an unrestricted cash balance in accounts
subject to an account control agreement in favor of Hercules of
at least the greater of (x) (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 invoice date and (y) (a) at
all times prior to the Stockholder Approval Date (as defined in
the Certificate of Designations for the Series C Preferred Stock),
$20.0 million and (b) at all times on and after the Stockholder
Approval Date, $10.0 million (the Stockholder Approval Date was
December 14, 2017, which was the date on which stockholder
approval of the issuance of certain shares upon the conversion
and/or redemption of the Company’s Series C Preferred Stock
was obtained).
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
MW to at least 200 MW. 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 Technologies 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
Technologies Center and tri-generation fuel cell power plant.
On July 30, 2014, the Company’s subsidiary, 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% per annum for construction-period financing and 8.0%
thereafter. As of October 31, 2017, there was no outstanding
balance on this facility.
Annual Report 2017
33
In March 2013, we closed on a long-term loan agreement with
Connecticut Green Bank totaling $5.9 million in support of the
Bridgeport Fuel Cell Park Project. The loan agreement carries
an interest rate of 5.0% 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 Connecticut Green Bank Note as of
October 31, 2017 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. As of October 31, 2017, we had
an outstanding balance of $2.3 million on this loan. The interest
rate is 5%. Interest only payments commenced in January 2014
and the loan is collateralized by the assets procured under
this loan as well as $4.0 million of additional machinery and
equipment. Repayment terms require interest and principal
payments through May 2018.
We have pledged approximately $38.2 million of our cash and
cash equivalents as performance security and for letters of
credit for certain banking requirements and contracts. As of
October 31, 2017, outstanding letters of credit totaled $2.9
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 October 31, 2017 includes $15.0
million which was placed in a Grantor’s Trust account to
secure certain Company 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, 2017 also includes $17.0 million
to support obligations of the power purchase and service
agreements related to the PNC sale-leaseback transactions.
As of October 31, 2017, we have uncertain tax positions
aggregating $15.7 million and have reduced our NOLs
carryforwards by this amount. Because of the level of NOLs
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 our fuel cell power plants. Under
certain agreements, we are also responsible for procuring
fuel, generally natural gas, to run our fuel cell power plants.
We are typically not required to produce minimum amounts
of power under our PPAs and we typically have the right to
terminate PPAs by giving written notice to the customer, subject
to certain exit costs. As of October 31, 2017, 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. 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 up to twenty
years. Pricing for service contracts is based upon estimates of
future costs, which could be materially different from actual
expenses. Also see “Critical Accounting Policies and Estimates”
for additional details.
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.
As of October 31, 2017, Advanced Technologies contracts
backlog totaled $44.3 million, of which $24.5 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet debt or similar obligations, other
than operating leases, which are not classified as debt. We do
not guarantee any third-party debt. See Note 18 “Commitments
and Contingencies” to our consolidated financial statements for
the year ended October 31, 2017 included in this Annual Report
for further information.
34
FuelCell Energy
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures
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,
contract loss accruals, excess, slow-moving and obsolete
inventories, product warranty accruals, loss accruals on service
agreements, share-based compensation expense, allowance for
doubtful accounts, depreciation and amortization, impairment
of goodwill and in-process research and development intangible
assets, impairment of long-lived assets (including project
assets) 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.
Our critical accounting policies are those that are both most
important to our financial condition and results of operations
and require the most difficult, subjective or complex judgments
on the part of management in their application, often as a
result of the need to make estimates about the effect of matters
that are inherently uncertain. Our accounting policies are set
forth below.
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. The intangible asset represents indefinite lived in-
process research and development for cumulative research and
development efforts associated with the development of solid
oxide fuel cells (SOFC) stationary power generation and is also
reviewed at least annually for impairment.
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 in-process research and development assets as
of July 31, 2017. The Company had performed a quantitative
assessment in the prior year and determined that the estimated
fair value of the reporting unit and in-process research and
development intangible asset exceeded the respective carrying
value and therefore no impairment was recognized as of July 31,
2016. The Company performed a qualitative assessment for
fiscal year 2017 and determined that it was more likely than not
that there was no impairment of goodwill or the indefinite lived
intangible asset.
Impairment of Long-Lived Assets (including Project Assets)
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset group may not be recoverable. If events or
changes in circumstances indicate that the carrying amount
of the asset group may not be recoverable, we compare the
carrying amount of an asset group to future undiscounted net
cash flows, excluding interest costs, expected to be generated
by the asset group and their ultimate disposition. If the sum
of the undiscounted cash flows is less than the carrying value,
the impairment to be recognized is measured by the amount by
which the carrying amount of the asset group exceeds the fair
value of the asset group. Assets to be disposed of are reported at
the lower of the carrying amount or fair value, less costs to sell.
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 including site engineering and construction
services, (ii) equipment only sales (modules, BOPs, component
part kits and spare parts to customers), (iii) performance
under long-term service agreements, (iv) the sale of electricity
and other value streams under PPAs and utility tariffs from
project assets retained by the Company, (v) license fees and
royalty income from manufacturing and technology transfer
agreements, and (vi) government and customer-sponsored
Advanced Technologies projects.
Given the growing revenue related to PPAs and project assets
retained by the Company, beginning in the first quarter of 2017,
the Company began classifying such revenues in a separate
line item called Generation, and prior period amounts have been
reclassified. As further clarification, revenue elements
are classified as follows:
Product. Includes the sale and installation of fuel cell power
plants and site engineering and construction services, and the
sale of component part kits, modules, BOPs and spare parts
to customers.
Service and license. Includes performance under long-term
service agreements for power plants owned by third parties
and license fees and royalty income from manufacturing and
technology transfer agreements.
Generation. Includes the sale of electricity under PPAs and
utility tariffs from project assets retained by the Company.
This also includes revenue received from the sale of other
value streams from these assets including the sale of heat,
steam and renewable energy credits.
Advanced Technologies. Includes revenue from customer-
sponsored and government-sponsored Advanced
Technologies projects.
Annual Report 2017
35
Our revenue is generated from customers located throughout the
U.S., Europe and Asia and from agencies of the U.S. government.
For customer contracts where the Company is responsible
for supply of equipment and site construction (full turn-key
construction project) and has adequate cost history and
estimating experience, and with respect to which 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 and total project costs. 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 operations applicable to performance in
prior periods. Revenues are recognized based on the percentage
of the contract value that incurred costs to date bear to
estimated total contract costs, after giving effect to estimates
of costs to complete based on most recent information. For
customer contracts for new or significantly customized products,
where management does not believe it has the ability to
reasonably estimate total contract costs, revenue is recognized
using the completed contract method and therefore all revenue
and costs for the contract are deferred and not recognized until
installation and acceptance of the power plant is complete. We
recognize anticipated contract losses as soon as they become
known and estimable. Actual results could vary from initial
estimates and estimates will be updated as conditions change.
Revenue from equipment only sales where the Company does
not have the obligations associated with overall construction of
the project (modules, BOPs, fuel cell kits and spare parts sales)
are 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 and certain key suppliers 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.
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 is 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(s) is deferred and is recognized upon
such module replacement event(s).
The Company receives license fees and royalty income from
POSCO Energy as a result of manufacturing and technology
transfer agreements entered into in 2007, 2009 and 2012.
The Cell Technology Transfer Agreement we entered into on
October 31, 2012 provides POSCO Energy with a technology
license to manufacture SureSource power plants in South Korea.
On March 17, 2017, the Company entered into a Memorandum
of Understanding (“2017 MOU”) with POSCO Energy to engage in
discussions to further amend the above referenced agreements
and other agreements between the parties, as well as to engage
in discussions relating to entering into new agreements to
further the parties’ mutual interests.
Pursuant to the 2017 MOU, the Company commenced marketing
the entire suite of SureSource solutions in South Korea as
well as the broader Asian markets for the supply, recovery and
storage of energy.
Under PPAs and project assets retained by the Company,
revenue from the sale of electricity and other value streams
is recognized as electricity is provided to the customer. These
revenues are classified as a component of generation revenues.
Advanced Technologies contracts include both private industry
and government entities. Revenue from most government
sponsored Advanced Technologies projects is recognized as
direct costs are incurred plus allowable overhead less cost
share requirements, if any. Revenue from fixed price Advanced
Technologies projects is recognized using percentage of
completion accounting. Advanced Technologies programs
are often multi-year projects or structured in phases with
subsequent phases dependent on reaching certain milestones
prior to additional funding being authorized. Government
contracts are typically structured with 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.
Sale-Leaseback Accounting
From time to time, the Company, through a 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 Company uses the financing method to account for these
transactions.
36
FuelCell Energy
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 $2.2 million and
$3.3 million as of October 31, 2017 and October 31, 2016,
respectively.
The Company provides for loss accruals on all service
agreements when the estimated cost of future module
exchanges and maintenance and monitoring activities exceed
the remaining contract value. Estimates for future costs on
service agreements are determined by a number of factors
including the estimated remaining life of the module, used
replacement modules available, our limit of liability on service
agreements and future operating plans for the power plant.
Our estimates are performed on a contract by contract basis
and include cost assumptions based on what we anticipate
the service requirements will be to fulfill obligations for each
contract. As of October 31, 2017 and October 31, 2016, our
accruals on service agreement contracts totaled $1.1 million
and $2.7 million, respectively.
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 for the module, the module will be returned to the
Company as the plant is no longer being monitored or having
routine service performed. As of October 31, 2017, the related
residual value asset was $1.0 million. As of October 31, 2016,
the Company did not have a residual value asset recorded.
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 have received financing for the full value of
the related power plant assets, 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.
Inventories
Inventories consist principally of raw materials and work-in-
process. Inventories are reviewed to determine if valuation
adjustments 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 needs for maintenance on installed
power plants.
