Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the FuelCell Energy's Second Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tom Gelston, Vice President of Investor Relations, you may begin your conference.

Thank you, Tiffany, and good morning, and welcome to the second quarter of 2018 earnings call for FuelCell Energy. This morning, FuelCell Energy released financial results for the second quarter of 2018. The earnings release as well as a presentation that will be referenced during this earnings call are available on the Investor Relations section of the company's website at www.fuelcellenergy.com. A replay of this call will be available approximately 2 hours after its conclusion on the company website. Before proceeding with the call, I would like to remind everyone that this call is being recorded and that the discussion today will contain forward-looking statements, including without limitation, statements with respect to the company's anticipated financial results and statements regarding the company's plans and expectations regarding the continuing development, commercialization and financing of its fuel cell technology and its business plans. I would like to direct listeners to read the company's cautionary statement on forward-looking information and other risk factors in our filings with the U.S. Securities and Exchange Commission. Now, I'd like to turn the call over to Chip Bottone, President and Chief Executive Officer. Chip?

Thank you, Tom. Good morning everyone and welcome. Please turn to Slide 4 labeled Highlights. Today, we announced our second quarter 2018 results highlighted by continued execution on a record $1.6 billion of project awards in backlog as well as execution of other key initiatives that are strengthening our financial position and leading our company to sustainable profitability. We completed commissioning and final acceptance testing of the eight power plants for the 20 megawatt fuel cell park for Korea Southern Power Company or KOSPO, our newest utility customer who owns 9 gigawatts of power generation assets. We are proud of our talented team, including our EPC contractor, Hanyang Development Company who accomplished this milestone two months ahead of schedule. While most of the revenue from the project was recognized in the past two quarters, the commissioning marks the completion of a critical project ahead of schedule. This is an important mark for us in South Korea that highlights our ability to execute large utility scale projects and will be extremely helpful with other projects and tenders currently being evaluated. South Korea is a sizable near term market with many opportunities for multi-megawatt fuel cell parks. We continue to execute on 62 megawatts of projects awarded or in our backlog. As we will discuss in detail during today's call, these projects will greatly increase the size of our clean energy generation portfolio. Our portfolio produces predictable and recurring revenue and is a key part of our strategy to attain sustainable profitability. In April, we executed on two important capital structure activities. We entered into a definitive agreement to sell our 2.8 megawatt fuel cell a wastewater treatment plant in Tulare, California to NRG Yield. Tulare project which was constructed by us was placed into commercial operation following the sale. The Tulare…

Thank you, Chip. Good morning and thank you for joining our call today. Please turn to Slide 5, titled Financial Overview. FuelCell Energy reported total revenues for the second quarter of fiscal 2018 of $20.8 million compared to $20.4 million for the second quarter of fiscal 2017. Product sales totaled $12.2 million for the second quarter of fiscal 2018 compared to $700,000 for the second quarter of fiscal 2017. The increase is primarily a result of the sale of the 2.8 megawatt fuel cell power plant project located in Tulare, California to NRG Yield. The plant was sold just prior to achieving commercial operations and is one example of the quality of revenue producing assets that we have in our portfolio. This transaction also highlights our strategy of having the optionalities to either retain or sell assets. The gross loss generated in the second quarter of fiscal 2018 totaled $0.6 million and the gross margin was negative 3%, compared to a gross profit of $0.4 million in the second quarter of fiscal 2017 and a gross margin of 1.9%. Generation costs of sales included a write-off of $0.4 million related to the cost of a development project. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes. Manufacturing variances totaled approximately $3.2 million for the three months ended April 30, 2018, compared to approximately $2.5 million for the three months ended April 30, 2017. For the three months ended April 30, 2018, the company operated at an annualized production rate of approximately 25 megawatts, compared to the rate of 35 megawatts in the three months ended April 30, 2017. Given the current level of backlog and awards the company is evaluating a plan to increase production in the second half of fiscal 2018. Operating…

