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…

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…

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.