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. 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. As of October 31, 2017 and October 31,
2016, the warranty accrual, which is classified in accrued
liabilities on the consolidated balance sheet, totaled $0.3 million
and $0.5 million, respectively.
Annual Report 2017
37
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 in 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, 2017, 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, 2017 based on the specified criteria.
Arthur A. Bottone
President and Chief Executive Officer
Michael Bishop
Senior Vice President, Chief Financial Officer and Treasurer
38
FuelCell Energy
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FuelCell Energy, Inc.:
We have audited the accompanying consolidated balance sheets of FuelCell Energy, Inc. and subsidiaries as of October 31, 2017 and
2016, and the related consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for each of
the years in the three year period ended October 31, 2017. We also have audited FuelCell Energy, Inc.’s internal control over financial
reporting as of October 31, 2017, 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’s Annual
Report on Internal Control 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, 2017 and 2016, and the results of their operations and their cash flows for
each of the years in the three-year period ended October 31, 2017, 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, 2017, 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 11, 2018
Annual Report 2017
39
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 $79 and
$193 as of October 31, 2017 and 2016, respectively
Inventories
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 as of October 31, 2017 and October 31, 2016)
Redeemable Series C preferred stock (liquidation preference of $33,300 as of October 31, 2017)
Total equity:
Stockholders’ equity
Common stock ($0.0001 par value; 125,000,000 and 75,000,000 shares authorized as of
October 31, 2017 and 2016, respectively; 69,492,816 and 35,174,424 shares issued and
outstanding as of October 31, 2017 and 2016, respectively)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Treasury stock, Common, at cost (88,861 and 21,527 shares as of October 31, 2017 and 2016,
respectively)
Deferred compensation
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
40
FuelCell Energy
October 31,
2017
2016
$
49,294
$
84,187
4,628
9,437
68,521
74,496
6,571
24,593
73,806
10,181
203,510
202,204
33,526
73,001
43,565
4,075
9,592
16,517
24,692
47,111
36,640
4,075
9,592
16,415
$ 383,786
$ 340,729
$
28,281
$
5,010
42,616
18,381
7,964
836
98,078
18,915
14,221
63,759
194,973
59,857
27,700
7
18,475
20,900
6,811
802
51,998
20,974
12,649
80,855
166,476
59,857
—
4
1,045,197
1,004,566
(943,533)
(889,630)
(415)
(280)
280
(544)
(179)
179
101,256
114,396
$ 383,786
$ 340,729
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 $0.4 million, $43.6 million and $100.5 million of
related party revenue)
Service agreements and license revenues (including $5.4 million, $8.5 million
and $11.4 million of related party revenue)
Generation revenues
Advanced Technologies contract revenue (including $0, $0 and $0.6 million of
related party revenue)
Total revenues
Costs of revenues:
Cost of product sales
Cost of service agreements and license revenues
Cost of generation revenues
Cost of Advanced Technologies contract revenues
Total cost of revenues
Gross profit (loss)
Operating expenses:
Administrative and selling expenses
Research and development expenses
Restructuring expense
Total operating expenses
Loss from operations
Interest expense
Other income, 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 stockholders
Net loss to common stockholders 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.
2017
2016
2015
$ 43,047
$ 62,563
$ 128,595
27,050
7,233
18,336
95,666
49,843
25,285
5,076
12,728
92,932
2,734
25,916
20,398
1,355
47,669
(44,935)
(9,171)
247
(53,859)
(44)
(53,903)
—
(53,903)
(3,200)
31,491
1,267
12,931
108,252
63,474
32,592
664
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)
21,012
—
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)
$ (57,103)
$ (54,157)
$ (32,559)
$ (1.14)
$ (1.14)
$
$
(1.82)
(1.82)
$
$
(1.33)
(1.33)
49,914,904
49,914,904
29,773,700
29,773,700
24,513,731
24,513,731
For the Years Ended October 31,
2017
2016
2015
$ (53,903)
$ (51,208)
$ (29,684)
129
(35)
(350)
$ (53,774)
$ (51,243)
$ (30,034)
Annual Report 2017
41
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended October 31, 2017, 2016 and 2015
(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
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.
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)
— —
— —
— —
(2,049) —
— —
— —
(1,308)
—
(3,200)
—
—
—
—
—
—
—
—
—
—
—
(29,359)
—
—
—
—
—
—
—
(350)
—
—
—
—
—
—
—
17
—
—
—
—
—
—
—
—
(17)
—
—
—
—
—
1,308
(325)
—
—
—
—
26,921
3,157
(539)
—
(325)
(3,200)
—
(350)
(29,359)
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
Taxes paid upon vesting of restricted stock
awards, net of stock issued under
benefit plans
Noncontrolling interest in subsidiaries
Purchase of noncontrolling shares of subsidiary
Preferred dividends—Series B
Adjustment for deferred compensation
Effect of foreign currency translation
Net loss attributable to FuelCell Energy, Inc.
Balance, October 31, 2016
Sale of common stock, warrants and public
offering
Exercise of prepaid warrants and warrants
Sale of common stock
Common stock issued, non-employee
compensation
Share based compensation
Taxes paid upon vesting of restricted stock
awards, net of stock issued under
benefit plans
Series C convertible preferred stock
conversions
Preferred dividends — Series B
Effect of foreign currency translation
Adjustment for deferred compensation
Net loss attributable to FuelCell Energy, Inc.
1,474,000 —
34,736
1,100,000 —
—
6,023,372
1
36,055
24,379 —
— —
157
3,425
587,963 —
— —
—
—
—
—
—
35,174,424
12,000,000
13,660,926
7,245,430
—
—
—
—
—
$ 4
1
1
1
86,001 —
— —
(286)
—
(809
)
)
(3,200
—
—
—
$ 1,004,566
13,883
12,721
12,430
129
4,585
1,284,673 —
(84)
108,696 —
— —
— —
(67,334) —
— —
167
(3,200)
—
—
—
—
—
—
—
—
—
—
—
—
—
(50,957)
$ (889,630)
—
—
—
—
—
—
—
—
—
—
— (53,903)
—
—
—
—
—
—
—
—
—
—
(35)
—
—
—
—
—
—
—
—
—
—
(101)
—
—
—
—
—
—
—
—
—
—
—
101
—
—
—
—
—
—
—
—
(251)
806
—
—
—
—
34,736
—
36,056
157
3,425
(286)
(251)
(3)
(3,200)
—
(35)
(50,957)
$(544)
$(179)
$ 179
$ —
$114,396
—
—
—
—
—
—
—
—
129
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (101)
—
—
101
—
—
—
13,884
12,722
— 12,431
—
—
—
—
—
—
—
129
4,585
(84)
167
(3,200)
129
—
— (53,903)
Balance, October 31, 2017
69,492,816 $ 7 $1,045,197 $(943,533 )
$(415) $(280)
$ 280 $ — $101,256
See accompanying notes to consolidated financial statements.
42
FuelCell Energy
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share amounts)
For the Years Ended October 31,
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation
Loss (gain) from change in fair value of embedded derivatives
Depreciation
Amortization of non-cash interest expense
Foreign currency transaction losses (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
Cash acquired from acquisition
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
Net proceeds from issuance of Series C preferred shares
Proceeds from common stock issuance and warrants
exercises, 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 (decrease) increase in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash—beginning of year
2017
2016
2015
$ (53,903)
$ (51,208)
$ (29,684)
4,585
91
8,518
6,256
581
165
(51,276)
(7,972)
—
(714)
25,020
(2,290)
(906)
(71,845)
(12,351)
(19,726)
633
3,425
(14)
4,949
3,207
(324)
451
30,235
(8,052)
—
(837)
(3,019)
1,240
(26,648)
(46,595)
(7,726)
(33,726)
—
3,157
(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)
—
—
(31,444)
(41,452)
(6,930)
(8,571)
17,877
(206)
—
27,866
39,396
(4,156)
86
72,292
129
(30,868)
118,316
(30,452)
85,935
(1,758)
(3)
—
70,929
(4,170)
177
120,658
(35)
32,576
85,740
(1,535)
6,763
—
—
—
27,060
(4,202)
133
28,219
(108)
(23,093)
108,833
Cash, cash equivalents, and restricted cash—end of year
$ 87,448
$118,316
$ 85,740
See accompanying notes to consolidated financial statements.
Annual Report 2017
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 31, 2017, 2016 and 2015
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. together with 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 SureSource power plants generate electricity and usable
high quality heat 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, corporate and project level 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.
Certain reclassifications have been made to conform to the
fiscal year 2017 presentation. The Company has adopted
Accounting Standards Update (“ASU”) 2015-03, Interest—
Imputation of Interest effective January 31, 2017, and
retrospective application is required which resulted in a
reclassification in our Consolidated Balance Sheet as of
October 31, 2016 of $0.3 million of debt issuance costs from
Current assets to be a direct deduction from Current portion
of long-term debt and a reclassification of $1.1 million of debt
issuance costs from Other assets, net to be a direct deduction
from Long-term debt and other liabilities. The Company has
also included an additional line item, “Generation,” in the
“Revenues” and “Cost of revenues” sections of the Statements
of Operations to include revenues generated from the
Company’s project assets (refer to the Revenue Recognition
section below for more information). The prior year amounts
associated with power purchase agreements have been
reclassified to the new “Generation” line item.
