Tom Gelston - VP, IR Chip Bottone - President and CEO Michael Bishop - CFO

Carter Driscoll - B. Riley Colin Rusch - Oppenheimer Jeff Osborne - Cowen & Co Aaron Spychalla - Craig-Hallum

Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to FuelCell Energy’s Q1 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tom Gelston, VP of Investor Relations. You may begin your conference.

Thank you, Tiffany, and good morning, and welcome to the first quarter of 2018 earnings call for FuelCell Energy. This morning, FuelCell Energy released financial results for the first 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 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 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 would 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 highlights. Today, we announced our first quarter 2018 results highlighted by increased sales and margins and excellent cash flow for the business. The key for our first quarter performance was delivery of the power plants for the 20-megawatt fuel cell park on Korea's Southern Power Company or KOSPO our newest utility customer who owns 9 gigawatts of power generation assets. Revenue for the project and cash from payments for inventory that we delivered was recognized in our first quarter financial statements, enhancing our financial position further demonstrating our ability to execute on large global projects. This project KOSPO's for first fuel cell park is now under construction and work is progressing on schedule. We will begin commissioning in the spring of this year and bring it to full power during the summer. KOSPO was a showcase installation and a model for future large projects. South Korea is a larger market for industry leading fuel cell solutions and includes other large high profile projects like the 59-megawatt fuel cell park for GGE, which is majority owned by Korea Hydropower Company or KHMP. South Korea is a large near-term market and we see sizeable opportunities for multi megawatt fuel cell parks with the country's top utilities. We are making major progress in expanding this market and our team is actively developing in bidding on numerous projects. We are also seeing good progress in United States. Last week, we announced that we executed a 20-year power purchase agreement or PPA with Bolthouse Farms, a subsidiary of our existing customer Campbell Soup Company, which also owns Pepperidge Farm, a long-term user of our solutions. We will install two SureSource 3000 power plants at Bolthouse Farms food processing plant in Bakersfield, California. This highly efficient on-site combined heat power or CHP system will generate 5 megawatts of reliable low-carbon electricity and steam. This project highlights multiple benefits of our innovated fuel cell solutions, with no upfront capital investment or customer benefits immediately from operating savings, power, reliability and emissions reductions. In addition, our customer benefits from our ability to offer industry-leading comprehensive turnkey solutions that include EPC, long-term operating and maintenance services. Illustrating our PPA-based generation strategies, we’ll be retaining this project in a growing generation portfolio. The generation assets are producing consistent long-term revenues and contributing to future profitability. Our on-site 2.2 megawatt CHP power plant powering a state-of-the-art microgrid in the town of Woodbridge in Connecticut was recently certified and placed in independent mode being that it will automatically takeover power in key facilities in the case of grid outage. Owned by Avangrid a regional utility, and installed at the town's high school. Our fuel cell plant is the sole power source for seven of the town's key facilities during power outages, making this a true microgrid of scale. We are pleased to have reached this important milestone because this project is an ideal showcase for microgrid solutions for a wide range of applications and customers. The Bolthouse Farms in Woodbridge projects highlight multiple elements of our strategy, and like other FuelCell Energy projects underscore growing momentum in the energy as a service market, which I will address later in the call. Recent federal legislation developments which will stimulate capital investment fuel cells, also contributing to momentum. On February 9th, the U.S. Congress reinstated the investment tax credit for fuel cells and extends significantly expands the existing carbon dioxide sequestration credit. The long awaited reinstatement of the investment tax credit or ITC for fuel cells, levels the playing field for the U.S. fuel cell manufacturers and is good public policy that supports American economy. Stationary distributed generation fuel cells are the cleanest and lowest emission high availability power sources on the market today and complement the intermittent wind and solar resources being placed into power grids. The ITC will facilitate continued market expansion and product deployment by enhancing our competitiveness on projects in our pipeline and help with project financing leverage and interest. The so called carbon oxide sequestration credit known as the 45Q bill includes three key provisions. First, the bill increases the dollar value of carbon captured credits. It provides a credit about the $50 per ton for CO2 that is sequestered and up to $35 ton for CO2 that is reutilized. Second, it eliminates the previous cap on the amount of available credits. Businesses would have 12 years to take advantage of the credits with no limit on the amount of CO2 that can be sequestered or reused. Third, the new legislation extends the tax credit by reducing the tonnage threshold of captured CO2, which will broaden the reach and attractiveness of carbon captured implementation. Financial incentives like these are instrumental in establishing the value for captured carbon by encouraging additional investment in carbon captured technology, by energy producers in the U.S., this credit could accelerate deployment of our invaded and revolutionary capture solutions. Working very closely with our technology partner Exxon Mobil, a global sequestration leader, we have developed a scalable innovated carbon capture solution for coal and gas power plant applications as well as oil sands applications that are making excellent progress. Both companies are happy with our progress and looking to accelerate deployment. Exxon Mobil executives recently referred to our work in their 2018 energy and carbon summary, providing prospective and goals for a lower carbon future. Our first private plant would be built in Texas at 2.7-gigawatt dual field mix used coal and gas bioelectric generated station in Alabama and operations are expected in 2019. The coal-fired power plants we continue to make progress with our partnership with the U.S. Department of Energy. I would discuss our company's energy as a service value preposition after Michael Bishop, our Chief Financial Officer, reviews our financial results for the quarter. Mike?

