Kurt Goddard - VP, IR Chip Bottone - President and CEO Mike Bishop - SVP and CFO.

Les Sulewski - Sidoti & Company Sven Eenmaa - Stifel JinMing Liu - Ardour Capital Ben Tainter - FBR Capital Markets Thomas Boyes - Cowen.

Good day, ladies and gentlemen, and welcome to the FuelCell Energy Second Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] I would now like to turn the conference over to our host of today’s call, Mr. Kurt Goddard, Vice President of Investor Relations. You may begin. .

Good morning, and welcome to the second quarter 2015 earnings call for FuelCell Energy. Yesterday evening, FuelCell Energy released financial results for the second quarter of 2015.

The earnings release, as well as a presentation that will be referenced during this earnings call, is available on the Investor Relations section of the company website at www.fuelcellenergy.com. A replay of this call will be available two 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 the company's plans and expectations for the continuing development and commercialization of our FuelCell technology.

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. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer and Mike Bishop, Senior Vice President and Chief Financial Officer.

Now, I would like to turn the call over to Chip Bottone.

Chip?.

Thank you, Kurt. Good morning, everyone, and welcome. Please turn to slide 4, second quarter 2015 highlights. We are pleased with our customer retention demonstrated by repeat business and attraction of new and increasingly diverse interest.

We have made continued progress on multiple strategic initiatives that are positioning the company for growth in large and diverse markets, improving the affordability of our solutions and balance sheet management that provides a flexible capital structure to support our growth and profitability.

Our team was pleased to recently announce two new projects with existing customers. Under power purchase agreements or PPAs that we executed with these customers, we are installing megawatt scale power plants at Pepperidge Farm’s commercial bakery in Connecticut and City of Riverside’s wastewater treatment plant in Southern California.

Both projects demonstrate these repeat customers’ continued satisfaction with our company and our increasingly cost competitive ultra-clean solutions. These will add approximately $40 million to backlog in quarter three. We are excited about the development of our proposed 63-megawatt energy park at Beacon Falls, Connecticut.

If constructed as proposed, it will be the largest fuel cell park in the world. This project demonstrates our ability to competitively bid on large projects and illustrates our future revenue backlog potential with developing large scale projects.

Projects like this contribute to margin expansion, economies of scale and leveraging supply chain purchases. We are positioning our multi-megawatt offerings as a preferred resource in all of our markets. As the name suggests, preferred resource solutions are for rate payer costs commensurate with grid costs.

It also highlights our ability to easily site plants in populated areas, operate cleanly and quietly, requires minimal land and minimizes or avoids transmissions, execute projects timely and reliably and provide several technical and stakeholder friendly advantages that gain support and demand for our solutions.

We are building momentum with global environmental solution for reducing CO2 from coal and gas-fired power plants as well as being on the forefront of enabling affordable distributed hydrogen. Our continued focus on cost reduction, affordability and margin improvement is enhancing the competitiveness of our solutions.

This is exemplified by our expanding margins even on lower volumes, which we will address in detail later in the presentation. Finally, we are maintaining a strong balance sheet and liquidity to support the growth ahead of us.

A strong financial posture is essential for successful execution of large scale projects and permits us to undertake PPA-based projects that we then sell in completion to project investors. I will discuss our markets and operations in more detail, and then turn the call over to Mike Bishop, our Chief Financial Officer.

Please turn to slide 5, large and diverse markets. FuelCell Energy’s expanding global market opportunity encompasses three growing areas, preferred resources for distributed power generation, distributed hydrogen and emission reductions with carbon capture.

We are targeting all of these markets with solutions based on our core Direct FuelCell technology platform. We estimate the value of the preferred resources market of on-site and utility scale at $18 billion representing about one-third in equipment revenue and two-thirds in service revenue.

We see the market size continue to expand with greater appreciation for clean on-site distributed generation that enhances grid resiliency, is affordable, and has a high power density per acre of land. Leveraging the versatility of our core Direct FuelCell technology or DFC platform is an integral aspect of our strategy.

Our carbon capture and distributed hydrogen solutions are based on our global fuel cell components, the same fuel cell components used at Asia and Europe for on-site and utility applications. The external equipment or balance-of-plant is configured to adapt these derivations to the specialized functions.

