2018 ANNUAL REPORT
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
energy solutions.
DEAR STOCKHOLDERS,
2018 marked an important year for FuelCell Energy, as our
relentless work to win business, develop and finance
projects, and drive policy initiatives positioned us well
to successfully execute on our strategy and drive toward
sustainable profitability.
We ended our fiscal year with record
backlog and awards of more than $2 billion,
comprised of more than 83 megawatts of
projects to be built.
As a world leader in the supply, recovery
and storage of energy, FuelCell Energy is
uniquely positioned to help solve the biggest
energy challenges of our day. Our fleet
of SureSource™ power plants spans three
continents and outpaces the industry with
more than 8 million MWh generated by more
than 100 plants at more than 50 sites around
the world.
This past year, we focused on four main areas
to drive our future success:
EXECUTE on projects under construction
and in backlog;
GROW our Generation Portfolio;
COMPETE for and win new business; and
COMMERCIALIZE our Carbon Capture,
Distributed Hydrogen and Solid Oxide
solutions
We are intensely focused on delivering on our
commitments of constructing the projects in
our record backlog. During 2018, we signed
Power Purchase Agreements (PPAs) and
are progressing two projects totaling 22.2
megawatts awarded under Connecticut’s
Department of Energy and Environmental
Protection (DEEP) competitive solicitation.
FuelCell Energy Annual Report 2018
1
FuelCell Energy Annual Report 2018
at their core, long-term contracted revenues
with creditworthy off-takers such as Long Island
Power Authority, Avangrid and Eversource. To
effect this transition is capital-intensive in the
near term, as we expected it to be, but we are
convinced that it is the right strategy for our
Company to build a sustainable and profitable
future. A developed generation portfolio will
deliver recurring revenue and strong cash flows,
establishing the foundation on which our future
In December 2018 we signed the first long-
term PPA for three projects awarded by Long
success will be built.
Island Power Authority in New York, which
three projects total 39.8 megawatts. We
completed the 20 megawatt power plant for
Korea Southern Power Company (“KOSPO”) in
South Korea ahead of schedule and executed a
20-year service agreement for that project. We
completed projects in Tulare, California, and at
Trinity College in Hartford, Connecticut. We also
broke ground and are continuing to progress a
7.4 megawatt power plant at the U.S. Navy base
in Groton, Connecticut.
All of the foregoing is in furtherance of our
previously announced transition to an “energy
as a service model” through the strategic
targeted growth of our power generation
portfolio. We are continuing the transition away
from being principally a seller of equipment to a
seller of energy, services and solutions. Through
this new model, our retained projects will have,
2
The implementation of this transition project
finance has been slower to develop than we
had initially planned. We believe that these
facts have significantly influenced our equity
valuation. However, we are determined to
complete this transition as our most appropriate
path to sustained profitability. Financiers
support our projects due to their clean energy
profiles, predictable revenue streams, strong
cash flows and top-tier off-takers. We will stay
the course and complete implementation of this
transition predominantly through efficient debt-
based capital for the construction and long term
ownership of our project backlog. Recently, we
entered into a new project finance facility that
establishes a clear pathway to build out our
backlog and awards in accordance with our
“energy as a service” business model. It provides
for up to $100 million, potentially expandable to
$300 million (subject to availability of capital
and certain approvals), that we will use to finance
construction, installation and commissioning of
Our affordable distributed hydrogen solution can
current and future backlog and awards.
reduce emissions for the transportation sector
The growth of our generation portfolio and
completion of our transition to our new business
model is a vital process that will ultimately provide
our stockholders with healthier, predictable and
less cyclical revenue streams.
Accompanying our new business model is an
expansion of our service offerings. The quantity
of our opportunities has never been greater
and the breadth of our solutions never broader.
In the U.S., we see particularly strong interest
and support from states with exposure to the
benefits stationary fuel cells deliver. Our offerings
provide energy security, sustainability benefits
and meet the challenge of getting hydrogen
to end-users at a price point competitive
with gasoline. We have several projects in
development in California and are addressing
global interest.
Based on our solid oxide fuel cell technology, we
developed a solution that addresses two markets
with a common design. The solution will answer
the need for long-term energy storage to help
integrate intermittent sources of power into the
grid more seamlessly, while also positioning us to
compete in the sub-megawatt market segment
with superior performance and cost profiles.
and operating savings to our customers, while
This past year, we evaluated opportunities to
other stakeholders in our projects benefit from
enhance our Company governance processes. In
financing returns and economic development.
November 2018, James H. England was named
Chairman of the Board, bringing to the position
deep management and board experience in the
Our carbon capture solution is unique in its
ability to reduce up to 90% of CO2 emissions and
70% of NOX from power plants and industrial
applications while generating additional power.
Our agreement with ExxonMobil has progressed
at an accelerated pace and we expect this
collaboration to expand in 2019.
FuelCell Energy Annual Report 2018
3
FuelCell Energy Annual Report 2018
energy industry. Mr. England replaced John
FuelCell Energy has worked tirelessly during
A. Rolls, who has served on the FuelCell
2018 to implement our transition to our market
Energy Board of Directors since 2000 and
leading energy as a service model, and we have
has been Chairman of the Board since 2011.
never been better positioned for success. We
Mr. Rolls played a key role in the shaping of
have more than $2 billion in project backlog and
FuelCell Energy, positioning the Company
awards, top-tier off-takers, world-class business
for profitable growth, and being a strong
partners, and a verifiable business strategy to
promoter of the Company and its pursuit of
achieve positive financial results by growing our
the advanced deployment of our stationary
power generation portfolio. We are leveraging
fuel cell technology. We are also pleased to
this position with forward strides in carbon
welcome two new board members, Christina
capture, hydrogen production and energy
Lampe-Onnerud and Jason B. Few. They are
storage. As we celebrate our 50th anniversary in
joining FuelCell Energy at a very exciting time,
2019, we are building even greater momentum
as we work to execute our record backlog, grow
towards a brighter future.
the business, and advance our carbonate fuel
cell technology and develop and deploy our
advanced technology applications.
The changes to our Board noted above reflect
FuelCell Energy’s commitment to a balanced
approach to director makeup that allows
the Board to benefit from a mix of newer
directors who bring fresh perspectives with
seasoned directors who provide continuity
and a deep understanding of our complex
Sincerely,
Arthur (Chip) Bottone
President and
Chief Executive Officer
FuelCell Energy, Inc.
business. In furtherance of this commitment, the
Arthur (Chip) Bottone
FuelCell Energy Board of Directors adopted a
mandatory director retirement age of 75 and
set a director term limit of 12 years, subject
to certain exceptions necessary to ensure
an orderly transition of Board members and
leadership positions. Additionally, the Company
adopted a six fold increase in share ownership
requirements for both the Board of Directors
and the Company’s named executive officers.
4
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
Stockholder Information
6
7
21
38
39
40
41
42
43
44
69
70
7 1
72
Directors and Officers
Inside Back Cover
5
FuelCell Energy Annual Report 2018
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,
2018 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
Other income (expense), net
Benefit (provision) for income tax
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to FuelCell Energy, Inc.
Series D Preferred stock redemption accretion
Series C Preferred stock deemed dividends
Series B 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
Book value per share (2)
2018
$ 52,490
15,757
7,171
14,019
89,437
54,504
15,059
6,421
10,360
86,344
3,093
24,908
22,817
—
47,725
(44,632)
(9,055)
3,338
3,015
(47,334)
—
(47,334)
(2,075)
(9,559)
(3,200)
$ (62,168)
Years Ended October 31,
2017
2016
2015
2014
$ 43,047
27,050
7,233
18,336
95,666
$ 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
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)
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)
$ (0.75)
$ (0.75)
$ (1.14)
$ (1.14)
$ (1.82 )
$ (1.82 )
$ (1.33)
$ (1.33)
$ (2.02)
$ (2.02)
82,754
82,754
49,915
49,915
29,774
29,774
24,514
24,514
20,474
20,474
At October 31,
2018
2017
2016
2015
2014
$ 80,239
70,182
130,303
340,421
60,121
103,377
94,729
82,194
$ 0.86
$ 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
[1] Includes short-term and long-term restricted cash and cash equivalents.
[2] Calculated as total equity divided by common shares issued and outstanding as of the balance sheet date.
6
BUSINESS OVERVIEW
Overview
Our mission and purpose is to utilize our state-of-the-art
fuel cell power plants to provide environmentally responsible
solutions for various applications such as utility-scale and
on-site power generation, carbon capture, local hydrogen
production for both transportation and industry, and long
duration energy storage. Our systems cater to the needs
of customers across several industries, including utility
companies, municipalities, universities, government entities
and a variety of industrial and commercial enterprises.
With more than 8.0 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 distributed
power solutions.
We provide comprehensive turn-key power generation
solutions to our customers, including power plant installation,
operations and maintenance under multi-year power purchase
and service agreements. We both develop projects as well
as sell equipment directly to customers, providing either a
complete solution of engineering, installing and servicing the
fuel cell power plant, or selling the power plant equipment and
providing long-term maintenance only. We offer to arrange
financing structures that enable power users to benefit from
the multitude of advantages of clean onsite power while
avoiding an up-front capital investment. Utilizing long-term
power purchase agreements (PPAs) or lease structures, the
end-user of the power hosts the installation and only pays
for power as it is delivered. For projects that we develop, the
end user of the power typically enters into a PPA, and we have
the option to either identify a project investor to purchase
the power plant and assume the PPA, or 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, hospitals, government
entities and a variety of industrial and commercial enterprises.
Our leading geographic markets are the United States and
South Korea, and we are pursuing expanding opportunities
in other countries around the world.
Our value proposition is to enable economic returns with
clean, affordable, reliable and resilient fuel cell power plants
that supply power where consumed. Our products can also
be configured for carbon capture, energy 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 New York corporation
headquartered in Connecticut 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 power plant.
Business Strategy
Central to our overall business strategy are four main areas
of focus: (1) executing on our backlog and new project awards,
(2) growing our generation portfolio, (3) competing for and
winning new business around the world, and (4) developing
and commercializing our carbon capture, distributed hydrogen
and long duration energy storage solutions. We plan to
continue to grow our generation portfolio in an effort to drive
additional recurring revenue and profitability to complement
our project sale model. We also intend to expand our domestic
U.S. presence with our “Energy as a Service” model, under
which we deliver energy to the customer under a PPA, as
there are signs of acceleration of the adoption of distributed
generation fuel cells owned by utilities in the U.S. under
this model. Lastly, the products under development in our
Advanced Technologies group have great market potential,
and we expect to commercially deploy these products over
the next several years.
Our business model involves full life-cycle management of our
projects and fuel cell solutions, from design through operation
and maintenance. Our solutions employ a common core fuel
cell technology, allowing our common product design 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.
7
FuelCell Energy Annual Report 2018
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 operated plants in Europe and Asia,
in addition to North America. 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. These are
(1) the need to further reduce the total cost of ownership,
and (2) the continued education and acknowledgment of the
value that our solutions provide. The business model for
the generation and delivery of electricity for over a century has
been central generation, which is large-scale power generation
in distant locations away from urban areas with transmission
and distribution to the end users. Distributed generation
enhances existing utility models and it is being embraced in
an increasing number of markets to improve grid operations.
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
solicitation 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 solicitation 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 or developers
generally purchased our fuel cell power plants outright. As the
size of our fuel cell projects has grown and availability of project
capital has improved, project structures have transitioned to
predominantly PPAs, which is what we refer to as the “Energy
as a Service” model. 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. Examples of actual
end-users that have previously entered into PPAs include
universities, a pharmaceutical company, hospitals and utilities.
A primary advantage for the end-user is that it does not need
to commit its own capital or 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 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. We report the financial performance
of retained projects as generation revenue and income.
Our decision to retain certain projects is based in part on the
recurring, predictable 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 the full benefit of future cash flows
under the PPAs, which are higher than if we sell the projects.
As of October 31, 2018, our operating portfolio of retained
projects totaled 11.2 MW with an additional 83.1 MW under
development or 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 value and
opportunity for the Company’s capital. In furtherance of the
asset ownership “Energy as a Service” model, the Company,
through its subsidiary FuelCell Energy Finance, LLC, on
October 31, 2018, signed a Membership Interest Purchase
Agreement with Dominion Generation, Inc. (“Dominion”) to
reacquire the 15 MW Bridgeport fuel cell park project. The
Company is currently working to arrange financing to close
the transaction with Dominion.
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 often lead to below-grid pricing. We measure power
costs by calculating the Levelized Cost of Energy (“LCOE”) over
the life of the project.
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. Given the level of
integration in our business model of manufacturing, installing
and operating fuel cell power plants, there are multiple areas
and opportunities for cost reductions. We are actively managing
and reducing costs in all four LCOE areas as follows:
• Capital Cost—Capital costs of our projects include costs
to manufacture, install, interconnect, and complete 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 additional experience and continued transition
to multi-MW fuel cell parks. Larger projects offer scale and
the opportunity to consolidate systems and reduce costs.
8
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 plants’ 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 and PPAs 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. Each model
of our SureSource power plants has a design life of 25 to 30
years. The fuel cell modules, with a 5 to 7-year cell design life,
go through periodic replacement, while the balance of plant
(“BOP”) systems, which consist of conventional mechanical
and electrical equipment, are maintained over the plant life.
The price for planned periodic fuel cell stack replacements is
included in our service 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. Our power plants
can operate on a variety of existing and readily available fuels,
including natural gas, renewable biogas, directed biogas and
propane. The high efficiency of the fuel cell results in low
carbon dioxide (“CO2”) emissions when using fossil fuels such
as natural gas or propane, and because of our fuel flexibility
our systems are essentially carbon neutral when operating on
biogas fuels. Our SureSource power plants deliver electrical
efficiencies of 47%, for systems targeting CHP applications
and 60% efficiency for systems targeting 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. Considering utilized
waste heat in CHP applications, total efficiency of systems
using our power plants is typically 60% to 80% and can be as
high as 90%. These efficiencies compare to average US fossil
fuel plant generation efficiency of about 40% with grid line
losses. 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 have
historically been 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 “Energy as a
Service” PPA approach by end users of the power that prefer
to avoid the up-front investment in power generation assets.
Our PPA projects create predictable recurring revenue that is
not dependent on weather or the 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 to achieve 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.
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.
Transmission systems are also more vulnerable to storm-related
and other interruptions than locally-generated energy.
We believe that our strong business model and strategy,
demonstrated project development and 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, prone to
interruption 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, where desired,
thermal energy 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 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 coasts of the United States, such as Avangrid
9
FuelCell Energy Annual Report 2018
Holdings (NYSE: AGR) and Long Island Power & Light. In Europe,
utility customers include E.ON Connecting Energies (DAX:
EOAN), one of the largest utilities in the world, and Switzerland-
based ewz. In Korea, we are contracted to operate and maintain
a 20 MW plant for Korea Southern Power Company (“KOSPO”).
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. Combined heat
and power fuel cell applications further support economic and
sustainability initiatives by minimizing or avoiding the use of
combustion based boilers for heat.
Our products are fuel flexible, utilizing clean natural gas and
renewable biogas generated by the customer on-site or directed
biogas generated at a distant location and transported via
the existing common carrier gas pipeline network. In addition,
we have demonstrated other fuel sources including coal syngas
and propane.
As intermittent 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 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 generation, or
integrated with other forms of power generation. We have fuel
cells operating as micro-grids at universities and municipalities,
including one university micro-grid owned by Clearway Energy
and a municipal-based micro-grid owned by Avangrid. For the
municipal-based system, under normal operation, the fuel cell
supplies 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 municipal buildings. Heat from this fuel cell
plant is used by the local high school.
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.
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 3.7 MW SureSource 4000TM. The plants are scalable for
multi-megawatt utility 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, and O&M, as well as arranging
financing structures that enable customers to benefit from
the advantages of clean power while avoiding an up-front
capital investment.
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. Our 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
10
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.
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. Examples of
fuel cells parks located throughout a utility service territory to
avoid costly transmission include the three LIPA projects to be
built totaling 39.8 MW. Our products can be part of a total power
generation solution with our high efficiency products providing
continuous power, and can be combined with intermittent power
generation, such as solar or wind, or less efficient combustion-
based equipment that provides peaking or load following power.
• Higher Electrical 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 MW 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 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, biomass or
coal-fired power plants or industrial facilities while producing
ultra-clean power. Exhaust flue gas from the coal/biomass/
gas plant or industrial facility is supplied to the fuel cell, which
extracts and purifies the CO2 in the flue gas as part of the fuel
cell 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 minimal capital outlay. Our solution generates a return on
capital resulting from the fuel cell’s production of electricity
11
FuelCell Energy Annual Report 2018
rather than an increase in operating expense required by
other carbon capture technologies, and can extend the life
of existing power plants, enabling low carbon utilization of
domestic coal and gas resources. During 2018, the Company
completed the first phase design and engineering of the first
carbon capture configured SureSource 3000 power plant,
planned to be located at a mixed coal/gas fired power station
owned by a subsidiary of Southern Company. The project was
partially funded by the U.S. Department of Energy (“DOE”) and
ExxonMobil. The Company is working to secure the funding
to move to the second phase of the project, which includes
construction of the carbon capture fuel cell plant.
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.
• 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:
12
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
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 and Service Facilities
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 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 project
site and are then assembled with the fuel cell module into a
complete power plant.
Emissions (Lbs. Per MWh)
SO 2
2.6
0.008
0.008
0.0001
0.0001
0.0001
0.0001
PM
0.08
0.09
0.08
0.00002
0.00002
0.00002
0.00002
CO2
1,533
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
0.48
0.44
1.15
0.01
0.01
0.01
0.01
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. This
facility also houses our global service center. It is expected
that, in early fiscal year 2019, our completed modules will
be conditioned in Torrington as well, and shipped directly to
customer sites, rather than first being shipped to our Danbury,
Connecticut location for conditioning as in the past. This
recent relocation of conditioning activities to the Torrington,
Connecticut factory location improves the cost and efficiency
of the final manufacturing process. Annual capacity (module
manufacturing, final assembly, testing and conditioning) is
100 MW per year, with full utilization under the Torrington
facility’s current configuration. The Torrington facility is sized to
accommodate annual production capacity of 200 MW per year.
The expansion of the Torrington facility has enabled the
consolidation of warehousing and service facilities, which has
resulted in 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,
a second phase will be undertaken to add manufacturing
equipment to increase annual capacity to 200 MW. The State
of Connecticut had previously extended 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 was anticipated to be $10.0
million, with an interest rate of 2.0% and a term of 15 years.
Originally, up to 50% of the principal was 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 extensions from the
State of Connecticut to meet the required job targets.
The Torrington production and service facility and the Danbury
corporate headquarters and research and development facility
are ISO 9001:2015 and ISO 14001:2015 certified and our Field
Service Operations (which maintains the installed fleet of our
plants) is 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
and environmental stewardship.
13
FuelCell Energy Annual Report 2018
We have a manufacturing and service 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 remaining sub-megawatt fuel cell power
plants in the European market. Our European service activities
are also operated out of this location. Our operations in Europe
are certified under both ISO 9001:2015 and ISO 14001:2015.
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. While we manufacture
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 our 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. For all operating fuel cell plants not under a PPA,
the 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. Each
model of our SureSource power plants has a design life of 25
to 30 years. The fuel cell modules, with a 5 to 7-year cell design
life, go through periodic replacement, while the BOP systems,
which consist of conventional mechanical and electrical
equipment, are maintained over the plant life.
Under the typical provisions of both our service agreements
and PPAs, we provide services to monitor, operate and maintain
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 PPAs and 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
module 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 and PPAs 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 the power plants to meet expected operating
parameters throughout their contracted service 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.
License Agreements and Royalty Income;
Relationship with POSCO Energy
We have historically relied on POSCO Energy Co., Ltd. (“POSCO
Energy”) to develop and grow the South Korean and Asian
markets for our products and services.
We record license fees and are entitled to receive 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.
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.
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 CTTA requires POSCO Energy to pay us
a 3.0% royalty on POSCO Energy net product sales, as well as
a royalty on scheduled fuel cell module replacements under
service agreements for modules that were built by POSCO
Energy and installed at plants in Asia under the terms of
long-term service agreements between POSCO Energy and
its customers. In March 2017, we entered into a memorandum
of understanding (“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
14
broader Asian market. In June 2018, POSCO Energy advised
us in writing that it was terminating the MOU effective July 15,
2018. Pursuant to the terms of the MOU, notwithstanding its
termination, we will continue to execute on sales commitments
in Asia secured in writing prior to July 15, 2018. POSCO Energy
has ceased communications with us.
On or about November 2, 2018, POSCO Energy served FuelCell
Energy with an arbitration demand, initiating a proceeding to
resolve various outstanding amounts between the companies.
We have made counterclaims and believe we have valid defenses
to the claims made by POSCO Energy. The Company does not
currently expect the results of this arbitration to have a material
adverse effect on the Company.
In light of recent developments with POSCO Energy, we are
evaluating all of our options with respect to our relationship and
agreements with POSCO Energy.
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 a configuration to concentrate
CO2 from coal, biomass and natural gas fired power plants
and industrial applications. 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 8%, 9% and 8% of our revenue for the fiscal
years ended October 31, 2018, 2017, and 2016, respectively.
Significant commercialization programs on which we are
currently working include:
Carbon Capture—Power generation and industrial
applications are the source of two-thirds of the world’s
carbon emissions. 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,
as well as burning biomass, results in the emission of criteria
pollutants and CO2. Cost effective and efficient carbon capture
from power generation and industrial applications globally
represents a large market because it could enable clean
use of all available 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 a five year agreement with ExxonMobil (NYSE:
XOM) in 2016 to pursue research and development of fuel
cell carbon capture for central generation gas-fired power
plants. Research and development under that agreement has
progressed and continues to progress at an accelerated pace.