Thank you, Mike. Please turn to Slide 8, Focus Areas. I would like to outline the four Focus Areas that are key to driving our future success. First, execute on the 62.3 megawatts of projects under construction in our $1.6 billion backlog. Second, grow our generation portfolio driving further recurring revenue profitability. Third, compete for and win new projects around the globe. And four, commercialize the big ideas that are being developed by our advanced technology team. First, execution. As Mike explained, we are on track to deliver on our commitments for 62.3 megawatts of new installations in Connecticut, New York and California as well as service our existing global installed base over our plants contractual lives. Our factory expansion in Torrington is complete and are prepared for the volume increases these projects will drive. This particular group of projects displays key segments of our business including utility grid support, creating reliable on-site generation for commercial and municipal customers, and distributing hydrogen for leading global automakers. Among these 62 megawatts of three projects totaling 39.8 megawatts for New York's Long Island Power Authority or LIPA we are making great progress on the individual sides and are proceeding on schedule. These grid support installations highlight our ability to deliver Energy-as-a-Service to utilities, helping them resolve daunting energy and environmental challenges. Second, our Generation Portfolio; we will continue to grow our clean power generation portfolio driving additional recurring revenue and profitability. We have line of sight to a number of new projects that would substantially enhance our portfolio. As discussed by Mike, we have a path to finance the portfolio's growth. Third, new business. We are successfully competing for and winning projects globally. We are building on our recent accomplishments and are growing momentum in our industry. In addition to our Energy-as-a-Service…

[Operator Instructions]. Your first question comes from the line of Carter Driscoll with B. Riley FBR. Your line is open.

Thanks for taking my questions. First one I have is can you talk about, you had a very quick turnaround for the first project in Korea with KOSPO. Maybe talk about some of the other projects you're bidding on? I would expect maybe a longer installation time than that project initially. Maybe talk about competitive environment, any changes there? I mean it seems like a very ripe market for your solutions. Just trying to get a sense of what else is in the pipeline in the near term?

Sure, Carter this is Chip. Relative to the Korean market, there is a sizable pipeline that we have, both direct procurement by utilities like this KOSPO project as well as special purpose energy as I mentioned that are set up in collaboration with the banks and the other generation companies. Not every project will be two months ahead of schedule I grant you that, but we understand very carefully the models that they use to make selections in Korea. We understand very carefully our competitive position. And I think as this project demonstrated we do what we say we're going to do, which has great value in markets like Korea. So on this first project, not only that we comply with all of the different testing and approval things that you have to go through but we also executed with local people, EPC companies and satisfied the utilities as you saw. So that goes a long way to helping your competitive position. Relative to the opportunity, as I mentioned, the goal in the country is to have 10% of the power generation which in total I think they have about something like 110 gigawatts of demand. So that's a pretty sizable market opportunity, obviously not all are going to get use of fuel cells, they can do wind, they can do some solar and things like that. But I would say that in general, relative to fuel cells which are typically what these projects are, we will -- we fared very well. We have a lot of other things in our pipeline that we're working on and the opportunity if we continue to execute on those properly I think is pretty substantial.

Shifting gears, so you are expecting a notification from DEEP sometime this month. You talked about the number of projects, you gave a collective megawatt number about yourself and your partner, I am assuming your partner is your partner at Beacon Falls, correct me if I am wrong. And then may be just talk about the range and size of more number of projects you've bid into for that RFP?

Okay, this is Chip again. So yes, we bid eight projects in total about 100 megawatts. They ranged in size between the smallest one was like 7 megawatts and then all of the other ones were -- the most there could be roughly is 19 could be or a few things for fuel cells that are below 20, there's a minimum of two I think and a maximum of 20. So they are all in that range. In general our projects were on the higher end of that. Beacon Falls was one of the projects and it was not 60 megawatts like it was before but it was in line with about 19 megawatts that we had. So yes, we will -- we had some optionality in things as well. So -- but roughly that's the landscape for us. And there's -- like I said in my remarks there is capacity for them to pick a significant amount of projects even if they choose to pick wind and we'll know in some time in the month of June if things happen according to their plan.