This avoids the need for different production and processes or separate fuel cell component inventory. The distributed hydrogen market is comprised of both industrial and transportation applications.

We estimate the addressable hydrogen market at about $7 billion for industrial and transportation combined targeting only a small portion of the overall market. Our carbon capture market is comprised of coal-fired and natural gas opportunities.

We have a scalable solution and this market estimate of $25 billion is based on the fuel cell project size of 25 megawatts and only 1% of the operating fleet of coal and gas-fired plants in our existing and target markets. One 25-megawatt project equates to about $300 million revenue opportunity for FuelCell Energy.

Industrial opportunity such as cement manufacturing are potentially additive over time though not included in the estimate. Based on the attributes of our Core DFC technologies, our solutions are uniquely capable of addressing the needs of these new markets. I will address the advantages of our distributed hydrogen and carbon capture solutions later.

Please turn to slide 6, preferred resource market update. We have transitioned our company from being a supplier of products to being a developer of projects. Completed and operating power plants are attractive to investor owners and we can move forward more quickly with more projects and growth.

At the same time, we are positioning our solution as preferred resource, which fairly describes the value and problem solving ability of our company, people and power plants. Today, I will highlight the diversity and favorable trends of our markets and project pipeline as well as the economics our solutions can deliver.

As I mentioned in the highlights discussion, we are executing on two new megawatt scale on-site combined heat and power projects with repeat customers at Pepperidge Farm and City of Riverside. At this time, we are completing an on-site CHP installation with the University of California Irvine Medical Center.

These projects exemplify three key markets for on-site CHP, which our ultra-clean power plants are duly suited, food and beverage, municipal wastewater treatment plants and healthcare.

Together, these on-site installations represent a total of $60 million in pending project sale and service revenues that will be realized in future quarters as projects were sold to investors as we execute on multi-year services agreement.

On-site CHP project like these are attracted to investors because they offer competitively priced PPAs with strong credit off-takers and generate predictable cash flows and appealing internal rates of return or IRR.

As shown on this slide, the typical 1.4 megawatt on-site fuel cell project can be delivered in five to nine months under a PPA that will save the end-used on power costs and generate an unlevered after-tax IRR of between 9% and 11% for the investor owner, a rate is attractive to investors such as yieldcos.

Rapid construction minimizes expense of construction period financing, which supports stronger margins. As shown on the upper graph in the middle of the page, a single 1.4 megawatt project can deliver $20 million of revenue backlog to FuelCell Energy. On the top far right, we depict a select portion of our on-site projects.

Few projects in particular that we have had in our pipeline from the last call have been closed. We show an increasingly large per megawatt project size with diverse end markets that we are working towards closure. The activity is supported by our increased affordability.

The model is even more advantageous to FuelCell Energy and our large utility scale market.

As you move through the pipeline of transition into executable projects, multi-megawatt projects will generate substantially higher gross profits and higher margins from economies of scale, reduces customer acquisition costs, and on a per megawatt measurement, it leverages our existing service infrastructure.

As an indication, a representative 19.6 megawatt utility scale fuel cell park can be delivered in 9 to 15 months after a PPA that is priced from $0.09 to $0.11 per kilowatt hour and generate an unlevered after tax return of between 8% and 10% for the investor owner. Power costs can vary depending on the application and geographic region.

As shown in the lower graph in the middle of the page, the utility scale project generates for us around $200 million in revenue and backlog. Obviously, even a very modest number of projects of this size can have a substantial impact on revenue and we have multiple projects in our pipeline.

Utility scale projects are attractive to investors for the same reasons as on-site combining power projects and they also provide higher returns, cash flows and additional revenue streams like the renewable energy credits that similar megawatt sized intermittent technology projects such as solar.

For example, to provide the same cash flows as a 10 megawatt fuel cell park project on just 1 acre of land the solar project would need to be 35 to 45 megawatts and require 35 to 45 acres.

These significant land use requirements and intermittency make solar projects substantially harder to site in urban areas where land is expensive and scarce, and transmission is not desirable.

Our utility scale pipeline consists of numerous large projects, including a 63 megawatt Beacon Falls project that has progressed since it first appeared on the select list of projects during the first quarter of 2015 call. Overall, our pipeline is about $2 billion for North America and Europe, royalty revenue from Asia is additive.