In 2018, we completed the design and engineering work for
the installation of a megawatt-class carbon capture fuel cell
power plant at a mixed coal/gas-fired power station owned by
Alabama Power, a subsidiary of Southern Company. This project
was supported by an award from the DOE and ExxonMobil. The
Company has been working to secure funding for the second
phase of the project, which would include construction of the
carbon capture fuel cell power plant.
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 previously announced a renewable
hydrogen generation project under a hydrogen power
purchase agreement with Toyota (NYSE: TM). 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 by
the fuel cell, 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 to 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
15
FuelCell Energy Annual Report 2018
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 applications 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 Clearway 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.
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.
We also recently launched our seven-year life stacks, which
extended our stack life from five years to seven years. 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
introduced the 3.7 megawatt SureSource 4000 configuration
with increased electrical efficiency, and we continually 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)
2018
2017
2016
Cost of Advanced Technologies
contract revenues
Research and development
expenses
Total research and
development
$10,360 $12,728 $11,879
22,817 20,398 20,846
$33,177 $33,126 $32,725
Backlog
The Company had a contract backlog totaling approximately
$1.2 billion as of October 31, 2018 compared to $554.2 million
as of October 31, 2017. As of October 31, 2018 and 2017, backlog
included approximately $316.0 million and $182.3 million,
respectively, of service agreements. Generation backlog as
of October 31, 2018 and 2017 was $839.5 million and $296.3
million, respectively. Service and generation backlog as of
October 31, 2018 had an average term of approximately 19 years
weighted based on dollar backlog and utility service contracts
up to twenty years in duration. As of October 31, 2018, product
sales backlog totaled approximately $1.0 thousand compared
to $31.3 million as of October 31, 2017. As of October 31, 2018,
Advanced Technologies contracts backlog totaled $32.4
million, of which $15.9 million was funded and $16.5 million was
unfunded, compared to $44.3 million as of October 31, 2017, of
which $24.5 million was funded and $19.8 million was unfunded.
Generally, our government research and development contracts
are subject to the risk of termination at the convenience of the
contracting agency.
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 definitive agreements executed by the
Company and our customers. As of October 31, 2018, we
also had project awards totaling between $600.0 million and
$1.0 billion, depending 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:
16
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 300 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%
41% - 65%
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
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 (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
solar and wind 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
17
FuelCell Energy Annual Report 2018
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 ten states
(Connecticut, Delaware, Indiana, New York, Ohio, Oklahoma,
Pennsylvania, New Hampshire, West Virginia and Maine) and
Puerto Rico 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
also promulgated regulations that will qualify certain fuel cells
under its Alternative Portfolio Standard.
In February 2018, the U.S. Congress reinstated the Investment
Tax Credit (“ITC”) for fuel cells and also extended and
significantly expanded the existing Carbon Oxide Sequestration
Credit. The reinstatement of the ITC for fuel cells provided equal
access to tax incentives for U.S. fuel cell manufacturers when
compared with other clean energy solutions. We believe that the
18
reinstatement of the ITC will help to facilitate market expansion
and product deployment by enhancing our competitiveness on
projects and encouraging project financing.
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 2024 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.
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 international
markets in which we operate. 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 our 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.
2018, Versa Power Systems, Ltd. also had three pending U.S.
patent applications and 14 patent applications pending in other
jurisdictions. In addition, as of October 31, 2018, our subsidiary,
FuelCell Energy Solutions, GmbH, had license rights to two U.S.
patents and seven patents outside the U.S. for carbonate fuel
cell technology licensed from Fraunhofer IKTS.
As of October 31, 2018, our Company, excluding its subsidiaries,
had 93 patents in the U.S. and 137 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, 2018, we also had 54 patent applications
pending in the U.S. and 125 pending in other jurisdictions.
Our U.S. patents will expire between 2019 and 2036, and
the current average remaining life of our U.S. patents is
approximately 9.0 years.
Our subsidiary, Versa Power Systems, Ltd., as of October 31,
2018, had 36 U.S. patents and 76 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 6.3 years. As of October 31,
No patents expired in 2018 that would have any material impact
on our current or anticipated operations. Three patents are
expiring in 2019, but none of these expirations are expected
to 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.
Certain of our U.S. patents are the result of government-funded
research and development programs, including our DOE
programs. U.S. patents we own that resulted from government-
funded research are subject to the government potentially
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, 2018, 2017 and 2016, our top customers, Hanyang Industrial Development Co., Ltd, Clearway
Energy (formerly NRG Yield, Inc.), AEP Onsite Partners, LLC, the U.S. Department of Energy, ExxonMobil, POSCO Energy, Dominion
Bridgeport Fuel Cell, LLC and Avangrid Holdings accounted for an aggregate of 84%, 78% and 75%, respectively, of our total annual
consolidated revenue. Revenue percentage by major customer for the last three fiscal years is as follows:
Hanyang Industrial Development Co. Ltd
Clearway Energy (formerly NRG Yield, Inc.)
AEP Onsite Partners, LLC
U.S. Department of Energy
ExxonMobil
POSCO Energy
Dominion Bridgeport Fuel Cell, LLC
Avangrid Holdings (through its various subsidiaries)
Total
Years Ended October 31,
2018
2017
2016
35%
15%
10%
8%
6%
5%
3%
2%
84%
40%
—%
—%
9%
9%
6%
11%
3%
78%
—%
—%
—%
8%
3%
48%
6%
10%
75%
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.
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.
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 2018,
the foreign country with the greatest concentration risk was
South Korea, accounting for 41% 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.
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. In October 2018, we were certified ISO
14001:2015 compliant, having demonstrated the establishment
of and adherence to an environmental management system
standard. FuelCell Energy is the only fuel cell manufacturer to
have received this certification.
19
FuelCell Energy Annual Report 2018
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 2017 weighed approximately 3.0 million pounds, of
which 2.5 pounds, or 0.000084%, 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, 2018, we had 489 full-time associates, of whom
210 were located at the Torrington manufacturing plant, 242
were located at the Danbury, Connecticut facility or other field
offices within the U.S., and 37 were located abroad. None of our
U.S. 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 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.
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 40%. Our solutions deliver this
high electrical efficiency where the power is used, avoiding
transmission. Transmission line losses average about 5% 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.
Energy management
We utilize our fuel cells to provide a portion of the electricity
used at our corporate headquarters and at our North American
manufacturing facility.
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 facilities for a portion of the power needs of the facilities,
and installation of high efficiency lighting at our North American
manufacturing facility and corporate headquarters.
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 relocating 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.
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 5 years. We have never had a workplace
fatality at any of our facilities or power plant installations.
20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
FuelCell Energy is developing and delivering 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, as well as advancing
development of solutions for 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
8.0 million megawatt hours (MWh) of electricity.
We provide comprehensive turn-key power generation solutions
to our customers, including power plant installation, operations
and maintenance under multi-year power purchase and service
agreements. We both develop projects as well as sell equipment
directly to customers, providing either a complete solution of
engineering, installing and servicing the fuel cell power plant,
or selling the power plant equipment and providing long-term
maintenance only. We offer to arrange financing structures that
enable power users to benefit from the multitude of advantages
of clean onsite power while avoiding an up-front capital
investment. Utilizing long-term power purchase agreements
(“PPAs”) or lease structures, the end-user of the power hosts
the installation and only pays for power as it is delivered. For
projects that we develop, the end user of the power typically
enters into a PPA, and we have the option to either identify a
project investor to purchase the power plant and assume the
PPA, or 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,
hospitals, government entities and a variety of industrial and
commercial enterprises. Our leading geographic markets
are the United States and South Korea, and we are pursuing
expanding opportunities in other countries around the world.
Our value proposition is to enable economic returns with clean,
affordable, reliable and resilient fuel cell power plants that supply
power where consumed. Our products can also be configured
for carbon capture, energy 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.
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, 2018 AND 2017
Revenues and Costs of revenues
Our revenues and cost of revenues for the years ended October 31, 2018 and 2017 were as follows:
(dollars in thousands)
Total revenues
Total costs of revenues
Gross profit
Gross margin
Years Ended October 31,
Change
2018
2017
$
$89,437
$95,666
86,344
92,932
$ 3,093
$ 2,734
3.5%
2.9%
$ (6,229)
(6,588)
$ 359
%
(7)%
(7)%
13%
21
FuelCell Energy Annual Report 2018
Total revenues for the year ended October 31, 2018 decreased
$6.2 million, or 7%, to $89.4 million from $95.7 million during
the year ended October 31, 2017. Total cost of revenues for
the year ended October 31, 2018 decreased by $6.6 million,
or 7%, to $86.3 million from $92.9 million during the year ended
October 31, 2017. The Company’s gross margin was 3.5% in fiscal
year 2018, as compared to the prior year gross margin of 2.9%.
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, 2018 and 2017 were as follows:
(dollars in thousands)
Product sales
Cost of product sales
Gross loss from product sales
Product sales gross margin
Years Ended October 31,
Change
2018
$ 52,490
54,504
2017
$ 43,047
49,843
$ (2,014)
$ (6,796
)
(3.8)%
(15.8
)%
$
%
$9,443
4,661
$4,782
22%
9%
70%
Product revenues for the year ended October 31, 2018 included
$49.4 million of power plant revenue and $3.1 million of
revenue related to engineering and construction services.
This is compared to product revenues for the year ended
October 31, 2017, which included $41.0 million of power plant
revenue and $2.0 million of revenue related to engineering
and construction services.
The increase in product revenues for the year ended October 31,
2018 when compared to the prior year period was primarily due to
the 20 MW order from Hanyang Industrial Development Co., Ltd
(“HYD”), pursuant to which we provided equipment to HYD for a
fuel cell project with Korea Southern Power Co., Ltd. (“KOSPO”).
Shipments began in the fourth quarter of fiscal 2017, which
resulted in $38.5 million in revenue recorded in the prior year, and
were completed in the first quarter of fiscal 2018, which resulted
in $28.5 million in revenue recorded in fiscal year 2018. The
Company completed commissioning the plant in the third quarter
of fiscal 2018. The Company also completed the sale of certain
project assets, including a 2.8 MW plant at the City of Tulare
and a 1.4 MW plant at Trinity College.
Cost of product revenues increased $4.7 million for the year
ended October 31, 2018 to $54.5 million, compared to $49.8
million in the same period in the prior year. Overall gross loss
from product revenues was $2.0 million for the year ended
October 31, 2018 compared to gross loss of $6.8 million in the
prior year comparable period. Gross loss decreased from the
prior year period due primarily to the favorable margins realized
for the HYD contract and the sale of certain project assets. Both
periods were impacted by the under-absorption of fixed overhead
costs due to low production volumes of approximately 25 MW in
each fiscal year.
As of October 31, 2018, product sales backlog totaled
approximately $1.0 thousand compared to $31.3 million as of
October 31, 2017.
Service and license revenues
Our service agreements and license revenues and associated cost of revenues for the years ended October 31, 2018 and 2017 were
as follows:
(dollars in thousands)
Service and license revenues
Years Ended October 31,
Change
2018
2017
$
%
$15,757
$27,050
$(11,293)
(42)%
Cost of service and license revenues
15,059
25,285
(10,226)
(40)%
Gross profit from service and license revenues
$
698
$ 1,765
$ (1,067)
60%
Service and license revenues gross margin
4.4%
6.5%
Revenues for the year ended October 31, 2018 from service
agreements and license fee and royalty agreements decreased
$11.3 million to $15.8 million from $27.1 million for the year
ended October 31, 2017. Service agreement revenue decreased
from the year ended October 31, 2017 primarily due to lower
revenue from fewer module replacements in the year ended
October 31, 2018 as compared to the same period in the prior
year. Revenue from license, royalty and material management
fees decreased to $2.2 million for the year ended October 31,
2018 from $2.7 million for the prior year period due to lower
royalties recognized.
Cost of service and license revenues decreased $10.2 million
to $15.1 million for the year ended October 31, 2018 from
$25.3 million for the year ended October 31, 2017. Cost of service
22
agreements includes maintenance and operating costs, module
exchanges, and performance guarantees. The decrease over
the prior year period relates to lower expenses associated with
module replacements and lower operating costs in the year
ended October 31, 2018.
Overall gross profit from service and license revenues was $0.7
million for the year ended October 31, 2018. The overall gross
margin percentage of 4.4 percent for the year ended October 31,
2018 compared to 6.5 percent in the prior year period. Service
margins were negatively impacted by, among other immaterial
factors, costs associated with a terminated legacy service
contract during the year ended October 31, 2018.
As of October 31, 2018, service backlog totaled approximately
$316.0 million compared to $182.3 million as of October 31, 2017.
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
2018
$ 7,171
6,421
$ 750
2017
$ 7,233
5,076
$ 2,157
10.5%
29.8%
$
%
$
(62)
1,345
(1)%
26%
$ (1,407)
(65)%
Revenues for the year ended October 31, 2018 from generation
totaled $7.2 million, which is generally consistent with revenues
for the year ended October 31, 2017. Generation revenues for
the years ended October 31, 2018 and 2017 reflects revenue
from electricity generated from the Company’s PPAs. Cost
of generation revenues totaled $6.4 million in the year ended
October 31, 2018, compared to $5.1 million for the comparable
prior year period. The decrease in gross profit from generation
revenues was primarily a result of the $0.5 million impairment
of a 1.4 MW project in development that was terminated in
fiscal year 2018 and higher maintenance activities at certain
installations that occurred in the first half of 2018. Cost of
generation revenues included depreciation of approximately
$4.1 million for each of the years ended October 31, 2018 and
2017. The Company had 11.2 MW of operating power plants in
its portfolio for both periods presented.
As of October 31, 2018, generation backlog totaled approximately
$839.5 million compared to $296.3 million as of October 31, 2017.
Advanced Technologies contract revenues
Advanced Technologies contracts revenue and related costs for the years ended October 31, 2018 and 2017 were as follows:
(dollars in thousands)
Advanced Technologies contracts
Cost of Advanced Technologies contracts
Gross profit
Years Ended October 31,
Change
2018
2017
$
$ 14,019
$18,336
10,360
12,728
$ 3,659
$ 5,608
$ (4,317)
(2,368)
$ (1,949)
%
(24)%
(19)%
(35)%
Advanced Technologies contract revenues gross margin
26.1%
30.6%
Advanced Technologies contract revenue for the year ended
October 31, 2018 was $14.0 million, which reflects a decrease
of $4.3 million when compared to $18.3 million of revenue
for the year ended October 31, 2017. Advanced Technologies
contract revenue was lower for the year ended October 31,
2018 primarily due to the timing of project activity under
existing contracts. Cost of Advanced Technologies contract
revenues decreased $2.4 million to $10.4 million for the
year ended October 31, 2018, compared to $12.7 million for
the same period in the prior year. Advanced Technologies
contracts for the year ended October 31, 2018 generated a
gross profit of $3.7 million compared to a gross profit of $5.6
million for the year ended October 31, 2017. The decrease in
Advanced Technologies contract gross margin is related to the
timing and mix of contracts being performed during the year
ended October 31, 2018, particularly a lower proportion related
to private industry contracts.
At October 31, 2018, Advanced Technologies contract backlog
totaled approximately $32.4 million compared to $44.3 million
at October 31, 2017.
Administrative and selling expenses
Administrative and selling expenses were $24.9 million and
$25.9 million for the years ended October 31, 2018 and 2017,
respectively. The decrease from the prior year period relates
to lower compensation expense offset marginally by higher
professional related expenditures and business development
activities during the year ended October 31, 2018.
Research and development expenses
Research and development expenses increased to $22.8 million
for the year ended October 31, 2018 compared to $20.4 million
during the year ended October 31, 2017. The increase from the
23
FuelCell Energy Annual Report 2018
prior year period is primarily due to timing of research and
development activities related to new products including the
SureSource 4000.
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. There were no restructuring activities for the
year ended October 31, 2018.
Loss from operations
Loss from operations for the year ended October 31, 2018 was
$44.6 million compared to $44.9 million for the year ended
October 31, 2017. The decrease was due to higher gross profit
realized for the year ended October 31, 2018, lower administrative
and selling expense and the lack of restructuring expense during
the year ended October 31, 2018. This was offset by increased
research and development expenses.
Interest expense
Interest expense for the years ended October 31, 2018 and 2017
was $9.1 million and $9.2 million, respectively. Interest expense
for both periods presented includes interest on the loan and
security agreement with Hercules and interest expense related
to sale-leaseback transactions. The interest expense for the
years ended October 31, 2018 and 2017 includes interest for the
accretion of the redeemable preferred stock of a subsidiary fair
value discount of $2.2 million and $2.0 million, respectively.
Other income, net
Other income, net, was $3.3 million for the year ended
October 31, 2018 compared to other income, net of $0.2 million
for the year ended October 31, 2017. The other income, net
for both periods presented includes foreign exchange gains
(losses) related to the remeasurement of the Canadian Dollar
denominated preferred stock obligation of our U.S. Dollar
functional currency Canadian subsidiary. For the year ended
October 31, 2018, foreign exchange gain was realized on
payments and unbilled receivable balances denominated in
South Korean Won for the HYD contract. Refundable research
and development tax credits for the years ended October 31,
2018 and 2017 were $0.6 million and $0.9 million, respectively.
Benefit (provision) for income taxes
We have not paid federal or state income taxes in several years
due to our history of net operating losses, although we have
paid foreign income and withholding taxes in South Korea. The
Company recorded an income tax benefit totaling $3.0 million
for the year ended October 31, 2018 compared to income tax
expense of $0.04 million for the year ended October 31, 2017. The
income tax benefit for the year ended October 31, 2018 primarily
related to the Tax Cuts and Jobs Act (the “Act”) that was enacted
on December 22, 2017. The Act reduced the U.S. federal
corporate tax rate from 34% to 21% effective January 1, 2018,
which resulted in a deferred tax benefit of $1.0 million primarily
related to a reduction of the Company’s deferred tax liability for
in process research and development (“IPR&D”). The Act also
established an unlimited carryforward period for the NOL the
Company generated in fiscal year 2018. This provision of the Act
resulted in a reduction of the valuation allowance attributable to
deferred tax assets at the enactment date by $2.0 million based
on the indefinite life of the resulting NOL as well as the deferred
tax liability for IPR&D.
24
As of October 31, 2018, we had $799.9 million of federal NOL
carryforwards that expire in the years 2019 through 2037 and
$410.2 million in state NOL carryforwards that expire in the years
2019 through 2037. Additionally, we had $8.3 million of state tax
credits available that expire from tax years 2018 to 2037.
Series D preferred stock redemption accretion
The Series D Preferred Stock redemption accretion of $2.1
million for the year ended October 31, 2018 reflects the accretion
of the difference between the carrying value and the amount
that would be redeemed should stockholder approval not be
obtained for common stock issuance equal to 20% or more
of the Company’s outstanding voting stock as of the date of
issuance of the Series D Preferred Stock. In the event that the
Company is unable to obtain such stockholder approval and
is therefore prohibited from issuing shares of common stock
as a result of this limitation (the “Exchange Cap Shares”) to a
holder of Series D Preferred Stock at any time after April 30,
2019, the Company shall pay cash to such holder in exchange for
the redemption of such number of Series D Preferred Shares
held by such holder that are not convertible into such Exchange
Cap Shares at a price equal to the product of (i) such number
of Exchange Cap Shares and (ii) the closing sale price on the
trading day immediately preceding the date such holder delivers
the applicable conversion notice with respect to such Exchange
Cap Shares to the Company.
Series C preferred stock deemed dividends
Installment conversions occurring prior to August 27, 2018 in
which the conversion price was below the initial conversion
price of $1.84 per share and installment conversions occurring
between August 27, 2018 and October 31, 2018 in which the
conversion price was below the adjusted conversion price of
$1.50 per share resulted in a variable number of shares being
issued to settle the installment amount and were treated
as a partial redemption of the Series C Preferred Shares.
Installment conversions during the year ended October 31, 2018
that were settled in a variable number of shares and treated
as redemptions resulted in deemed dividends of $9.6 million.
There were no deemed dividends recorded for the year ended
October 31, 2017 since the Series C Preferred Shares were
not issued until September 2017 and installment conversions
started in October 2017. The deemed dividend represents the
difference between the fair value of the common shares issued
to settle the installment amounts and the carrying value of the
Series C Preferred Shares.
Series B 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, 2018
and 2017.
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 Series D Preferred Stock
redemption accretion, preferred stock deemed dividends on the
Series C Preferred Stock and the preferred stock dividends on
the Series B Preferred Stock. For the years ended October 31,
2018 and 2017, net loss attributable to common stockholders
was $62.2 million and $57.1 million, respectively, and loss per
common share was $0.75 and $1.14, respectively.
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)%
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 from product sales
Product sales gross margin
Years Ended October 31,
Change
2017
2016
$
$43,047
$ 62,563
49,843
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 was 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 was 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 was 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 had 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 the balance sheet rather than sales to end customers
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 was 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.
25
FuelCell Energy Annual Report 2018
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
25,285
32,592
$ (4,441)
(7,307)
%
(14)%
(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)%
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 related 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 was for service agreements of up to
twenty years and is expected to generate positive margins and
cash flows based on then current estimates.
Generation revenues
Generation revenue and related costs for the years ended October 31, 2017 and 2016 were as follows:
(dollars in thousands)
Generation revenues
Cost of generation revenues
Generation revenues gross profit
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 reflected
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 represented the
growth in the Company’s operating portfolio. The reduction in
generation revenues gross margin percentage was 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.