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 first quarter of 2018 of $38.6 million compared to $17 million for the first quarter of 2017. This increase in revenue reflects completion of the deliveries under a 20 megawatt order to a South Korean Construction company for utility project to be owned by Korea Southern Power Company or KOSPO. As the picture on the bottom right of the slide indicates we have made tremendous project in a short period of time. This contract was executed in the August 2017 and we completed deliveries in the first quarter of 2018. Commissioning is expected to commence in the spring and the plant is expected to be fully operational in late summer. The KOSPO project highlights our ability to rapidly respond and execute on projects of scale for the utility markets on a global basis. Gross profit for the first quarter of 2018 totaled $4.6 million and the gross margin percentage was 12%. This compares to a gross profit of $1.8 million for the first quarter of 2017 and a gross margin percentage of 10.7%. Higher gross profit in the quarter was driven primarily by the Korean product sales. Operating expenses for the first quarter of 2018 totaled $10.2 million compared to $12.7 million for the first quarter of 2017. This decrease was primarily due to lack of restructuring expenses in 2018 and lower research and development expenses following the introduction of the 3.7 megawatts SureSource 4000. Net loss attributable to common shareholders for the first quarter of 2018 totaled 8.4 million or $0.12 per basic and diluted share, this compares to a net loss of 14.5 million or $0.39 per basic and diluted share for the first quarter of 2017. Net loss attributable to common shareholders for the first quarter of fiscal 2018 includes two new items in this period. First, a non-cash deemed dividend was incurred totaling 3.5 million related to the Company Series C preferred stock which had conversion activity in the period. Conversions and redemptions which occur when the conversion price is less than a $1.84 per share results in deemed dividend. The Company has been making periodic installment payments on a Series C preferred stock in shares of common stock. The final installment payment is expected to occur in March of 2019. Separately the Company recorded an income tax benefit totaling $3 million for the three months ended January 31, 2018 related to the Tax Cuts and Jobs Act that was enacted on December 22, 2017. The Act reduced the U.S. federal tax credit from 34% to 21% effective January 1, 2018, and also established an unlimited carry forward period for net operating losses generated in 2018 and beyond. As a result of these changes to the tax code, the Company's deferred tax liability related to in-process research and development was reduced by $3 million. Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA, which is a non-GAAP measure in the first quarter 2018 totaled negative 2.8 million, compared to negative 6.5 million for the first quarter 2017. Please see our earnings release for a reconciliation of adjusted EBITDA to the most comparable GAAP measure. Cash, cash equivalents and restricted cash totaled 115.4 million as of January 31, 2018. This includes 76.8 million of unrestricted cash and cash equivalents and 38.6 million of restricted cash. We also have $40 million of borrowing availability under the NRG Energy revolving project financing facility. We are pleased with the increase in net cash of approximately $28 million in the first quarter. The primary drivers were reduction of accounts receivable and inventory related to the KOSPO project. Backlog fits at a record level of 638.5 million at the end of the first quarter of 2018, at the end of the quarter service backlog totaled approximately 179 million, generation backlog totaled 414 million, and advanced technology contract backlog totaled 43 million. Product sales backlog totaled approximately 2.2 million related to the Korean utility order. The remaining revenue from this order will be recognized when commissioning the project later in the fiscal year. As illustrated by the chart on the top right of the slide, backlog and project awards combined totaled approximately $1.6 billion at the end of the first quarter. Project awards not included in backlog include the three LIPA projects and a service contract of Korean utility project. Backlog and project awards do not include the 5-megawatt Bolthouse Farms project executed subsequent to quarter end. The chart at the bottom left of the slide breaks down our project activity by category. As we have discussed in prior calls, we are prudently building our generation portfolio given the long-term cash flow profile of these projects. Upon completion of the LIPA project and the other projects currently under development, if owner has shipped of these projects is retained by the Company, the Company would have a generation portfolio of over 70 megawatts in the U.S. market with the revenue backlogs in excess of 1 billion producing revenue for periods of up to 20 years leading to what we believe would be strong sustainable cash flows for the Company. As Chip mentioned we are pleased with the ITC extension for fuel cell. This broadens the financing options for our projects by opening up tax equity opportunities. We have seen good project finance interest for the projects that we have underdevelopment. In conclusion, we are pleased with the revenue and cash generated in the quarter, backlog and project awards stand at approximately 1.6 billion, and we believe the Company is well positioned to execute on these and other market opportunities in front of us on our pathway to sustainable profitability. I will now turn the call back to Chip. Chip?