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. As of October 31, 2017, $38.2
million of cash and cash equivalents was pledged as collateral
for letters of credit and for certain banking requirements and
contractual commitments, compared to $34.1 million pledged
as of October 31, 2016. The restricted cash balance includes
$15.0 million as of October 31, 2017 and 2016, which has been
placed in a Grantor’s Trust account to secure certain obligations
of the Company 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. As of
October 31, 2017 and 2016, we had outstanding letters of credit
of $2.9 million and $7.9 million, respectively, which expire on
various dates through April 2019. Cash and cash equivalents
as of October 31, 2017 and 2016 also included $3.0 million and
$5.3 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 and obsolete). 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
44
FuelCell Energy
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 Facility”
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. There were no short-term project assets as of
October 31, 2017. 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 the in-process research & development assets
(IPR&D) as of July 31, 2017. The goodwill and IPR&D asset are
both held by the Company’s Versa reporting unit. Goodwill and
the IPR&D asset are also reviewed for possible impairment
whenever changes in conditions indicate that the fair value
of a reporting unit or IPR&D asset are more likely than
not below its carrying value. No impairment charges were
recorded during any of the years presented.
Impairment of Long-Lived Assets (including Project Assets)
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset group may not be recoverable. If events or
changes in circumstances indicate that the carrying amount
of the asset group may not be recoverable, we compare the
carrying amount of an asset group to future undiscounted net
cash flows, excluding interest costs, expected to be generated
by the asset group and their ultimate disposition. If the sum
of the undiscounted cash flows is less than the carrying value,
the impairment to be recognized is measured by the amount by
which the carrying amount of the asset group exceeds the fair
value of the asset group. Assets to be disposed of are reported
at the lower of the carrying amount or fair value, less costs to
sell. 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 including site engineering and construction
services, (ii) equipment only sales (modules, balance of plants
(“BOP”), component part kits and spare parts to customers), (iii)
performance under long-term service agreements, (iv) the sale
of electricity and other value streams under power purchase
agreements (“PPAs”) and utility tariffs from project assets
retained by the Company, (v) license fees and royalty income
from manufacturing and technology transfer agreements,
and (vi) government and customer-sponsored Advanced
Technologies projects.
Given the growing revenue related to PPAs and project assets
retained by the Company, beginning in the first quarter of 2017,
the Company began classifying such revenues in a separate line
item called Generation, and prior period amounts have been
reclassified. As further clarification, revenue elements
are classified as follows:
Product. Includes the sale and installation of fuel cell power
plants and site engineering and construction services, and,
the sale of component part kits, modules, BOPs and spare
parts to customers.
Service and license. Includes performance under long-term
service agreements for power plants owned by third parties
and license fees and royalty income from manufacturing and
technology transfer agreements.
Generation. Includes the sale of electricity under PPAs and
utility tariffs from project assets retained by the Company.
This also includes revenue received from the sale of other
value streams from these assets including the sale of heat,
steam and renewable energy credits.
Advanced Technologies. Includes revenue from customer-
sponsored and government-sponsored Advanced
Technologies projects.
Annual Report 2017
45
Our revenue is generated from customers located throughout
the U.S., Europe and Asia and from agencies of the
U.S. government.
For customer contracts where the Company is responsible
for supply of equipment and site construction (full turn-key
construction project) and has adequate cost history and
estimating experience, and with respect to which 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 and total project costs. 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 operations applicable to performance in
prior periods. Revenues are recognized based on the percentage
of the contract value that incurred costs to date bear to
estimated total contract costs, after giving effect to estimates
of costs to complete based on most recent information. For
customer contracts for new or significantly customized products,
where management does not believe it has the ability to
reasonably estimate total contract costs, revenue is recognized
using the completed contract method and therefore all revenue
and costs for the contract are deferred and not recognized until
installation and acceptance of the power plant is complete. We
recognize anticipated contract losses as soon as they become
known and estimable. Actual results could vary from initial
estimates and estimates will be updated as conditions change.
Revenue from equipment only sales where the Company does
not have the obligations associated with overall construction of
the project (modules, BOPs, fuel cell kits and spare parts sales)
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 and certain key suppliers 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.
In June 2017, an EPC contractor, Hanyang Industrial Development
Co., Ltd (“HYD”), was awarded a 20 MW project by a utility in South
Korea (Korea Southern Power Company) utilizing the Company’s
SureSource technology. On August 29, 2017, the Company
entered into a contract with HYD pursuant to which the Company
will provide equipment to HYD for this 20 MW fuel cell project
as well as ancillary services including plant commissioning.
Construction began in fall 2017 and the installation is expected to
be operational in the summer of 2018. The value of the contract to
the Company is in excess of $60 million. The Company assessed
the contract using the multi-element revenue recognition
guidance and determined that each of the modules and BOPs
as well as the ancillary services each represent separate
deliverables with stand-alone value. The full contract value was
allocated to each element based on estimated selling prices using
cost plus expected margins and revenue recognition will occur
upon completion of shipping and customer acceptance of each
piece of equipment and the proportional performance method is
being used for ancillary services as provided. Approximately $39
million of revenue was recognized in the fourth quarter of fiscal
2017 related to this contract. The contract includes performance
penalties and partial termination rights if certain delivery dates
are not met or if individual equipment deliverables do not pass
final acceptance tests after three tries due to issues solely
attributable to the Company.
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 is generally expected to be incurred on a straight-
line basis. For service agreements where we expect to have
module exchanges 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(s) is deferred and is recognized upon
such module replacement event(s).
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 manufacturing
and technology transfer agreements entered into in 2007,
2009 and 2012. The Cell Technology Transfer Agreement we
entered into on October 31, 2012 provides POSCO Energy with
the technology rights to manufacture SureSource power plants
in South Korea. On March 17, 2017, the Company entered into
a Memorandum of Understanding (“2017 MOU”) with POSCO
Energy to permit us to directly develop the Asian fuel cell
business, including the right for us to sell SureSource solutions
in South Korea and the broader Asian market. We and POSCO
Energy also agreed to undertake to amend certain technology
transfer and other agreements by a target date of September 30,
2017 to reflect our new relationship. Although these agreements
have not yet been amended, we continue to engage in
discussions with POSCO Energy regarding our relationship and
the direction of the fuel cell business in the South Korean and
Asian markets.
Pursuant to the 2017 MOU, the Company commenced marketing
the entire suite of SureSource solutions in South Korea as
well as the broader Asian markets for the supply, recovery and
storage of energy.
Under PPAs and project assets retained by the Company,
revenue from the sale of electricity and other value streams
is recognized as electricity is provided to the customer. These
revenues are classified as a component of generation revenues.
46
FuelCell Energy
Advanced Technologies contracts include both private industry
and government entities. Revenue from most government
sponsored Advanced Technologies projects is recognized as
direct costs are incurred plus allowable overhead less cost
share requirements, if any. Revenue from fixed price Advanced
Technologies projects is recognized using percentage of
completion accounting. Advanced Technologies programs
are often multi-year projects or structured in phases with
subsequent phases dependent on reaching certain milestones
prior to additional funding being authorized. Government
contracts are typically structured with 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.
Sale-Leaseback Accounting
From time to time, the Company, through a 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 projects are considered
integral equipment, sale accounting is precluded by ASC 840-40.
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. 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. As of October 31, 2017 and 2016, the
warranty accrual, which is classified in accrued liabilities
on the consolidated balance sheet, totaled $0.3 million and
$0.5 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 $2.2 million and
$3.3 million as of October 31, 2017 and 2016, 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. As of October 31, 2017, our loss accruals on service
agreements totaled $1.1 million compared to $2.7 million as
of October 31, 2016.
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. As of 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 $1.0 million as of October 31, 2017.
License Agreements and Royalty Income
The Cell Technology Transfer and License Agreement dated
October 31, 2012 by and between the Company and POSCO
Energy, Co., (the “CTTA”) provides POSCO Energy with the
technology to manufacture SureSource power plants in South
Korea and the exclusive market access to sell power plants
throughout Asia. In connection with the CTTA, fees totaling $18.0
million were paid between fiscal year 2012 and 2015 and are
being amortized over the term of the CTTA.
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 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.
Annual Report 2017
47
6%
8%
3%
3%
5%
1%
48%
67%
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
that were built by POSCO Energy and installed at any plant
in Asia.
The percent of consolidated revenues from each customer for
the years ended October 31, 2017, 2016 and 2015, respectively,
are presented below.
Hanyang Industrial
Development Co., LTD
2017
2016
2015
40%
—%
—%
Dominion Bridgeport Fuel Cell, LLC
11%
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 fixed compensation for services rendered.
Department of Energy
ExxonMobil
POSCO Energy
9%
9%
6%
The Company recorded revenue of $2.7 million, $6.2 million
and $3.9 million for the years ended October 31, 2017, 2016
and 2015, respectively, relating to the above agreements.
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, 2017, 2016 and 2015, our top customers accounted
for 78%, 75% and 90%, respectively, of our total annual
consolidated revenue.
Avangrid Holdings (through its
various subsidiaries)
Total
3%
78%
10%
75%
14%
90%
Derivatives
We do not use derivatives for speculative purposes and through
fiscal year end 2017, 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 13
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. Estimates are used in
accounting for, among other things, revenue recognition, excess
and obsolete inventories, product warranty costs, accruals for
service agreements, allowance for uncollectible receivables,
depreciation and amortization, impairment of goodwill,
indefinite-lived intangible assets 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. Due to the inherent uncertainty
involved in making estimates, actual results in future periods
may differ from those estimates.
Foreign Currency Translation
The translation of the financial statements of FuelCell Korea
Ltd’s, FCES GmbH’s and Versa Power Systems Ltd’s. results in
translation gains or losses, which are recorded in accumulated
other comprehensive loss within stockholders’ equity.
48
FuelCell Energy
Our Canadian subsidiary, FCE Ltd., is financially and
operationally integrated and the functional currency is the U.S.
dollar. We are subject to foreign currency transaction gains
and losses as certain transactions are denominated in foreign
currencies. We recognized (losses) gains of $(0.7) million, $0.3
million and $1.7 million for the years ended October 31, 2017,
2016 and 2015, respectively. These amounts have been classified
as other income, net in the consolidated statements
of operations.