26
Advanced Technologies contract revenues
Advanced Technologies contract revenues and related costs for the years ended October 31, 2017 and 2016 were as follows:
(dollars in thousands)
Advanced Technologies contract revenues
Cost of Advanced Technologies contract revenues
Years Ended October 31,
Change
2017
2016
$18,336
$12,931
12,728
11,879
$
$ 5,405
849
%
42%
7%
Advanced Technologies contracts gross profit
$ 5,608
$ 1,052
$ 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 contracts
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 was related to the timing and mix of
contracts then 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 resulted 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.
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.
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.
Interest expense
Interest expense for the years ended October 31, 2017 and 2016
was $9.2 million and $5.0 million, respectively. The increase
resulted 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 years 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.
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, as of October 31, 2017, no
tax benefit had been recognized for these NOLs or other deferred
tax assets as significant uncertainty existed surrounding the
recoverability of these deferred tax assets.
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.
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.
27
FuelCell Energy Annual Report 2018
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.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2018, we believe that our cash, cash equivalents
on hand, cash flows from operating activities, availability under
our loan facilities and access to debt and capital markets will be
sufficient to meet our working capital and capital expenditure
needs for at least the next twelve months.
We expect to maintain appropriate cash and debt levels based
upon our expected cash requirements for operations, capital
expenditures, construction of project assets and principal,
interest and dividend payments. In the future, we may also
engage in additional debt or equity financings, including project
specific debt financings under existing and new facilities. We
believe that, when necessary, we will have adequate access
to the capital markets, although the timing, size and terms of
any financing will depend on multiple factors, including market
conditions, future order flow and the need to adjust production
capacity. There can be no assurance that we will be able to
raise additional capital at the times, in the amounts, or on the
terms required for the implementation of our business plan
and strategy. In addition, our capital-intensive business model
of building generation assets increases the risk that we will be
unable to successfully implement our plans, particularly if we
do not raise additional capital in the amounts required. If we are
unable to raise additional capital at the times or in the amounts
required, or on terms favorable to us, our growth potential may
be adversely affected and we may have to modify our plans which
could include restructuring, workforce reductions, change in
production volumes and asset or intellectual property sales. If
these strategies are not successful, we may be required to delay,
reduce and/or cease our operations.
Cash and cash equivalents including restricted cash totaled $80.2
million as of October 31, 2018 compared to $87.4 million as of
October 31, 2017. As of October 31, 2018:
• Unrestricted cash and cash equivalents was $39.3 million
compared to $49.3 million as of October 31, 2017.
• Restricted cash and cash equivalents was $40.9 million, of
which $5.8 million was classified as current and $35.1 million
was classified as non-current, compared to $38.1 million of
total restricted cash and cash equivalents as of October 31,
2017, of which $4.6 million was classified as current and $33.5
million was classified as non-current.
Subsequent to fiscal year end, as of December 31, 2018, cash and
cash equivalents including restricted cash and cash equivalents
totaled $74.9 million. Unrestricted cash and cash equivalents
was $34.7 million and restricted cash and cash equivalents was
$40.2 million.
In addition to the cash and cash equivalents described above,
the Company has $90.0 million of availability under its project
finance loan agreement with Generate Lending, LLC (“Lender”
or “Generate Lending”). On December 21, 2018, the Company,
through its indirect wholly-owned subsidiary FuelCell Energy
Finance II, LLC (“FCEF II” or “Borrower”), entered into a
Construction Loan Agreement (the “Agreement” or the “Generate
Lending Construction Loan Agreement”) with Generate
Lending pursuant to which Generate Lending agreed (the
“Commitment”) to make available to FCEF II a credit facility in an
aggregate principal amount of up to $100.0 million and, subject
to further Lender approval and available capital, up to $300.0
million if requested by the Company (the “Facility”) to fund the
manufacture, construction, installation, commissioning and
start-up of stationary fuel cell projects to be developed by the
Company on behalf of Borrower during the Availability Period
(as defined below and in the Agreement). Fuel cell projects
must meet certain conditions to be determined to be “Approved
Projects” under the Facility. The Facility will be comprised of
multiple loans to individual Approved Projects (each, a “Working
Capital Loan”). Each Working Capital Loan will be sized to the
lesser of (i) 100% of the construction budget and (ii) the invested
amount that allows Lender to achieve a 10% unlevered, after-
tax inefficient internal rate of return. Approved Projects will be
funded on a cost incurred basis. FCEF II or the Company will
contribute any additional equity required to construct an Approved
Project on a pari-passu basis with the Working Capital Loans.
The Commitment to provide Working Capital Loans will remain
in place for thirty-six months from the date of the Agreement (the
“Availability Period”). Working Capital Loans borrowed during the
Availability Period for Approved Projects may be outstanding until
the achievement of an Approved Project’s Commercial Operation
Date, to the extent that such date is after the Availability Period.
Interest will accrue at 9.5% per annum, calculated on a 30/360
basis, on all outstanding principal, paid on the first business day
of each month.
The initial draw amount under the Facility, funded at closing,
was $10 million. The initial draw reflects loan advances for the
first Approved Project under the Facility, the Bolthouse Farms
5 MW project in California. Additional drawdowns are expected
to take place as the Company completes certain project
milestones. The Company expects to use this Facility to fund
the construction of its utility-scale backlog, including the three
projects totaling 39.8 MW with LIPA (as defined below) and the
two projects awarded pursuant to the Connecticut DEEP RFP,
totaling 22.2 MW.
The Company continues to work with the Connecticut Green Bank
to source financing for the construction of the 7.4 MW plant for the
Connecticut Municipal Electric Energy Cooperative located on the
U.S. Navy submarine base in Groton, CT and the 3.7 MW Triangle
Street project in Danbury, CT as well as the acquisition of the
14.9 MW Bridgeport fuel cell park from Dominion Energy. These
financings are expected to close in early 2019.
28
As previously disclosed, on July 30, 2014, the Company’s
wholly owned subsidiary, FuelCell Energy Finance, LLC
(“FuelCell Finance”), entered into a loan agreement (the “Loan
Agreement”) with NRG Energy, Inc. (“NRG”) pursuant to which
NRG extended a $40 million revolving construction and term
financing facility (the “Loan Facility”) to FuelCell Finance for the
purpose of accelerating project development by the Company
and its subsidiaries. On December 13, 2018, FuelCell Finance’s
wholly owned subsidiary, Central CA Fuel Cell 2, LLC, drew
a construction loan advance of $5.8 million under the Loan
Facility. This advance will be used to support the completion of
construction of the 2.8 MW Tulare BioMAT project in California.
This plant is expected to meet its commercial operations date
(“COD”) in March 2019. In conjunction with the December 13, 2018
draw, FuelCell Finance and NRG entered into an amendment to
the Loan Agreement (the “Amendment”) to revise the definitions
of the terms “Maturity Date” and “Project Draw Period” under
the Loan Agreement and to make other related revisions. Prior to
the Amendment, FuelCell Finance and its subsidiaries were able
to request draws under the Loan Facility through July 30, 2019
and the Maturity Date of each note under the Loan Facility was
five years after the first disbursement under such note. Pursuant
to the Amendment, FuelCell Finance and its subsidiaries were
able to request draws only through December 31, 2018 and the
Maturity Date of each note is the earlier of (a) March 31, 2019 and
(b) the COD (commercial operation date or substantial completion
date, as applicable) with respect to the fuel cell project owned
by the borrower under such note. There are currently no other
drawdowns or outstanding balances under the Loan Facility.
In addition, we have an effective shelf registration statement on
file with the SEC for issuance of equity and debt securities.
On June 13, 2018, the Company entered into an At Market
Issuance Sales Agreement (the “Sales Agreement”) with B. Riley
FBR, Inc. and Oppenheimer & Co. Inc. (together, the “Agents”)
to create an at the market equity program under which the
Company, from time to time, may offer and sell shares of its
common stock having an aggregate offering price of up to
$50,000,000 through the Agents. Under the Sales Agreement, the
Agent making the sales is entitled to a commission in an amount
equal to 3.0% of the gross proceeds from such sales. Since
entering into the Sales Agreement, the Company sold 5.7 million
shares of the Company’s common stock at prevailing market
prices under the Sales Agreement and received gross proceeds
of $8.0 million and paid $0.9 million of fees and commissions.
On August 27, 2018, the Company entered into an Underwriting
Agreement with Oppenheimer & Co. Inc. (the “Underwriter”),
relating to an underwritten offering (the “Offering”) of the
Series D Preferred Shares. Subject to the terms and conditions
contained in the Underwriting Agreement, the Underwriter
agreed to purchase, and the Company agreed to sell, 30,680
Series D Preferred Shares, initially convertible into 22,231,884
shares of the Company’s common stock (without regard to
any limitation on conversion set forth in the Series D
Certificate of Designation) at an initial conversion price of
$1.38 per share, subject to certain adjustments. The Offering
closed on August 29, 2018. The net proceeds to the Company
from the sale of the Series D Preferred Stock, after deducting
the underwriting discounts and commissions and Offering
expenses payable by the Company, was $25.3 million. The
Company intends to use, and has been using, the net proceeds
of the Offering for working capital, project financing, and
general corporate purposes.
During fiscal year 2017, the Company completed an equity capital
raise, which included the issuance of warrants. If all remaining
warrants related to this equity offering are exercised in periods
subsequent to October 31, 2018, the Company could receive
additional cash proceeds of up to $18.5 million.
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. To grow
our generation portfolio, the Company will invest in developing
and building turn-key fuel cell projects which will be owned by the
Company and classified as project assets on the balance sheet.
This strategy requires liquidity and is expected to continue to
have increasing liquidity requirements as project sizes increase.
We may commence building project assets upon the award of a
project or 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 operation 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
facilities or other financing arrangements. Delays in construction
progress or in completing financing or the sale of our projects
may impact our liquidity.
Our operating portfolio (11.2 MW as of October 31, 2018)
contributes higher long-term cash flows to the Company than if
these projects had been sold. These projects currently generate
$7—$8 million per year in annual revenue. The Company plans
to continue to grow this portfolio while also selling projects to
investors. As of October 31, 2018, the Company had an additional
43.3 MW under development and construction, which projects
are expected to generate operating cash flows in future periods.
These totals do not include the 39.8 MW Long Island Power
Authority (“LIPA”) project awards, which are not yet in backlog.
Including the LIPA awards, the projects in process totaled
83.1 MW as of October 31, 2018. We expect these projects,
which include the LIPA awards, to generate an additional
$70—$80 million of annual recurring revenue once they become
operational. 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
worked with financial institutions to secure long-term debt
and sale-leasebacks for our project asset portfolio as well as
Generate Lending and NRG for construction period financing.
As of October 31, 2018, we have financed four projects through
sale-leaseback transactions. As of October 31, 2018, total
financing obligations and debt outstanding related to project
assets was $46.1 million. Our operating portfolio provides the
Company with the full benefit of future cash flows.
29
FuelCell Energy Annual Report 2018
The following table summarizes our operating portfolio as of October 31, 2018:
Actual
Commercial
Operation Date
(FuelCell
Rated
Capacity Energy Fiscal
Project Name
Location
Power Off-Taker
(MW)
Quarter)
Central CT State University (“CCSU”)
UCI Medical Center (“UCI”)
Riverside Regional Water Quality
Control Plant
Pfizer, Inc.
Santa Rita Jail
New Britain, CT
Orange, CA
Riverside, CA
Groton, CT
Dublin, CA
CCSU (CT University)
UCI (CA University Hospital)
City of Riverside
(CA Municipality)
Pfizer, Inc.
Alameda County, California
Total MW Operating:
1.4
1.4
1.4
5.6
1.4
11.2
Q2 ‘12
Q1 ‘16
Q4 ‘16
Q4 ‘16
Q1 ‘17
The following table summarizes projects in process as of October 31, 2018:
Project Name
Location
Power Off-Taker
Estimated
Commercial
Operation Date
(FuelCell
Rated
Capacity Energy Fiscal
(MW)
Quarter)
Triangle St
Tulare BioMAT
Bolthouse Farms
Groton Sub Base
Toyota
LIPA 1
LIPA 2
LIPA 3
CT RFP-1
CT RFP-2
Danbury, CT
Tulare, CA
Bakersfield, CA
Groton, CT
Los Angeles, CA
Long Island, NY
Long Island, NY
Long Island, NY
Hartford, CT
Derby, CT
Eversource (CT Utility)
PG&E CA (CA Utility)
Bolthouse Farms (Campbell’s)
CMEEC (CT Electric Co-op)
Southern California
Edison; Toyota
PSEG / LIPA, LI NY (Utility)
PSEG / LIPA, LI NY (Utility)
PSEG / LIPA, LI NY (Utility)
Eversource (CT Utility)
United Illuminating (CT Utility)
Total MW in Process:
3.7
2.8
5.0
7.4
2.2
7.4
18.5
13.9
7.4
14.8
83.1
Q1 ‘19
Q2 ‘19
Q3 ‘19
Q4 ‘19
Q3 ‘20
Q3 ‘20
Q4 ‘20
Q1 ‘21
Q4 ‘21
Q2 ‘21
PPA
Term
(Years)
10
19
20
20
20
PPA
Term
(Years)
Tariff
20
20
20
20
20
20
20
20
20
The Company had a contract backlog totaling approximately
$1.2 billion as of October 31, 2018. The Company also had
project awards with respect to 39.8 MW of LIPA projects
totaling an additional $792.5 million, resulting in total backlog
and awards of approximately $2.0 billion as of October 31,
2018. On December 19, 2018, one LIPA PPA totaling 7.4 MW was
executed and was included in backlog. The remaining PPAs are
expected to be executed in the first half of fiscal year 2019.
On August 28, 2018, the Company sold a 1.4 MW project previously
classified as Generation backlog. The Company also executed
a service agreement with the customer, which was added to
backlog as of October 31, 2018. The services backlog will be
recognized as recurring revenue over the 15-year project term
of our service agreement.
Backlog by revenue category is as follows:
• Services backlog totaled $316.0 million as of October 31, 2018
compared to $182.3 million as of October 31, 2017. Services
backlog includes future contracted revenue from routine
maintenance and scheduled module exchanges for power
plants under service agreements.
• Generation backlog totaled $839.5 million as of October 31, 2018
compared to $296.3 million as of October 31, 2017. Generation
backlog represents future contracted energy sales under
contracted PPAs between the Company and the end-user of
the power.
• Product sales backlog totaled $1.0 thousand as of October 31,
2018 compared to $31.3 million as of October 31, 2017.
• Advanced Technologies contract backlog totaled $32.4
million as of October 31, 2018 compared to $44.3 million as
of October 31, 2017.
Backlog represents definitive agreements executed by the
Company and our customers. Projects with respect to which the
Company intends to retain ownership are included in generation
backlog, which represents future revenue under long-term PPAs.
Projects sold to customers (and not retained by the Company) are
included in product sales and service backlog. Project awards
30
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. The Company is working to enter
into definitive agreements with respect to these project awards
and, upon execution of a definitive agreement with respect to a
project award, that project award will become backlog. Project
awards that were not included in backlog as of October 31, 2018
include the 39.8 MW LIPA project awards (which are expected to
become generation backlog). These awards in total represent
approximately $792.5 million of future revenue potential over the
life of the projects, assuming the Company retains ownership
of the projects. If the Company were to sell such projects, the
backlog amount would be decreased (in an amount determined
by the negotiated sales price at the time of sale) and would consist
of product sales to be recognized over a one to two year period
and service revenue to be recognized over a twenty year term.
Factors that may impact our liquidity in fiscal year 2019 and
beyond include:
• Timing of project awards and factory production rate. The
Company bids on large projects in diverse markets that
can have long decision cycles and uncertain outcomes. The
Company manages production rate based on expected demand
and projects schedules. Changes to production rate take time
to implement. In fiscal 2018, the Company began to increase its
production rate from a level of 25 MW and as of December 31,
2018 the production run-rate was approximately 35 MW on an
annualized basis.
• 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, 2018 and
October 31, 2017 was $32.4 million ($9.4 million of which is
classified as “Other assets”) and $81.3 million ($12.8 million
of which is classified as “Other assets”), respectively.
Included in accounts receivable as of October 31, 2018
and October 31, 2017 was $23.1 million and $38.3 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, 2018 and
October 31, 2017 was $53.6 million and $74.5 million,
respectively, which includes work in process inventory totaling
$29.1 million and $54.4 million, respectively. Work in process
inventory can generally be deployed rapidly while the balance
of our inventory requires further manufacturing prior to
deployment. As we continue to execute on our business plan,
we must produce fuel cell modules and procure balance of
plant (“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 amount of total project assets as of October 31, 2018
and October 31, 2017 was $99.6 million and $73.0 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, 2018
consisted of $28.6 million of completed installations currently
operating and $71.0 million of projects in development. As
of October 31, 2018, we had 11.2 MW of our operating project
assets that generated $7.2 million of revenue in fiscal 2018.
Also, as of October 31, 2018, the Company had an additional
83.1 MW under development and construction, some of which
is expected to generate operating cash flows in fiscal year 2019.
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, 2018, we had pledged approximately $40.9 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 2019, we forecast capital expenditures in the
range of $2.0 million to $4.0 million compared to $10.0 million
in fiscal year 2018. Capital expenditures for fiscal year 2019
reflect maintenance capital expenditures. Over the past
two years, we have completed the expansion of our 65,000
square foot manufacturing facility in Torrington, Connecticut
by adding 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. Investments in 2019 are expected to include finalizing
the addition of module conditioning capacity to our Torrington
facility. Commissioning is expected to be completed in the
first quarter of fiscal year 2019, leading to expected logistics,
time and cost savings as modules are currently shipped to our
Danbury, Connecticut facility for conditioning.
Cash Flows
Cash and cash equivalents and restricted cash and cash
equivalents totaled $80.2 million as of October 31, 2018 compared
to $87.4 million as of October 31, 2017. As of October 31, 2018,
restricted cash and cash equivalents was $40.9 million, of
which $5.8 million was classified as current and $35.1 million
was classified as non-current, compared to $38.1 million total
restricted cash and cash equivalents as of October 31, 2017, of
which $4.6 million was classified as current and $33.5 million
was classified as non-current.
31
FuelCell Energy Annual Report 2018
The following table summarizes our consolidated cash flows:
2018
2017
2016
Consolidated Cash Flow Data:
Net cash provided by (used in)
operating activities
$ 16,322 $(71,845) $(46,595)
Net cash used in
investing activities
(51,260)
(31,444)
(41,452)
Net cash provided by
financing activities
27,717
72,292
120,658
Effects on cash from changes
in foreign currency rates
12
129
(35)
Net (decrease) increase
in cash and cash
equivalents
$ (7,209) $(30,868) $ 32,576
The key components of our cash inflows and outflows were
as follows:
Operating Activities—Net cash provided by operating activities
was $16.3 million during fiscal year 2018 compared to $71.8
million used in operating activities during fiscal year 2017.
Net cash provided by operating activities during fiscal year 2018
was primarily the result of decreases in accounts receivable of
$48.7 million, inventories of $31.7 million, deferred revenue of
$1.3 million and net non-cash activity of $15.4 million. Accounts
receivable and inventory decreased primarily as a result of cash
received and inventory delivered under the HYD contract. The
amounts were offset by the net loss of $47.3 million for fiscal
year 2018, decreases in accounts payable of $19.8 million
and accrued liabilities of $11.3 million, and an increase in other
assets of $2.3 million.
Net cash used in operating activities during fiscal year 2017
was 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 activity of $20.2 million and an increase in accounts
payable of $25.0 million.
Investing Activities —Net cash used in investing activities was
$51.3 million during fiscal year 2018 compared to net cash used in
investing activities of $31.4 million during fiscal year 2017.
Net cash used in investing activities during fiscal year 2018
included a $41.2 million investment in project assets to expand
our operating portfolio and $10.0 million for capital expenditures.
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.
Financing Activities—Net cash provided by financing activities
was $27.7 million during fiscal year 2018 compared to $72.3
million in fiscal year 2017.
Net cash provided by financing activities during fiscal year
2018 resulted from net proceeds of $25.3 million received in
connection with the offering and issuance of Series D Preferred
Stock, the receipt of $13.1 million under the amended Hercules
Loan and Security Agreement and net proceeds received of $10.5
million from warrant exercises and sales of our common stock
under the Sales Agreement offset by cash payments of $16.6
million primarily relating to repayments under the Hercules Loan
and Security Agreement and the payment of preferred dividends
and the return of capital of $4.2 million.
Net cash provided by financing activities during fiscal year 2017
included 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.
Commitments and Significant Contractual Obligations
A summary of our significant future commitments and contractual obligations as of October 31, 2018 and the related payments by fiscal
year is summarized as follows:
(dollars in thousands)
Contractual Obligations
Purchase commitments (1)
Payments Due by Period
Total
Less than
1 year
1-3
years
3-5 More than
5 years
years
$ 63,984
$57,670
$ 6,223
$ 91
$ —
Series 1 Preferred obligation (2)
5,287
952
4,335
—
—
Term loans (principal and interest)
49,034
16,812
16,240
4,932
11,050
Capital and operating lease commitments (3)
Sale-leaseback financing obligation (4)
Option fee (5)
Series B Preferred dividends payable (6)
Total
32
5,889
21,229
550
—
1,078
3,717
250
—
1,051
6,771
300
—
756
4,616
—
—
3,004
6,125
—
—
$145,973
$80,479
$34,920
$10,395
$20,179
(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 annual amount of Cdn. $750,000 as return of capital payments payable in cash. These
payments will end on December 31, 2020. Dividends accrue at a 1.25 percent quarterly rate on the unpaid principal balance, and additional dividends will
accrue on the cumulative unpaid dividends at a rate of 1.25 percent per quarter, compounded quarterly. On December 31, 2020, the amount of all accrued
and unpaid dividends on the 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 subsidiaries, under their respective financing agreements with
PNC. Lease payments under this facility are generally payable in fixed quarterly installments over a ten-year period.