Much more favorable environment I think the last time they were bidding just on some of the legislative developments. Could we then walk through on Slide 7 where you gave the hypothetical example. I am assuming that example would be something like roughly 12 megawatt installation, is that a reasonable assumption based on kind of just shy of $1 million in revenue per megawatt? And a; I guess my first question is that a reasonable assumption and is this the kind of typical profile under the ITC and the terms that you are facing today? Are you seeing any upward pressure on the rising yield curve in terms of required returns or is that kind of baked into this hypothetical?

It's Mike. And I appreciate you joining the call and the questions. So we didn't give an exact number of megawatts but I think the number you quoted there Carter is fair. This example would include fuel in it. And as far as the financing terms, this is what we are seeing today, we are not seeing any pressure. Our projects have higher yield than solar and wind projects which have obviously more capacity out there. So, we're already kind of in a different band than those are, so not seeing any pressure there. And as I said in my remarks really strong interest. We have an opportunity here. We haven't financed the assets that we have under construction today which are north of $40 million some of those are pretty close COD. So as we bring in financing for those that's obviously accretive to our cash balance.

And as you think about to kind of the decision to hold in your Generation Portfolio versus sale is there any qualification or timing considerations from commercial operation versus NTP or is it more thinking along an asset sale once it hits COD?

Yeah. I don't think we see any asset sales at Notice To Proceed. I think that for what we do given we're the owner or the developer of the OEM we would typically sell assets close to the COD. If we were to do that we would certainly bring in construction financing earlier in the process. We do go through the syndication process and we will get bids on both sides either tax equity debt financing or if we can efficiently sell it and get the appropriate value for the tax equity in the projects we'll do that. We obviously -- the strategy of the company is to retain a meaningful percentage of these so that we can benefit from the future cash flows. And as I said in my remarks with the portfolio that we have today, generates $7 million to $8 million of revenue with an EBITDA profile north of 40% if you add another $50 million to $60 million of revenue with same or better EBITDA profile that dramatically changes the EBITDA profile of the business as a whole and puts us in a positive position. So, clearly our strategy is to continue to grow this but as opportunities present themselves we'll consider spinning certain assets off as well.

Okay. And just last one for me can you talk about -- have you learned anything different from the carbon capture you've been doing right now or is it really learning curve going to accelerate once the plant is up and running? And then concurring to that in terms of distributed hydrogen certainly the [indiscernible] conference has a lot of discussion about fuel cells powered with batteries certainly on the commercial trucking side. I realize this is more for your partnership with Toyota is on light duty side. But economically with rising gaps it almost seems like the cost of the fuel -- at least on a energy equivalent basis is going to be less challenging. Can you talk about maybe the economics of distributed hydrogen in particular from the fuel side and how one of your -- the profit in total could be economical or have a positive ROI because it seems the cost of fuel is one of the biggest hurdles right now to making those projects viable?

Carter, it's Chip, I'll take that first with the carbon capture. So, the facility we're building in Alabama is using current technology and the real purpose of that plant is that we're going to run that unit on both emissions from the coal plant as well as the gas plant. And the not so subtle differences there are the amount of CO2 in the incoming gas varies dramatically being higher on carbon from a coal plant and lower from a gas plant. So we don't expect any of the hardware if we apply that technology in bigger plants or different applications to change. It's really just the kind of the how do you run a dual fuel application, we have a such a wide range in gas concentration on the inlet side. Even my other not so subtle comment I guess in the script was, I talked about opening up the opportunity for using the same technology in its current form for industrial applications. And power generation is roughly one-third of the CO2 emissions in the world, industrial is about a third and transportation is the other third. So that is another way for us to really expand the marketability or the market deployment of that. Now those applications in industrial we don't need that testing relative to the lower concentration because the concentration from those particular projects being post usually boilers or things are higher. So we're ready to go with those and in fact, we have many proposals out there to deploy that carbon capture system for industrial applications. Relative to the hydrogen strategy, the hydrogen strategy is -- the key to it is that you have to have affordable fuel to the consumer based to the equivalent of gasoline today. And you're exactly right, the price of gasoline has going up, it doesn't necessarily reflect what's happened to the price of natural gas and biogas, they are kind of independent things. But yeah, you would think that that the thought that the price of gas goes up more we make our job easier I would say, that's fine, but as I maybe -- as we've shared with people before, the economics on this kind of work at kind of current prices as well. So we have a whole strategy around this. And the fundamental premise is that we can produce power and hydrogen basically doubling the revenue from this device with pretty much the same capital base. And that's how the maths work. So the strategy is the same, the economics could get better as you said given the environment. But we had win even if they didn't change. So we're pretty positive about deploying many more of these hydrogen things not just in the U.S. but for a couple of key markets in the rest of the world.