We have increased activity; projects are trending larger with increasing margins and have a nice mix of end markets that see the value creation. Please turn to slide 7, operational execution. Our two stage manufacturing expansion initiative is moving forward in parallel with our expanding project pipeline and evolving business model.

It is a key element of our plan for growth; we are working to finalize a number of agreements supporting the expansion of our North American facility in Torrington, Connecticut and anticipate breaking ground on the project in 2015.

With state-of-the-art automation equipment being completed with the POSCO's installation in Pohang, South Korea, our Asian partner’s facility is currently in startup mode. Plans are on track that we expect production to commence this summer and estimate about 30 megawatts of production for the Asian facility in 2015.

Aggregating global demand for supply chain optimization is a key element of our manufacturing strategy. When added to the 70 megawatts of purchasing from North America, this new Asian production increases our 2015 global purchasing by 40% giving us greater purchasing leverage throughout our global supply chain, driving down product costs over time.

This supports the downward trend in the LCOE or levelized cost of electricity of our solutions and contributes to the increasing competitiveness in our markets. Our organization is focused on completing specific project development initiatives that are contributing to expanding project pipeline and closures.

In new product development, our high efficiency fuel cell hybrid power plant or HEFC is on track for 2016 release.

An innovative adaptation of our core technology, it is designed for applications with significant power needs, significant reduction in operating expenses with its world leading 60% electrical efficiency but minimal thermal energy demand.

The HEFC is a targeted solution that provides attractive economics for the global data center market and enhances our attractiveness within utility market. This is a very important development for FCE, the industry and most importantly, our potential customers globally. Please turn to slide 8, advancing new markets.

We are actively advancing into adjacent markets valued at $32 billion targeting existing classes of customers with technically proven and affordable solutions. We are witnessing increasing momentum and are in discussions on several potential projects with multiple customers and partners.

Our Company's innovative unique carbon capture solution captures CO2 emissions from coal and gas-fired power plants destroying pollutants in the process and does this far more efficiently and affordably than conventional methods.

The solution operates by routing the power plants through gases rather than ambient air directly into our standard fuel cells. As the fuel cell plants remove or concentrate harmful emissions, they generate revenue from the power and other potential revenue streams produce, whereas conventional technologies require power and add to operating expenses.

The ability to generate clean electric power and capture other revenue streams is an industry game changer as compliance obligation becomes a project with an attractive financial return. This solution offers numerous advantages over conventional capture technologies. Importantly, our capture solutions are available and ready now for deployment.

Power plant operators can adopt our technology incrementally, spreading the investment out over time. Our solution can extend the life of a coal plant and if the coal plant is closed at some point in the future, the fuel cell plants are independent of the coal plant and can continue generating power.

In contrast, conventional carbon capture technologies are dependent on the coal plant and would have to be written off if the coal plant closes. We had a targeted effort with utilities, energy companies and governments that has resulted in meetings and site visits.

We envision starting with the 25 megawatt plant for coal application that can reduce CO2 by 600 tons per day. As depicted earlier in the presentation, we estimate the market potential to be $25 billion and 125 megawatt plant would be worth $300 million in revenue and backlog for equipment and services.

In parallel, we are looking at the development of a similarly sized gas-fired project. Our clean and affordable distributed hydrogen solution offers an environmentally friendly alternative to conventional hydrogen production methods at a competitive price point.

On-site production of hydrogen provides the user with enhanced reliability of supply and flexible revenue or value streams for electricity and heat as well as hydrogen gas. Depending on the user's needs, the multiple value streams and municipal off-taker for power and heat is attractive to product capital.

This solution operates on the principle that the core fuel cell modules' electrical power in hydrogen outputs could be adjusted. In practice, we adjust the electrical output and generate more or less hydrogen depending on the users' needs and economic factors.

Configured for hydrogen co-production, our 2.8 megawatt power plant can produce 2 megawatts of power and enough hydrogen for a fleet of 1,500 cars. Our solutions are designed to serve two hydrogen markets, transportation and industrial, both offer numerous advantages.

Transportation solution support and renewable fueling infrastructure to service hydrogen powered vehicles. The fueling infrastructure industrial market for hydrogen-powered vehicles can be enabled by the unique characteristics of our DFC technology base plants and our business model.

It operates by converting the renewable biogas produced by the wastewater treatment facility into electricity, heat and hydrogen; make it zero carbon solution that is cost competitive with gasoline.