Thank you, Mike. Please turn to Slide 6, energy as a service. We are building on last year's transformational accomplishments and the growing momentum in our company and industry with multiple catalysts contributing to growth in our key energy markets. These catalysts include the accelerating global adoption of distributed generation fuel cells for utilities as demonstrated by recent activity in the U.S. and South Korea, and the rapidly emerging energy as a service market place that is contributing to the growth of our generation portfolio enhancing margins and revenue. The unique pairing of our versatile fuel-cell technology and flexible business model allows us to provide comprehensive innovative solutions that solve customers' business, energy and environmental problems in unique ways. Recent projects demonstrated how FuelCell Energy is providing affordable, clean and reliable distribution distributed generation for utilities municipalities and industrial customers such as service rather than a mere commodity. We are executing on three projects awarded by New York State's Long Island Power Authority or LIPA under the utilities 40 megawatt programs. Our approach of working collaboratively with LIPA PSEG authorities and the public is very welcome and going well. This also positions us nicely for future up in synergies. These groups support installation highlight our ability to deliver energy as a service to utilities, helping them resolve daunting energy and environmental challenges especially in densely populated regions. LIPA needed an on Island generation to supply the densely populated areas with clean power and want to avoid costly transmission infrastructure. The utility had to have affordable clean quite and easy to site generation. Our fuel cell solutions which are converting unused industrial land into income generated property fulfill the utilities critical requirements. Due to the success of projects like these distributed generations once proceed there as a threat in central generation utility model is now being actively implemented by utilities and other stakeholders through value its unique problem solving ability. The LIPA project is making great project, progress and the individual sites are proceeding on schedule. These three projects have attracted margin and cash flow profiles that could represent nearly 800 million of revenue over a 20 year period, if you retain them in our generation portfolio as planned. Referenced in this general of the slide, our power plant serving the town of Woodbridge's microgrid is now operational. The plant supplies 2.2 megawatts of continuous power for the grid under normal operation. It automatically switches to microgrid mode in the event of an outage, supplying power to seven critical municipal facilities. The project illustrates how our energy as a service model allows municipalities and utilities to cooperate to enhance critical power infrastructure with clean and affordable distributed generation. This true win-win microgrid installation benefits the utility with clean and reliable distributed generation installed where it's needed in the grid. The municipality enjoys affordable and environmentally friendly power that protects critical town buildings from possible grid interruptions. We anticipate helping other municipalities and utilities benefits from microgrid installations like this one. Finally, as depicted on the right side of the slide, we are excited to be executing on the new hydrogen coal production plant or Toyota's Port of Long Beach facility in California. We have produced a new transportation model focusing on intersection of electrification and hydrogen. We have matched this with our project execution and financing model, which are keys to global deployment. Our multi megawatt SureSource project installation will display our unique and innovative power tri-generation technology and as a template for future projects. It demonstrates how our energy as a service model can contribute to the development of the hydrogen fueling infrastructure that will support the emerging market for fuel cell electric vehicles. The unique coal production plant will supply the global automakers with affordable renewable hydrogen or export facility fueling needs, and it will simultaneously generate renewable power for the grid under California's BioMAT program. Reducing global transportation emissions will require portfolio of several mode of technologies, and analysts believe hydrogen power automobiles are significant market opportunity. Mass deployment of these strike generation systems and the associated hub and spoke fueling infrastructure is gaining global interest from automakers, utility energy companies and others. We executed a hydrogen and power off take agreement with Toyota in November, which is now on our backlog and we’ll retain the project in growing generation portfolio. We are making great progress and the project is proceeding on schedule. I recently visited with Toyota's leadership in Japan. They are excited about the market potential for fuel cell vehicles and the opportunity to reduce the carbon footprint of transportation. Toyota and the industry are committed to having a fuel cell electric vehicles play an important role in their future global product portfolio. We have looked at the demand for hydrogen supply and infrastructure by country and region globally. We see solving current hydrogen infrastructure challenges with solutions like those provided by FuelCell Energy is critical to global success and are in the process of confirming the detailed plan and partners. We are revolutionizing how people think about making power cleaner and more resilient offering the growth opportunity to utilities, and offering a step change in reducing transportation emissions globally. Please turn to Slide 7, summary, we started our fiscal year with a strong first quarter in terms of revenue and cash generation. We continue to execute very well on our record backlog and continue the growth of our diversified portfolio of clean energy solutions. Favorable policies for fuel cells have made our strong value proposition even more attractive for all of our target markets. Looking forward, I am steadfast of the best opportunity and our ability with our partners to revolutionize several portions of our energy markets globally. Execution on existing projects, continued success in attracting new opportunities, flexible service oriented solutions for our customers and favorable legislative developments will continue to be the foundation on which our pathway to profitability is built. Operator, I'd be happy to take question at this time.