(5) The Company entered into an agreement with a customer on June 29, 2016 that 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 when or if we will be able to convert the Series B Preferred Stock into shares of our common stock. We may, at our option,
convert these shares into the number of shares of our common stock that are issuable at the then prevailing conversion rate if the closing price of our
common stock exceeds 150 percent of the then prevailing conversion price ($141 per share at October 31, 2018) for 20 trading days during any consecutive 30
trading day period.
In November 2016, the Company’s wholly-owned subsidiary,
FuelCell Finance, entered into a membership interest purchase
agreement with GW Power LLC (“GWP”) whereby FuelCell
Finance purchased all of the outstanding membership interests
in New Britain Renewable Energy, LLC (“NBRE”) from GWP. GWP
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 rate is 5.0% per annum and payments due
on a quarterly basis commenced in January 2017. The balance
outstanding as of October 31, 2018 was $1.1 million.
In April 2016, the Company entered into a loan and security
agreement (the “Hercules Agreement”) with Hercules Capital,
Inc. (“Hercules”) for a loan with an aggregate principal amount
of up to $25.0 million, subject to certain terms and conditions.
The Company received an initial term loan advance on the
date of closing of $15.0 million and an additional $5.0 million
in September 2016. The loan was a 30 month secured facility.
The term loan interest rate was previously 9.75% per annum
and increased to 10.0% per annum during the three months
ended January 31, 2018 as a result of the increase in the prime
rate. In addition to interest, which is paid on a monthly basis,
principal payments commenced on November 1, 2017 in equal
monthly installments. The loan balance and all accrued and
unpaid interest was due and payable by October 1, 2018. Under
the terms of the Hercules Agreement, there was an end of term
charge of $1.7 million also due and paid October 31, 2018.
The Hercules Agreement was amended on September 5,
2017, October 27, 2017, March 28, 2018, August 29, 2018 and
December 19, 2018. The March 28, 2018 Amendment (the
“March Amendment”) allowed the Company to draw a term loan
advance of $13.1 million. The aggregate amount outstanding,
which included the amount outstanding under the original
Hercules Agreement of $11.9 million and the term loan advance
under the March Amendment, was $25.0 million as of October 31,
2018. The term loan maturity date is April 1, 2020. Payments for
the aggregate amount outstanding are interest only for the initial
12-month period, followed by equal monthly installments of
principal and interest until the term loan maturity date and the
term loan interest rate was 10.15% per annum which increased
to 10.40% in June 2018 and to 10.65% in September 2018 as a
result of the increases in the prime rate. The term loan interest
rate is the greater of either (i) 9.90% plus the prime rate minus
4.50%, and (ii) 9.90%. The end of term charge of $1.7 million was
paid on October 1, 2018. An additional end of term charge of $0.9
million will be due on April 1, 2020. The end of term charge is
being accreted over a 30-month term.
As collateral for obligations under the Hercules Agreement, as
amended, the Company granted Hercules a security interest in
FuelCell Energy, Inc.’s existing and thereafter-acquired assets
except for intellectual property and certain other excluded
assets. The 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 (a) 75% of the
outstanding loan balance plus (b) the amount of accounts
payable (as defined under GAAP) not paid within 90 days of
the date payment was issued. The Hercules Agreement, as
amended, contains customary representations and warranties,
affirmative and negative covenants, and events of default that
entitle Hercules to cause our indebtedness under the agreement
to become immediately due and payable.
On August 29, 2018, in connection with the issuance of Series
D Preferred Stock, the Company and Hercules (and various
affiliated entities) entered into the fourth amendment to the
Hercules Agreement to (i) modify the definition of “Permitted
Indebtedness” to include certain redemption and/or conversion
rights as set forth in the Series D Certificate of Designation,
(ii) permit the Company, so long as no event of default has
occurred and is continuing, to repurchase or redeem stock in
cash pursuant to the redemption and/or conversion rights set
forth in the Series D Certificate of Designation; provided that,
the Company must make any such repurchase, redemption
or payment in common stock and not in cash or other
consideration unless prohibited pursuant to the terms of the
Series D Certificate of Designation or otherwise prohibited by
applicable law, (iii) permit the Company, so long as no event of
default has occurred and is continuing, to pay cash dividends
under the Series D Preferred Shares as required in the Series D
Certificate of Designation; provided that, the Company must
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FuelCell Energy Annual Report 2018
pay such dividends in common stock and not in cash or other
consideration unless prohibited pursuant to the terms of the
Series D Certificate of Designation or otherwise prohibited by
applicable law, and (iv) add a new event of default, which occurs
upon the delivery of a Triggering Event Redemption Notice (as
defined under the Series D Certificate of Designation) under the
Series D Certificate of Designation.
of projects through the commercial operating date of the power
plants. Additionally, FuelCell Finance had the option to continue
the financing term for each project after the commercial
operating date for a maximum term of five years per project. The
interest rate is 8.5 percent per annum for construction-period
financing and 8.0 percent thereafter. As of October 31, 2018, there
was no outstanding balance on this facility.
On December 19, 2018, to facilitate the Generate Lending
Construction Loan Agreement described above, the Company
and Hercules (and various affiliated entities) entered into the
fifth amendment to the Hercules Agreement to (i) modify the
definitions of “Permitted Investment,” “Permitted Liens,”
“Project Companies,” “Project Company Indebtedness,”
and “Qualified Subsidiary” to permit the creation of a new
holding company, FuelCell Energy Finance II, LLC, to hold
the membership interests of project companies to be funded
under the Facility with Generate Lending described above and
(ii) modify the definition of “Project Roundtrip Transaction” to
increase the investment amount under a Project Roundtrip
Transaction to $40.0 million.
In November 2015, the Company closed on a definitive
Assistance Agreement with the State of Connecticut and
received a disbursement of $10.0 million, which was used for
the first phase of the expansion of our Torrington, Connecticut
manufacturing facility. In conjunction with this financing, the
Company entered into a $10.0 million Promissory Note and
related security agreements securing the loan with equipment
liens and a mortgage on its Danbury, Connecticut location.
Pursuant to the terms of the loan, payment of principal is
deferred for the first four years with principal payments
beginning in November 2019. Monthly interest payments at a
fixed rate of 2.0 percent per annum began in December 2015.
The financing is payable over 15 years, and is predicated on
certain terms and conditions, including the forgiveness of up
to 50 percent of the loan principal if certain job retention and
job creation targets are reached.
On April 17, 2017, the Company entered into an amendment to
the Assistance Agreement extending certain of the job creation
target dates until October 28, 2019. In addition, the Company
may receive up to $10.0 million of non-refundable transferable
tax credits if certain terms and conditions are met. Under the
Assistance Agreement, as amended, the Company targeted
employment of 703 Connecticut employees by October 2019. In
connection with this amendment to the Assistance Agreement,
in July 2018, the Company announced an increase in its annual
production rate and committed to hire over 100 employees. As of
October 31, 2018, the Company had 431 Connecticut employees.
If the Company does not meet this target in the required time
period, principal under the promissory note will be paid at an
annual rate of $14.0 thousand for each employee under the 703
employee target. The Company cannot currently predict whether
the time period for meeting this target will be extended.
As discussed above, on July 30, 2014, the Company’s subsidiary,
FuelCell Finance, entered into a Loan Agreement with NRG.
Pursuant to the Loan Agreement, NRG extended a $40.0 million
Loan Facility to FuelCell Finance for the purpose of accelerating
project development by the Company and its subsidiaries. Under
the Loan Agreement, FuelCell Finance and its subsidiaries were
permitted to draw on the Loan Facility to finance the construction
On December 13, 2018, FuelCell Finance’s wholly owned
subsidiary, Central CA Fuel Cell 2, LLC, drew a construction
loan advance of $5.8 million under the Loan Facility. This
advance will be used to support the completion of construction
of the 2.8 MW Tulare BioMAT project in California. This plant is
expected to meet its commercial operations date (COD) in March
2019. In conjunction with the December 13, 2018 draw, FuelCell
Finance and NRG entered into an amendment to the Loan
Agreement (the “Amendment”) to revise the definitions
of the terms “Maturity Date” and “Project Draw Period” under
the Loan Agreement and to make other related revisions.
Prior to the Amendment, FuelCell Finance and its subsidiaries
were able to request draws under the Loan Facility through
July 30, 2019 and the maturity date of each note under the
Loan Facility was five years after the first disbursement under
such note. Pursuant to the Amendment, FuelCell Finance
and its subsidiaries may now request draws only through
December 31, 2018 and the maturity date of each note is the
earlier of (a) March 31, 2019 and (b) the COD (commercial
operation date or substantial completion date, as applicable)
with respect to the fuel cell project owned by the borrower
under such note. There are currently no other drawdowns
or outstanding balances under the Loan Facility.
In March 2013, we closed on a long-term loan agreement with
the Clean Energy Finance and Investment Authority, now known
as 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 per annum and principal
repayments will commence on the eighth anniversary of the
project’s provisional acceptance date which is December 20,
2021. Outstanding amounts are secured by future cash flows
from the Bridgeport fuel cell park contracts. The outstanding
balance on the Connecticut Green Bank Note as of October 31,
2018 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, 2018, we
had an outstanding balance of $0.3 million on this loan. The
interest rate is 5.0 percent per annum. 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
required interest and principal payments through May 2018.
However, the repayment terms were modified in April 2018, such
that the remaining balance and interest will be paid on a monthly
basis through December 2018.
We have pledged approximately $40.9 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, 2018, outstanding letters of credit totaled $3.8
million. These expire on various dates through August 2025.
34
Under the terms of certain contracts, the Company will provide
performance security for future contractual obligations. The
restricted cash balance as of October 31, 2018 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 service agreement. The restricted cash balance
as of October 31, 2018 also includes $18.2 million primarily
to support obligations of the power purchase and service
agreements related to the PNC sale-leaseback transactions.
As of October 31, 2018, we had uncertain tax positions
aggregating $15.7 million and have reduced our NOL
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 under the heading “Commitments
and Significant Contractual Obligations.”
In addition to the commitments listed in the table under
the heading “Commitments and Significant Contractual
Obligations,” 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 estimated 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 or biogas, to run our fuel cell power
plants. In addition, under certain agreements, we are required
to produce minimum amounts of power under our PPAs and we
have the right to terminate PPAs by giving written notice to the
customer, subject to certain exit costs. As of October 31, 2018,
our operating portfolio was 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 of up to twenty
years. Pricing for service contracts is based upon estimates of
future costs, which could be materially different from actual
expenses. Refer to “Critical Accounting Policies and Estimates”
for additional details.
Advanced Technologies 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, 2018,
Advanced Technologies contracts backlog totaled $32.4 million,
of which $15.9 million is funded and $16.5 million is unfunded.
Should funding be terminated or 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 19 “Commitments
and Contingencies” to our consolidated financial statements for
the year ended October 31, 2018 included in this Annual Report
for further information.
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.
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FuelCell Energy Annual Report 2018
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.
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).
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, 2018 and 2017. The Company performed a qualitative
assessment for fiscal year 2018 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. The Company recorded a $0.5 million
impairment of a project asset for the year ended October 31,
2018 due to the termination of a project. No impairments were
recorded for the year ended October 31, 2017.
Revenue Recognition
We earn revenue from (i) the sale and installation of fuel cell
power plants including site engineering and construction
services, (ii) sale of completed project assets, (iii) equipment
only sales (modules, BOPs, component part kits and spare
parts to customers), (iv) performance under long-term
service agreements, (v) the sale of electricity and other value
streams under PPAs and utility tariffs from project assets
retained by the Company, (vi) license fees and royalty income
from manufacturing and technology transfer agreements,
and (vii) government and customer-sponsored Advanced
Technologies projects.
As further clarification, revenue elements are classified as
follows:
Product. Includes the sale of completed project assets, 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.
36
We recognize license fees and other revenue over the term
of the associated agreement. The Company records 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 manufacturing and technology
transfer agreements we entered with POSCO Energy collectively
provide them with the rights to manufacture SureSource power
plants in South Korea and exclusive rights to sell in Asia.
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.
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 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 project assets 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 the projects being 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. 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. The sale-leaseback
arrangements with PNC allow the Company to repurchase the
project assets at fair market value.
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, 2018 and October 31, 2017,
the warranty accrual, which is classified in accrued liabilities on
the Consolidated Balance Sheets, totaled $0.1 million and $0.3
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(s). The
Company has accrued for performance guarantees for service
agreements of $1.1 million and $2.2 million as of October 31,
2018 and October 31, 2017, respectively.
The Company records loss accruals on all service agreements
when the estimated cost of future module exchanges and
maintenance and monitoring activities exceed the remaining
unrecognized 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, 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, 2018 and October 31, 2017, our
accruals on service agreement contracts totaled $0.9 million and
$1.1 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 maintained. As of
October 31, 2018 and October 31, 2017, the related residual value
asset was $1.2 million and $1.0 million, respectively.
37
FuelCell Energy Annual Report 2018
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, 2018, 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, 2018 based on the specified criteria.
Arthur A. Bottone
President and Chief Executive Officer
Michael Bishop
Senior Vice President, Chief Financial Officer and Treasurer
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
FuelCell Energy, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of FuelCell Energy, Inc. and subsidiaries (the Company) as of
October 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated
financial statements). We also have audited the Company’s internal control over financial reporting as of October 31, 2018, based
on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of October 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the
three-year period ended October 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2018, based
on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Basis for Opinions
The Company’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 the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due
to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
We have served as the Company’s auditor since 1995.
Hartford, Connecticut
January 10, 2019
39
FuelCell Energy Annual Report 2018
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 $160 and
$79 as of October 31, 2018 and 2017, respectively
Inventories
Other current assets
Total current assets
Restricted cash and cash equivalents—long-term
Project assets
Property, plant and equipment, net
Goodwill
Intangible assets
Other assets
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 Series B preferred stock (liquidation preference of $64,020 as of October 31, 2018
and October 31, 2017)
Redeemable Series C preferred stock (liquidation preference of $8,992 and $33,300 as
of October 31, 2018 and 2017, respectively)
October 31,
2018
2017
$
39,291
$
49,294
5,806
4,628
23,039
53,575
8,592
68,521
74,496
6,571
130,303
203,510
35,142
99,600
48,204
4,075
9,592
13,505
33,526
73,001
43,565
4,075
9,592
16,517
$ 340,421
$ 383,786
$
17,596
$
22,594
7,632
11,347
952
60,121
16,793
14,965
71,619
28,281
42,616
18,381
7,964
836
98,078
18,915
14,221
63,759
163,498
194,973
59,857
59,857
7,480
27,700
Redeemable Series D preferred stock (liquidation preference of $30,680 as of October 31, 2018)
27,392
Total equity:
Stockholders’ equity
Common stock ($0.0001 par value; 225,000,000 and 125,000,000 shares authorized as of
October 31, 2018 and 2017, respectively; 95,672,237 and 69,492,816 shares issued and
outstanding as of October 31, 2018 and 2017, respectively)
10
—
7
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Treasury stock, Common, at cost (156,501 and 88,861 shares as of October 31, 2018 and 2017,
respectively)
Deferred compensation
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
40
1,073,454
1,045,197
(990,867)
(943,533)
(403)
(363)
363
(415)
(280)
280
82,194
101,256
$ 340,421 $ 383,786
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 $11.4 million, $0.4 million and $43.6 million of
related party revenue)
Service agreements and license revenues (including $6.5 million, $5.4 million
and $8.5 million of related party revenue)
Generation revenues
Advanced Technologies contract revenues
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 benefit (provision) for income taxes
Benefit (provision) for income taxes
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to FuelCell Energy, Inc.
Series B Preferred stock dividends
Series C Preferred stock deemed dividends
Series D Preferred stock redemption accretion
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.
2018
2017
2016
$ 52,490
$ 43,047
$ 62,563
15,757
7,171
14,019
89,437
54,504
15,059
6,421
10,360
86,344
3,093
24,908
22,817
—
47,725
(44,632)
(9,055)
3,338
(50,349)
3,015
(47,334)
—
(47,334)
(3,200)
(9,559)
(2,075)
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)
—
—
$ (62,168)
$ (57,103)
$ (54,157)
$ (0.75)
$ (0.75)
$
$
(1.14)
(1.14)
$
$
(1.82)
(1.82)
82,754,268
82,754,268
49,914,904
49,914,904
29,773,700
29,773,700
For the Years Ended October 31,
2018
2017
2016
$ (47,334)
$ (53,903)
$ (51,208)
12
129
(35)
$ (47,322)
$ (53,774)
$ (51,243)
41
FuelCell Energy Annual Report 2018
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended October 31, 2018, 2017 and 2016
(Amounts in thousands, except 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, 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.
1,474,000 —
34,736
1,100,000 —
—
6,023,372
1
36,055
24,379 —
— —
587,963 —
— —
—
—
—
—
—
—
—
—
—
—
157
3,425
(286)
—
(809
)
(3,200
)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(50,957)
—
—
—
—
—
—
—
—
—
—
(35)
—
—
—
—
—
—
—
—
—
—
(101)
—
—
—
—
—
—
—
—
—
—
—
101
—
—
— 34,736
—
—
— 36,056
—
—
—
(251)
806
—
—
—
—
157
3,425
(286)
(251)
(3)
(3,200)
—
(35)
(50,957)
Balance, October 31, 2016
35,174,424
$ 4
$ 1,004,566
$ (889,630)
$ (544)
$ (179)
$ 179
$ —
$114,396
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
12,000,000
13,660,926
7,245,430
1
1
1
86,001 —
— —
13,883
12,721
12,430
129
4,585
Taxes paid upon vesting of restricted stock awards,
net of stock issued under benefit plans
1,284,673 —
(84)
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.
108,696 —
— —
— —
(67,334) —
— —
167
(3,200)
—
—
—
—
—
—
—
—
—
—
—
—
—
(53,903)
—
—
—
—
—
—
—
—
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
Sale of common stock, net of fees
Exercise of warrants
Common stock issued, non-employee
compensation
Share-based compensation
5,715,180
2,595,710 —
1
158,708 —
— —
Taxes paid upon vesting of restricted stock awards,
net of stock issued under benefit plans
Series C convertible preferred stock conversions
(178,950) —
2
17,956,413
Preferred dividends — Series B
Series D Preferred strock redemption accretion
Effect of foreign currency translation
Adjustment for deferred compensation
Net loss attributable to FuelCell Energy, Inc.
— —
— —
— —
(67,640) —
— —
7,128
3,326
282
3,238
(660)
20,218
(3,200)
(2,075)
—
—
—
—
—
—
—
—
—
—
—
—
— (47,334)
—
—
—
—
—
—
—
—
12
—
—
—
—
—
—
—
—
—
—
—
(83)
—
—
—
—
—
—
—
—
—
—
83
—
— 7,129
— 3,326
—
282
— 3,238
—
(660)
— 20,220
— (3,200)
— (2,075)
12
—
—
—
— (47,334)
Balance, October 31, 2018
95,672,237 $10 $1,073,454 $(990,867)
$(403) $(363)
$363
$ — $ 82,194
See accompanying notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except 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
Deferred income taxes
Foreign currency transaction losses (gains)
Other non-cash transactions
Decrease (increase) in operating assets:
Accounts receivable
Inventories
Other assets
(Decrease) increase in operating liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Net cash provided by (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
Net proceeds from issuance of Series D preferred shares
Proceeds from common stock issuance and warrant
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
2018
2017
2016
$ (47,334)
$ (53,903)
$ (51,208)
3,238
60
8,648
5,957
(3,035)
(223)
760
48,731
31,714
(2,264)
(19,846)
(11,345)
1,261
16,322
(10,028)
(41,232)
—
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)
—
(51,260)
(31,444)
(41,452)
(16,616)
13,091
(352)
—
—
25,317
10,455
(4,178)
—
(8,571)
17,877
(206)
—
27,866
—
39,396
(4,156)
86
(30,452)
85,935
(1,758)
(3)
—
—
70,929
(4,170)
177
27,717
72,292
120,658
12
129
(7,209)
(30,868)
87,448
118,316
(35)
32,576
85,740
Cash, cash equivalents, and restricted cash—end of year
$ 80,239
$ 87,448
$118,316
See accompanying notes to consolidated financial statements.
43
FuelCell Energy Annual Report 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 31, 2018, 2017 and 2016
Note 1. Nature of Business, Basis of Presentation and
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.
Liquidity
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. To grow our generation portfolio,
the Company will invest in developing and building turn-
key fuel cell projects which will be owned by the Company
and classified as project assets on the balance sheet. This
strategy requires liquidity and is expected to continue to have
increasing liquidity requirements as project sizes increase.
We may commence building project assets upon the award
of a project or 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 operation 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 facilities or other
financing arrangements. Delays in construction progress or
in completing financing or the sale of our projects may impact
our liquidity.
We expect to maintain appropriate cash and debt levels based
upon our expected cash requirements for operations, capital
expenditures, construction of project assets and principal,
interest and dividend payments. In the future, we may also
engage in additional debt or equity financings, including project
specific debt financings under existing and new facilities. We
believe that, when necessary, we will have adequate access
to the capital markets, although the timing, size and terms of
any financing will depend on multiple factors, including market
conditions, future order flow and the need to adjust production
capacity. There can be no assurance that we will be able to
raise additional capital at the times, in the amounts, or on the
terms required for the implementation of our business plan
and strategy. In addition, our capital-intensive business model
of building generation assets increases the risk that we will
be unable to successfully implement our plans, particularly
if we do not raise additional capital in the amounts required.