A highly versatile technology, the solution simultaneously supplies the wastewater treatment facilities around the clock electricity and heat requirements, disposing of harmful biogas in the process and generating a hydrogen revenue stream.

Industrial solutions operating on clean natural gas support manufacturing industrial applications with an economical solution that enhances security of supply. Our low carbon solution offers economics that are competitive with central gas generation and subsequent delivery by truck.

We envision starting with a 10 megawatt four site project that can supply 5,000 kilograms of 100% renewable hydrogen per day, enough to support 6,000 cars to a broad dispensing network.

As depicted earlier in the presentation, we estimate the market potential to be $7 billion and this 110 megawatt project will be worth $170 million in revenue and backlog for equipment and services. Discussions with a very focused stakeholder group are on process and this model can be replicated globally.

Before summarizing our results, I would like to turn the call over to Mike Bishop, our Chief Financial Officer, who will review our financial results for the quarter.

Mike?.

Thank you, Chip, good morning, and thank you for joining our call today. Please turn to slide 9, titled financial summary. FuelCell Energy reported total revenues for the second quarter of 2015 of $28.6 million compared to $38.3 million for the prior-year period.

Gross profit for the second quarter of 2015 totaled $2 million compared to $1.6 million for the same period last year. The gross margin percentage in the quarter was 7.1% compared to 4.2% in Q2 2014.

The higher gross profit and improvement to gross margin percentage year-over-year reflected continued cost reductions and manufacturing efficiencies along with a mix improvement with higher margin installation activities in the quarter. These numbers are reflected on the first two charts under the heading quarterly financial metrics on this slide.

We recognized a charge of $700,000 in the quarter for obsolete spare parts for the legacy 250 kilowatt product line which had an impact to margin. As we transition our focus to multi-megawatt fuel cell parks and to include early sub-megawatt pilot projects, this service inventory was no longer needed for the business.

Excluding this charge, the gross margin percentage would have been approximately 10%. Total operating expenses were $10.8 million for the second quarter of 2015 compared to $10.4 million in the prior year period with the increase reflecting marketing and project developing activities.

Net loss to common shareholders for the second quarter of 2015 was $10.7 million or $0.04 per basic and diluted share. This compares to $16.6 million or $0.07 per basic and diluted share in the second quarter of 2014.

Adjusted EBITDA, which is a measure of cash flow and is based on earnings before interest, taxes, depreciation, amortization and other income and expense, totaled negative $7.7 million for the second quarter of 2015.

The Company's total liquidity at April 30, 2015 was $150 million, consisting of $110 million of cash and cash equivalents, including restricted cash, and availability of $40 million on the project finance facility extended by our partner, NRG Energy.

In comparison, total liquidity at the end of the second quarter of 2014 was $97 million as reflected in the chart on the top of the slide.

In addition to these totals, agreements are being finalized with the State of Connecticut for $20 million of low interest long-term loans and $10 million of tax credits to support the expansion of the Company's Connecticut manufacturing facility.

Our liquidity position helps to support the growth enabling the commencement of projects and the subsequent sale to project investors. The last chart on the top of this slide is backlog, which totaled $312 million at April 30, 2015 compared to $343 million at the end of Q2 2014.

Backlog includes product sales orders of $91 million or 54 megawatts, service backlog totaled $204 million and advanced technology contract backlog was $17 million at the end of the second quarter.

Subsequent to quarter end, we signed two new agreements with three key customers, which added approximately $40 million to backlog and as reflected in this chart. I would like to continue to elaborate on the Company's project development model.

As we announced projects that are being developed and we begin construction prior to the sale of the project, the project costs are reflected on the balance sheet. Revenue will be recognized on these projects at their commercial operations date or COD.

As explained last quarter, we have a line item under the current asset section of our balance sheet titled project assets. Project assets totaled $9.9 million at April 30, 2015 and reflect costs incurred to-date for projects that FuelCell Energy is developing but have not yet sold.

The future sale of these projects will result in recognizing revenue for the entire projects at the closing date, which contracts from the percentage of completion method of revenue recognition utilized for projects that are sold prior to the start of construction.

We have a number of projects announced with executed power purchase agreements or PPA for sure with the off-taker of the power. We will commence construction with an executed PPA and then work with project investors who purchase the power plant at or near COD.