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

So maybe we just start with the ITC obviously being waiting long time very favorable development and you just talked about maybe the tenure or some of the conversations you had since its passage. I would expect just given elongated nature probably a greater impact in fiscal '19, but and we just characterize some of those conversations. Are they opening up new opportunities with customers, existing customers and maybe the scope?

This is Chip. I'll start and answer the first thing about the market and the customers, maybe Mike could talk about the financing, how that ITC itself in the financing or project financing aspects. But relative to the project side and creating opportunities, it certainly has a positive impact, I mean a 30% tax credit even though it reduces down to 22%, but that takes us all the way to the end of 2023 and service days. So there is no question that it basically creates more projects that will go forward with that. It obviously for projects that we have, enhances the financial results or the margins obviously, but we've seen people call it just because they heard about it but frankly applying it to our pipeline has been very-very helpful to try to expedite and accelerate closure of projects. We also have a vast number of 100s of megawatts of projects that we're bidding in the upcoming RMPs so the timing is so there is really critical to allow us to compete at a level playing field or whatever things, so that should help us as well there. And Mike, do you want to comment about it?

This is Mike. And just a follow-on to that, yes, ITC obviously very helpful when it comes to budget financing, it opens up additional opportunities with tax equity us financing and improves the potential loan to value financing for our project. So, it has increased interest level and in our projects and will be helpful as we get long-term financing on the project that we're building in our portfolio.