If we are unable to raise additional capital at the times or
in the amounts required, or on terms favorable to us, our
growth potential may be adversely affected and we may
have to modify our plans which could include restructuring,
workforce reductions, change in production volumes and
asset or intellectual property sales. If these strategies are not
successful, we may be required to delay, reduce and/or cease
our operations.
The Company believes that its current working capital and
cash anticipated to be generated from future operations, as
well as recent debt incurred and cash received under our
project financing facilities and remaining availability under
these project financing facilities (See Notes 12 and 22) and
proceeds from future equity offerings, will provide sufficient
liquidity to fund operations for at least one year after the
date that the financial statements are issued. The Company
has an At The Market Issuance Sales Agreement in place
(see Note 13) which could supplement proceeds through equity
offerings dependent upon market conditions.
Significant Accounting Policies
Cash and Cash Equivalents and Restricted Cash
All cash equivalents consist of investments in money market
funds with original maturities of three months or less at date of
acquisition. We place our temporary cash investments with high
credit quality financial institutions. As of October 31, 2018, $40.9
million of cash and cash equivalents was pledged as collateral
for letters of credit and for certain banking requirements and
contractual commitments, compared to $38.2 million pledged
as of October 31, 2017. The restricted cash balance includes
$15.0 million as of October 31, 2018 and 2017, 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, 2018 and 2017, we had outstanding letters of credit
of $3.8 million and $2.9 million, respectively, which expire on
various dates through August 2025. Cash and cash equivalents
as of October 31, 2018 and 2017 also included $3.0 thousand and
$3.0 million, respectively, of cash advanced by POSCO Energy
Co., Ltd. (“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
44
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 excess quantities or obsolescence. 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, capitalized costs for fuel cell projects which are the
subject of a sale-leaseback transaction with PNC, projects in
development for which we expect to secure long-term contracts
or projects retained by the Company under a merchant model.
Certain project assets currently in development are actively
being marketed and may be sold, although we may choose to
retain ownership of one or more of these projects after they
become operational if we determine it would be of economic
and strategic benefit. Project 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.
There were no short-term project assets as of October 31, 2018
or 2017.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less
accumulated depreciation which is recorded based 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.
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, 2018 and 2017. The goodwill and IPR&D
asset are both held by the Company’s Versa Power Systems,
Inc. (“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. The Company recorded a $0.5 million
impairment of a project asset for the year ended October 31,
2018 due to the termination of a project. No impairments were
recorded for the years ended October 31, 2017 and 2016.
Revenue Recognition
We earn revenue from (i) the sale and installation of fuel cell
power plants including site engineering and construction
services, (ii) the sale of completed project assets, (iii) equipment
only sales (modules, balance of plants (“BOP”), component part
kits and spare parts to customers), (iv) performance under long-
term service agreements, (v) the sale of electricity and other
value streams under power purchase agreements (“PPAs”)
and utility tariffs from project assets retained by the Company,
(vi) license fees and royalty income from manufacturing and
technology transfer agreements, and (vii) government and
customer-sponsored Advanced Technologies projects.
As further clarification, revenue elements are classified
as follows:
Product. Includes the sale of completed project assets,
sale and installation of fuel cell power plants including 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.
Our revenue is generated from customers located throughout
the U.S., Europe and Asia and from agencies of the
U.S. government.
45
FuelCell Energy Annual Report 2018
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. The Company
was able to participate on this Korean project pursuant to a
Memorandum of Understanding (“MOU”) with POSCO Energy
that permitted the Company access to the Asian fuel cell
market, including the sale of SureSource solutions in South
Korea. Effective July 15, 2018, the MOU was terminated. On
August 29, 2017, the Company entered into a contract with HYD
pursuant to which the Company provided equipment to HYD
for this 20 MW fuel cell project as well as ancillary services
including plant commissioning. Construction began in the fall of
2017 and the installation became operational in the summer of
2018. The value of the contract to the Company was $70 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
represented 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 occurred upon completion of shipping
and customer acceptance of each piece of equipment and the
proportional performance method was used for the ancillary
services provided. Approximately $39 million of revenue was
recognized in the fourth quarter of fiscal 2017 related to this
contract and approximately $31 million was recognized during
fiscal year 2018.
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 recognize license fees and other revenue over the term
of the associated agreement. The Company records 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 manufacturing and technology
transfer agreements we entered with POSCO Energy collectively
provide them with the rights to manufacture SureSource power
plants in South Korea and exclusive rights to sell in Asia.
Under PPAs and project assets retained by the Company,
revenue from the sale of electricity and other value
streams are recognized as electricity is provided to customers.
These revenues are classified as 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
The Company, through a wholly-owned subsidiary, has entered
into sale-leaseback transactions for commissioned project
assets 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 the projects being considered integral equipment, sale
accounting is precluded by ASC 840-40, “Leases.”
Accordingly, the Company uses the financing method to account
for these transactions.
46
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. 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. The
sale-leaseback arrangements with PNC allow the Company to
repurchase the project assets at fair market value.
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, 2018 and 2017, the
warranty accrual, which is classified in accrued liabilities on
the Consolidated Balance Sheets, totaled $0.1 million and $0.3
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 for service
agreements of $1.1 million and $2.2 million as of October 31,
2018 and 2017, respectively.
The Company records loss accruals for service agreements
when the estimated cost of future module exchanges and
maintenance and monitoring activities exceeds the remaining
unrecognized 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 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, 2018, our loss accruals
on service agreements totaled $0.9 million compared to $1.1
million as of October 31, 2017.
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
maintained. As of October 31, 2018, the Company had
$1.2 million 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 (the “CTTA”) provides POSCO Energy with the technology
to manufacture SureSource modules 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, which is fifteen years.
The Company is entitled to receive 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 associated with the Company’s
technology. Additionally, under the STTA, license fee income
aggregating $10.0 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. 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 Asia.
In April 2014, the Company entered into an Integrated Global
Supply Chain Plan Agreement (“IGSCP”) with POSCO Energy.
FuelCell Energy provides procurement services for POSCO
Energy and receives fixed compensation for services rendered.
The Company recorded revenue of $2.1 million, $2.7 million and
$6.2 million for the years ended October 31, 2018, 2017 and 2016,
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. Costs incurred for customer-sponsored
projects are recorded as cost of 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, 2018, 2017 and 2016, our top customers accounted
for 84%, 78% and 75%, respectively, of our total annual
consolidated revenue.
47
FuelCell Energy Annual Report 2018
The percent of consolidated revenues from each customer for
the years ended October 31, 2018, 2017 and 2016, respectively,
are presented below.
Hanyang Industrial
Development Co., LTD
Clearway Energy (formerly
NRG Yield, Inc.)
2018
2017
2016
35%
40%
—%
15%
—%
—%
AEP Onsite Partners, LLC
10%
—%
—%
U.S. Department of Energy
ExxonMobil
POSCO Energy
Dominion Bridgeport Fuel Cell, LLC
Avangrid Holdings (through its
various subsidiaries)
Total
8%
6%
5%
3%
9%
9%
6%
8%
3%
48%
11%
6%
2%
3%
84%
78%
10%
75%
Derivatives
We do not use derivatives for speculative purposes and, through
the end of fiscal year 2018, we 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 Other income, net on the
Consolidated Statements of Operations. Refer to Note 14 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 FCE Korea
Ltd., FCES GmbH and Versa Power Systems Ltd. results in
translation gains or losses, which are recorded in accumulated
other comprehensive loss within stockholders’ equity.
Our Canadian subsidiary, FCE FuelCell Energy, Ltd., is financially
and operationally integrated and the functional currency is the
U.S. dollar. We are also subject to foreign currency transaction
gains and losses as certain transactions are denominated in
foreign currencies. We recognized foreign currency transaction
gains (losses) of $0.3 million, $(0.7) million and $0.3 million for
the years ended October 31, 2018, 2017 and 2016, respectively.
These amounts have been classified as other income, net in the
consolidated statements of operations.
Recently Adopted Accounting Guidance
In March 2016, the Financial Accounting Standards Board
(the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-09, “Compensation—Stock Compensation” (Topic
718): Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”). ASU 2016-09 is effective for fiscal
years beginning after December 15, 2016, including interim
periods within those fiscal years. The adoption of ASU 2016-09
resulted in no net impact to equity as the additional deferred
tax asset recorded for previously unrecognized net operating
loss carryforwards of $7.8 million was offset by a valuation
allowance of the same amount.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic
330)—Simplifying the Measurement of Inventory.” This guidance
changes the measurement principle for inventory from the
lower of cost or market to the lower of cost and net realizable
value. Net realizable value is defined as estimated selling prices
in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation. This guidance
is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2016. The Company
adopted this standard in fiscal year 2018. The adoption of this
standard did not have an 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 ASU 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 Company will adopt
this ASU in the first quarter of fiscal year 2019. 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 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. The Company has decided
to use the modified retrospective transition method. The
adoption of this ASU is expected to result in a cumulative effect
adjustment increasing Accumulated deficit by approximately
between $7.0 million and $10.0 million on November 1, 2018,
which is the result of the change in timing of revenue recognition
for the Company’s service agreements and license revenue.
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.
48
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, generally on a 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 (which, for the Company, will be the first quarter
of fiscal year 2020). Early adoption is permitted. The Company
has both operating and capital leases (refer to Note 18.
“Commitments and Contingencies”) 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.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles-Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment” which provides for a one-step
quantitative impairment test, whereby a goodwill impairment
loss will be measured as the excess of a reporting unit’s
carrying amount over its fair value (not to exceed the total
goodwill allocated to that reporting unit). It eliminates Step 2
of the current two-step goodwill impairment test, under
which a goodwill impairment loss is measured by comparing
the implied fair value of a reporting unit’s goodwill with the
carrying amount of that goodwill. The standard is effective, on
a prospective basis for interim and annual periods beginning
after December 15, 2019, with early adoption permitted.
We are currently assessing the impact the standard will have
on the Company, but it is not expected to have a material
impact on the Company’s consolidated financial statements.
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 was 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 was temporary and will be reevaluated as order flow
dictates. Restructuring expense relating to eliminated
positions of $1.4 million was recorded and paid for the year
ended October 31, 2017, which has been presented on a
separate caption in the Consolidated Statements of Operations.
There were no restructuring activities during the fiscal years
ended October 31, 2018 and 2016.
Note 3. Accounts Receivable, Net
Accounts receivable as of October 31, 2018 and 2017 consisted
of the following (in thousands):
Commercial customers:
Amount billed
Unbilled receivables(1)
Advanced Technologies
(including U.S. Government(2)):
Amount billed
Unbilled receivables
Accounts receivable, net
2018
2017
$ 7,415
10,632
18,047
$ 41,073
18,162
59,235
1,865
3,127
4,992
$23,039
1,934
7,352
9,286
$ 68,521
(1) Additional long-term unbilled receivables of $9.4 million and
$12.8 million are included within “Other Assets” as of October 31, 2018
and 2017, respectively.
(2) Total U.S. government accounts receivable, including unbilled receivables,
outstanding as of October 31, 2018 and 2017 were $2.3 million and
$3.2 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 revenues
recorded, typically in the subsequent month. Some Advanced
Technologies contracts are billed based on contractual
milestones or costs incurred. Unbilled receivables relate to
revenue recognized on customer contracts that have not been
billed. Accounts receivable are presented net of an allowance
for doubtful accounts of $0.2 million and $0.1 million as of
October 31, 2018 and 2017, 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 receivables) included amounts due from POSCO Energy
of $1.6 million and $6.2 million as of October 31, 2018 and 2017,
respectively, and amounts due from NRG and NRG Yield of
$2.2 million and $0.1 million as of October 31, 2018 and 2017,
respectively.
Note 4. Inventories
Inventories as of October 31, 2018 and 2017 consisted of the
following (in thousands):
Raw materials
Work-in-process (1)
Inventories
2018
2017
$24,467
$ 20,065
29,108
54,431
$53,575
$ 74,496
(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, 2018 and 2017
is $19.0 million and $46.3 million, respectively, of completed standard
components.
49
FuelCell Energy Annual Report 2018
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.
Note 5. Project Assets
The carrying value of project assets as of October 31, 2018 and
2017 was $99.6 million and $73.0 million, respectively. Project
assets as of October 31, 2018 and 2017 included five completed,
commissioned installations generating power with respect to
which we have a power purchase agreement (“PPA”) with the
end-user of power and site host with an aggregate value of
$28.6 million and $32.1 million as of October 31, 2018 and 2017,
respectively. Certain of these assets are the subject of sale-
leaseback arrangements with PNC Energy Capital, LLC (“PNC”),
which are recorded under the financing method.
The project assets balance as of October 31, 2018 and 2017
also includes assets aggregating $71.0 million and $40.9
million, respectively, which are being developed and constructed
by the Company under existing PPAs and have not been placed
in service.
On April 5, 2018, the Company sold a project asset to NRG
Yield (now known as Clearway Energy) which resulted in the
recognition of product revenue of $10.8 million. The total
reduction in project assets relating to the sale to NRG Yield was
$9.8 million which was recorded as product cost of revenues.
On August 28, 2018, the Company sold a project asset to AEP
OnSite Partners, LLC, and American Electric Power Company,
Inc. (NYSE: AEP) which resulted in the recognition of product
revenue of $9.2 million. The total reduction in project assets
relating to the sale was $8.0 million, which was recorded as
product cost of revenues.
The Company also recorded a $0.5 million impairment of a
project asset during the year ended October 31, 2018 due to
the termination of the project. The impairment was recorded
as generation cost of revenues.
Depreciation expense for project assets was $4.1 million, $4.1
million and $0.7 million for the years ended October 31, 2018,
2017 and 2016, respectively.
Project construction costs incurred for 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 12 for more information).
Note 6. Property, Plant and Equipment
Property, plant and equipment as of October 31, 2018 and 2017
consisted of the following (in thousands):
2018
2017
Estimated
Useful Life
Land
$
524
$
524
—
Building and improvements
19,674
9,331 10-26 years
Machinery, equipment
and software
93,356
91,680
3-8 years
Furniture and fixtures
3,958
3,576
10 years
Construction in progress
17,711
23,163
—
Accumulated
depreciation
Property, plant and
equipment, net
135,223
128,274
(87,019)
(84,709)
$ 48,204
$ 43,565
The Company 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, 2018.
Depreciation expense for property, plant and equipment was
$4.6 million, $4.4 million and $4.3 million for the years ended
October 31, 2018, 2017 and 2016, respectively.
Note 7. Goodwill and Intangible Assets
As of October 31, 2018 and 2017, the Company had goodwill
of $4.1 million and intangible assets of $9.6 million that was
recorded in connection 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, 2018. The Company performed a qualitative assessment
for fiscal year 2018 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, 2018 and 2017 consisted
of the following (in thousands):
2018
2017
Advance payments to vendors (1)
$2,696
$ 1,035
Deferred finance costs (2)
Prepaid expenses and other (3)
97
5,799
129
5,407
Other current assets
$ 8,592
$ 6,571
(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) Primarily relates to other prepaid vendor expenses including insurance,
rent and lease payments.
50
Note 9. Other Assets
Other assets as of October 31, 2018 and 2017 consisted of the
following (in thousands):
2018
2017
Long-term unbilled receivables (1)
$ 9,385
$ 12,806
Deferred finance costs (2)
Long-term stack residual value (3)
Other (4)
Other assets
—
1,206
2,914
97
987
2,627
$13,505
$ 16,517
(1) Represents unbilled receivables 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.
(2) 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.
(3) 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.
(4) The Company entered into an agreement with one of its customers on
June 29, 2016 which includes payments for the purchase of the
customer’s power plants at the end of the term of the agreement. The
amounts are payable in installments over the term of the agreement
and the total paid as of October 31, 2018 and 2017 was $2.0 million and
$1.6 million, respectively. Also included within “Other” are long-term
security deposits.
Note 10. Accounts Payable
Accounts payable as of October 31, 2018 and 2017 was
$22.6 million and $42.6 million, respectively. Included in the
balance were amounts due to POSCO Energy of $7.2 million
and $32.7 million as of October 31, 2018 and 2017, respectively,
for the purchase of inventory.
Note 11. Accrued Liabilities
Accrued liabilities as of October 31, 2018 and 2017 consisted of
the following (in thousands):
Accrued payroll and employee benefits
$ 2,550
$ 5,315
2018
2017
Accrued contract loss
Accrued product warranty costs (1)
Accrued material purchases (2)
Accrued service agreement costs (3)
Contractual milestone billings for inventory (4)
—
147
—
2,029
—
Accrued legal, taxes, professional and other
2,906
37
348
2,396
3,319
4,440
2,526
Accrued liabilities
$ 7,632
$18,381
(3) Activity in service agreement costs represents a decrease in loss accruals
on service contracts of $0.2 million from $1.1 million as of October 31,
2017 to $0.9 million as of October 31, 2018. The accruals for performance
guarantees also decreased from $2.2 million as of October 31, 2017 to
$1.1 million as of October 31, 2018 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) Amount represented contractual milestone billings for inventory that
was provided to POSCO Energy under a transaction that did not result
in revenue recognition.
Note 12. Debt
Debt as of October 31, 2018 and 2017 consisted of the following
(in thousands):
2018
2017
Hercules Loan and Security Agreement
$ 25,343
$ 21,468
State of Connecticut Loan
10,000
10,000
Finance obligation for sale-leaseback
transactions
46,062
46,937
Connecticut Green Bank Note
Connecticut Development Authority Note
New Britain Renewable Energy
Term Loan
Capitalized lease obligations
Deferred finance costs
Total debt
6,052
284
1,107
341
6,052
2,349
1,697
632
(1,311)
(1,344)
$ 87,878
$ 87,791
Current portion of long-term debt
(17,596)
(28,281)
Long-term debt
$ 70,282
$ 59,510
Aggregate annual principal payments under our loan
agreements and capital lease obligations for the years
subsequent to October 31, 2018 are as follows (in thousands):
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter(1)
$ 17,908
17,174
4,064
4,089
4,640
16,481
$64,356
(1) The annual principal payments included above only include sale-
leaseback payments whereas the difference between debt outstanding as
of October 31, 2018 and the annual principal payments represent accreted
interest and amounts included in the finance obligation that exceed
required principal payments.
(1) Activity in the accrued product warranty costs for the years ended
October 31, 2018 and 2017 included additions for estimates of future
warranty obligations of $0.4 million and $0.6 million, respectively, on
contracts in the warranty period and reductions related to actual warranty
spend of $0.6 million and $0.8 million, respectively, as contracts progress
through the warranty period or are beyond the warranty period.
(2) The Company acts as a procurement agent for POSCO 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 are
recorded as “Accounts payable.”
In April 2016, the Company entered into a loan and security
agreement (the “Hercules Agreement”) with Hercules Capital,
Inc. (“Hercules”) for an aggregate principal amount of up
to $25.0 million, subject to certain terms and conditions, of
which the Company drew down $20.0 million during fiscal year
2016. The loan was a 30 month secured facility. The term loan
interest was 9.75 percent per annum as of October 31, 2017
and increased to 10.0 percent per annum as of January 31,
2018 as a result of the increase in the prime rate. In addition to
interest, which is paid on a monthly basis, principal payments
51
FuelCell Energy Annual Report 2018
commenced on November 1, 2017 in equal monthly installments.
The loan balance and all accrued and unpaid interest was due
and payable by October 1, 2018. Under the terms of the Hercules
Agreement, there was an end of term charge of $1.7 million
due on October 31, 2018, which was being accreted over the 30
month term using the effective interest rate method.
The Hercules Agreement was subsequently amended on
September 5, 2017, October 27, 2017, March 28, 2018, August 29,
2018 and December 19, 2018. The March 28, 2018 amendment
(the “March Amendment”) allowed the Company to draw a term
loan advance of $13.1 million and extended the maturity date.
The aggregate amount outstanding as of October 31, 2018, which
includes the amount outstanding under the original Hercules
Agreement of $11.9 million and the term loan advance under the
March Amendment, was $25.0 million. The term loan maturity
date is April 1, 2020. Payments for the aggregate amount
outstanding are interest-only for the initial 12-month period,
followed by equal monthly installments of principal and interest
until the term loan maturity date. The term loan interest rate
was 10.15% per annum and increased to 10.40% per annum
as of June 14, 2018 and increased to 10.65% as of September
2018. The term loan interest rate is the greater of either
(i) 9.90% plus the prime rate minus 4.50%, and (ii) 9.90%. The
initial end of term charge of $1.7 million was paid on October 1,
2018. An additional end of term charge of $0.9 million will be
due on April 1, 2020, subject to extension upon the Company’s
achievement of certain performance milestones. The additional
end of term charge is being accreted over a 30-month term.
On August 29, 2018, in connection with the issuance of the
Series D Preferred Stock (see Note 14), the Company and
Hercules (and various affiliated entities) entered into the fourth
amendment to the Hercules Agreement to (i) modify the definition
of “Permitted Indebtedness” to include certain redemption and/
or conversion rights as set forth in the Series D Certificate of
Designation, (ii) permit the Company, so long as no event of
default has occurred and is continuing, to repurchase or redeem
stock in cash pursuant to the redemption and/or conversion
rights set forth in the Series D Certificate of Designation;
provided that, the Company must make any such repurchase,
redemption or payment in common stock and not in cash or
other consideration unless prohibited pursuant to the terms of
the Series D Certificate of Designation or otherwise prohibited
by applicable law, (iii) permit the Company, so long as no event
of default has occurred and is continuing, to pay cash dividends
under the Series D Preferred Shares as required in the Series D
Certificate of Designation; provided that, the Company must
pay such dividends in common stock and not in cash or other
consideration unless prohibited pursuant to the terms of the
Series D Certificate of Designation or otherwise prohibited by
applicable law, and (iv) add a new event of default, which occurs
upon the delivery of a Triggering Event Redemption Notice
(as defined under the Series D Certificate of Designation) under
the Series D Certificate of Designation.