I appreciate all the color guys. I will take the rest offline. Thank you.

Your next question comes from the line of Eric Stein with Craig-Hallum. Your line is open.

Yeah hi, it's Aaron Spychalla on for Eric. Thanks for taking the questions. Maybe first on the generation bucket this quarter. Can you just talk about the impairment charge kind of what happened there? Are there any other costs that are going to be kind of recurring next quarter going forward? And then even excluding that, the gross margin for that bucket looks like it was kind of low double digits somewhat below your target going forward. Can you just talk about what's going on there, and that target going forward?

Sure, I'll take that one Aaron, this is Mike. So on the write-off that we talked about, is about $400,000 write-off of small projects that we had some investment in and really the conditions that the site has changed and we decided to end that project, those are all the costs associated with it. You won't see any trailing costs. As far as the overall margin in the quarter, I would acknowledge it ticked down a little bit from last quarter. We did have some maintenance activities in the quarter. I think the more important metric in the Generation Portfolio is to look at the overall EBITDA percentage of that portfolio. There is a meaningful amount of depreciation that's in cost of sales, north of $1 million -- I think it's $1.1 million, in that range. So you add that back in and you're still looking at a very strong EBITDA percentage for that portfolio.

Okay, thanks. And then may be secondly on the TriGen portfolio you've touched on it a little bit. But what are the next milestones to look for there? And any more color you can share on how the pipeline is shaping up? Chip you mentioned U.S. and abroad and some opportunities on the East Coast that obviously is to be one of the most exciting parts of your business.

Yes. So the first milestone is to execute on the current project with Toyota. There's -- that's a 2020 thing is what our contractual requirements are. We are working with some other people including Shell and some others that manage all the different aspects of that. So we are going to learn some things process wise and as we build that plant but that's all going fine. We -- there's a demand, there's a -- we have looked at the demand for vehicles, California, and then we looked at the East Coast and we've looked at a couple of other countries including Japan. And when you kind of do the calculation and you kind of look at things by 2025 frankly, which means you got to have infrastructure in place for how many cars you want to have like 2023, 2024. You look at there's the sizable number of these plants have to built to supply that. So we've kind of done that calculation and we are pursuing many different things in terms of building more plants within California, within the East Coast and then within these other markets. So I would say that stay tuned, but we would expect that in the next several months we would have more projects to announce.

Your next question comes from the line of Craig Irwin with ROTH Capital Partners. Your line is open.

Chip first thing I wanted to ask is a bigger picture question. So how should we think about the transition as you move to pursue more traditional construction financing for your Generation Portfolio and then levering up the projects once they are completed? Is this something where we should look for small incremental steps over the next couple of years or are we likely to see individual projects executed with more traditional financing mechanisms in a near time frame?

We'll always take your calls just for the record -- your questions, so don't worry about that. But I will start and may be Mike can finish it off. But we -- for clarity we've put together that slide, we've actually laid out all the different projects and whey then would go COD if you will. And they are not all lined up and are not all going to happen at one time. So the way we kind of see this year and if you include may be even selling some assets like we just did recently, this is going to be -- and when new things come online they are obviously producing cash. So, the combination of managing thoughtfully the cash here and the debt from these projects we, it's our expectation is a smooth transition growth, I'll use the word cashless. But as Mike said, there is some equity but lot of that equity we can probably produce from working capital that we've built over time and included in our balance sheet at the moment. So, I don't know Mike if you want to add anything to that answer.