This is a follow-up to that. Is this changed your potential decision on the LIPA projects? I think you were leading towards retaining on balance sheet. I mean just to make it even more favorable, but then again you would potential want a financing partner just because you might not be able to monetize them as easily as someone else. Just trying to get a sense of particular how the LIPA projects might be changed by the ITC application?

We are profiling the LIPA projects in our project awards category as generation projects meeting that we would currently plan on retaining those on the balance sheet and would obviously want to fully monetize the tax equity, so that brings in those types of financing partners, and I'd say it just broadens the types of financing interest that we would get. For every project that the Company does, we prudently evaluate it. And for those projects worth makes sense to monetize it through a product sale and recycle capital, we will do that and for projects worth makes sense to retain and receive the long-term cash flow benefit, we will do that as well. But every project gets carefully analyzed and the same will happen with the LIPA project.

And maybe shifting gears a little bit over to Korea, so obviously you executed very rapidly on the 20 megawatt project. Can you talk about maybe just the characterize the kind of push versus pull, I mean, your opportunities specifically within Korea, you are knocking on doors versus people coming to you directly and then maybe is the project scope still of the similar size kind of 15 plus megawatts, maybe give us updated range and/or maybe the number of projects you're bidding on, you can identify them specifically?

Cart, this is Chip. I'll comment on the Korea thing. So the two things about it, number one is, there's a RPS objected in Korea, which makes the market opportunity very-very large I mean second only to probably United States in terms of overall capability. And KOSPO had installed 200 megawatts of projects, so we have a lot of people coming directly to us because of that because they know it's our technology and/or being referred to us from them. Secondly, it's a fairly concentrated marketplace. So I would say that the amount of volume and things we see at all. The range of projects we're dealing with their as we mentioned before are generally large I mean we are working on projects anywhere from 10 megawatts to 60 megawatts. And so, that's right in our wheelhouse as well. So, I'd say I don’t want to comment exactly but I think it's safe to say that it's a very-very large market, we compete very well there, we are very well represented there and our team has done a good job of closing some projects and I would expect some others near term as well.

And maybe just last one from me. Update on the Alabama power sequestration project, just next steps you talked about being operational in '19 and then the tax credit. Does that potentially accelerate either what you're demoing with the DOE and/or potential I don't know pull-forward with Exxon Mobil or you still have to wait for the results in the pilot lab to be able to go forward with other opportunities?

So, the pilot plant, in Alabama we say operational. It will be built out this year '18, and then the testing and such which is in our definition operational for that pilot project in early '19 and then there's we are going to run different tests both on coal and gas, but that's going very well. We are very close to the Exxon people in -- I would say because of the success of that and some other things we are doing. We are very keen to accelerate whatever other things we're working on. So that's all going very well and they made public reference to that project is well and our relationship as I alluded to. But the answer is that, yes, carbon capture will accelerate because of that and people's interest in it, but I noted in my comments that in addition to the ITC, which carbon capture projects would eligible for the investments tax credit of 13% in this country. The Carbon Sequestration Act is very beneficial to accelerating deployment of carbon capture projects as well, and to give you just a data point, give or take per unit that we would do like we're doing a pilot in our Alabama, given that credit and all we've looking at the $35 per ton level for enhanced all recovery and industrial used, we're talking about a $1 million a year for a 12 year period in revenue. So that combination of the ITC in this carbon tax credit dramatically improves the value proposition of carbon capture. So as we have this momentum here of interest, the economics of that interest that are going to kind of push this forward faster. So, we're are pretty happy at that as well.

Yes, I don't think people recognize the advantage that your modular technology has and the fact that it's a net producer of electricity rather than a consumer. I appreciate answering all of my questions. I'll take the rest off line. Thanks guys.

Thank you.

Thank you.

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

Can you give us a sense of the trajectory on the inventory as we go through the next quarter or two? And how much you'll be able to work that down here or next quarter or two?