We believe this project development approach helps to accelerate order flow and expands the margin potential for projects as we avoid high cost construction period financing from project investors. We are self-financing during the construction period utilizing our cash and the $40 million project finance facility extended by NRG.

As Chip already discussed, our fuel cell projects offer attractive returns and financial profile to project investors, including consistent cash flows that are not dependent on weather or time of day and with counterparties that have strong credit profiles. Now, I would like to address the guidance on the bottom portion of the slide.

The first bar in the chart is inventory plus project assets. Inventory includes approximately $25 million of substantially completed power plants, which can be rapidly deployed and converted to revenue. The next bar is actual Q2 2015 revenue. Product revenue for the quarter consisted primarily of fuel cell kits along with installation revenue.

Revenue was lower than recent quarters due to the absence of complete power plant sales as a result of the continued transition to our project development model. The third bar is projected average quarterly revenue of $38 million to $48 million for the third and fourth quarters of 2015.

The increase in the second half reflects the expected conversion of inventory into product revenue and increasing service revenue. Looking ahead to 2016, the fourth bar on the chart reflects a higher mix of complete power plant sales and conversion of PPA projects at the current production rate, which will also address stronger margin.

Finally, the last bar on the chart represents the revenue opportunity if we were to ramp production beyond our current level up to 90 megawatts annually. We have available capacity to make such a ramp as our larger pipeline projects convert to backlog.

In summary, we continue to demonstrate the margin expansion capability of the business, we remain focused on topline revenue growth with the closure of projects in our pipeline and our balance sheet remain strong as we continue to execute on our business plan of growth through deployment of our multi-megawatt fuel cell projects.

I will now turn the call back to Chip.

Chip?.

Thank you, Mike. Please turn to slide ten, summary. Our talented team is continuing to execute on multiple strategic initiatives. They're enhancing our prospects for growth and profitability. Global market size is indicator of our potential and we are continually expanding that potential with new and more affordable solutions.

With solutions that have been designated preferred resource, our sales pipeline is comprised of numerous high quality projects, including what would become the world's largest fuel cell park.

We're evolving our project development model focused on large and larger projects; PPA-based projects and deployment of inventory as our pipeline converts backlog, we’ll drive future revenue. Capacity expansion plans are proceeding well and will continue to further cost reduction and operating leverage.

We are maintaining a strong financial profile to support our growth. Lastly, we're advancing into new markets with solutions derived from our core technology and we're excited to see the growing momentum in our carbon capture and distributed hydrogen markets. We are enthusiastic and optimistic about our future prospects.

I thank our talented associates for the hard work and I thank you for your continued support. Operator, we'd be happy to take questions at this time..

[Operator Instructions] And our first question comes from Les Sulewski of Sidoti & Company. Les, your line is open..

Good morning. Thank you guys..

Good morning, Les..

So, in regards to second quarter revenue, other than the absence of complete power plant sales, were there any licensing contracts that terminated during the quarter?.

Good morning, Les. This is Mike. I'll take that question. So, license revenue coming through in the quarter was approximately $1.2 million. This is higher than in the second quarter of last year as our partner POSCO Energy continues to execute in Korea. So, I think you said termination.

No termination of license occurring agreements, just continued growth in that line..

Okay. I'm just trying to figure out essentially why the revenue line was a little bit light prior to your guidance earlier quarter..

Yeah, I guess Les, what I would also mention is as you said, we did not have any complete power plants coming through in the quarter. We are building assets on the balance sheet, project asset line over $9 million and inventory is up this quarter as well as we showed on the slide. We expect that to convert to higher revenue in the coming quarters.

Our guidance range for the next two quarters is an average quarterly revenue of $38 million to $48 million..

And then, in reference to that guidance for the next two quarters, is your visibility improved and then also, I guess on that $9 million balance sheet item in project assets, what amount of that, if any, will convert into revenue over the next two quarters?.

Sure, Les. On your last question, the project assets are assets that we're building, which are for power purchase agreements at customer sites. Examples that we talked about are the UCI Medical Center, Pepperidge Farms and Riverside. Those projects will come to COD in the beginning of 2016 and will convert to revenue.

As far as our pipeline we have near-term high probability of pipeline, which will convert into backlog in the coming quarters and expect to deploy inventory to generate additional revenue as we've outlined in our guidance..