Recently Adopted Accounting Guidance
In August 2014, the Financial Accounting Standards Board ‘
(the “FASB”) issued Accounting Standards Update (“ASU”)
2014-15, “Disclosure of Uncertainties about an Entity’s Ability
to Continue as a Going Concern,” which requires an entity to
evaluate at each reporting period whether there are conditions
or events, in the aggregate, that raise substantial doubt about
the entity’s ability to continue as a going concern within one
year from the date the financial statements are issued and to
provide related footnote disclosures in certain circumstances.
The Company adopted the provisions of this ASU for the annual
reporting period ended October 31, 2017. The adoption of this
update did not have a significant impact 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 Company has adopted ASU 2015-
03 effective January 31, 2017 and retrospective application is
required which resulted in a reclassification in our Consolidated
Balance Sheet as of October 31, 2016 of $0.3 million of debt
issuance costs from Current assets to be a direct deduction from
“Current portion of long-term debt” and a reclassification of $1.1
million of debt issuance costs from “Other assets” to be a direct
deduction from Long-term debt and other liabilities.
In January 2017, the FASB issued ASU 2017-01, “Business
Combinations.” ASU 2017-01 was issued to clarify the
definition of a business with the objective of adding guidance
to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or
businesses. The Company has elected to early adopt ASU 2017-01
effective November 1, 2016 which did not have a significant
impact on the Company’s consolidated financial statements.
Recent Accounting Guidance Not Yet Effective
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers (Topic 606).” This topic provides
for five principles which should be followed to determine the
appropriate amount and timing of revenue recognition for the
transfer of goods and services to customers. The principles
in this ASU should be applied to all contracts with customers
regardless of industry. The amendments in this ASU are
effective for fiscal years, and interim periods within those years
beginning after December 15, 2016, with two transition methods
of adoption allowed. Early adoption for reporting periods prior
to December 15, 2016 is not permitted. In March 2015, the
FASB voted to defer the effective date by one year to fiscal
years, and interim periods within those fiscal years beginning
after December 15, 2017 (first quarter of fiscal year 2019 for
the Company), but allow adoption as of the original adoption
date. The Company has numerous different revenue sources
including the sale and installation of fuel cell power plants, site
engineering and construction services, sale of modules, BOPs
and spare parts, extended warranty service agreements, sale
of electricity under power purchase agreements, license fees
and royalty income from manufacturing and technology transfer
agreements and customer-sponsored Advanced Technologies
projects. This requires application of various revenue recognition
methods under current accounting guidance. Although we
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
expedients regarding collectability, presentation of sales tax
collected from customers, non-cash consideration, contract
modifications at transition, completed contracts at transition
and other technical corrections. We have initiated a review of the
contracts for our significant revenue streams to understand the
impact of the adoption of this ASU.
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. This 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 year 2020 for the Company). Early adoption is
permitted. The Company has both operating and capital leases
(refer to Note 18. 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 that adoption of this ASU
will result in the recognition of right-of-use assets and lease
liabilities not currently recorded in our consolidated financial
statements under existing accounting guidance. However 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.
Annual Report 2017
49
Note 2. Restructuring
On November 30, 2016, a business restructuring was announced
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 reduced materials spend as well as implemented
various cost control initiatives. The workforce was reduced
at both the North American production facility in Torrington,
Connecticut, as well as at the corporate offices in Danbury,
Connecticut and remote locations. A total of 96 positions, or
approximately 17% of the Company’s global workforce, were
eliminated. The production rate was reduced to twenty-five MW
annually, from the prior rate of fifty MW annually, in order to
position for delays in anticipated order flow. This production
level is anticipated to be temporary and will be reevaluated as
order flow dictates. Restructuring expense relating to eliminated
positions of $1.4 million has been recorded and paid for the
year ended October 31, 2017, which has been presented on a
separate caption in the Consolidated Statement of Operations.
Note 3. Accounts Receivable
Accounts receivable as of October 31, 2017 and 2016 consisted of
the following (in thousands):
Advanced Technology (including
U.S. Government (1)):
Amount billed
Unbilled recoverable costs
Commercial customers:
Amount billed
Unbilled recoverable costs
Accounts receivable
2017
2016
$ 1,934
7,352
9,286
$ 2,463
3,068
5,531
41,073
18,162
59,235
$68,521
5,411
13,651
19,062
$ 24,593
(1) Total U.S. government accounts receivable outstanding as of October 31,
2017 and 2016 is $3.2 million and $2.2 million, respectively.
We bill customers for power plant and power plant component
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 Technologies
contracts are billed based on actual recoverable costs incurred,
typically in the month subsequent to incurring costs. Some
Advanced Technologies 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 $0.1 million and $0.2 million as of
October 31, 2017 and 2016, 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 $6.2 million and $5.0 million, and amounts due from
NRG of $0.1 million as of each of October 31, 2017 and 2016.
The Company also had amounts due to POSCO Energy of $32.7
million and $0 as of October 31, 2017 and 2016, respectively, for
the purchase of inventory.
Note 4. Inventories
Inventories as of October 31, 2017 and 2016 consisted of the
following (in thousands):
Raw materials
Work-in-process (1)
Inventories
2017
2016
$20,065
$ 25,286
54,431
48,520
$74,496
$ 73,806
(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 as of October 31, 2017 and
2016 is $46.3 million and $40.6 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 $0.2 million and $0.8 million as
of October 31, 2017 and 2016, respectively.
Note 5. Project Assets
Project assets as of October 31, 2017 and 2016 were $73.0
million and $47.1 million, respectively. Project assets as of
October 31, 2017 include $30.2 million which represents four
completed, commissioned installations where we have a PPA
with the end-user of power and site host. Project assets as of
October 31, 2016 include $6.2 million which represents one
completed, commissioned installation where we have a PPA
with the end-user of power and site host. These assets are
the subject of sale-leaseback arrangements with PNC Energy
Capital, LLC (“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 Project assets
balance as of October 31, 2017 also includes assets aggregating
$40.9 million which are being constructed by the Company under
PPAs which have been executed or are expected to be executed
in fiscal year 2018.
50
FuelCell Energy
Depreciation expense for project assets was $4.1 million and
$0.7 million for the years ended October 31, 2017 and 2016,
respectively. There was no depreciation expense recorded for
the year ended October 31, 2015 since there were no project
assets in service.
In November 2016, the Company’s wholly-owned subsidiary,
FuelCell Energy Finance, LLC (“FuelCell Finance”) entered into
a membership interest purchase agreement with GW Power
LLC (“Seller”) whereby FuelCell Finance purchased all of the
outstanding membership interests in New Britain Renewable
Energy, LLC (“NBRE”) from Seller. Seller assigned the NBRE
interest to FuelCell Finance free and clear of all liens other than
a pledge in favor of Webster Bank, National Association. The
Company adopted ASU 2017-01 which resulted in the transaction
being accounted for as an asset acquisition of a power plant for a
relative fair value of $2.3 million (carrying amount of $1.9 million
as of October 31, 2017) which has been classified as a long-term
project asset in support of an Energy Purchase Agreement.
Project construction costs incurred for the long-term project
assets are reported as investing activities in the Consolidated
Statements of Cash Flows. The proceeds received from the sale
and subsequent leaseback of project assets are classified as
“Cash flows from financing activities” within the Consolidated
Statements of Cash Flows and are classified as a financing
obligation within “Current portion of long-term debt” and “Long-
term debt and other liabilities” on the Consolidated Balance
Sheets (refer to Note 11 for more information).
Note 6. Property, Plant and Equipment
Property, plant and equipment at October 31, 2017 and 2016
consisted of the following:
2017
2016
Estimated
Useful Life
Land
$
524
$
524
—
Building and improvements
9,331
9,218 10-26 years
Machinery, equipment
and software
91,680
87,350
3-8 years
Furniture and fixtures
3,576
3,509
10 years
Construction in progress
23,163
16,388
—
Accumulated
depreciation
Property, plant and
equipment, net
128,274
116,989
(84,709)
(80,349)
$ 43,565
$ 36,640
The Company substantially completed 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 during the
year ended October 31, 2017.
Depreciation expense for property, plant and equipment was
$4.4 million, $4.3 million and $4.1 million for the years ended
October 31, 2017, 2016 and 2015, respectively.
Note 7. Goodwill and Intangible Assets
As of October 31, 2017 and 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 for cumulative research and development efforts
associated with the development of solid oxide fuel cells
stationary power generation.
The Company completed its annual impairment analysis of
goodwill and in-process research and development assets
as of July 31, 2017. The Company performed a quantitative
assessment in the prior year and determined that the estimated
fair value of the reporting unit and in-process research and
development intangible asset exceeded the respective carrying
value and therefore no impairment was recognized as of July 31,
2016. The Company performed a qualitative assessment for
fiscal year 2017 and determined that it was more likely than not
that there was no impairment of goodwill or the indefinite lived
intangible asset.
Note 8. Other Current Assets
Other current assets as of October 31, 2017 and 2016 consisted
of the following (in thousands):
2017
2016
Advance payments to vendors (1)
$1,035
$ 1,247
Deferred finance costs (2)
Notes receivable (3)
Prepaid expenses and other (4)
129
—
5,407
152
1,007
7,775
Other current assets
$ 6,571
$ 10,181
(1) Advance payments to vendors relate to payments for inventory purchases
ahead of receipt.
(2) Represents the current portion of direct deferred finance costs that relate
primarily to securing a $40.0 million loan facility with NRG which is being
amortized over the five-year life of the facility.
(3) Represents a note receivable from NBRE prior to the acquisition in
November 2016 discussed in Note 5.