This is Mike. I will take that one. So when, obviously, in the first quarter really happy with the reduction of inventory that was deployed primarily to the project in Korea, so we brought that down nicely from Q4. As I think I talked about on the last call, we would like to have inventory levels in the 50 million range, so a little bit above that some of the inventory we talked about the we just press released that both have funds projects that's an example of inventory that we do have and we deployed to that project during the year. So I think you'll see inventory continue to rotate out to project assets as we execute on that. As Chip mentioned, when he was talking about a Korea, and as we just demonstrated with this KOSPO project, we do want to maintain some balance so that we can execute on those types of opportunities pretty quickly. So I wouldn’t expect dramatic reductions from where we sit today during the course of this year, but again we'll prudently manage it between deploying the project assets and having some safety stock to be able to take advantage of new opportunities.

And then, can you talk a little bit about the change in composition and pacing through a late stage sales pipeline? And are you seeing more equipment sales kind of come into that late stage opportunities set? Is it more on the generation side, and if you can talk a little bit about any changes in the pace of the sales cycle?

This is Chip. I'll take that one. So yes a couple of questions there. So, in the U.S., it's primarily turned into be energy as a service model i.e. PPAs whether it's purely electric and thermal for in the case of Toyota's, its hydrogen and electricity. And I don't see that changing, so I mean with the ITC that allows us to apply some more competitive price points obviously, which would accelerate the deployment of projects. Internationally, primarily in Korea and that doesn't apply there, there's already a strong demand in a rather large pipeline for that. So that's just about -- we are going to execute those as fast as we can execute them prudently. As Mike said, those are -- tend to be short cycle projects. They -- [indiscernible] [0:35:27.6] come out in a month or two, you get something and then you -- there is an award and then you move on. So those are pretty short cycle, shorter than the ones in the U.S. because it's more of a development model in the U.S. But as far as the overall pipeline, the overall pipeline is growing both internationally and domestically. Some of that is because of interest in ITC, but some of that was just naturally what we were doing, as our team of people has expanded and gotten more traction in different customers and national accounts and utilities. So, we are pleased with all that. So now it's a question of closing what we can to meet deadlines and schedules that are out there to full these into new projects.

And then just one final housekeeping question. How should we think about share count going forward? Is there -- is it a number that you guys would grant us to or are we going to see that adjust a little bit as we go through the balance of the year?

This is Mike. I'll take that one. So when we think about share count, the shares outstanding that we reported with our 10-Q filing stays about 80.6 million shares outstanding. As I mentioned today on the Series C preferred, we are making those installment payments in shares of common stock, depending on stock price that over the next year and that instrument matures in March of 2019 could be in the range of 10 million shares, but again really dependent on stock price. So you will see our share count assuming that we continue to pay in shares of common stock increase as a result of that instrument. But again that fully matures in March of 2019.

Your next question comes from the line of Jeff Osborne with Cowen & Co. Your line is open.

Just maybe following up on the Colin's question, how should we think about the interest expense associated with the preferred? Does that trickle down as you pay that off and then you go to zero beyond March?

This is Mike. So, on the Series C preferred, there is no interest expense on it. It's really just an amortizing preferred instrument, so paying it down in series of shares. On the P&L, this quarter there's a deemed dividend and there's essentially a fixed conversion price in the instrument of a $1.84. Anytime the shares are actually below that it creates at being dividends so the calculation this quarter was about 3.5 million again depending on stock price there will be variability in that line.

And then maybe it's just my interpretation of Chip's comments about the LIPA projects. So you've referred to the 800 million of generation revenue and I think you used the word as planned. I thought on prior calls we had talked about it kind of combination of either retaining some and selling some retaining stuffs of portfolios. Has something changed that you want to now retain all 40 megawatts on the balance sheet?