Okay. I guess one more.

On the $3.3 million drawdowns from NRG, what was that in reference to?.

That was the UCI project that I just mentioned, Les, as we execute on the construction period. We do have availability under that finance line and we’ll look to use that to offset some of the working capital that we’re incurring for those types of projects..

Okay, great. Thank you. I'll jump back in the queue..

Thanks a lot..

Thanks a lot..

Our next question comes from Sven Eenmaa of Stifel. Your line is open..

Hi. Thanks for taking my question.

First, I wanted to ask about the 63 megawatt project and how far along you are in the project to get closer to actually a point where you can start to recognize bookings on that?.

Good morning. This is Chip. I’ll take that. The way these projects work is, obviously, you have to have land, you have to have a lot of other things, access to gas in this particular case and interconnection.

So what happens is then you have to go get various approvals, Siting Council approval from the difference municipality and things and all those take time. Our plan is to develop that in multiple possible ways.

One was, we can do it all in one project, there is different request for proposals coming out within the state, or we can do it in pieces in a similar fashion. Secondly, we can develop it in pieces in a merchant model.

What’s somewhat unique about the State of Connecticut is there are a variety of different revenue streams that you can monetize such as renewable energy credits that fuel cells create.

So it becomes really a question of, as we finish more of the permits and things like that which we should get in the coming months, we’re going to look at that as financing it through multiple different programs.

So -- but as Mike said, the way that would probably work, depending on the final model here is that may also be something we would use this operating model for or depending on how the financing of the project goes, we could recognize revenues sooner rather than later..

Got it.

And is that project really a contingent also getting access to investment tax credit in terms of how you have positioned the return on it or because that is obviously – there is kind of deadline at the end of ’16 by which it would need to be completed?.

Yes, sure. Good question. So we have kind of two different – it’s different phases. The investment tax credit for those on the phone here, the way it’s currently drafted is that you have to have equipment in operation by the end of December 2016. Now, that could very well get extended as it sometimes has.

But the short of that is that’s what I mentioned, we’ll do this in phases.

So certainly, if you are able to -- the way the approvals work for this, right, the way we've got a plan that I personally had a meeting with the other partners here just this week or last week, it could get executed in parts and still become part of the investment tax credit by 2016.

The second and third phase of it, the way we looked at it, we could utilize the high efficiency fuel cell and the high-efficiency fuel cell, unlike the product in Phase 1 has a higher electrical efficiency and therefore, it's about 20% higher efficiency, which would actually help the return of the project and mitigate some of the potential loss in the investment tax grade.

So we’ll find a way to do it. It just got a lot of moving pieces, but one thing is, it’s -- we have land rights with the partner, which is very important. We’re very excited about it, we’re very capable of doing it. The press for that project has been nothing, but spectacularly supported, so those are all combinations of things that can get done..

That's very helpful. A couple of quick follow-up questions here.

In terms of their revenue guidance of 38 to 48 average, what is the kind of the implied gross margins on that?.

Good morning, Sven. This is Mike. So we would expect gross margins continuing to go up from where we reported this quarter. As I mentioned in my remarks, our gross margin percentage in this quarter was a bit damper and that we did take an inventory charge somewhere around the 10% range, excluding that.

So we are targeting margins north of 10% in the low-teens as we continue to execute on the US pipeline and bring those projects through backlog and into revenue recognition..

Got it.

And then final question in terms of the two 1.4 megawatt projects, I just wanted to clarify that, are these also recognized only at COD or are those percentage of completion revenue recognition?.

Sven, yes, good question. So, those two projects that Chip mentioned, Pepperidge Farms and Riverside, those will go into project assets on the balance sheet and be recognized in revenue at the commercial operation date. So after we build them, we will sell them and recognize the revenue completely at that time..

Got it, thank you..

No problem..

Our next question comes from JinMing Liu of Ardour Capital. Your line is open..

Good morning. Thanks for taking my question..

Good morning, JinMing..

Yeah.

First, just a follow-up on the -- I didn't hear clearly, how much was the revenue from POSCO during the quarter and how much was the engineering revenue for the quarter?.

Good morning, JinMing. This is Mike. So POSCO was a large percentage of revenue for the quarter coming through the financial statements. I believe, they were in around the 60% range as far as services, revenue, equipment, EPC type work, we recognized about $5 million of that coming through the quarter..