(4) Primarily relates to other prepaid vendor expenses including insurance,
rent and lease payments.
Annual Report 2017
51
(3) Activity in service agreement costs represents a decrease in loss accruals
on service contracts of $1.6 million from $2.7 million as of October 31,
2016 to $1.1 million as of October 31, 2017. The decrease primarily relates
to module exchanges performed during the year ended October 31,
2017. The accruals for performance guarantees also decreased from
$3.3 million as of October 31, 2016 to $2.2 million as of October 31, 2017
resulting from guarantee payments to customers partially offset by
additional accruals for the minimum output falling below the contract
requirements for certain service agreements.
(4) Other includes $4.4 million which represents contractual milestone
billings for inventory that will be provided to POSCO Energy within the next
twelve months and will not result in revenue recognition. An additional
$10.4 million will be billed and collected under this arrangement.
Note 11. Debt
Debt as of October 31, 2017 and 2016 consisted of the following
(in thousands):
Hercules Loan and Security Agreement
$ 21,468
$ 20,521
State of Connecticut Loan
10,000
10,000
2017
2016
Finance obligation for sale-leaseback
transactions
NRG loan agreement
Connecticut Green Bank Note
Connecticut Development Authority Note
New Britain Renewable Energy
Term Loan
Capitalized lease obligations
Deferred finance costs
Total debt
46,937
41,603
—
1,755
6,052
2,349
1,697
632
6,050
2,589
—
660
(1,344)
(1,408)
$ 87,791
$ 81,770
Current portion of long-term debt
(28,281)
(5,010)
Long-term debt
$ 59,510
$ 76,760
Aggregate annual principal payments under our loan
agreements and capital lease obligations for the years
subsequent to October 31, 2017 are as follows (in thousands):
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
$ 28,583
4,518
4,863
4,057
4,089
43,025
$ 89,135
Note 9. Other Assets, net
Other assets, net at October 31, 2017 and 2016 consisted of the
following (in thousands):
2017
2016
Long-term accounts receivable (1)
$ —
$ 8,353
Long-term unbilled recoverable costs (2)
12,806
5,714
Deferred finance costs (3)
Long-term stack residual value (4)
Other (5)
Other assets, net
97
987
225
—
2,627
2,123
$16,517
$ 16,415
(1) The balance as of October 31, 2016 represents receivables which were
subsequently collected and relate to project and stack replacement
reserve accounts for a sale-leaseback transaction. As of October 31, 2017,
the funds were 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 the balance sheet date.
(3) Represents the long-term portion of direct deferred finance costs relating
to the Company’s loan facility with NRG which is being amortized over the
five-year life of the facility.
(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 increase from October 31, 2016 represents
residual value for two module replacements performed during the year
ended October 31, 2017.
(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 and the total paid as of
October 31, 2017 was $1.6 million. Also included within other are long-
term security deposits.
Note 10. Accrued Liabilities
Accrued liabilities at October 31, 2017 and 2016 consisted of the
following (in thousands):
Accrued payroll and employee benefits
$ 5,315 $ 4,183
2017
2016
Accrued contract loss
Accrued product warranty costs (1)
Accrued material purchases (2)
Accrued service agreement costs (3)
Accrued taxes, legal, professional and other (4)
37
348
2,396
3,319
6,966
—
516
6,908
6,030
3,263
Accrued liabilities
$18,381 $ 20,900
(1) Activity in the accrued product warranty costs for the years ended
October 31, 2017 and 2016 included additions for estimates of future
warranty obligations of $0.6 million and $0.3 million, respectively, on
contracts in the warranty period and reductions related to actual
warranty spend of $0.8 million and $0.7 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 Energy under
an Integrated Global Supply Chain Agreement whereby the Company
procures materials on POSCO Energy’s behalf for its Asian production
facility. This liability represents amounts received for the purchase of
materials on behalf of POSCO Energy. Amounts due to vendors is recorded
as “Accounts payable.”
52
FuelCell Energy
In April 2016, the Company entered into a loan and security
agreement with Hercules Capital, Inc. (“Hercules”) subject to
certain terms and conditions of which the Company drew down
$20.0 million during fiscal year 2016. The loan is a 30 month
secured facility and the term loan interest was previously
9.5 percent and increased to 9.75 percent resulting from the
increase in the prime rate. Interest is paid on a monthly basis.
Interest only payments were to be made for the first 18 months
as a result of the Company achieving certain milestones.
In addition to interest, principal payments commenced on
November 1, 2017 in equal monthly installments. The loan
balance and all accrued and unpaid interest is due and payable
by October 1, 2018. Per the terms of the loan and security
agreement, there is an end of term payment of $1.7 million
which is being accreted over the 30 month term using the
effective interest rate method.
As collateral for obligations under Hercules Agreement, the
Company granted Hercules a security interest in FuelCell
Energy, Inc.’s existing and hereafter-acquired assets except
for intellectual property and certain other excluded assets.
Collateral does not include assets held by FuelCell Finance
or any project subsidiary thereof. The Company may continue
to collateralize and finance its project subsidiaries through
other lenders and partners. Under the Hercules Agreement, as
amended, there is a minimum cash covenant which requires the
Company to maintain an unrestricted cash balance in accounts
subject to an account control agreement in favor of Hercules of
at least the greater of (x) (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 invoice date and (y) (a) at
all times prior to the Stockholder Approval Date (as defined in
the Certificate of Designations for the Series C Preferred Stock),
$20.0 million and (b) at all times on and after the Stockholder
Approval Date, $10.0 million (the Stockholder Approval Date was
December 14, 2017, which was the date on which stockholder
approval of the issuance of certain shares upon the conversion
and/or redemption of the Company’s Series C Preferred Stock
was obtained).
In November 2015, the Company closed on a definitive
Assistance Agreement with the State of Connecticut and
received a disbursement of $10.0 million 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 loan, payment of principal is deferred for the
first four years. Interest at a fixed rate of 2.0 percent is payable
beginning in December 2015. The financing 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. On
April 17, 2017, the Company entered into an amendment to the
Assistance Agreement extending certain of the job creation
target dates by two years to October 28, 2019.
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 site host/end-user
of produced power. 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 constitute payment to acquire the assets subject
to these arrangements. Instead, the sale proceeds received are
accounted for as financing obligations. The outstanding finance
obligation balance as of October 31, 2017 was $46.9 million and
the increase from the October 31, 2016 balance of $41.6 million
includes a sale-leaseback transaction of $5.4 million which was
completed in December 2016 and the recognition of imputed
interest expense offset by lease payments. New sale-leaseback
transactions of $41.5 million were entered into during the
year ended October 31, 2016. The sale-leaseback transactions
include a fair value purchase option at the end of the lease term.
In July 2014, the Company, through its wholly-owned subsidiary,
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 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 percent per annum
for construction-period financing and 8.0 percent thereafter.
Fees that were paid by FuelCell Finance to NRG for making
the loan facility available and related legal fees incurred were
capitalized and are being amortized straight-line over the life
of the related loan agreement, which is five years. The term of
the loans are up to five years but 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 Green Bank totaling $5.9 million in support of
the Bridgeport Fuel Cell Park project. The loan agreement
carries an interest rate of 5.0 percent. Interest only payments
commenced in January 2014 and principal payments will
commence on the eighth anniversary of the project’s provisional
acceptance date, which is December 20, 2021, payable in forty-
eight equal monthly installments. Outstanding amounts are
secured by future cash flows from the Bridgeport Fuel Cell Park
service agreement.
The Company has 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 percent and the loan is collateralized by the assets procured
under this loan as well as $4.0 million of additional machinery
and equipment. Repayment terms require monthly interest and
principal payments through May 2018.
Annual Report 2017
53
In November 2016, in connection with the acquisition of
NBRE, debt with Webster Bank was assumed as a part of the
transaction in the amount of $2.3 million. The term loan interest
rate is 5.0 percent and payments are due on a quarterly basis
commencing in January 2017. The balance outstanding as of
October 31, 2017 was $1.7 million.
The Company leases computer equipment under master lease
agreements. Lease payment terms are generally thirty-six
months from the date of acceptance for leased equipment.
Direct deferred finance costs relate primarily to sale-leaseback
transactions entered into with PNC which are being amortized
over the ten-year term and direct deferred finance costs relating
to the Hercules loan and security agreement entered into in April
2016 is being amortized over the 30 month life of the loan.
Note 12. Stockholders’ Equity
Authorized Common Stock
In April 2017, the number of authorized shares of the Company’s
common stock was increased from 75,000,000 to 125,000,000, by
vote of the holders of a majority of the outstanding shares of the
Company’s common stock.
Public Offerings and Outstanding Warrants
On May 3, 2017, the Company completed an underwritten
public offering of (i) 12,000,000 shares of its common stock, (ii)
Series C warrants to purchase 12,000,000 shares of its common
stock and (iii) Series D warrants to purchase 12,000,000 shares
of its common stock, for gross proceeds of approximately
$15.4 million, at a public offering price of $1.28 per share and
accompanying warrants. Total net proceeds to the Company
were approximately $13.9 million. The Series C warrants have
an exercise price of $1.60 per share and a term of five years. A
total of 419,100 shares of common stock were issued during the
fourth quarter of fiscal year 2017 upon the exercise of Series C
warrants and the Company received total proceeds of $0.7
million. The Series D warrants have an exercise price of $1.28
per share and a term of one year. A total of 9,415,826 shares of
common stock were issued during the third and fourth quarters
of fiscal year 2017 upon the exercise of Series D warrants and
the Company received total proceeds of $12.1 million.