No nothing has changed in that, Jeff. The way we're characterizing this in project awards and we had to pick one. We think it's more likely than not that we've retained some or all these projects and doing projects financing around that. So these LIPA projects would go into our generation backlog once the PPAs are executing and that's expected, here in the first half of this year. But as I said earlier and particularly with tax equity coming back in the play, the Company is going to prudently syndicate these projects. We will get bids for financing on and then keeping them on amount balance sheet and also selling amount right. And it could wind up being hybrids, but the way we're currently thinking about it today and at least accounting for in project awards is generation project.

And then maybe just two quick follow-ups on that, so with that thought process in play. What are the cash needs as it relates to constructing the projects, once the PPAs are signed? And then maybe along the same vein and as solar went through this a few years ago, but can you just talk about what the premium would be, if you were to sell the projects upon commissioning or interconnection versus finding buyers pre-commissioning and even pre-construction? Is there a premium that you would get, if you were to carry these on the balance sheet and then overtime once they are operational sell up parts or all of them?

This is Mike again. So, the second part of that first and I completely agree with that analysis, the further down in the development and construction cycle, the projects offer the more of the premium that you can derive because you've eliminated risk, right. And folks generally, when they are purchasing these assets, one in operating assets that's generating cash flows. That said, there is strong interest out there in providing construction, financing for these types of projects. As far as cash needs specific to LIPA, there is no near term cash needs related to LIPA as today. As we talked about, we're going through a development cycle. Right now, there is some modest cash, as part of that, we will begin construction late in 2018 or going into 2019 and then operational in the 2020, 2021 range. So it's really next fiscal year where there is more of a cash need, but again already talking to finance here is about different ways to bring capital to these projects. We've obviously demonstrated in the past strong project financing interest in small projects and large projects it's even greater.

And you can use also the 40 megawatt revolver with NRG as well for construction, if needed?

That $40 million revolver.

40 million, that's right.

That's correct, we will put that to use as necessary.

Last one I had is, can you just go over the kind of the cadence of the generation portfolio under construction? So I think you've 21.7 megawatts, I forget at Triangle Street operational, I think that's probably the near-term one that's not already done, but can you just walk through how we should think about both the generation revenue line item for the next three or four quarters and then also the kind of roll off that 21.7 in general?

Sure and your math is correct, we do have -- and just to kind of start, in the beginning generation portfolio today is operating at 11.2 megawatts, and that's comprised of the biggest project in there is the Pfizer project at 5.6 megawatts and then we have four other 1.4 megawatt projects at universities and municipal locations. In the 21.7 megawatts, it's under construction. You are right the Triangle Street, which is our first SureSource 4000 is in the commissioning phase right now and given that, that's our first SureSource 4000. There's a series of additional certifications and other operation testing that we want to go through, but that will come online and begin generating power in the first half of this year. Right alongside of that and probably a little bit ahead of that is the Florida Wastewater Treatment projects that we announced a little over a year ago. That's close to coming online, and then other projects that we've announced and these are all public, I'll just go down the list, there's Trinity College 1.4 megawatt project, the CMEEC Groton sub-base project 7.4 megawatt, that will be built later this year, operational next year. We have a 1.4 megawatt project in Long Island. We have a second 2.8 megawatt project with Tulare and a 2.2 megawatt project that obviously we've announced with Toyota. So, Jeff, these will come online between first half of this year and end of next year with obviously Toyota probably being the furthest one out there and given that that's different application, there's some additional design work that goes into that.

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

It's Aaron Spychalla for Eric Stein. First maybe on the Toyota project, Chip, it sounds like you are putting together a detailed plan, but can you maybe just talk a little bit more about the interest level and how the pipeline has shaped up since you announced that project and just somewhat characterized the opportunity whether it's number of OEM partners or potential sites or anything of one?