Okay, got that.

So regarding the -- you mentioned the potential for the distributed hydrogen market, what kind of potential price of hydrogen we are looking at here? I understand currently growing rate for hydrogen may be in the $4 and $5 per kilogram range, so are you going to be substantially cheaper than that or does that pay market price?.

JinMing, this is Chip. Let me take that. The short answer is that it depends on the example that I gave you there for the wastewater facility, which is 100% renewable. That’s in that $3.5 to $4 per kilogram range. Now, that's not what you sell for because the equivalent of gas, I mean, is more like $8 a kilogram.

So the balance of that difference would be for the delivery mechanism, get it to the dispensing station, amortize the dispensing cost, et cetera, et cetera, maintenance costs.

On the industrial side, it’s a little bit different and the industrial price for fuel is much higher, because you’re not – you’re basically just competing with whatever they are selling it for today as compared to will you have a reference for gasoline.

So the short answer is that we can be competitive either way we look at it, but the numbers would be different and that's how we set it up.

We say what's the number need to be and then we say, can be deliver a project, given all the other inputs and cost and things and effectively what we’re doing here is also providing private capital for these projects, which eliminates the need for the states or the countries for that matter to put capital in here, which is kind of an unheard-of concept.

That's really our calling card is, we can build this infrastructure in an affordable way and you won’t have to put money into that infrastructure and they first look at you go, is that possible and then we explain it to them, and we – because of the uniqueness of what we do, the answer is yes..

Okay, I see. Got that.

Last quarter, you disclosed the large project pipeline, basically the project with over [ph] 10 megawatts, the sum of those projects was 308 megawatts, are you still looking at the same size of pipeline right now?.

Yes.

So we've got a couple of comments back about -- after the call and they said, well, how are you going – look at on-site and look at utility differently, so if you actually looked at it closely, we have two charts this time and some of the data that we had in the chart from the last presentation, we moved up to the on-site, that there is 11.2 and 14 megawatt there and we didn’t put all of the projects on the utility scale, but the pipeline in total is actually up.

We just didn't highlight every single project, because we've got 20 of them on here right now..

Okay, got that. Okay, that's all from me. Thank you..

Thank you..

And our next question comes from Aditya Satghare of FBR Capital Markets. Your line is open..

Hi. Good morning. This is Ben Tainter on for Aditya today.

I just had one question, could you guys give us a little bit more of an update on some of your newer product lines, just as the Tri-gen and Carbon Capture, are there any pilot projects out there and then additionally so, what really needs to happen before we start to see sort of customer orders for these projects, any update there would be helpful? Thanks..

Yeah, Ben. Good morning. Thanks for joining. This is Chip. Let me answer that question. So there is kind of -- let's just talk about, the high efficiency fuel cell really supports the preferred resource business and as I said, the efficiency level is much higher.

That's on track to be delivered – the first one in 2016 to become production in 2017, so that's really just a substitution kind of the broadening of the market opportunities for us which just makes us more affordable in what we are doing. On the hydrogen side and carbon capture, I will kind of take you through that. So on -- start with hydrogen.

We talked about two different aspects, one is renewable and we built the first pilot plant for renewable hydrogen around for three years, that project is complete and we are ready now to deploy commercial projects with much larger size which is what I was talking about as a 10 megawatt project that we now know with confidence can get the project capital forward.

So we are actively pursuing a specific project of 10 megawatts and there is others in the world to do that. So as quick as we can get those closed and then we can start to get those deployed, those will happen over the next several years. Those are pretty big projects, but they get deployed over time. On the industrial side, a similar story.

We took that on as – well, this makes a lot of sense so we have the first product plant running at our Torrington, Connecticut facilities producing power, thermal energy and hydrogen.

And that's running as we speak and we are talking to other people about projects at their facility, so it’s back to project development again, but again that's a commercial that as soon as we get the next contract, we can move that into revenue and backlog. On the carbon capture side, a slightly different story there.

As we've laid, we did a bunch of study work for the Department of Energy and then we built a 300 kilowatt power plant for -- that's finished off its testing and things successfully.

We are in the process right now of talking to multiple people, people meaning utility companies and energy companies to actually deploy and the way we are going about this is, we are looking for a project for 25 megawatt plant.