Yeah. Good morning, Craig. Yeah, I'd agree with what Chip said and you'll see project financing coming in here in the next several quarters. I think it will be prudent as we grow these projects. Obviously the LIPA projects are sizable and we will use construction financing for those. We self finance the smaller projects that are on balance sheet that are close to COD. For the instance the Tulare project we just sold and the Triangle Street. We felt going out and doing construction financing for smaller projects didn't make a lot of lot of sense given the working capital that we had, but as these bigger projects start to get built you will see that get added to the balance sheet.

Craig I would say that we've seen increased interest from more companies for these kinds of projects. So, particularly in this environment we are in the U.S. where tax equity could serve these things here. But we've used a couple of different firms but there is other folks that we've talked to as well that, so I think the pool of interest in expanding actually.

That's really good to hear. So, the next question I wanted to ask really is specifically about Tulare. Can you maybe discuss the factors that contributed to your decision to sell Tulare? Maybe anything you can say about why this specific plant and why now? Thanks for any color.

Sure. So, we have had a great relationship with NRG Yield. They own an asset in Connecticut. They've been tactically looking at assets in our portfolio. They did this on this project. We were also looking at potentially doing other sources of financing, but found the offer attractive. It was around the time of commercial operations and it's an entity that we know very well and it was a very smooth transaction and brought capital back into the company. So, for all those reasons, we chose to do that. But as you know with these projects, FuelCell Energy continues to have a measure role. There is 20 year service agreement that we have with NRG Yield now. Basically we operate and service the plant for them. They are an investor in the project and own the project, but we will continue to have an active role in this. We're also in the process of building another project at Tulare, it's a great long-term customer for the company.

And then another high level question, the investment tax credit having that reinstated at the -- back in February was a pretty nice thing. Can you maybe share with us anything you can say about how this is impacting specific conversations with those customers you're getting line of sight on potentially executing projects that might not have without the ITC renewal?

Okay. So I'll maybe start again Craig and Mike can finish it off. Clearly that ITC would that help us, and I think you have to -- everybody is a little different in that regard. What helped us really was the -- with this Generation Portfolio strategy it's helped us to increase the amount of debt the projects would attract. So that's great. So did it accelerate anything? Not necessarily. But it's certainly helpful going from a cash perspective going forward here to execute these. There are some projects that were not generation assets or PPAs that the ITC would have a positive impact as well, but not to minimize that. But I mean in general it's more for us -- some new projects that are going to bought, but the ability to attract more debt to get this Generation Portfolio increasing. Mike?

Yeah, I agree with that. And on the financing side, it just broadens the number of firms that would bid. Since because you now have the tax equity component.

Great. That's good to hear. Congratulations again on the progress.

Your next question comes from the line of Colin Rusch with Oppenheimer & Company. Your line is open.

Thanks so much guys. With this use of inventory for the project. Can you talk about what the working capital needs are going to be going forward. And how we should see that trend over the next few quarters?

Good morning, Colin this is Mike. I will take that. So when you look at our inventory balance today as of the end of the second quarter, we had about $55 million of inventory on balance sheet. Of that, about $36 million is work in process so these are pretty close to finished goods can be applied to the projects and term very quickly. Yeah, I would say we're always going to keep some level of that, but I'd say there is still opportunity to squeeze cash out of inventory. And as I'd also said in my remarks, when you look at project assets, north of $40 million of project assets had not been financed yet. We look at that as a near term opportunity as well to bring cash into the company. So going back to the example that I talked about in my remarks, there will be some equity required in projects, but we're able to use our working capital we have a very strong balance as I just mentioned in inventory, in project assets that we can pull cash out of right now to recycle that into other projects and obviously a good cash balance on top of that.

And Colin I'd just add one more thing to that. We perhaps our portfolio that we talked about is somewhat modest at the moment in terms of 11 megawatts or so generating about $8 million. But we are very confident in the ability of those projects on an EBITDA basis to generate very attractive margins. So there is two things, one is to get the project going, second is once it gets going it generates cash. So we just we're very comfortable on that model and we have experience to support that enthusiasm in that model.

Great. And then just going back to the current customers. Can you talk a little bit about the effect of levers that you are seeing in accelerating the sales cycle, what's really working right now with these folks?