As collateral for obligations under Hercules Agreement, the
Company granted Hercules a security interest in FuelCell
Energy, Inc.’s existing and thereafter-acquired assets except
for intellectual property and certain other excluded assets.
The collateral does not include assets held by FuelCell Energy
Finance, LLC (“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 (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. The Hercules Agreement, as
amended, contains customary representations and warranties,
affirmative and negative covenants, and events of default that
entitle Hercules to cause our indebtedness under the agreement
to become immediately due and payable.
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, principal payments were deferred for
the first four years and will begin in November 2019. Monthly
interest payments at a fixed rate of 2.0 percent per annum
began 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 job creation target
dates by two years to October 28, 2019. Under the Assistance
Agreement, as amended, the Company targeted employment
of 703 Connecticut employees by October 2019. In connection
with this amendment to the Assistance Agreement, in July 2018,
the Company announced an increase in its annual production
rate and committed to hire over 100 employees. As of October 31,
2018, the Company had 452 Connecticut employees. The
Company cannot currently predict whether it will meet its target
of employing 703 Connecticut employees by October 2019 or
whether the time period for meeting this target will be extended.
If the Company does not meet this target in the required time
period, principal under the promissory note will be paid at
an annual rate of $14.0 thousand for each employee under
the 703 employee target.
In 2015, the Company entered into the first of a series of
agreements with PNC, whereby the Company’s project finance
subsidiaries entered 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 financing obligation balance as of October 31,
2018 was $46.1 million and the decrease from the October 31,
2017 balance of $46.9 million includes lease payments offset
by the recognition of interest expense.
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
52
an interest rate of 5.0 percent per annum. 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 that was used to finance equipment
purchases associated with our prior manufacturing capacity
expansion. The interest rate is 5.0 percent per annum and the
loan is collateralized by the assets procured under this loan as
well as $4.0 million of additional machinery and equipment.
The original repayment terms required monthly interest and
principal payments through May 2018. However, the repayment
terms for the loan agreement with the Connecticut Development
Authority were modified in April 2018, such that the remaining
balance and interest will be paid on a monthly basis through
December 2018.
In November 2016, we assumed debt with Webster Bank in
the amount of $2.3 million as a part of an asset acquisition
transaction. The term loan interest rate is 5.0 percent per annum
and payments, which commenced in January 2017, are due on a
quarterly basis. The balance outstanding as of October 31, 2018
and 2017 was $1.1 million and $1.7 million, respectively.
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 Agreement, as amended, which is being
amortized over the 30 month life of the loan.
In July 2014, the Company, through its wholly-owned subsidiary,
FuelCell Finance, entered into a Loan Agreement with NRG
(the “Loan Agreement”). Pursuant to the Loan Agreement,
NRG has extended a $40.0 million Loan Facility to FuelCell
Finance for the purpose of accelerating project development by
the Company and its subsidiaries. Under the Loan Agreement,
FuelCell Finance and its subsidiaries were permitted to draw
on the Loan Facility to finance the construction of projects
through the commercial operating date of the power plants.
Additionally, FuelCell Finance had the option to continue the
financing term for each project after the commercial operating
date for a minimum term of five years per project. The interest
rate is 8.5 percent per annum for construction-period financing
and 8.0 percent per annum 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. There were
no drawdowns or outstanding balances on the Loan Agreement
as of October 31, 2018 and 2017. The Loan Facility expires
on March 31, 2019, therefore, any draws under the facility
would be considered short-term debt. Refer to Note 22,
Subsequent Events, for information on a drawdown subsequent
to October 31, 2018.
Note 13. Stockholders’ Equity
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.
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.
At Market Issuance Sales Agreement and
Other Common Stock Sales
On June 13, 2018, the Company entered into an At Market
Issuance Sales Agreement (the “Sales Agreement”) with B. Riley
FBR, Inc. and Oppenheimer & Co. Inc. (together, the “Agents”) to
create an at the market equity program under which the Company
from time to time may offer and sell shares of its common stock
having an aggregate offering price of up to $50,000,000 through
the Agents. Under the Sales Agreement, the Agent making the
sales is entitled to a commission in an amount equal to 3.0%
of the gross proceeds from such sales. During the year ended
October 31, 2018, the Company sold 5.7 million shares of the
Company’s common stock at prevailing market prices under the
Sales Agreement and received gross proceeds of $8.0 million and
paid $0.9 million of fees and commissions.
During the years ended October 31, 2017 and 2016, the Company
sold 7.2 million shares and 6.0 million shares, respectively,
of the Company’s common stock at prevailing market prices
through periodic offerings/sales 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.
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 11,536 shares of common stock were issued during fiscal year
2018 upon the exercise of Series C warrants and the Company
received total proceeds of $0.02 million. The Series D warrants
had an exercise price of $1.28 per share and a term of one
year. A total of 2,584,174 shares of common stock were issued
during fiscal year 2018 upon the exercise of Series D warrants
and the Company received total proceeds of $3.3 million. As of
October 31, 2018, all Series D warrants have been exercised.
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, 2018, 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 were
immediately exercisable. They had an exercise price of $0.0001
53
FuelCell Energy Annual Report 2018
per share and were to 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.
The following table outlines the warrant activity during the year
ended October 31, 2018:
Series A
Warrants
Series C
Warrants
Series D
Warrants
Balance as of
October 31, 2017
7,680,000
11,580,900
2,584,174
Warrants exercised
Warrants expired
Balance as of
—
—
October 31, 2018
7,680,000
11,569,364
(11,536)
(2,584,174)
—
—
—
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.
Note 14. 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 D Convertible Preferred Stock (referred
to herein as Series D Preferred Stock), Series C Convertible
Preferred Stock (referred to herein as Series C Preferred Stock)
and 5% Series B Cumulative Convertible Perpetual Preferred
Stock (referred to herein as Series B Preferred Stock).
Series D Preferred Stock
On August 27, 2018, the Company entered into an underwriting
agreement (the “Underwriting Agreement”) with Oppenheimer &
Co. Inc. (the “Underwriter”), relating to an underwritten offering
(the “Offering”) of the Company’s Series D Preferred Stock with a
par value of $0.01 per share. Subject to the terms and conditions
contained in the Underwriting Agreement, the Underwriter
agreed to purchase, and the Company agreed to sell, 30,680
Series D Preferred Shares, initially convertible into 22,231,884
shares of the Company’s common stock (without regard to any
limitation on conversion set forth in the Series D Certificate of
Designation) at an initial conversion price of $1.38 per share
(“Series D Conversion Price”), subject to certain adjustments.
The Offering closed on August 29, 2018. The net proceeds to the
Company from the sale of the Series D Preferred Stock, after
deducting the underwriting discounts and commissions and the
offering expenses payable by the Company, were approximately
$25.3 million.
In conjunction with the closing of the Offering, on August 29,
2018, the Company filed the Series D Certificate of Designation
with the Secretary of State of the State of Delaware, designating
30,680 shares of the Company’s preferred stock as Series D
Convertible Preferred Stock and establishing the rights,
preferences, privileges, qualifications, restrictions, and limitations
relating to the Series D Preferred Stock, as described below.
54
Based on review of pertinent accounting literature including
Accounting Standards Codification (“ASC”) 470 —Debt, ASC 480—
Distinguishing Liabilities from Equity and ASC 815—Derivative
and Hedging, the Series D Preferred Shares are classified
outside of permanent equity on the Consolidated Balance Sheets
and were recorded at fair value on the issuance date (proceeds
from the issuance, net of direct issuance cost). An assessment
of the probability of the exercise of the potential redemption
features in the Series D Certificate of Designation for the
Series D Preferred Stock is performed at each reporting date to
determine whether any changes in classification are required.
As discussed below, the Company has not obtained stockholder
approval to issue a number of shares of common stock equal to
20% or more of the Company’s outstanding voting stock as of the
date of issuance of the Series D Preferred Stock and therefore is
accreting as part of the stated value the estimated value of the
potential common stock shortfall if stockholder approval is not
obtained. As of October 31, 2018, the Company determined that
none of the other contingent redemption features were probable.
A description of certain terms and provisions of the Series D
Preferred Shares is as follows:
Conversion Right. The Series D Preferred Shares are convertible
into shares of the Company’s common stock, subject to the
requirements of Nasdaq Listing Rule 5635(d), and the beneficial
ownership limitation provided in the Series D Certificate of
Designation, at a conversion price equal to $1.38 per share of
common stock, subject to adjustment as provided in the Series D
Certificate of Designation, including adjustments if the Company
sells shares of common stock or equity securities convertible
into or exercisable for shares of common stock, at prices below
$1.38 per share, in certain types of transactions. The holders
are prohibited from converting Series D Preferred Shares into
shares of common stock if, as a result of such conversion,
such holder, together with its affiliates, would own more than
4.99% 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. Additionally, prior to receiving stockholder
approval of the issuance of more than 19.9% of the Company’s
outstanding common stock prior to the Offering, the holders
will be prohibited from converting Series D Preferred Shares
into shares of common stock if such conversion would cause
the Company to issue pursuant to the terms of the Series D
Preferred Stock a number of shares in excess of the maximum
number of shares permitted to be issued thereunder without
breaching the Company’s obligations under the rules or
regulations of Nasdaq.
The Series D Conversion Price is subject to adjustment
under certain circumstances in accordance with the Series D
Certificate of Designation, including the following:
• The conversion price may be proportionately reduced in the
event of a subdivision of the Company’s common stock into a
greater number of shares or proportionately increased in the
event of a combination of the Company’s common stock into a
smaller number of shares.
• In the event that the Company in any manner issues or
sells or enters into any agreement to issue or sell Variable
Price Securities (as defined in the Series D Certificate of
Designation), which generally includes any common stock,
options or convertible securities that are issuable at a price
which varies or may vary with the market price of the shares
of common stock, including by way of one or more reset(s) to
a fixed price, but excluding customary anti-dilution provisions
(each of the formulations for such variable price being
referred to as, the “Variable Price”), each holder of Series D
Preferred Shares will have the right (in its sole discretion) to
substitute the Variable Price for the Conversion Price upon
conversion of the Series D Preferred Shares. Sales of common
stock pursuant to the Company’s At Market Issuance Sales
Agreement with B. Riley FBR, Inc. and Oppenheimer & Co.,
Inc. will be deemed Variable Price Securities with a Variable
Price equal to the lowest price per share at which common
stock is sold pursuant to that agreement. Under the Series D
Certificate of Designation, the term “options” means any
rights, warrants or options to subscribe for or purchase
shares of common stock or convertible securities, and the
term “convertible securities” means any stock or other
security (other than options) that is at any time and under
any circumstances, directly or indirectly, convertible into,
exercisable or exchangeable for, or which otherwise entitles
the holder thereof to acquire, any shares of common stock.
• At any time any Series D Preferred Shares remain outstanding,
the Company may reduce the then current conversion price to
any amount for any period of time deemed appropriate by the
Company’s board of directors.
Conversion Upon a Triggering Event. Subject to the requirements
of Nasdaq Listing Rule 5635(d), and the beneficial ownership
limitations provided in the Series D Certificate of Designation,
in the event of a triggering event (as defined in the Series D
Certificate of Designation and summarized below), the Series D
Preferred Shares are convertible into shares of common stock at
a conversion price equal to the lower of the Series D Conversion
Price in effect on the Trading Day (as such term is defined in the
Series D Certificate of Designation) immediately preceding the
delivery of the conversion notice and 85% of the lowest VWAP of
the common stock on any of the five consecutive Trading Days
ending on the Trading Day immediately prior to delivery of the
applicable conversion notice. This conversion right commences
on the date of the triggering event and ends on the later of (i) the
date the triggering event is cured and (ii) ten Trading Days after
the Company delivers notice of the triggering event.
A triggering event (as defined in the Series D Certificate of
Designation) includes, without limitation:
• any failure to pay any amounts due to the holders of the
Series D Preferred Shares;
• the Company’s failure to timely deliver shares;
• the suspension of the Company’s common stock from trading
or failure to be trading or listed on The Nasdaq Global Market,
without obtaining a listing on another national securities
exchange, for a period of five consecutive Trading Days;
• subject to limited exceptions, the Company’s failure to keep
reserved for issuance 150% of the number of shares of
common stock issuable upon conversion of the outstanding
Series D Preferred Shares;
• certain bankruptcy events; and
• breaches of certain covenants that are not timely cured, where
a cure period is permitted.
Redemption. On December 1, 2018, and on the sixteenth day
and first day of each calendar month thereafter until March 1,
2020, subject to extension in certain circumstances (the
“Series D Maturity Date”), inclusive, the Company will redeem
the stated value of Series D Preferred Stock in thirty-one
equal installments of approximately $989,677 (each bimonthly
amount, a “Series D Installment Amount” and the date of each
such payment, a “Series D Installment Date”). The holders will
have the ability to defer installment payments, but not beyond
the Series D Maturity Date. In addition, during each period
commencing on the 11th trading day prior to a Series D
Installment Date and prior to the immediately subsequent
Series D Installment Date, the holders may elect to accelerate
the conversion of Series D 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 (a) in the aggregate, all the accelerations in
such installment period exceed the sum of three other Series D
Installment Amounts, or (b) the number of Series D Preferred
Shares subject to prior accelerations exceeds in the aggregate
twelve Series D Installment Amounts.
Subject to the requirements of Nasdaq Listing Rule 5635(d)
and certain other equity conditions set forth in the Series D
Certificate of Designation, the Company may elect to pay the
Series D Installment Amounts in cash or shares of common
stock or in a combination of cash and shares of common stock.
Series D Installment Amounts paid in shares will be that number
of shares of common stock equal to (a) the applicable Series D
Installment Amount, to be paid in common stock divided by (b)
the lesser of (i) the then existing conversion price, (ii) 87.5% of
the volume weighted average price (“VWAP”) of the common
stock on the Trading Day immediately prior to the applicable
Series D 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 Series D
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 Series D Installment Date.
If the Company elects or is required to pay a Series D Installment
Amount in whole or in part in cash, the amount paid will be equal
to 108% of the applicable Series D Installment Amount.
Redemption Upon a Triggering Event. In the event of a triggering
event (as defined in the Series D Certificate of Designation
and summarized above), the holders of Series D Preferred
Shares may require the Company to redeem such Series D
Preferred Shares in cash at a price equal to the greater of (a)
125% of the stated value of the Series D Preferred Shares being
redeemed plus accrued dividends, if any, and (b) the market
value of the number of shares issuable on conversion of the
Series D Preferred Shares, valued at the greatest closing sales
price during the period from the date immediately before the
triggering event through the date the Company makes the
redemption payment.
Redemption Upon a Change of Control. In the event of a change
of control, as defined in the Series D Certificate of Designation,
the holders of Series D Preferred Shares can force redemption
at a price equal to the greater of (a) the conversion amount to be
redeemed multiplied by 125%, (b) the product of (i) the conversion
amount being redeemed multiplied by (ii) the quotient determined
by dividing (A) the greatest closing sale price of the common stock
55
FuelCell Energy Annual Report 2018
on any Trading Day during the period commencing immediately
preceding the earlier to occur of (1) the consummation of the
applicable change of control and (2) the public announcement
of such change of control and ending on the date such holder
delivers the change of control redemption notice, by (B) the
conversion price then in effect and (c) the product of (i) the
conversion amount being redeemed multiplied by (ii) the quotient
determined by dividing (A) the aggregate value of the cash and
non-cash consideration per share of common stock being paid
to holders of common stock in the change of control transaction
by (B) the conversion price then in effect. Redemptions of the
Series D Preferred Shares required under the Series D Certificate
of Designation in connection with a change of control will have
priority over payments to all other stockholders of the Company
in connection with such change of control.
Dividends. Each holder of Series D Preferred Shares shall be
entitled to receive dividends (a) if no triggering event, as defined
in the Series D Certificate of Designation, has occurred and is
continuing when and as declared by the Company’s board of
directors, in its sole and absolute discretion or (b) 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 D Preferred Shares multiplied by
the stated value. The holders of Series D Preferred Shares also
have the right to participate in any dividend or other distribution
made to holders of common stock to the same extent as if they
had converted their Series D Preferred Shares.
Liquidation Preference. In the event of the liquidation,
dissolution, or winding up of the Company, prior to distribution
to holders of securities ranking junior to the Series D Preferred
Stock, holders of Series D 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 D Preferred Shares into common stock immediately prior
to the date of such payment.
Ranking. Shares of Series D Preferred Stock rank with respect
to dividend rights and rights upon the liquidation, winding up or
dissolution of the Company:
• senior to shares of the Company’s common stock;
• junior to the Company’s debt obligations;
• junior to the Company’s outstanding Series B Preferred Stock;
• pari passu to the Company’s outstanding Series C Preferred
Stock; and
• effectively junior to the Company’s subsidiaries’ (i) existing and
future liabilities and (ii) capital stock held by others.
Limited Voting Rights. The holders of Series D Preferred Shares
have no voting rights, except as required by law; provided,
however, that any amendment to the Company’s certificate of
incorporation or bylaws or the Series D Certificate of Designation
that adversely affects the powers, preferences and rights of the
Series D Preferred Stock requires the approval of the holders of a
majority of the Series D Preferred Shares then outstanding.
Participation Rights. Until August 29, 2019, the holders of the
Series D Preferred Shares have the right to receive notice of and
to participate in any offering, issuance or sale of equity or equity-
equivalent securities by the Company or its subsidiaries, other
56
than issuances under certain employee benefit plans, upon the
conversion of certain options or other convertible securities, or
pursuant to certain acquisitions or strategic transactions. Pursuant
to such participation rights, the Company must offer to issue
and sell to such holders at least 35% of the offered securities.
Nasdaq Marketplace Rule 5635(d). Pursuant to the requirements
of Nasdaq Listing Rule 5635(d), the Series D Preferred Shares
may not be converted or redeemed by payment of shares of the
Company’s common stock if such conversion or redemption
would cause the Company to issue a number of shares equal
to 20% or more of the Company’s outstanding voting stock as
of the date of the issuance of the Series D Preferred Shares,
until the Company’s stockholders approve such issuance. The
Company has agreed to file a proxy statement with the SEC for the
purpose of having the Company’s stockholders vote on a proposal
to approve such issuances and further agreed to hold such
stockholders’ meeting by no later than April 30, 2019.
Series C Preferred Stock
The Company issued an aggregate of 33,500 shares of its Series C
Preferred Stock, $0.01 par value and $1,000 stated value per
share, during the fiscal year ended October 31, 2017 for net
proceeds of $27.9 million. 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, 2018 and 2017,
there were 8,992 shares and 33,300 shares of Series C Preferred
Stock issued and outstanding, respectively, with a carrying value
of $7.5 million and $27.7 million, respectively.
During the fiscal year ended October 31, 2018, holders of the
Series C Preferred Stock converted 24,308 Series C Preferred
Shares into common shares through installment conversions
resulting in a reduction of $20.2 million to the carrying value
being recorded to equity. Installment conversions occurring
prior to August 27, 2018 in which the conversion price was below
the initial conversion price of $1.84 per share resulted in a
variable number of shares being issued to settle the installment
amount and were treated as a partial redemption of the Series
C Preferred Shares. In order to resolve different interpretations
of the provisions of the Series C Certificate of Designations that
govern adjustments to the conversion price in connection with
sales of common stock under the Company’s at-the-market
sales plan below the fixed conversion price and whether such
sales constitute sales of variable priced securities under the
Series C Certificate of Designations, the Company’s board of
directors agreed to reduce the conversion price of the Series
C Preferred Shares from $1.84 to $1.50 effective August 27,
2018 in exchange for a waiver of certain anti-dilution and price
adjustment rights under the Series C Certificate of Designations
for future at-the-market sales. Installment conversions
occurring between August 27, 2018 and October 31, 2018 in
which the installment conversion price was below the adjusted
conversion price of $1.50 per share resulted in a variable
number of shares being issued to settle the installment amount
and were treated as a partial redemption of the Series C
Preferred Shares. Installment conversions during the year
ended October 31, 2018 that were settled in a variable number
of shares and treated as partial redemptions resulted in deemed
dividends of $9.6 million. The deemed dividend represents the
difference between the fair value of the common shares issued
to settle the installment amounts and the carrying value of the
Series C Preferred Shares.
Based on review of pertinent accounting literature including
Accounting Standards Codification (“ASC”) 470—Debt, ASC 480—
Distinguishing Liabilities from Equity and ASC 815—Derivative
and Hedging, the Series C Preferred Shares are classified
outside of permanent equity on the Consolidated Balance Sheets
and were recorded at fair value on the issuance date (proceeds
from the issuance, net of direct issuance cost). An assessment
of the probability of the exercise of the potential redemption
features in the Series C Certificate of Designations for the
Series C Preferred Stock is performed at each reporting date to
determine whether any changes in classification are required.
As of October 31, 2018 and 2017, the Company determined that
none of the contingent redemption features were probable.
Series C Installment Amounts paid in shares will be that number
of shares of common stock equal to (a) the applicable Series C
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 Series C 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 Series C 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 Series C Installment Date.
A summary of certain terms of the Series C Preferred Stock follows.