On July 12, 2016, the 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. In conjunction with the offering the Company issued
7,680,000 Series A Warrants, all of which remained outstanding
as of October 31, 2017, at 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 Company
also issued 4,926,000 prefunded Series B Warrants which
are immediately exercisable. They have an exercise price of
$0.0001 per share and will expire on the fifth anniversary of the
issue date. There were 3,826,000 prefunded Series B Warrants
outstanding as of October 31, 2016, all of which were exercised
during the year ended October 31, 2017.
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 had 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 expired on July 30, 2017.
The following table outlines the warrant activity during the year ended October 31, 2017:
Series A
Warrants
Balance as of October 31, 2016
7,680,000
Warrants issued on May 3, 2017
Warrants exercised
Warrants expired
—
—
—
Balance as of October 31, 2017
7,680,000
Series B
Warrants
3,826,000
Series C
Warrants
—
—
12,000,000
(3,826,000)
(419,100)
Series D
Warrants
—
12,000,000
(9,415,826)
NRG
Warrants
166,000
—
—
—
—
—
—
(166,000)
11,580,900
2,584,174
—
Other Common Stock Sales
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, 2017 and 2016, respectively, the Company
sold 7.2 million shares and 6.0 million shares of the Company’s
common stock at prevailing market prices through periodic trades
on the open market and raised approximately $12.6 million and
$36.1 million, net of aggregate selling commissions of $0.1 million
and $0.1 million, respectively.
Note 13. Redeemable Preferred Stock
The Company is authorized to issue up to 250,000 shares of
preferred stock, par value $0.01 per share, issuable in one
or more series of which shares to date have been issued and
designated as Series C Convertible Preferred Stock and 5%
Series B Cumulative Convertible Perpetual Preferred Stock.
Series C Preferred Shares
The Company issued an aggregate of 33,500 shares of its
Series C Convertible Preferred Stock (“Series C Preferred Stock”
and such shares, the “Series C Preferred Shares”), $0.01 par
value and $1,000 stated value per share, for net proceeds of
54
FuelCell Energy
$27.9 million on September 5, 2017. Each share of Series C
Preferred Stock was sold at a price of $895.52 for gross
proceeds of approximately $30.0 million. As of October 31, 2017,
there were 33,300 shares of Series C Preferred Stock issued
and outstanding with a carrying value of $27.7 million.
The Series C Preferred Shares are convertible into shares of
common stock subject to the beneficial ownership limitations
provided in the Certificate of Designations for Series C
Preferred Stock (the “Certificate of Designations”), at a
conversion price equal to $1.84 per share of common stock
(“Conversion Price”), subject to adjustment as provided in
the Certificate of Designations, at any time at the option of
the holder. In the event of a triggering event, as defined in the
Certificate of Designations, the Series C Preferred Shares are
convertible into shares of common stock at a conversion price
of the lower of $1.84 per share and 85% of the lowest volume
weighted average price (“VWAP”) of the common stock of the
five Trading Days (as such term is defined in the Certificate of
Designations) immediately prior to delivery of the applicable
conversion notice. The holders will be prohibited from converting
Series C Preferred Shares into shares of common stock if,
as a result of such conversion, such holder, together with its
affiliates, would own more than 8.99% of the total number of
shares of common stock then issued and outstanding. Each
holder has the right to increase its maximum percentage up to
9.99% upon 60 days’ notice to the Company.
On November 1, 2017 and on the sixteenth day and first day of
each calendar month thereafter until March 1, 2019, subject
to extension in certain circumstances (the “Maturity Date”),
inclusive, the Company will redeem the stated value of Series C
Preferred Shares in thirty-three equal installments of $1.0 million
(each bimonthly amount, an “Installment Amount” and the date
of each such payment, an “Installment Date”). The holders will
have the ability to defer Installment payments, but not beyond
the Maturity Date. In addition, during each period commencing
on the 11th trading day prior to an Installment Date and prior
to the immediately subsequent Installment Date, the holders
may elect to accelerate the conversion of Series C Preferred
Shares at then applicable installment conversion price, provided
that the holders may not elect to effect any such acceleration
during such installment period if either (x) in the aggregate, all
the accelerations in such installment period exceeds the sum of
three other Installment Amounts, or (y) the number of Series C
Preferred Shares subject to prior accelerations exceeds in the
aggregate twelve Installment Amounts.
Subject to certain conditions as provided in the Certificate of
Designations, the Company may elect to pay the Installment
Amounts in cash or shares of common stock or in a combination
of cash and shares of common stock.
Installment Amounts paid in shares will be that number of
shares of common stock equal to (a) the applicable Installment
Amount, to be paid in common stock divided by (b) the least of
(i) the then existing conversion price, (ii) 87.5% of the VWAP of
the common stock on the trading day immediately prior to the
applicable Installment Date, and (iii) 87.5% of the arithmetic
average of the two lowest VWAPs of the common stock during
the ten consecutive Trading Day period ending and including the
Trading Day immediately prior to the applicable Installment Date
as applicable, provided that the Company meets standard equity
conditions. The Company shall make such election no later than
the eleventh trading day immediately prior to the applicable
Installment Date.
If the Company elects or is required to effect an Installment
Amount in whole or in part in cash, the amount paid will be
equal to the 108% of the applicable Installment Amount.
Each holder of the Series C Preferred Shares shall be entitled
to receive dividends (i) if no triggering event, as defined in the
Certificate of Designations, has occurred and is continuing
when and as declared by the Board of Directors, in its sole and
absolute discretion or (ii) if a triggering event has occurred and
until such triggering event has been cured, a dividend of 15% per
annum based on the holder’s outstanding number of Series C
Preferred Shares multiplied by the stated value. There were no
triggering events or dividends declared in fiscal year 2017.
In the event of a triggering event, as defined in the Certificate
of Designations, the holders of the Series C Preferred Shares
can force redemption at a price equal to the greater of (i) the
conversion amount to be redeemed multiplied by 125% and
(ii) the product of (X) the Conversion Rate with respect to the
Conversion Amount in effect at such time as such Holder
delivers a Triggering Event Redemption Notice multiplied by
(Y) the greatest Closing Sale Price of the common stock on
any Trading Day during the period commencing on the date
immediately preceding such Triggering Event and ending on the
date the Company makes the entire payment required.
In the event of the Company’s liquidation, dissolution, or winding
up, prior to distribution to holders of securities ranking junior
to the Series C Preferred Shares, holders of Series C Preferred
Shares will be entitled to receive the amount of cash, securities
or other property equal to the greater of (A) the stated value
thereof on the date of such payment plus accrued dividends,
if any and (B) the amount per share such holder would receive
if such holder converted such Series C Preferred Shares into
common stock immediately prior to the date of such payment.
Annual Report 2017
55
Shares of Series C 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;
• junior to our outstanding Series B Preferred Stock; and
• effectively junior to our subsidiaries’ (i) existing and future
liabilities and (ii) capital stock held by others.
The holders of the Series C Preferred Shares have no voting
rights, except as required by law. Any amendment to the
Company’s certificate of incorporation, bylaws or certificate
of designation that adversely affects the powers, preferences
and rights of the Series C Preferred Shares requires the approval
of the holders of a majority of the Series C Preferred Shares
then outstanding.
Based on review of pertinent accounting literature including
ASC 470—Debt, ASC 480—Distinguishing Liabilities from Equity
and ASC 815—Derivative and Hedging, the Series C Preferred
Shares are classified as temporary equity on the consolidated
balance sheets and recorded at fair value on the issuance
date (proceeds from the issuance, net of direct issuance cost).
An assessment of the probability of the potential redemption
features in the Series C Preferred instrument is performed
at each reporting date to determine whether any changes in
classification are required. As of October 31, 2017, the Company
determined that none of the contingent redemption features
were probable. As Series C Preferred Shares are converted to
common shares, a proportional reduction in the carrying value
will be recorded to equity. For the year ended October 31, 2017,
200 shares of the Series C Preferred Shares were converted to
common shares resulting in a reduction of $0.2 million to the
carrying value recorded in temporary equity.
Redeemable Series B Preferred Stock
We have 105,875 shares of our 5% Series B Cumulative
Convertible Perpetual Preferred Stock (Liquidation Preference
$1,000.00 per share) (“Series B Preferred Stock”) authorized for
issuance. As of October 31, 2017 and 2016, 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 $50.00 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
were paid in cash in each of the years ended October 31, 2017,
2016 and 2015. There were no cumulative unpaid dividends
as of October 31, 2017 and 2016.
• 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, $1,000.00 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. As of October 31, 2017
and 2016, 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 $141.00 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.
56
FuelCell Energy
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 ($141.00 per
share as of October 31, 2017) 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.
• Voting Rights — Holders of Series B Preferred Stock currently
have no voting rights.
Class A Cumulative Redeemable Exchangeable Preferred
Shares (the “Series 1 Preferred Shares”)
FuelCell Energy Ltd. (“FCE Ltd”), the Company’s wholly owned
subsidiary, has 1,000,000 Class A Cumulative Redeemable
Exchangeable Preferred Shares (the “Series 1 Preferred
Shares”) outstanding, which are held by Enbridge, Inc.
(“Enbridge”). FuelCell guarantees the return of principal and
dividend obligations of FCE Ltd. to the holders of Series 1
Preferred Shares.
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 terms of the Series 1
Preferred Shares.
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 2017, 2016 and 2015, under the terms
of the agreement. The Company also recorded interest expense,
which reflects the amortization of the fair value discount of
approximately Cdn. $2.6 million, Cdn. $2.4 million and Cdn.
$2.3 million, respectively. As of October 31, 2017 and 2016, the
carrying value of the Series 1 Preferred shares was Cdn. $19.4
million ($15.1 million) and Cdn. $18.0 million ($13.5 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. $25.00 per share less any amounts paid
as a return of capital in respect of such share plus all unpaid
dividends and accrued interest.