Well I mean at the end of the day the ability to be competitive whether it would be a PPA price or however, we used to add value. We've been focusing on our value proposition primarily, there's a bunch of noise out there, people have other ideas, we're just kind of putting our head down and we know that -- we know the costs we can do will be -- what the future will be. We know the competitive landscape and the other levers in a project are typically can you get them financed and have the capital to do that. We have the model, so its, yes. Things like a track record of doing the right thing. That's not a minor detail even with public bids, that reputation kind of serves you well. But we have said for a long time, there's no short cuts in the energy space. And that I think is one of those things that served us well. So from a lever perspective, I think doing what you say is one, second is that having to -- have a model that is finance-able which we proved we have, and then third, we've got the cost structure to compete with anybody in the world.

[Operator Instructions]. Your next question comes from the line of Jeff Osborne with Cowen & Company. Your line is open.

Can you keep your answers brief, most of them have been answered so far? On the DEEP awards in Connecticut, let's just for argument sake say that you win 10 to 20 megawatt this month. In your RFP, when would the construction be and I guess when would the interconnection be, if you were to sort of plot this on that helpful chart that you have of the projects you already have under contract?

This is Chip. Good morning. Yes, so as I mentioned, there's eight different projects and most of those have pretty good line of sight to sub stations Jeff. So just physically, we did -- that was -- part of our strategy was to minimize, one, the expense of interconnection, but secondly, the effort there. And we've already run all of these sites by the utility company, so we have a good -- they have supported us in the past, they know our folks and we don't see any issue with that. So I would also say that Connecticut is a lot of quicker in a lot of the permitting issues and stuff like that than others like the Siting Council and stuff. So in the RFP I won't may be get this 100% right but I think any projects that are selected I think have to be done by like 2023 or something which is more driven by the wind industry than any -- than us. But we would expect to build these projects depending on interconnection of course but in the 12 to 18 month timeframe I would guess.

Two other quick ones. Can you remind us on the solid oxide win that you had with NRG in Pennsylvania, when that would be delivered and any just update on that program in general? And then the last one I had was from Mike, just as you look at the next call it two to three quarters, is there anything in the line of sight that you have as it relates to your service revenue stream in terms of stack replacements just as we think about the cadence of that? It's being a lumpy line item in the past, just wasn't sure over the next few quarters if you have one or two quarters where there's a little bit of a surge there just from a stack replacement run rate or if the current levels should be consistent over the next few quarters?

So I will take the solid oxide question and then I'll give it Mike to answer your last question there, Jeff. So, yes we have a solid oxide project that we're going to be installing at the NRG Yield's facility in Pittsburg. The site has already been prepped for this and we expect to ship the hardware here in June, I think latter part of June if I'm correct on that. And that start up should be fairly simple here everything has been pretty much been done. So, I will expect third quarter of the calendar year that unit will be running that facility in Pittsburg.

And Jeff, this is Mike. On the service revenue line, I said just to go through the accounting for folks on the call there is two components of accounting for service revenues, it's the day-to-day operations and maintenance and that's pretty ratable and that's what you seeing come through our financial statements. So over the last couple of quarters and then as we do module replacements we have deferred revenue and costs related to those and when they get deployed that will drive higher revenue and cost of sales go along with it. We haven't put out specific revenue guidance, so I can't comment too much on that other than say that the range that the operating expenses and the operating revenues have been in, we expect to continue to be in this range. As you think about kind of what's out in the fleet, the bigger project the Dominion 15-megawatt project you probably expect to see module replacements for that as we go into next year since that will have been online for five years at that point.

Got it. Thank you. Appreciate it.

There are no further questions in queue at this time. I will turn the call to back to Chip Bottone.

All right. Thank you very much Tiffany. And thank you everybody for joining the call today. Hopefully what the takeaway was that we're very focused on what we have to do to reach profitability and continue to build on that foundation. And critical to that is that obviously the execution of these different projects. You can probably tell from the comments and the voice that we're also very keen on the other things we are working on and I think that people should be on a lookout for further results of those efforts as well. So, we look forward to talking to you on the next earnings call. And hope everybody has a great day. Thank you very much.

This concludes today's conference call. You may now disconnect.