This is Chip. So, it's pretty clear, it may not be very -- you don't care about it much, but it's very clear that fuel cell vehicles and I say vehicles because as trucks and passenger vehicles are going to be part of our future, okay. The economics of fuel cell vehicles are superior to that of batteries even with massive cost reductions we're talking about. There's obviously performance thing like that and the emissions are as good if not better. So all those reasons point to you are going to have a fuel cell electric vehicles. The question has always been the infrastructure to support. The rate of deployment of vehicles and so for example this pilot plant that we are building is one way of producing affordable hydrogen and feeding it into the infrastructure for hydrogen vehicles. So the three things that have to happen other than the vehicles itself, which I have every confidence that is available is; A, you have to have sources of hydrogen; B you need to get that hydrogen to the dispensing stations and; C you need to have dispensing stations. And I've given away too much of our strategy which you can sense from that is that the way you want to do this you don’t have to have 50 different people, and it doesn’t really require from a partner perspective. And in our view, it doesn’t require massive investments from states or countries to make this happen. You can either utilize existing programs like for example we are using the BioMAT tariff in California for this, but there is others that's been taxed credit etcetera, etcetera. And then if you country-to-country Japan, Korea, China places in Europe you would find the similar story with similar things. So we are working on a global plans to do this because the car companies one way or the other have their eye on the global markets, and every within a country or within a continent, there is obviously some countries that are more focused on this than others. But to give you some sense, we were talking about a vast number of tri-generation systems to even meet 50% of the projected volume of hydrogen needed for vehicle by 2025. So this is both a near term thing as well as a very-very large thing and working with people like Toyota, the largest car company in the world which also would do trucks and things like that is very helpful to; A, get an insight of what the demand is; and B, work alongside of them and perhaps their subsidiaries to figure out how we actually get this deployed and financed. So I don’t want to say anymore than that but we do have a plan and it's a big opportunity and it would be done that big opportunity hopefully by 2025.

Maybe second on the carbon capture, you already talked about it a bit, good to hear the impact of that credit can have. Can you just touch on the competitive environment there? I know in the past Exxon has said that FuelCell is the only company that can do this. Can you just talk about that from a competitive standpoint?

Yes, so when you look at carbon capture, there are primarily two ways to do carbon capture. You can obviously do it with a carbon in FuelCell, which we are going to display down in Alabama with Southern company. And then there is something called a mean system, it's basically a chemical process to do it. And so physically there is multiple ways to do it, but really when it comes down to is the math has to work. So therefore what you are looking for is the most affordable way to do it and that falls back to us. I mean FuelCell energy and I think it is carter that mentioned it that the uniqueness of what we do is not just the amount of CO2 we can capture but the fact that we can produce power while we are doing it which has a significant improvement on the economics. So the leader in the clubhouse is FuelCell Energy and nobody else does what we do relative to FuelCell. Second thing is as carbon tax issue in the United States will be helpful to kind of move some of these things as well, along, and it actually expands the carbon capture story to industrial markets. In the past that carbon tax that we are talking about did not apply to industrial applications because tonnage per year was below the threshold. But now they've lowered the threshold so we can do industrial, we can be do enhanced oil recovery and we can do large scale power generation. So it's going to really help out not just in accelerating, people looking at this for power generation but it's actually going to accelerate it and expand the market for EOR and for industrial customers.

And then maybe last for me, just on the service gross margin line, good number there this quarter. Was there any module replacement or anything that drove that or structurally just can you talk about your expectations there going forward?

This is Mike. I'll take that one. No, I mean from a module replacement perspective, relatively like this quarter not a lot of scheduled replacements, we continue to as the fleet gets a little bit bigger here we continue to work to drive down overall service cost absolutely pleased with the service margin in the quarter, long term, we target that margin to be north of 20%. So a little bit of work to do there and given the levels that we are at today, you will see variability in that line quarter-to-quarter, but again pleased with the continued progress.

At this time, there're no further questions. So I am turning the call back over to Chip for closing remarks.

Thank you very much everybody for the questions, and I think hopefully you saw from here there's a lot of momentum, what we are doing we are pleased with it, in all aspects of the different areas, power generation, carbon capture and hydrogen. So, more to follow but our expectation is that we continue to build this backlog of ours with good quality projects and good uptick and execute on the backlog that we currently have, so look forward to talking to you on the second quarter call. Everybody have a great day. Thank you very much.

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