Conversion Rights. As of October 31, 2018, the Series C
Preferred Shares were convertible into shares of common stock
subject to the beneficial ownership limitations provided in the
Series C Certificate of Designations, at a conversion price equal
to $1.50 per share. The conversion price is subject to adjustment
as provided in the Series C Certificate of Designations, including
adjustments if the Company sells shares of common stock or
equity securities convertible into or exercisable for shares of
common stock, at variable prices below the conversion price
then in effect. In the event of a triggering event, as defined in
the Series C Certificate of Designations, the Series C Preferred
Shares are convertible into shares of common stock at a
conversion price equal to the lower of the conversion price then
in effect and 85% of the lowest VWAP of the common stock of the
five trading days 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.
Installment Payments. 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 “Series C Maturity Date”), inclusive, the
Company will redeem the stated value of Series C Preferred
Shares in thirty-three equal installments of approximately
$1.0 million (each bimonthly amount, a “Series C Installment
Amount” and the date of each such payment, a “Series C
Installment Date”). The holders will have the ability to defer
installment payments, but not beyond the Series C Maturity
Date. In addition, during each period commencing on the 11th
trading day prior to a Series C Installment Date and prior to
the immediately subsequent Series C Installment Date, the
holders may elect to accelerate the conversion of Series C
Preferred Shares at the then applicable installment conversion
price, provided that the holders may not elect to effect any such
acceleration during such installment period if either (a) in the
aggregate, all the accelerations in such installment period
exceed the sum of three other Series C Installment Amounts,
or (b) the number of Series C Preferred Shares subject to
prior accelerations exceeds in the aggregate twelve Series C
Installment Amounts.
Subject to certain conditions as provided in the Series C
Certificate of Designations, the Company may elect to pay the
Series C Installment Amounts in cash or shares of common
stock or in a combination of cash and shares of common stock.
If the Company elects or is required to pay a Series C Installment
Amount in whole or in part in cash, the amount paid will be equal
to 108% of the applicable Series C Installment Amount.
Dividends. Each holder of the Series C Preferred Shares shall be
entitled to receive dividends (a) if no triggering event, as defined
in the Series C Certificate of Designations, has occurred and
is continuing when and as declared by the Company’s board of
directors, in its sole and absolute discretion or (b) 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 years 2017 or 2018.
Redemption. In the event of a triggering event, as defined in the
Series C Certificate of Designations, the holders of the Series C
Preferred Shares can force redemption at a price equal to the
greater of (a) the conversion amount to be redeemed multiplied
by 125% and (b) the product of (i) 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 (ii) 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.
Liquidation. 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.
Ranking and Voting Rights. Shares of Series C Preferred
Stock rank with respect to dividend rights and rights upon the
Company’s liquidation, winding up or dissolution:
• senior to shares of the Company’s common stock;
• junior to the Company’s debt obligations;
• junior to the Company’s outstanding Series B Preferred Stock;
• pari passu to the Company’s outstanding Series D Preferred
Stock (which was issued on August 29, 2018); and
• effectively junior to the Company’s subsidiaries’ (i) existing and
future liabilities and (ii) capital stock held by others.
57
FuelCell Energy Annual Report 2018
Liquidation — The holders of Series B Preferred Stock are
entitled to receive, in the event that the Company is 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
the Company’s 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 the Company’s
assets. As of October 31, 2018 and 2017, the Series B Preferred
Stock had a Liquidation Preference of $64.0 million.
Conversion Rights — Each share of Series B Preferred Stock
may be converted at any time, at the option of the holder,
into 7.0922 shares of the Company’s 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 in the Series B Certificate of Designation. The
conversion rate is not 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.
The Company may, at its option, cause shares of Series B
Preferred Stock to be automatically converted into that
number of shares of common stock that are issuable at the
then prevailing conversion rate. The Company may exercise its
conversion right only if the closing price of its common stock
exceeds 150% of the then prevailing conversion price ($141.00
per share as of October 31, 2018) for 20 trading days during any
consecutive 30 trading day period, as described in the Series B
Certificate of Designation.
If holders of Series B Preferred Stock elect to convert their
shares in connection with certain fundamental changes, as
defined in the Series B Certificate of Designation, the Company
will in certain circumstances increase the conversion rate
by a number of additional shares of common stock upon
conversion or, in lieu thereof, the Company may in certain
circumstances elect to adjust the conversion rate and related
conversion obligation so that shares of Series B Preferred
Stock are converted into shares of the acquiring or surviving
company, in each case as described in the Series B 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 — The Company does not have the option to redeem
the shares of Series B Preferred Stock. However, holders of the
Series B Preferred Stock can require the Company 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 described in the Series
B Certificate of Designation). A fundamental change will be
deemed to have occurred if any of the following occurs:
The holders of the Series C Preferred Shares have no voting
rights, except as required by law, provided, however, that any
amendment to the Company’s certificate of incorporation or
bylaws or the Series C Certificate of Designations 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.
Redeemable Series B Preferred Stock
The Company has 105,875 shares of Series B Preferred Stock
(Liquidation Preference $1,000.00 per share) authorized for
issuance. As of October 31, 2018 and 2017, there were 64,020
shares of Series B Preferred Stock issued and outstanding,
with a carrying value of $59.9 million. The shares of Series B
Preferred Stock and the shares of common stock issuable upon
conversion of the shares of Series B Preferred Stock are covered
by a registration rights agreement. The following is a summary
of certain provisions of the Series B Preferred Stock.
Ranking — Shares of Series B Preferred Stock rank with respect
to dividend rights and rights upon the Company’s liquidation,
winding up or dissolution:
• senior to shares of the Company’s common stock;
• senior to shares of the Company’s Series C Preferred Stock;
• senior to shares of the Company’s Series D Preferred Stock;
• junior to the Company’s debt obligations; and
• effectively junior to the Company’s 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. Dividends accumulate and are cumulative from the date of
original issuance. Unpaid accumulated dividends
do not bear interest.
The dividend rate is subject to upward adjustment as set forth
in the Series B Certificate of Designation if the Company fails
to pay, or to set apart funds to pay, any quarterly dividend on
the Series B Preferred Stock. The dividend rate is also subject
to upward adjustment as set forth in the Registration Rights
Agreement entered into with the initial purchasers of the Series
B Preferred Stock (the “Registration Rights Agreement”) if the
Company fails to satisfy its registration obligations with respect
to the Series B Preferred Stock (or the underlying common
shares) under the Registration Rights Agreement.
No dividends or other distributions may be paid or set apart
for payment on the Company’s common shares (other than a
dividend payable solely in shares of a like or junior ranking)
unless all accumulated and unpaid Series B Preferred Stock
dividends have been paid or funds or shares of common stock
have been set aside for payment of accumulated and unpaid
Series B Preferred Stock dividends.
The dividend on the Series B Preferred Stock may be paid in
cash; or at the option of the holder, in shares of the Company’s
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, 2018,
2017 and 2016. There were no cumulative unpaid dividends as of
October 31, 2018 and 2017.
58
• any “person” or “group” is or becomes the beneficial owner,
directly or indirectly, of 50% or more of the total voting
power of all classes of the Company’s capital stock then
outstanding and normally entitled to vote in the election
of directors;
Notwithstanding the foregoing, the Company may only pay
such redemption price in shares of the Company’s 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.
• during any period of two consecutive years, individuals who
at the beginning of such period constituted the board of
directors (together with any new directors whose election
by the Company’s board of directors or whose nomination
for election by the stockholders was approved by a vote of
two-thirds of the Company’s directors then still in office
who were either directors at the beginning of such period
or whose election of nomination for election was previously
so approved) cease for any reason to constitute a majority of
the directors then in office;
• the termination of trading of the Company’s common stock
on The Nasdaq Stock Market and such shares are not
approved for trading or quoted on any other U.S. securities
exchange; or
• the Company consolidates with or merges with or into
another person or another person merges with or into
the Company or the sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all
of the Company’s assets and certain of its subsidiaries,
taken as a whole, to another person and, in the case of any
such merger or consolidation, the Company’s securities
that are outstanding immediately prior to such transaction
and which represent 100% of the aggregate voting power of
the Company’s voting stock are changed into or exchanged
for cash, securities or property, unless pursuant to the
transaction such securities are changed into securities of
the surviving person that represent, immediately after such
transaction, at least a majority of the aggregate voting power
of the voting stock of the surviving person.
Notwithstanding the foregoing, holders of shares of Series B
Preferred Stock will not have the right to require the Company
to redeem their shares if:
• the last reported sale price of shares of the Company’s
common stock for any five trading days within the 10
consecutive trading days ending immediately before the
later of the fundamental change or its announcement
equaled or exceeded 105% of the conversion price of the
shares of Series B Preferred Stock immediately before the
fundamental change or announcement;
• at least 90% of the consideration (excluding cash payments
for fractional shares) and, in respect of dissenters’ appraisal
rights, if the transaction constituting the fundamental
change consists of shares of capital stock traded on a U.S.
national securities exchange, or which will be so traded
or quoted when issued or exchanged in connection with a
fundamental change, and as a result of the transaction,
shares of Series B Preferred Stock become convertible into
such publicly traded securities; or
• in the case of fundamental change event in the fourth bullet
above, the transaction is affected solely to change the
Company’s jurisdiction of incorporation.
The Company may, at its option, elect to pay the redemption
price in cash or in shares of the Company’s common stock,
valued at a discount of 5% from the market price of shares
of the Company’s common stock, or any combination thereof.
Voting Rights — Holders of Series B Preferred Stock currently
have no voting rights; however, holders may receive certain voting
rights, as described in the Series B Certificate of Designation,
if (1) dividends on any shares of Series B Preferred Stock, or any
other class or series of stock ranking on a parity with the Series
B Preferred Stock with respect to the payment of dividends, shall
be in arrears for dividend periods, whether or not consecutive,
for six calendar quarters or (2) the Company fails to pay the
redemption price, plus accrued and unpaid dividends, if any,
on the redemption date for shares of Series B Preferred Stock
following a fundamental change.
So long as any shares of Series B Preferred Stock remain
outstanding, the Company will not, without the consent of the
holders of at least two-thirds of the shares of Series B Preferred
Stock outstanding at the time (voting separately as a class with
all other series of preferred stock, if any, on parity with the
Series B Preferred Stock upon which like voting rights have been
conferred and are exercisable) issue or increase the authorized
amount of any class or series of shares ranking senior to
the outstanding shares of the Series B Preferred Stock as to
dividends or upon liquidation. In addition, the Company will not,
subject to certain conditions, amend, alter or repeal provisions of
the Company’s certificate of incorporation, including the Series
B Certificate of Designation relating to the Series B Preferred
Stock, whether by merger, consolidation or otherwise, so as to
adversely amend, alter or affect any power, preference or special
right of the outstanding shares of Series B Preferred Stock or
the holders thereof without the affirmative vote of not less than
two-thirds of the issued and outstanding Series B Preferred
Stock shares.
Class A Cumulative Redeemable Exchangeable Preferred
Shares (the “Series 1 Preferred Shares”)
FCE FuelCell Energy Ltd. (“FCE Ltd”), one of the Company’s
indirect subsidiaries, has 1,000,000 Class A Cumulative
Redeemable Exchangeable Preferred Shares (the “Series 1
Preferred Shares”) issued and outstanding, which are held by
Enbridge, Inc. (“Enbridge”), which is a related party. The Company
guarantees the return of principal and dividend obligations of FCE
Ltd. to the holders of Series 1 Preferred Shares.
On March 31, 2011 and April 1, 2011, the Company entered into
agreements with Enbridge to modify the provisions of the
Series 1 Preferred Shares of FCE Ltd. Enbridge is the sole holder
of the Series 1 Preferred Shares. Consistent with the previous
Series 1 Preferred Share agreement, FuelCell Energy continues
to guarantee the return of principal and dividend obligations of
FCE Ltd. to the holders of Series 1 Preferred Shares under the
modified agreement.
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. Dividends accrue at a 1.25% quarterly rate on the unpaid
principal balance, and additional dividends will accrue on the
cumulative unpaid dividends (inclusive of the Cdn. $12.5 million
unpaid dividend balance as of the modification date) at a rate
59
FuelCell Energy Annual Report 2018
of 1.25% 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 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 represent 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 2018, 2017 and 2016. The Company also
recorded interest expense, which reflects the accretion of the
fair value discount of approximately Cdn. $2.8 million, Cdn. $2.6
million and Cdn. $2.4 million, respectively. As of October 31, 2018
and 2017, the carrying value of the Series 1 Preferred Shares was
Cdn. $20.9 million ($15.9 million) and Cdn. $19.4 million ($15.1
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.
• 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.
For example, assuming the holder of the Series 1 Preferred
Shares exercises its conversion rights after July 31 2020 and
assuming the common stock price is $0.85 (the common stock
closing price on October 31, 2018) and an exchange rate of U.S.
$1.00 to Cdn. $1.31 (exchange rate on October 31, 2018) at the
time of conversion, the Company would be required to issue
approximately 4,192,221 shares of its common stock.
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, 2018 and 2017 was $0.8 million.
Note 15. 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.
60
Revenues, by geographic location (based on the customer’s
ordering location) for the years ended October 31, 2018, 2017
and 2016 were as follows (in thousands):
United States
South Korea
England
Germany
Canada
Spain
Total
2018
2017
2016
$50,953 $ 47,539 $ 48,697
36,279
44,217
52,007
387
368
1,795
2,740
23
—
729
73
277
7,147
124
—
$89,437 $ 95,666 $108,252
Service agreement revenue which is included within Service
agreements and license revenues on the consolidated statement
of operations was $13.5 million, $24.4 million and $26.6
million, for the years ended October 31, 2018, 2017 and 2016,
respectively.
Long-lived assets located outside of the United States as of
October 31, 2018 and 2017 are not significant individually or in
the aggregate.
Note 16. 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.
2018 Omnibus Incentive Plan
The Company’s 2018 Omnibus Incentive Plan (the “2018 Incentive
Plan”) was approved by the Company’s stockholders at the
2018 Annual Meeting of Stockholders, which was held on April 5,
2018. The 2018 Incentive Plan provides that a total of 4.0
million shares of the Company’s common stock may be issued
thereunder. The 2018 Incentive Plan authorizes grants of stock
options, stock appreciation rights (“SARs”), restricted stock
awards (“RSAs”), restricted stock units (“RSUs”), performance
shares, performance units and incentive awards to key
employees, directors, consultants and advisors. Stock options,
RSAs and SARs have restrictions as to transferability. Stock
option exercise prices are fixed by the Board but shall not be
less than the fair market value of our common stock on the date
of the grant. SARs may be granted in conjunction with stock
options. Stock options generally vest ratably over 4 years and
expire 10 years from the date of grant. As of October 31, 2018,
there were 1.4 million shares available for grant.
Other 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. Under the 2010 Equity Incentive Plan, the Board was
authorized to grant incentive stock options, nonstatutory stock
options, SARs, RSAs, RSUs, performance units, performance
shares, dividend equivalent rights and other stock based
awards to our officers, key employees and non-employee
directors. Stock options, RSAs and SARs have restrictions as
to transferability. Stock option exercise prices are fixed by the
Board but shall not be less than the fair market value of our
common stock on the date of the grant. SARs may be granted
in conjunction with stock options. Stock options generally vest
ratably over 4 years and expire 10 years from the date of grant.
The Company also has an international award program to
provide RSUs for the benefit of certain employees outside the
United States. At October 31, 2018, equity awards outstanding
under the 2010 Equity Incentive Plan consisted of incentive stock
options, nonstatutory stock options, RSAs and RSUs.
The Company’s 1998, 2006 and 2010 Equity Incentive Plans
remain in effect only to the extent of awards outstanding under
the plan as of October 31, 2018.
Share-based compensation was reflected in the consolidated
statements of operations as follows (in thousands):
Cost of revenues
General and administrative
expense
2018
2017
2016
$ 543 $ 1,050 $ 745
2,256
2,721
2,110
Research and development expense
355
679
504
Share-based compensation
$3,154 $ 4,450 $ 3,359
Stock Options
We account for stock options awarded to 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
2018
7.0
2017
2016
7.0
7.0
2.8%
2.2%
1.5%
72.7% 79.5% 80.1%
—%
—%
—%
The expected life is the period over which our non-employee
directors 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, 2018:
Options
Outstanding as of October 31, 2017
Granted
Cancelled
Shares
309,950
54,503
(40,967)
Outstanding as of October 31, 2018
323,486
Weighted-Average
Option Price
$ 23.81
$ 1.78
$100.85
$ 10.34
The weighted average grant-date fair value per share for options
granted during the years ended October 31, 2018, 2017 and 2016
was $1.78, $1.50 and $6.44, respectively. There were no options
exercised in fiscal years 2018, 2017 or 2016.
61
FuelCell Energy Annual Report 2018
The following table summarizes information about stock options outstanding and exercisable as of October 31, 2018:
Range of
Exercise Prices
$0.00 — $ 3.23
$3.24 — $61.20
Options Outstanding
Weighted Average
Remaining
Contractual Life
Weighted Average
Exercise
Price
8.8
4.1
6.4
$ 1.60
$18.72
$10.34
Options Exercisable
Number
exercisable
103,819
163,500
267,319
Weighted Average
Exercise
Price
$ 1.50
$18.79
$12.07
Number
outstanding
158,322
165,164
323,486
There was no intrinsic value for options outstanding and exercisable at October 31, 2018.
Restricted Stock Awards and Units
The following table summarizes our RSA and RSU activity for the
year ended October 31, 2018:
Restricted Stock Awards and Units
Outstanding as of October 31, 2017
Shares
3,008,686
Weighted-Average
Fair Value
$ 2.52
Granted
Vested
Forfeited
2,545,715
(925,662)
(258,164)
Outstanding as of October 31, 2018 4,370,575
$1.75
$2.80
$2.19
$2.03
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, 2018, the 4.4
million outstanding RSAs and RSUs had an average remaining
life of 1.4 years and an aggregate intrinsic value of $3.7 million.
As of October 31, 2018, total unrecognized compensation cost
related to RSAs including RSUs was $6.2 million which is
expected to be recognized over the next 2.0 years on a weighted-
average basis.
Stock Awards
During the years ended October 31, 2018, 2017 and 2016, we
awarded 158,708, 86,001 and 24,379 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 $0.3 million, $0.1
million and $0.2 million of expense for each of the respective years.
Employee Stock Purchase Plan
The 2018 Employee Stock Purchase Plan (the “ESPP”) was
approved by the Company’s stockholders at the 2018 Annual
Meeting of Stockholders. The adoption of the ESPP allows the
Company to provide eligible employees of FuelCell Energy, Inc.
and of certain designated subsidiaries with the opportunity to
voluntarily participate in the ESPP, enabling such participants to
purchase shares of the Company’s common stock at a discount
to market price at the time of such purchase. The maximum
number of the Company’s shares of common stock that may
be issued under the ESPP is 500,000 shares. The previous
Employee Stock Purchase Plan was suspended as of May 1,
2017 because we did not have sufficient shares of common stock
available for issuance.
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.
There was no ESPP activity for the year ended October 31, 2018.
The fair value of shares issued under the previous Employee Stock
Purchase Plan was determined at the grant date using the Black-
Scholes option-pricing model with the following weighted average
assumptions for the years ended October 31, 2017 and 2016:
Expected life (in years)
Risk free interest rate
Volatility
Dividends yield
2017
0.5
0.46%
75.0%
—%
2016
0.5
0.30%
37.0%
—%
The weighted-average fair value of shares issued under the
previous Employee Stock Purchase Plan 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, $0.5 million and $0.6 million for the years ended October
31, 2018, 2017, and 2016, respectively.
62
U.S.
Foreign
Note 17. Income Taxes
The components of loss before income taxes for the years ended
October 31, 2018, 2017, and 2016 were as follows (in thousands):
Our deferred tax assets and liabilities consisted of the following
at October 31, 2018 and 2017 (in thousands):
2018
2017
2016
$ (47,314) $ (49,723 ) $ (46,708 )
Deferred tax assets:
Compensation and benefit accruals
2018
2017
$ 7,767 $ 11,158
(3,035)
(4,136)
(3,981)
Bad debt and other allowances
426
605
Loss before income taxes
$ (50,349) $ (53,859 ) $ (50,689 )
The Company recorded an income tax benefit totaling $3.0 million
for the year ended October 31, 2018 compared to income tax
expense of $0.04 million and $0.5 million for the years ended
October 31, 2017 and 2016, respectively. The income tax benefit
for the year ended October 31, 2018 primarily related to the Tax
Cuts and Jobs Act (the “Act”) that was enacted on December 22,
2017. The Act reduced the U.S. federal corporate tax rate from
34% to 21% effective January 1, 2018 which resulted in a deferred
tax benefit of $1.0 million primarily related to a reduction of
the Company’s deferred tax liability for in process research and
development (“IPR&D”). The Act also established an unlimited
carryforward period for the net operating loss (“NOL”) the
Company generated in fiscal year 2018. This provision of the Act
resulted in a reduction of the valuation allowance attributable
to deferred tax assets at the enactment date by $2.0 million
based on the indefinite life of the resulting NOL as well as the
deferred tax liability for IPR&D. The current income tax expense
for the years ended October 31, 2017 and 2016 related to foreign
withholding taxes and income taxes in South Korea and there was
no deferred federal income tax expense (benefit) for the years
ended October 31, 2017 and 2016. Franchise tax expense, which is
included in administrative and selling expenses, was $0.5 million,
$0.5 million and $0.4 million for the years ended October 31, 2018,
2017 and 2016, respectively.