• 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. $25.00 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.
Annual Report 2017
57
• 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 as of October 31, 2017 and 2016 was $0.8 million and
$0.7 million, respectively.
Note 14. 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. The chief operating decision maker 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, 2017, 2016
and 2015 were as follows (in thousands):
United States
South Korea
England
Germany
Canada
Spain
Total
2017
2016
2015
$47,539 $ 48,697 $ 52,109
44,217
52,007
109,953
368
277
2,740
7,147
729
73
124
—
142
764
—
109
$95,666 $108,252 $163,077
Service agreement revenue which is included within Service
agreements and license revenues on the consolidated
statement of operations was $24.4 million, $26.6 million
and $16.3 million, for the years ended October 31, 2017,
2016 and 2015, respectively.
Long-lived assets located outside of the United States as of
October 31, 2017 and 2016 are not significant individually or
in the aggregate.
Note 15. Benefit Plans
We have stockholder approved equity incentive plans, a
stockholder 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 a 2010 Equity Incentive Plan. In April 2017,
the number of shares of common stock reserved for issuance
under the 2010 Equity Incentive Plan was increased to 4.5 million
shares. 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
58
FuelCell Energy
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. As of October 31, 2017,
there were 0.2 million shares available for grant. At October 31,
2017, equity awards outstanding consisted of incentive stock
options, nonstatutory stock options, RSAs and RSUs.
The Company’s 1998 and 2006 Equity Incentive Plans remain
in effect only to the extent of awards outstanding under the plan
as of October 31, 2017.
Share-based compensation was reflected in the consolidated
statements of operations as follows (in thousands):
Cost of revenues
General and administrative
expense
Research and development
expense
2017
2016
2015
$1,050 $ 745 $ 769
2,721
2,110
1,990
679
504
360
Share-based compensation
$4,450 $ 3,359 $ 3,119
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:
Expected life (in years)
Risk free interest rate
Volatility
Dividend yield
2017
7.0
2016
2015
7.0
7.0
2.2%
1.5%
1.7%
79.5% 80.1% 80.3%
—%
—%
—%
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, 2017:
Options
Outstanding at October 31, 2016
Granted
Cancelled
Shares
246,923
103,819
(40,792)
Outstanding at October 31, 2017
309,950
Weighted-Average
Option Price
$ 44.88
$ 1.50
$94.63
$23.81
The weighted average grant-date fair value per share for options
granted during the years ended October 31, 2017, 2016 and 2015
was $1.50, $6.44 and $13.24, respectively. There were no options
exercised in fiscal year 2017, 2016 or 2015.
The following table summarizes information about stock options outstanding and exercisable as of October 31, 2017:
Range of
Exercise Prices
$ 0.00 — $ 3.23
$ 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
9.4
5.2
0.3
0.6
6.0
$ 1.50
$ 18.72
$100.78
$121.56
$ 23.81
77,865
161,832
40,833
134
280,664
$ 1.50
$ 18.86
$ 100.78
$ 121.56
$ 26.00
Number
outstanding
103,819
165,164
40,833
134
309,950
The intrinsic value for options outstanding and exercisable at October 31, 2017 was $0.07 million and $0.05 million, respectively.
Restricted Stock Awards and Units
The following table summarizes our RSA and RSU activity for
the year ended October 31, 2017:
Restricted Stock Awards and Units
Outstanding at October 31, 2016
Granted
Vested
Forfeited
Shares
990,035
2,510,216
392,458
99,107
Outstanding at October 31, 2017
3,008,686
Weighted-
Average
Fair Value
$ 9.52
$ 1.48
$12.39
$ 6.62
$ 2.52
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 over 3 or 4 years. As of October 31, 2017, the 3.0
million outstanding RSAs and RSUs had an average remaining
life of 2.5 years and an aggregate intrinsic value of $6.1 million.
As of October 31, 2017, total unrecognized compensation cost
related to RSAs including RSUs was $6.0 million which is
expected to be recognized over the next 2.5 years on a weighted-
average basis.
Annual Report 2017
59
Stock Awards
During the years ended October 31, 2017, 2016 and 2015, we
awarded 86,001, 24,379 and 2,399 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 $0.1
million, $0.2 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 avoid
impermissible trading fractions. Shares issued pursuant
to the ESPP contain a legend restricting the transfer or sale
of such common stock for a period of 0.5 years after the date
of purchase.
ESPP activity for the year ended October 31, 2017 was as follows:
ESPP
Balance at October 31, 2016
Issued at $2.85 per share
Issued at $0.98 per share
Available for issuance as of October 31, 2017
Number of
Shares
62,226
(25,988)
(36,168)
70
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)
2017
0.5
2016
0.5
2015
0.5
Risk free interest rate
0.46% 0.30% 0.07%
Volatility
Dividends yield
75.0% 37.0% 72.0%
—%
—%
—%
The weighted-average fair value of shares issued under the
ESPP during fiscal year 2017 and 2016 was $1.76 and $6.86
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 $0.5 million, $0.6 million
and $0.4 million for the years ended October 31, 2017, 2016,
and 2015, respectively.
Note 16. Income Taxes
The components of loss before income taxes for the years ended
October 31, 2017, 2016, and 2015 were as follows (in thousands):
U.S.
Foreign
2017
2016
2015
$ (49,723) $ (46,708 ) $ (26,459 )
(4,136)
(3,981)
(2,951)
Loss before income taxes
$ (53,859) $ (50,689 ) $ (29,410 )
There was current income tax expense of $0.04 million, $0.5
million and $0.3 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,
2017, 2016 and 2015, respectively. Franchise tax expense,
which is included in administrative and selling expenses, was
$0.5 million, $0.4 million and $0.2 million for the years ended
October 31, 2017, 2016 and 2015, respectively.
The reconciliation of the federal statutory income tax rate to our
effective income tax rate for the years ended October 31, 2017,
2016 and 2015 was as follows:
Statutory federal income tax rate (34.0)%
(34.0)%
(34.0)%
2017
2016
2015
Increase (decrease) in income
taxes resulting from:
State taxes, net of
Federal benefits
(1.3)%
(0.2)%
(0.1)%
Foreign withholding tax
0.1%
1.1%
0.9%
The ESPP was suspended as of May 1, 2017 because we did not
have sufficient shares of common stock available for issuance.
Net operating loss
adjustment and true-ups
(4.6)%
Nondeductible expenditures
1.9%
3.3%
0.9%
Change in state tax rate
(0.8)%
(0.3)%
Other, net
Valuation allowance
Effective income tax rate
0.6%
38.2%
0.1%
60
FuelCell Energy
4.7%
0.1%
1.6%
0.4%
0.2%
30.1%
27.3%
1.1%
0.9%
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 completed a detailed Section 382 study in fiscal year 2017 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 2017
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 as of October 31,
2017 and 2016 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 certain 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.
Our 2016 U.S. federal tax return is currently under examination
by the Internal Revenue Service.
Note 17. Earnings Per Share
Basic earnings (loss) per common share (“EPS”) are generally
calculated as income (loss) available to common stockholders
divided by the weighted average number of common shares
outstanding. Diluted EPS is generally calculated as income
(loss) available to common stockholders divided by the weighted
average number of common shares outstanding plus the dilutive
effect of common share equivalents.
Our deferred tax assets and liabilities consisted of the following
at October 31, 2017 and 2016 (in thousands):
Deferred tax assets:
Compensation and benefit accruals
$ 11,158 $
Bad debt and other allowances
605
9,625
1,276
2017
2016
Capital loss and tax credit
carry-forwards
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:
13,398
12,772
282,022
7,850
265,799
8,616
111
5,095
1,522
278
4,653
1,327
321,761
304,346
(321,761)
(304,346)
—
—
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 fiscal year
2013 acquisition of Versa we recorded a deferred tax liability
for IPR&D, which has an indefinite life. Accordingly, we do not
consider it to be a source of taxable income in evaluating the
recoverability of our deferred tax assets.
As of October 31, 2017, we had federal and state NOL
carryforwards of $752.7 million and $414.7 million, respectively,
a portion of which ($7.4 million and $6.3 million of federal
and state NOL carryforwards, respectively) have not been
recognized as they relate to windfall benefits arising from
share-based compensation. The federal NOL carryforwards
expire in varying amounts from 2019 through 2037 while state
NOL carryforwards expire in varying amounts from fiscal year
2018 through 2037. Additionally, we had $11.6 million of state
tax credits available, of which $0.6 million expires in fiscal year
2018. The remaining credits do not expire.
Annual Report 2017
61
The calculation of basic and diluted EPS for the years ended October 31, 2017, 2016 and 2015 was as follows (amounts in thousands,
except share and per share amounts):
Numerator
Net loss
Net loss attributable to noncontrolling interest
Preferred stock dividend
Net loss attributable to common stockholders
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)
2017
2016
2015
$(53,903)
$ (51,208)
$ (29,684)
—
(3,200)
251
(3,200)
325
(3,200)
$(57,103)
$ (54,157)
$ (32,559)
49,914,904
29,773,700
24,513,731
—
—
—
49,914,904
29,773,700
24,513,731
$(1.14)
$(1.14)
$(1.82)
$(1.82)
$(1.33)
$(1.33)
(1) Due to the net loss to common stockholders 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. As of October 31, 2017, 2016 and 2015, potentially dilutive securities excluded
from the diluted loss per share calculation are as follows:
October 31, 2017
October 31, 2016
October 31, 2015
May 2017 Offering - Series C Warrants
May 2017 Offering - Series D Warrants
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
Series C Preferred Shares to satisfy conversion requirements (1)
5% Series B Cumulative Convertible Preferred Stock (2)
Series 1 Preferred Shares to satisfy conversion requirements (2)
Total potentially dilutive securities
11,580,900
2,584,174
7,680,000
—
—
309,950
1,898,692
18,097,826
454,043
15,167
42,620,752
—
—
7,680,000
3,826,000
166,666
246,923
915,831
—
454,043
15,167
—
—
—
—
166,666
257,769
450,783
—
454,043
15,167
13,304,630
1,344,428
(1) The number of shares of common stock issuable upon conversion of the Series C Preferred Stock was calculated using the stated value outstanding on
October 31, 2017 of $33,300,000 (original total stated value of $33,500,000 less conversion through October 31, 2017 totaling $200,000) divided by the conversion
price of $1.84.