It's not hard to find those kind of people, but the way that would work is, we would basically develop a project for 25 megawatts and then put into force piece of it which would be roughly 2.5 megawatts, but again that would be kind of spread out over, I would say, two years.

So we are in the active mode of commercializing all those, but by the time you get the projects developed and you get the materials out there, then it's supposed to take a couple of years to pull through the revenue..

Great. Okay, yeah, thank you. That was very helpful..

Our next question comes from Thomas Boyes from Cowen. Your line is open, Thomas..

Hi, gentlemen, thank you for taking my questions. I know that you did give a split for product and service revenue from the hospital project in California and then you had referenced $40 million from this two on-site heat and power projects.

Is there a breakdown for that as well, maybe to get an idea of what's service and what's part of that product?.

So, Thomas, what we are trying to do on one of the slides, it's on slide six is, if you take one – those are all 1.4 megawatt projects give or take, right.

And typically a project of that size is about $20 million and a about a third of that is the capital that we will derive the revenue from on COD when we deliver the plant and roughly the other two-thirds of it is derived over the length of the service agreement, which is either 15 or 20 years, so you just basically amortize the revenue over the term of the contract, but it just kind of works out, but those projects are about $20 million.

As I said below, if you are basically taking utility project and make 20 megawatts at 1.4, it basically multiplies to revenue opportunity by 10 times and the margins get better as well. So that’s where we are kind of focused on both larger projects and some of the behind the meter kind of projects..

Got it.

And then what type of margin improvement kind of do you expect to see once POSCO is up and running and you have that lower cost of energy? Is that already taken into account when you are saying that mid-teens gross margins or is that something for the expansion we see in 2016?.

Hi, Thomas, this is Mike. So, yeah, looking at 2016, that's baked into 2016, but that's a significant margin opportunity for the company as POSCO continues to ramp up their facility in Korea and then expand beyond that.

That – our margin for the company, we get 3% of their net product sales and we expect that to continue for a long time with the relationship with POSCO..

Great. And then just a last one from one me. I noticed that the gross margin for R&D contracts was negative to a larger degree than we've seen in the prior four or five quarters. I was just wondering where that was stemming from..

Sure, Thomas. Good question.

So in our backlog for Advanced Technology contracts, we do Department of Energy projects and we also do projects for private industry, just a mix of projects coming through in the second quarter with heavily weighted to Department of Energy type contracts, which have a cost share obligation with them, but overall the Advanced Technology backlog is profitable.

We would expect to see growing profit margins on that in the coming quarters as the mix shifts back to more private industry type activity..

Great.

I mean this was closer to 15 in the prior quarter, is there some sort of levelized or normalized margin that we should look for?.

Yeah, I would say, Thomas, we are targeting that as a 10% business today that will certainly see increases to that over time as that – again if the mix shifts to more private industry, that's definitely the goal of the company to continue to increase those margins..

Great. Thank you very much..

Thank you..

I am showing no further questions at this time, I would now like to turn the conference back over to Chip Bottone, Chief Executive Officer..

So, I would first like to thank everybody for being on the call and the thoughtful questions. I just had a few closing comments. One, we have these calls, but I just want to tell you, this management team of this company engages a lot on these projects.

And as you see here, we've got an expanding list of things and these projects are very high dollar value and whether it's governments, whether it's big customers like Dominion and other things, we are making a lot of progress and building a very unique offering, although it's a very large market potential for this company.

But I just unfortunately, in the call, we can only share that, but the respect this company gets and the people that we have is very, very nice to see. Another comment is that there is a lot of discussion about the revenue for the quarter. I think most people hit the different sides of that.

It is a transition that we are making in terms of the business model, which we think is right on target. That's the feedback we get from our customers and obviously the results of that as we get these projects financed. If we were to go back several years the financial wasn't available. So I would take that as a positive.

I would also say that despite the lower revenue for the quarter, we talk about the fundamentals of the business and as Mike said several times, the margins are creeping up as we would want and I want to tell you that when we do get the higher revenue we gain significant leverage on our business model, because we've lost our cost and we've lost our margins and things like that.

So I just don't want that to be – it's an adjustment that we made to transition and it's all good. So with that, again, I would just like to say thank you and have a great day and we will see you on the next call for the third quarter. Take care..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day..