The reconciliation of the federal statutory income tax rate to our
effective income tax rate for the years ended October 31, 2018,
2017 and 2016 was as follows:
Statutory federal income tax rate
(23.2)% (34.0)% (34.0)%
2018
2017
2016
Increase (decrease) in income
taxes resulting from:
State taxes, net of
Federal benefits
Foreign withholding tax
Net operating loss
expiration and true-ups
Nondeductible expenditures
0.7%
0.0%
4.6%
1.5%
(1.3)%
(0.2)%
0.1%
1.1%
(4.6)%
1.9%
3.3%
0.9%
Change in tax rates
201.6%
(0.8)%
(0.3)%
Other, net
0.0%
0.6%
0.2%
Valuation allowance
(191.2)%
38.2%
30.1%
Effective income tax rate
(6.0)%
0.1%
1.1%
Capital loss and tax credit
carryforwards
Net operating losses
(domestic and foreign)
Deferred license revenue
Inventory valuation allowances
Accumulated depreciation
Grant revenue
Gross deferred tax assets:
Valuation allowance
Deferred tax assets after
valuation allowance
Deferred tax liability:
12,295
13,398
202,643
4,765
282,022
7,850
238
4,374
910
111
5,095
1,522
233,418
321,761
(231,403)
(321,761)
2,015
—
In process research and development
(2,356)
(3,377)
Net deferred tax liability
$
(341) $
(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, with the exception of the discussion above, we recorded
a valuation allowance against our net deferred tax assets. None
of the valuation allowance will reduce additional paid in capital
upon subsequent recognition of any related tax benefits. As of
October 31, 2018, we had federal and state NOL carryforwards
of $799.9 million and $410.2 million, respectively. The federal
NOL carryforwards expire in varying amounts from 2019 through
2037 while state NOL carryforwards expire in varying amounts
from fiscal year 2019 through 2037. Federal NOLs generated in
fiscal 2018 are not subject to expiration subsequent to the Act
discussed above. Additionally, we had $8.3 million of state tax
credits available that will expire from tax years 2019 to 2037.
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 complete
a detailed Section 382 ownership shift analysis on an annual basis
to determine whether any of our NOL and credit carryovers will
be subject to limitation. Based on that study, we determined that
there was no ownership change as of the end of our fiscal year
2018 that impacts Section 382. The acquisition of Versa in fiscal
year 2013 triggered a Section 382 ownership change at the level
of Versa Power System which will limit the future usage of some
of the federal and state NOLs that we acquired in that transaction.
The federal and state NOLs that are non 382-limited are included
in the NOL deferred tax assets as disclosed.
63
FuelCell Energy Annual Report 2018
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,
2018 and 2017 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 2001 to the present.
During the fiscal year ended October 31, 2018, the Company
underwent an IRS examination for its fiscal year 2016 tax year
which was closed without material adjustment.
Note 18. 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.
The calculation of basic and diluted EPS for the years ended October 31, 2018, 2017 and 2016 was as follows (amounts in thousands,
except share and per share amounts):
Numerator
Net loss
Net loss attributable to noncontrolling interest
Series B Preferred stock dividends
Series C Preferred stock deemed dividends
Series D Preferred stock redemption accretion
Net loss to common stockholders
Denominator
2018
2017
2016
$(47,334)
$ (53,903)
$ (51,208)
—
(3,200)
(9,559)
(2,075)
—
(3,200)
—
—
251
(3,200)
—
—
$(62,168)
$ (57,103)
$ (54,157)
Weighted average common shares outstanding—basic
82,754,268
49,914,904
29,773,700
Effect of dilutive securities (1)
—
—
—
Weighted average common shares outstanding—diluted
82,754,268
49,914,904
29,773,700
Net loss to common stockholders per share—basic
Net loss to common stockholders per share—diluted(1)
$(0.75)
$(0.75)
$(1.14)
$(1.14)
$(1.82)
$(1.82)
(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, 2018, 2017 and 2016, potentially dilutive securities excluded
from the diluted loss per share calculation are as follows:
October 31, 2018
October 31, 2017
October 31, 2016
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
Unvested RSUs
Series C Preferred Shares to satisfy conversion requirements (1)
Series D Preferred Shares to satisfy conversion requirements (2)
5% Series B Cumulative Convertible Preferred Stock (3)
Series 1 Preferred Shares to satisfy conversion requirements (3)
Total potentially dilutive securities
11,569,364
—
7,680,000
—
—
323,486
1,119,433
3,251,142
5,994,667
22,231,884
454,043
15,168
52,639,187
11,580,900
2,584,174
7,680,000
—
—
309,950
1,898,692
1,109,994
18,097,826
—
454,043
15,168
43,730,747
—
—
7,680,000
3,826,000
166,666
246,923
915,831
74,204
—
—
454,043
15,168
13,378,835
(1) The number of shares of common stock issuable upon conversion of the Series C Preferred Stock was calculated using the liquidation preference value
outstanding on October 31, 2018 of $9.0 million divided by the reduced conversion price of $1.50 and the liquidation preference of $33.3 million divided by
the conversion price of $1.84 as of October 31, 2017. The actual number of shares issued could vary depending on the actual market price of the Company’s
common shares on the date of such conversions.
(2) The number of shares of common stock issuable upon conversion of the Series D Preferred Stock was calculated using the liquidation preference value
outstanding on October 31, 2018 of $30.7 million divided by the conversion price of $1.38. The actual number of shares issued could vary depending on the
actual market price of the Company’s common shares on the date of such conversions.
(3) Refer to Note 14, Redeemable Preferred Stock, for information on the calculation of the common shares upon conversion.
64
Note 19. Commitments and Contingencies
Lease agreements
As of October 31, 2018 and 2017, we had capital lease obligations
of $0.3 million and $0.6 million, respectively. Lease payment
terms are primarily 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 $1.2 million, $1.6 million and $1.8 million for
the years ended October 2018, 2017 and 2016, respectively.
Non-cancelable minimum payments applicable to operating and
capital leases at October 31, 2018 were as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Operating
Leases
$ 841
570
381
378
374
3,004
$5,548
Capital
Leases
$237
83
17
4
—
—
$341
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 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
$1.1 million and $2.2 million as of October 31, 2018 and 2017,
respectively, and is recorded in “Accrued liabilities.”
Our loss accrual on service agreements, excluding the accrual
for performance guarantees, totaled $0.9 million and $1.1
million as of October 31, 2018 and 2017, respectively, and is
recorded in “Accrued liabilities.” Our loss 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, 2018.
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 estimated future electricity pricing available
from the grid. As owner or 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
or biogas, to run the power plants.
Assistance Agreement with the State of Connecticut
On April 17, 2017, the Company entered into an amendment to
the Assistance Agreement extending certain job creation target
dates by two years to October 28, 2019. Under the Assistance
Agreement, as amended, the Company targeted employment of
703 Connecticut employees by October 2019. In connection with
this amendment to the Assistance Agreement, in July 2018, the
Company announced an increase in its annual production rate
and committed to hire over 100 employees. As of October 31,
2018, the Company had 452 Connecticut employees. The
Company cannot currently predict whether it will meet its target
of employing 703 Connecticut employees by October 2019 or
whether the time period for meeting this target will be extended.
If the Company does not meet this target in the required time
period, principal under the promissory note will be paid at
an annual rate of $14.0 thousand for each employee under the
703 employee target.
Other
At October 31, 2018, the Company has unconditional purchase
commitments aggregating $64.0 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 realization
of 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 with respect to these obligations
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 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.
65
FuelCell Energy Annual Report 2018
Note 20. Supplemental Cash Flow Information
The following represents supplemental cash flow information (dollars 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 between inventory and project assets
Assumption of debt in conjunction with asset acquisition
Acquisition of project assets
Series C Preferred stock conversions
Accrued sale of common stock, cash received in a subsequent period
Accrued purchase of fixed assets, cash paid in a subsequent period
Accrued purchase of project assets, cash paid in a subsequent period
Year Ended October 31,
2018
$ 4,486
2017
$2,715
2016
$1,941
2
2
80
—
50
10,793
7,282
105
—
— 2,289
—
—
2,386
20,220
—
—
—
—
1,579
3,115
— 357
2,490
2,380
3,952
1,797
Note 21. Quarterly Information (Unaudited)”
Selected unaudited financial data for each quarter of fiscal year 2018 and 2017 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, 2018
Revenues
Gross profit (loss)
Loss on operations
Net loss
Series B Preferred stock dividends
Series C Preferred stock deemed dividends
Series D Preferred stock redemption accretion
Net loss to common stockholders
Net loss to common stockholders per basic
and diluted common share (1)
Year ended October 31, 2017
Revenues
Gross (loss) profit
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)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
$ 38,613
$ 20,830
$ 12,110
$ 17,884
$ 89,437
4,635
(5,553)
(4,183)
(800)
(3,463)
—
(629)
(12,735)
(13,174)
(800)
(4,199)
—
(2,056)
(14,474)
(15,881)
(800)
(939)
—
(8,446)
(18,173)
(17,620)
1,143
(11,870)
(14,096)
(800)
(958)
(2,075)
(17,929)
3,093
(44,632)
(47,334)
(3,200)
(9,559)
(2,075)
(62,168)
$ (0.12)
$ (0.23)
$ (0.20)
$ (0.19)
$
(0.75)
$ 17,002
$ 20,417
$ 10,358
$ 47,889
$ 95,666
1,813
(10,928)
(13,685)
(800)
(14,485)
383
(11,496)
(13,238)
(800)
(14,038)
(2,626)
(14,330)
(17,001)
(800)
(17,801)
3,164
(8,181)
(9,979)
(800)
(10,779)
2,734
(44,935)
(53,903)
(3,200)
(57,103)
$
(0.39)
$
(0.33)
$
(0.31)
$
(0.17)
$
(1.14 )
(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.
66
Note 22. Subsequent Events
NRG Loan Facility
As described in Note 12, the Company has a project finance
facility with NRG pursuant to which NRG extended a $40 million
revolving construction and term financing facility (the “Loan
Facility”) to FuelCell Finance for the purpose of accelerating
project development by the Company and its subsidiaries. On
December 13, 2018, FuelCell Finance’s wholly owned subsidiary,
Central CA Fuel Cell 2, LLC, drew a construction loan advance
of $5.8 million under the Loan Facility. This advance will be
used to support the completion of construction of the 2.8 MW
Tulare BioMAT project in California. This plant is expected to
meet its commercial operations date (COD) in March 2019. In
conjunction with the December 13, 2018 draw, FuelCell Finance
and NRG entered into an amendment to the NRG Agreement
(the “Amendment”) to revise the definitions of the terms
“Maturity Date” and “Project Draw Period” under the NRG
Agreement and to make other related revisions. Prior to the
Amendment, FuelCell Finance and its subsidiaries were able to
request draws under the Loan Facility through July 30, 2019 and
the Maturity Date of each note under the Loan Facility was five
years after the first disbursement under such note. Pursuant to
the Amendment, FuelCell Finance and its subsidiaries may now
request draws only through December 31, 2018 and the Maturity
Date of each note is the earlier of (a) March 31, 2019 and (b)
the COD (commercial operation date or substantial completion
date, as applicable) with respect to the fuel cell project owned
by the borrower under such note. There are currently no other
drawdowns or outstanding balances under the Loan Facility.
Generate Lending Loan Facility
On December 21, 2018, the Company, through its indirect
wholly-owned subsidiary FuelCell Energy Finance II, LLC (“FCEF
II” or “Borrower”), entered into a Construction Loan Agreement
(the “Agreement” or the “Generate Lending Construction Loan
Agreement”) with Generate Lending, LLC (“Lender” or “Generate
Lending”) pursuant to which Generate Lending agreed (the
“Commitment”) to make available to FCEF II a credit facility in an
aggregate principal amount of up to $100.0 million and, subject
to further Lender approval and available capital, up to $300.0
million if requested by the Company (the “Facility”) to fund the
manufacture, construction, installation, commissioning and
start-up of stationary fuel cell projects to be developed by the
Company on behalf of Borrower during the Availability Period
(as defined below and in the Agreement). Fuel cell projects
must meet certain conditions to be determined to be “Approved
Projects” under the Facility. The Facility will be comprised of
multiple loans to individual Approved Projects (each, a “Working
Capital Loan”). Each Working Capital Loan will be sized to the
lesser of (i) 100% of the construction budget and (ii) the invested
amount that allows Lender to achieve a 10% unlevered, after-
tax inefficient internal rate of return. Approved Projects will
be funded at milestones on a cost incurred basis. FCEF II and
the Company will contribute any additional equity required to
construct an Approved Project on a pari-passu basis with the
Working Capital Loans. The Commitment to provide Working
Capital Loans will remain in place for thirty-six months from
the date of the Agreement (the “Availability Period”). Interest
will accrue at 9.5% per annum, calculated on a 30/360 basis, on
all outstanding principal, paid on the first business day of each
month. The initial draw amount under this facility, funded at
closing, was $10 million.
The maturity date for the outstanding principal amount of each
Working Capital Loan will be the earlier of (a) the achievement
of the Commercial Operation Date under the Engineering,
Procurement and Construction (“EPC”) Agreement for
such Approved Project, (b) ninety days prior to the required
Commercial Operation Date under the Revenue Contract (as
defined in the Agreement), or (c) upon certain defaults by
Borrower. The lender has the right to issue a notice to the
Borrower that the Commitment, and that all Working Capital
Loans shall be due and payable on September 30, 2019; provided
that such notice shall be issued by the Lender, if at all, during
the ten (10) day period beginning on June 20, 2019 and ending on
(and including) June 30, 2019. If the Lender delivers such notice,
all of the Working Capital Loans, together with all accrued and
unpaid interest thereon, shall be due and payable in its entirety,
without penalty or premium. If the Lender delivers such notice,
the Borrower may prepay all then outstanding Working Capital
Loans at any time prior to September 30, 2019. Mandatory
prepayments are required in the event of (i) material damage
or destruction to an Approved Project, (ii) termination or default
under an Approved Project’s Revenue Contract, (iii) a change
of control, or (iv) failure to achieve Substantial Completion as
defined under the EPC Agreement for such Approved Project by
the required dates.
Provided that the Approved Project has been completed as of the
maturity date and no defaults exist with respect to the Working
Capital Loans for such Approved Project, FCEF II, as determined
in its sole discretion, will have a 90-day period to either sell the
Approved Project or effect a refinancing, in either case proceeds
of which will be used to repay the Working Capital Loan for
the Approved Project. In the case of a disposition of the
Approved Project, Lender will be entitled to a “Disposition Fee,”
as described below. In the case where the Working Capital
67
FuelCell Energy Annual Report 2018
Amendment to Hercules Loan and Security Agreement
As noted in Note 12, the Company has a loan and security
agreement with Hercules for an aggregate principal amount of
up to $25.0 million, subject to certain terms and conditions.
On December 19, 2018, to facilitate the Generate Lending
Construction Loan Agreement described above, the Company
and Hercules (and various affiliated entities) entered into the
fifth amendment to the loan and security agreement to (i)
modify the definitions of “Permitted Investment,” “Permitted
Liens,” “Project Companies,” “Project Company Indebtedness,”
and “Qualified Subsidiary” to permit the creation of a new
holding company, FuelCell Energy Finance II, LLC to hold the
membership interests of project companies to be funded under
the Facility described above and (ii) modify the definition of
“Project Roundtrip Transaction” to increase the investment
amount under a Project Roundtrip Transaction to $40.0 million.
Series C Preferred Shares
As noted in Note 14, as of October 31, 2018 and 2017, there were
8,992 shares and 33,300 shares of Series C Preferred Stock
issued and outstanding, respectively, with a carrying value of
$7.5 million and $27.7 million, respectively. As of October 31,
2018, the Series C Preferred Shares were convertible into shares
of common stock subject to the beneficial ownership limitations
provided in the Series C Certificate of Designations, at a
conversion price equal to $1.50 per share. The conversion price
is subject to adjustment as provided in the Series C Certificate
of Designations, including adjustments if the Company sells
shares of common stock or equity securities convertible into
or exercisable for shares of common stock, at variable prices
below the conversion price then in effect. Subsequent to
October 31, 2018, the conversion price has been periodically
adjusted in accordance with the terms of the Series C Certificate
of Designations and was $0.434 as of January 2, 2019.
Loan for the Project is refinanced, Lender will have the right to
make an equity investment in the Approved Project on terms
such that Lender derives an after-tax yield of no less than a
12% internal rate of return on an investment of greater than
10% of the total purchase price. Borrower and Lender will enter
into an arrangement to share any returns realized in excess
of the foregoing target return. In the event that Borrower does
not sell or refinance an Approved Project within ninety days
following the Working Capital Loan maturity date (or such other
date as may be mutually agreed), then the outstanding balance
of the Working Capital Loan on such Approved Project shall
convert into a 100% equity ownership of the applicable project
company owning such Approved Project through execution
of a Membership Interest Purchase Agreement (“MIPA”) with
the Lender. At that time, the Lender will own the project and
Borrower will not have any repayment obligations. Included
in the applicable MIPA for each Approved Project subject to
this provision will be a conditional purchase price adjustment
for Borrower equal to 50% of any distributions to Lender after
Lender has achieved a 10% inefficient after-tax, unlevered
internal rate of return. In the event that Borrower and Lender are
unable to come to terms on a MIPA for any Approved Project, the
Working Capital Loan for such Approved Project will be required
to be repaid in full without penalty or premium.
Borrower will pay a draw down fee equal to 3% of the amount
of each Working Capital Loan and certain other diligence and
administration fees. Upon the sale of any Approved Project to
a third party, Lender will be entitled to a disposition fee equal
to 3% of the total sale price (“Disposition Fee”). At such time
as Lender has made Working Capital Loans in the aggregate
amount of greater than $100,000,000 but less than $200,000,000,
the Disposition Fee is reduced to 2% and in the aggregate
amount of greater than $200,000,000 but less than $300,000,000,
the Disposition Fee is reduced to 1%.
The initial draw amount under this Facility, funded at closing,
was $10 million. The initial draw reflects loan advances for
the first Approved Project under the Facility, the Bolthouse
Farms 5 MW project in California. Additional drawdowns are
expected to take place as the Company completes certain project
milestones. The Company expects to use this Facility to fund
the construction of its backlog, including the three LIPA projects
totaling 39.8 MW and the two projects awarded pursuant to the
Connecticut DEEP RFP, totaling 22.2 MW.
68
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, 2018, 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, 2018, 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 Shares
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, 2018 and 2017 was $0.8 million for each period presented. 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.
69
FuelCell Energy Annual Report 2018
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, 2018 with the cumulative stockholder total return on the Russell 2000 Index, a peer group
consisting of Standard Industry Classification 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, 2013 with dividends reinvested.
70
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, 2018, filed with the Securities and
Exchange Commission on January, 10, 2019 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,
• potential volatility of energy prices,
• availability of government subsidies and economic incentives for alternative energy technologies,
• our ability to remain in compliance with U.S. federal and state and foreign government laws and regulations,
• rapid technological change,
• competition,
• our dependence on strategic relationships,
• 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,
• recent developments with POSCO Energy, which may limit our efforts to access the South Korean and Asian markets and could
expose us to costs of arbitration or litigation proceedings,
• our ability to implement our strategy,
• our ability to reduce our levelized cost of energy and our cost reduction strategy generally,
• our ability to protect our intellectual property,
• litigation and other proceedings,
• the risk that commercialization of our products will not occur when anticipated,
• our need for and the availability of additional financing,
• 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 and readers are cautioned not to place
undue reliance on these forward-looking statements. 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.
71
FuelCell Energy Annual Report 2018
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, 2018, 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, 2018. 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 4, 2019 at 10:00 a.m. at:
Lotte New York Palace Hotel
455 Madison Avenue
New York, NY
FuelCell Common Stock
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 periods
indicated as reported by the Nasdaq Global Market during the
indicated quarters.
Common Stock Price
High
Low
First Quarter 2019
(through January 4, 2019)
Year Ended October 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended October 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 0.97
$0.47
$ 2.31
2.11
1.99
1.33
$3.40
1.98
1.79
2.49
$1.50
1.45
1.25
0.72
$1.40
1.00
0.80
1.33
In December 2017, the number of authorized shares of the
Company’s common stock was increased from 125 million
shares to 225 million shares by a vote of the holders of a
majority of the outstanding shares of the Company’s common
stock. In April 2017, the number of authorized shares of the
Company’s common stock was increased from 75 million to 125
million by vote of the holders of a majority of the outstanding
shares of the Company’s common stock.
On January 4, 2019, the closing price of our common stock on
the Nasdaq Global Market was $0.55 per share. As of January 4,
2019, there were 188 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 Stock 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.
72
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
James H. England 1, 2, 3
Corporate Director and Chief Executive Officer of
Stahlman—England Irrigation, Inc.
Arthur A. Bottone 2
President and Chief Executive Officer of
FuelCell Energy, Inc.
Jason B. Few 3, 4, 7
President of Sustayn Analytics LLC
Matthew F. Hilzinger 3, 4, 5
Executive Vice President and Chief Financial Officer of
USG Corporation
Christina Lampe-Onnerud 4, 5, 7
Co-founder, Chairman and Chief Executive Officer of
Cadenza Innovation, Inc
John A. Rolls 2, 4, 5, 6
Former Executive Vice President and
Chief Financial Officer of
United Technologies
Christopher S. Sotos* 6
President, Chief Executive Officer and Director of
NRG Yield, Inc.
Natica von Althann 3, 5
Former financial executive at Bank of America
and Citigroup
1 Chairman of the Board of Directors
2 Executive Committee
3 Audit and Finance Committee
4 Compensation Committee
5 Nominating and Corporate Governance Committee
6 Will not be standing for re-election
7 Appointed November 2018
* Mr. Sotos is a non-independent director and therefore
does not serve on any standing committees.
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, 2018, 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. 2019
3 Great Pasture Road
Danbury, CT 06813-1305
203.825.6000
www.FuelCellEnergy.com