(2) Refer to Note 13, Redeemable Preferred Stock, for information on the calculation of the common shares upon conversion.
Service 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(s). An estimate is not recorded for
a potential performance guarantee liability until a performance
issue has occurred at 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 fleet performance, which totaled
$2.2 million and $3.3 million as of October 31, 2017 and 2016,
respectively, and is recorded in “Accrued liabilities.”
Note 18. Commitments and Contingencies
Lease agreements
As of October 31, 2017 and 2016, we had capital lease obligations
of $0.6 million and $0.7 million, respectively. Lease payment
terms are thirty-six months from the date of lease.
We also lease certain computer and office equipment and
manufacturing facilities in Torrington and Danbury, Connecticut
under operating leases expiring on various dates through 2030.
Rent expense was $1.6 million, $1.8 million and $1.7 million for
the years ended October 2017, 2016 and 2015, respectively.
Non-cancelable minimum payments applicable to operating and
capital leases at October 31, 2017 were as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
62
FuelCell Energy
Operating
Leases
$1,181
910
403
381
377
3,289
$ 6,541
Capital
Leases
$ 353
211
54
10
4
—
$ 632
Our loss accrual on service agreements, excluding the accrual
for performance guarantees, totaled $1.1 million and $2.7
million as of October 31, 2017 and 2016, 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 under each contract.
The decrease primarily relates to module exchanges performed
during the year ended October 31, 2017.
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
lessee 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.
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. The Company has
substantially completed the first phase of the expansion during
the fourth quarter of fiscal year 2017.
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 that was 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. The second phase of our
manufacturing expansion, for which we will be eligible, subject
to certain conditions to receive an additional $10.0 million in
low-cost financing from the State of Connecticut, will commence
as demand supports.
Other
At October 31, 2017, the Company has unconditional purchase
commitments aggregating $29.1 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 (the “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 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 19. Supplemental Cash Flow Information
The following represents supplemental cash flow information (in thousands):
Cash interest paid
Income taxes paid
Noncash financing and investing activity:
Common stock issued for Employee Stock Purchase Plan in settlement of prior year accrued
employee contributions
Noncash reclass from inventory to project assets
Assumption of debt in conjunction with asset acquisition
Acquisition of project assets
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,
2017
$2,715
2016
$1,941
2
80
2015
$677
8
50
7,282
2,289
2,386
—
2,490
2,380
105
—
—
—
357
3,952
1,797
169
—
—
—
494
—
—
Annual Report 2017
63
Note 20. Quarterly Information (Unaudited)
Selected unaudited financial data for each quarter of fiscal year 2017 and 2016 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 (in thousands).
Year ended October 31, 2017
Revenues
Gross profit (loss)
Loss on operations
Net loss
Preferred stock dividends
Net loss to common stockholders
Net loss to common stockholders per basic
and diluted common share (1)
Year ended October 31, 2016
Revenues
Gross (loss) profit
Loss on operations
Net loss
Preferred stock dividends
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
$ 17,002
$ 20,417
$ 10,358
$ 47,889
$ 95,666
1,813
(10,928)
(13,685)
(800)
383
(11,496)
(13,238)
(800)
(2,626)
(14,330)
(17,001)
(800)
3,164
(8,181)
(9,979)
(800)
(14,485)
(14,038)
(17,801)
(10,779)
2,734
(44,935)
(53,903)
(3,200)
(57,103)
$ (0.39)
$
(0.33)
$ (0.31)
$ (0.17)
$
(1.14)
$ 33,482
$ 28,581
$ 21,716
$ 24,473
$ 108,252
(166)
(157)
434
(11,517)
(12,708)
(11,779)
(15,414)
(800)
(800)
(10,323)
(11,067)
(800)
(468)
(11,805)
(12,948)
(800)
(357)
(46,353)
(51,208)
(3,200)
(54,157)
Net loss to common stockholders
(12,512)
(16,173)
(11,810)
(13,662)
Net loss to common stockholders per basic
and diluted common share (1)
$
(0.48)
$
(0.56)
$
(0.38)
$
(0.41)
$
(1.82)
[1] The full year net loss to common stockholders basic and diluted share may not equal the sum of the quarters due to weighting of outstanding shares.
Note 21. Subsequent Events
Authorized Common Stock
On December 14, 2017, the number of authorized shares of
the Company’s common stock was increased from 125,000,000
to 225,000,000, by a vote of the holders of a majority of the
outstanding shares of the Company’s common stock.
NASDAQ Marketplace Rule 5635(d)
On December 14, 2017, in accordance with NASDAQ Marketplace
Rule 5635(d), the Company’s common stockholders approved the
issuance of shares of the Company’s common stock exceeding
19.9% of the number of shares outstanding on September 5,
2017, upon the conversion and/or redemption of the Series C
Convertible Preferred Stock issued in an underwritten offering
in September 2017.
Tax Cuts and Jobs Act
On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”)
was signed into law. While enacted subsequent to this balance
sheet date, the Act changes existing United States tax law and
includes numerous provisions that will affect the Company.
Specifically, the reduction of the U.S. federal tax rate from 34%
to 21% effective January 1, 2018 will reduce the Company’s
deferred tax liability IPR&D by approximately $1.0 million with
the benefit to be reflected in the first quarter of fiscal year 2018.
The reduction in the federal tax rate will also reduce the value of
the Company’s existing deferred tax assets, though an offsetting
decrease to valuation allowance would be recorded.
64
FuelCell Energy
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 as of October 31, 2017, 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
As of October 31, 2017, approximately 4% 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
as of October 31, 2017 and 2016 was $0.8 million and $0.7 million, respectively. 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 Shares are 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.
Annual Report 2017
65
PERFORMANCE GRAPH
The following 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, 2017 with the cumulative stockholder total return on the Russell 2000 Index,
a peer group consisting of Standard Industry Classification (“SIC) Group Code 3690 companies listed on the Nasdaq Global Market
and New York Stock Exchange and a customized 12 company peer group. It assumes $100.00 invested on October 31, 2012 with
dividends reinvested.
66
FuelCell Energy
FORWARD-LOOKING STATEMENT DISCLAIMER
This Annual Report contains statements that the Company believes to be “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Annual
Report, including statements regarding the Company’s future financial condition, results of operations, business operations and
business prospects, are forward-looking statements. Words such as “expects,” “anticipates,” “estimates,” “projects,” “intends,”
“plans,” “believes,” “predicts,” “should,” “will,” “could,” “would,” “may,” “forecast,” and similar expressions and variations of such
words 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 Technologies 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 risks contained
under Item 1A - Risk Factors included in our Form 10-K for the fiscal year ended October 31, 2017, filed with the Securities and
Exchange Commission on January 11, 2018 and 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,
• our changing relationship with POSCO Energy, which may affect our ability to develop the market in Asia and deploy SureSource
power plants,
• our ability to implement our strategy,
• our ability to reduce our levelized cost of energy and cost reduction strategy generally,
• our ability to protect our intellectual property,
• 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 business allies.
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 SureSource power plants will remain commercially successful,
• 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, or
• 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 2017
67
STOCKHOLDER 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, 2017, 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, 2017. 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
Stockholders 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
Foley & Lardner LLP
Annual Meeting
The Annual Meeting of Stockholders will be held Thursday,
April 5, 2018 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 2018
(through January 2, 2018)
Year Ended October 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended October 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 2.31
$1.50
$ 3.40
1.98
1.79
2.49
$12.24
8.08
8.88
5.67
$1.40
1.00
0.80
1.33
$4.51
4.56
5.02
3.35
On January 2, 2018, the closing price of our common stock on
the Nasdaq Global Market was $1.74 per share. As of January 2,
2018, there were 185 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 our 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, disability, protected veteran status, sexual orientation,
gender identification, genetic information, or any other characteristic protected by federal, state or local law.
68
FuelCell Energy
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
John A. Rolls 1, 2, 3, 5
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 F. Hilzinger 3, 5
Executive Vice President and Chief Financial Officer of
USG Corporation
Christopher S. Sotos
President, Chief Executive Officer and Director of
NRG Yield, Inc.
Natica von Althann 3, 4, 5
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
OFFICERS
Arthur A. Bottone
President and Chief Executive Officer
Michael S. Bishop
Senior Vice President, Chief Financial Officer and Treasurer
Anthony F. Rauseo
Senior Vice President and Chief Operating Officer
Jennifer D. Arasimowicz
Senior Vice President, General Counsel and Corporate Secretary
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, 2017, filed by FuelCell Energy, Inc. with the Securities and Exchange
Commission and available at www.fuelcellenergy.com.
SureSource, SureSource 1500, SureSource 3000, SureSource 4000, SureSource Recovery, SureSource Capture, SureSource Hydrogen,
SureSource Storage, SureSource Service, SureSource Capital, FuelCell Energy, and FuelCell Energy logo are all trademarks of FuelCell
Energy, Inc.
All rights reserved. © FuelCell Energy, Inc. 2018
Annual Report 2017
69
3 Great Pasture Road
Danbury, CT 06813-1305
203.825.6000
www.FuelCellEnergy.com
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FuelCell Energy